SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] Annual Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1996
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _____ to _____
Commission file number: 1-31070
DERMA SCIENCES, INC.
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2328753
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
121 West Grace Street, Old Forge, Pennsylvania 18518
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (717) 457-1232
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value Boston Stock Exchange
Common Stock, $.01 par value Pacific Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of Class)
Check whether the Registrant: (1) filed all reports required to be filed by
Sections 13 or 15(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 past 90 days.
Yes X No
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.[ X ]
Issuer's revenues for its most recent fiscal year were $4,557,931.
The aggregate market value of the voting stock held by non-affiliates,
computed by reference to the average bid and asked prices of such stock as of
March 3, 1997, was approximately $3,484,586.
The number of shares outstanding of each of the issuer's classes of common
equity, as of March 3, 1997, was 4,067,632.
Documents Incorporated by Reference: None
<PAGE>
Part I
Item 1. Description of Business
Overview
Derma Sciences, Inc. (the "Company") was incorporated under the laws of
Colorado on September 10, 1984. On June 3, 1996 the Company changed its state of
domicile to Pennsylvania. The Company engages in the development, marketing and
sale of primarily proprietary sprays, ointments and dressings for the management
of certain chronic non-healing skin ulcerations such as pressure, diabetic and
venous ulcers, surgical incisions and burns. As such wounds primarily afflict
the elderly, the Company markets its products through independent distributors
mainly to healthcare providers to the geriatric community such as nursing homes,
similar extended care facilities, hospitals and home healthcare agencies
throughout the United States. For 1998, sales of wound care products in the
United States are estimated to attain $3.0 billion. Source: "Wound Dressing,
Artificial Skin, Cell Therapy & Related Therapeutics...Evolving Long Term
Business Opportunities in Wound Management," POV(R) Reports, Executive Summary
Section, page 18, 1996.
The Company believes that its products offer certain advantages over those
of its competitors with respect to wound management, cost effectiveness and ease
of use. Improved wound management is achieved by the unique ability of the
majority of the Company's products to simultaneously address multiple
environmental factors affecting the wound site consisting of moisture, pH
balance, infection control, nutrition and protection. The utilization of readily
available components and standardized manufacturing techniques contribute to the
cost effectiveness of the products. Ease of use results from the formulation and
packaging of the Company's wound care products in convenient formats.
In 1996, the Company experienced a 20% decrease in annual revenue. This
decrease is primarily attributable to decreases in Medicare reimbursement
relative to a portion of the Company's product line. Revenues increased 20% and
18% in 1994 and 1995, respectively. Revenues are derived principally from the
sale of Dermagran Ointment, Dermagran Spray, Dermagran Wet Dressings and
Dermagran Hydrophilic Wound Dressing.
The Company's objective is to become a leading provider of chronic wound
care products throughout the United States and selected international markets.
The Company seeks to accomplish this objective by internal product development,
product acquisitions, product licensing, joint ventures and joint marketing
arrangements. The Company introduced one new product in 1996: Dermagran
Zinc-Saline Hydrogel. Also in 1996, the Company entered into licensing and
distributorship agreements that extended the sale of its products into Malawi,
Mozambique, Namibia, South Africa, Zimbabwe and Israel.
Chronic Wounds and Wound Care
Wound Classification
Wounds are generally classified as acute or chronic in accordance with
their healing tendencies. Acute wounds, typically those received as a result of
surgery or trauma, heal uneventfully within an expected time frame. The healing
of chronic wounds, however, is protracted and subject to complications. Such
wounds may linger for weeks, months or years, and may defy all traditional
attempts at treatment. In many cases, amputation of the affected limb is the
exclusive means of effecting a cure.
Stage III and IV pressure, venous and diabetic leg ulcers constitute three
of the largest categories of chronic wounds. Pressure ulcers, also known as
decubitus ulcers or bedsores, result from prolonged pressure on the skin which
impairs blood supply to the affected area. Lack of blood supply leads to tissue
death and ulceration of the skin and underlying tissue. Venous ulcers, or venous
stasis disease, result from poorly functioning veins, particularly in the lower
extremities, resulting in venous insufficiency. As a result, blood pools in the
legs causing chronic wounds. Diabetic leg ulcers result from diabetic
neuropathy. As of 1989 (the latest year for which such data is available), the
incidence of various chronic wounds and ulcers in the United States was
estimated at not less than: (1) pressure ulcers - 2.1 million cases, (2) venous
stasis disease - 500,000 cases and, (3) diabetic leg ulcers - 3 million cases.
Source: "Chronic Wounds, an Overview," Chronic Wound Care, a Clinical Source
Book for Health Care Professionals, pages 12-18, 1989.
The Afflicted Population
A disproportionately large share of total U.S. healthcare costs is
attributable to the elderly population. A factor of this disproportionality is
the prevalence in elderly patients of chronic wounds. It is estimated that by
the year 2000 12.6% (35 million) of the United States population will be over
the age of 65 and that 47.6% of that 12.6% will be over the age of 75. Source:
"Wound Dressing, Artificial Skin, Cell Therapy & Related Therapeutics...Evolving
Long Term Business Opportunities in Wound Management," POV(R) Reports,
Macroeconomic Factors Affecting Wound Care, page 7, 1996. It is also estimated
that by the year 2030 more than 20% of all Americans (60 million) will be over
the age of 65, and that this segment of the population will account for 50% of
total healthcare costs. Source: "Wound Care, an Emerging Discipline," New
Directions in Wound Healing, page 2, 1990.
As of 1989 (the latest year for which such data is available), there were
approximately 35 million admissions to nursing homes in the United States. Of
these admissions, an estimated 10 to 20 percent suffered from chronic wounds in
the nature of pressure sores or venous ulcers. Diabetics are particularly
susceptible to chronic non-healing wounds. Diabetics often suffer from
inadequate blood circulation and neuropathy, a loss of sensation in the limbs.
This predisposes diabetics to chronic wounds, particularly on the legs and feet.
In 1989 (the latest year for which such data is available), diabetes was the
leading cause of non-traumatic amputations in the United States resulting in
approximately 50,000 limb amputations. As of 1989, there were more than 12
million diabetics in the United States of which 25% suffered from chronic
non-healing wounds and ulcerations. Source: "Chronic Wounds, an Overview,"
Chronic Wound Care, a Clinical Source Book for Health Care Professionals, pages
12-18, 1989.
In 1995, sales of wound care products in the United States were estimated
at $2.7 billion. This amount is expected to increase to $3.0 billion in 1998.
Source: "Wound Dressing, Artificial Skin, Cell Therapy & Related
Therapeutics...Evolving Long Term Business Opportunities in Wound Management,"
POV(R) Reports, Executive Summary Section, page 18, 1996.
Principles of Treatment
Traditional techniques for the treatment of chronic wounds have principally
involved cleansing and debriding the wound (removing infected and dead tissue),
controlling infection with antibiotics and protecting the wound. For example,
topical agents may be applied to chemically clean the wound and remove wound
debris and exudate; antibiotics may be administered to decrease the bacterial
count in the wound; and protective dressings may be used to protect the wound
from trauma. Each of the foregoing treatments is passive in nature. That is,
these treatments do not stimulate or accelerate the body's wound healing
processes.
It is generally recognized that several environmental factors affecting the
wound site are of critical importance in the wound healing process. Among these
factors are: (1) adequate moisture, (2) pH balance, (3) infection control, (4)
nutrition, and (5) protection. The foregoing factors are sometimes referred to
in this filing as the "traditional wound care factors." Virtually all currently
available wound healing products seek to influence one or more of these factors
in order to promote an environment conducive to healing.
Wound care products are typically categorized according to the
environmental healing factors which they are designed to influence. Thus,
moisturizers provide and maintain moisture in the wound; cleansers clean the
wound; antimicrobials control infection; and dressings protect the wound from
trauma and other harmful influences.
In addition to the above described factors, medical researchers generally
agree that trace amounts of certain elements are necessary to many biological
processes involved in wound healing. Among the elements so identified is zinc.
The precise role of zinc in the wound healing process is not well understood.
Likewise, there is disagreement among medical practitioners as to the most
efficacious method of ensuring an adequate supply of zinc at the wound site.
The Company's Products
Product Descriptions
The Company develops, markets and sells mostly proprietary topical
preparations and devices primarily devoted to the management of certain pressure
and venous ulcers. Secondary product uses include treatment of wounds or skin
irritations caused by surgical incisions, abrasions, burns and skin tears. The
Company believes that its products offer certain advantages over those of its
competitors with respect to wound management, cost effectiveness and ease of
use. Improved wound management is attributable both to the unique ability of the
majority of the Company's products to simultaneously address multiple
traditional wound care factors and the Company's focus on zinc as a primary
wound nutrient. The utilization of readily available components and standardized
manufacturing techniques contribute to the cost effectiveness of the products.
Ease of use results from the formulation and packaging of the Company's wound
care products in convenient formats.
The Company's products, together with their features and uses, are
described below:
1. Dermagran Ointment. Dermagran Ointment is a topical ointment with a
lanolin odor and is packaged in both jars and tubes. The product's active
ingredient is aluminum hydroxide gel. Dermagran Ointment, when used in
conjunction with Dermagran Spray, addresses all five traditional wound care
factors. Indicated uses include stage I and II pressure and venous ulcers,
incisions, burns and other skin irritations. Dermagran Ointment is marketed in
accordance with the FDA regulatory policy on OTC drugs.
2. Dermagran Spray. Dermagran Spray is a colorless, odorless liquid and is
packaged in translucent plastic bottles with pump spray nozzles. The product's
active ingredient is zinc acetate. Dermagran Spray, when used in conjunction
with Dermagran Ointment, addresses all five traditional wound care factors.
Indicated uses are similar to those for Dermagran Ointment. Dermagran Spray is
marketed in accordance with the FDA regulatory policy on OTC drugs.
3. Dermagran II Moisturizing Spray. Dermagran II Moisturizing Spray, which
may be used either alone or with Dermagran II Ointment, is a colorless, odorless
liquid and is packaged in translucent plastic bottles with pump spray nozzles.
The product's active ingredient is zinc chloride. Dermagran II Moisturizing
Spray, when used in conjunction with Dermagran II Ointment, addresses all five
traditional wound care factors. Indicated uses include stage I through IV
pressure and venous ulcers. This product, which is not sold domestically, is
presently manufactured and sold in Canada. Dermagran II Moisturizing Spray has
been approved for sale in Canada by the Canadian Health Protection Branch. This
product, when used in conjunction with Dermagran II Ointment, is indicated in
the treatment of decubitus ulcers.
4. Dermagran II Ointment. Dermagran II Ointment, which may be used either
alone or with Dermagran II Moisturizing Spray, is a topical ointment with a
lanolin odor and is packaged in both jars and tubes. The product's active
ingredient is magnesium hydroxide. Dermagran II Ointment, when used in
conjunction with Dermagran II Moisturizing Spray, addresses all five traditional
wound care factors. Indicated uses are similar to those for Dermagran II
Moisturizing Spray. This product, which is not sold domestically, is presently
manufactured and sold in Canada. Dermagran II Ointment has been approved for
sale in Canada by the Canadian Health Protection Branch. This product, when used
in conjunction with Dermagran II Moisturizing Spray, is indicated in the
treatment of decubitus ulcers.
5. Dermagran Wet Dressing (Saline). Dermagran Wet Dressing (Saline) is a
sterile 4" x 8", 12 ply gauze dressing saturated with sterile solution and
packaged in foil envelopes with peel-down tabs. The FDA has granted a Section
510(k) approval for the marketing and sale of this dressing. Dermagran Wet
Dressing (Saline) addresses the traditional wound care factors of moisture,
infection control and protection. Indicated uses are the management of pressure
sores, venous ulcers, incisions, burns and skin irritations. Dermagran Wet
Dressing (Saline) is appropriate whenever a saline dressing is indicated. This
product provides a convenient, economical method of compliance with requirements
for aseptic technique in the treatment of pressure sores and similar wounds.
6. Dermagran Zinc-Saline Wet Dressing. Dermagran Zinc-Saline Wet Dressing
is similar to Dermagran Wet Dressing (Saline) described above with the addition
of trace amounts of zinc. The FDA has granted a Section 510(k) approval for the
marketing and sale of this dressing. Dermagran Zinc-Saline Wet Dressing
addresses all five traditional wound care factors. The medical indications for
Dermagran Zinc-Saline Wet Dressing are the same as for Dermagran Wet Dressing
(Saline).
7. Dermagran Hydrophilic Wound Dressing. Dermagran Hydrophilic Wound
Dressing is an advanced hydrogel formulation available as: (1) a gauze
impregnated with a hydrophilic compound, and (2) a "bulk" (not impregnated in
gauze) hydrophilic dressing packaged in tubes. The FDA has granted a Section
510(k) approval for the marketing and sale of this dressing in both forms.
Dermagran Hydrophilic Wound Dressing addresses all five traditional wound care
factors. Indicated uses are the management of all stages of pressure sores,
diabetic ulcers, first and second degree burns and surgical incisions. Marketing
and sale of Dermagran Hydrophilic Wound Dressing (gauze) began in December,
1993. The marketing and sale of Dermagran Hydrophilic Wound Dressing (bulk)
began in December, 1995.
8. Dermagran Tri-Zinc Incontinent Wash. Dermagran Tri-Zinc Incontinent Wash
is a cleanser packaged in an eight ounce opaque plastic bottle with a pump spray
nozzle. Dermagran Tri-Zinc Incontinent Wash removes dry fecal matter and odor
resulting from incontinence. Sales of Dermagran Tri-Zinc Incontinent Wash have
not been a material income producing factor, therefore, the Company is currently
phasing out the sale of this product.
9. Dermagran Wound Cleanser with Zinc. Dermagran Wound Cleanser with Zinc
is a saline wound cleanser with moisturizing and lubricating properties packaged
in a four ounce translucent plastic bottle with a single stream dispenser tip
nozzle. The FDA has granted a Section 510(k) approval for the marketing and sale
of this cleanser. The indicated use of this product is to cleanse dermal wounds
while contributing to the maintenance of a mildly acidic wound environment. The
marketing and sale of this product began in the fourth quarter, 1995. Sales of
this product have not been a material income producing factor.
10. Dermagran Zinc-Saline Hydrogel. Dermagran Zinc-Saline Hydrogel is a
clear hydrogel to be packaged in tubes. The FDA has granted a Section 510(k)
approval for the marketing and sale of this hydrogel. Dermagran Zinc-Saline
Hydrogel addresses all five traditional wound care factors. The medical
indications of this hydrogel are the management of all stages of pressure sores,
first and second degree burns and surgical incisions. Due to its ability to
conform to deep, difficult-to-reach wound beds, and the recognized importance of
zinc as an element essential to wound healing, the Company believes this is an
important addition to the Company's product line. Marketing and sale of
Dermagran Zinc-Saline Hydrogel began in the third quarter, 1996 and totaled
approximately $6,600.
<PAGE>
Product Development
The Company has incurred expenditures for product development in 1995 and
1996 of $688,141 and $803,744, respectively. The Company does not intend to
develop any product which would require it to file a New Drug Application
("NDA"), or its equivalent, with the FDA or similar foreign agencies. Rather,
the Company will seek to market its current and newly developed or acquired
products in accordance with such abbreviated approval procedures as may be
available. These procedures have included in the past, and are likely to include
in the future, applications under the FDA's Tentative Final Monographs (relating
to known "active ingredients") and Section 510(k) (relating to "medical
devices"), together with analogous foreign procedures. See "Governmental
Regulation."
Products under development by the Company include the following:
1. Dermagran Barrier Cream. Dermagran Barrier Cream is a cream to be
distributed in tubes. The treatment objective of this cream is to protect the
skin from external irritants associated with incontinence.
2. Dermagran Hydrocolloid Dressing. Dermagran Hydrocolloid Dressing is a
single unit dose dressing. The treatment objectives of this hydrocolloid
dressing are to remove wound exudate and provide protection for one-quarter inch
to one-eighth inch wounds and partial thickness burns. The Company believes this
dressing will be an important addition to the Company's product line since it
requires less frequent changing and provides increased cost effectiveness. The
marketing and sale of Dermagran Hydrocolloid Dressing will require Section
510(k) approval from the FDA.
Product Sourcing and Quality Control
The Company does not maintain manufacturing facilities and it contracts for
the production and packaging of its entire product line. The following table
lists the Company's manufacturers as of December 31, 1996, together with the
products manufactured by each:
Manufacturer Product
------------ -------
Topiderm, Inc. Dermagran Ointment
Bohemia, New York Dermagran Hydrophilic Wound Dressing (bulk)
Applied Labs Dermagran Spray
Columbus, Indiana Dermagran Tri-Zinc Incontinent Wash
Zinc-Saline solution for Dermagran Zinc-Saline
Wet Dressing
Kendall Health Care Products Dermagran Wet Dressing (Saline)
Mansfield, Massachusetts Dermagran Zinc-Saline Wet Dressing
Technol, Inc. Dermagran Hydrophilic Wound Dressing (gauze)
Fort Worth, Texas
Ambix Laboratories Dermagran Wound Cleanser with Zinc
East Rutherford, New Jersey Dermagran Zinc-Saline Hydrogel
Hydrophilic compound for Dermagran
Hydrophilic Wound Dressing
Contract Pharmaceuticals Ltd. Dermagran II Ointment
Mississauga, Ontario Dermagran II Moisturizing Spray
The Company has a three year manufacturing contract, expiring January 1,
1998, with Kendall Health Care Products, the manufacturer of the Company's Wet
Dressings. This contract provides for minimum purchases in 1997 of $189,034.
Failure to meet minimum purchase requirements could result in contract
cancellation.
The Company's products utilize readily available components. There are
numerous laboratories and production facilities with the capability of producing
the Company's products to the standards required by the FDA, the Company and the
pharmaceutical industry. Given the availability of other suppliers, the Company
does not believe that the loss of one or more of its suppliers would adversely
affect its operations.
The Company requires that all of its suppliers conform to the standards set
forth in the Good Manufacturing Practice ("GMP") regulations promulgated by the
FDA. See "Government Regulation." No product batch is released for shipment
until a quality control analysis thereof is reviewed and approved by the
Company.
<PAGE>
Patents and Proprietary Technology
Certain of the Company's products have received patent protection in
several countries under the title "Two-Step Procedure for Indolent Would Healing
and Aqueous Medium and Topical Ointment Used in Connection therewith." Patent
applications are pending in various other countries. Countries where patent
applications have been made, application status and, where applicable, patent
expiration dates are set forth below:
Country Status Expiration Date
------- ------ ---------------
Australia Issued November 11, 2003
Canada Issued March 5, 2008
Egypt Pending ---
European Community* Issued March 20, 2007
Ireland Issued March 24, 2007
Japan Pending ---
Mexico Issued April 2, 2007
Philippines Issued July 1, 2008
Spain Issued February 26, 2008
United States Issued July 11, 2006
__________________________
* The European Community is comprised of the following countries: Austria,
Belgium, France, Germany, Italy, Luxembourg, Netherlands, Sweden,
Switzerland and United Kingdom.
The Company believes that the foregoing patents and patent applications
afford reasonable protection to the Company against the unauthorized copying of
the technology embodied in the subject products. However, it must be emphasized
that: (1) the means whereby the products may stimulate and accelerate wound
healing are unknown, and (2) the chemical and biological processes bearing upon
wound healing are highly complex and subject to a wide variety of influences and
stimuli. As such, it is possible that others will develop wound healing products
equal or superior to those of the Company without infringing the Company's
patents.
The Company's policy is to seek, when appropriate, protection for candidate
products and proprietary technology by filing patent applications in the United
States and other jurisdictions. There can be no assurance that the Company will
file additional patent applications or that any patent will issue on any of the
Company's patent applications. Even if such patents issue, there can be no
assurance that the patents will provide protection against competitive products
or otherwise be commercially valuable. Patent law relating to the scope of
claims with respect to wound care pharmaceutical products is still evolving, and
the Company's patent rights are subject to this uncertainty. Furthermore, the
existence of patent rights does not provide absolute assurance against
infringement of these rights. The prosecution and defense of patent claims is
both costly and time consuming, regardless of outcome.
The Company has trademark rights in the names of each of its products.
Dermagran is a registered trademark of the Company and may be used in
conjunction with the names of each of the Company's products. In addition,
Tri-Zinc is a registered trademark of the Company and is used in conjunction
with Dermagran Tri-Zinc Incontinent Wash. Dermagran II is also a registered
trademark of the Company and is used in conjunction with Dermagran II
Moisturizing Spray and Dermagran II Ointment, products sold only in Canada.
An important part of the Company's product development strategy is to
acquire, by purchase or license, proprietary wound care technology from other
parties. There can be no assurance that the Company will be able to obtain such
technology on acceptable terms, if at all. An inability to obtain such
technology will not interfere with the Company's plans to develop its own
proprietary technology or to commercialize wound care products it has developed.
Such inability to license proprietary wound care technology could have a
material adverse effect on the Company's business.
The Company relies upon trade secrets and other unpatented proprietary
information in its product development activities. The Company's employees are
required to enter into agreements providing for confidentiality and the
assignment of rights to inventions made by them while in the employ of the
Company. The Company also has entered into non-disclosure agreements which are
intended to protect its confidential information delivered to third parties for
research and other purposes. There can be no assurance that these agreements
will provide meaningful protection of the Company's confidential or proprietary
information.
<PAGE>
Distribution and Sales
Domestic
Most of the Company's wound care products are distributed and sold
domestically pursuant to the Company's "master distributor" distribution system.
Master distributors purchase products directly from the Company and distribute
the products, through their network of representatives and dealers, to end
users. Master distributors enter into master distributorship agreements with the
Company which provide for product purchase quotas. While the Company provides
suggested pricing formulas or guidelines, the master distributor retains sole
discretion to determine the price at which to sell the products. Master
distributors are responsible for supervising their own network of
representatives and dealers. Compensation to master distributors is in the form
of markups on products distributed by master distributors to their
representatives and dealers and by commissions earned on products sold and
distributed, by whatever means, to national accounts or end users within a given
master distributor's territory.
The Company's domestic master distributors and their respective sales
territories are set forth below:
Distributor Sales Territories
----------- -----------------
D-LUX Products, Inc. Arizona, California, Hawaii, Nevada,
Corona, California New Mexico
Dimensions Distributing, Inc. Connecticut, Maine, Massachusetts,
Norton, Massachusetts New Hampshire, Rhode Island, Vermont
GMI, Inc. New Jersey, New York, Pennsylvania
Port Washington, New York
InnerQuest Sales, Inc. Illinois, Indiana, Iowa, Kansas, Michigan,
Lamont, Illinois Minnesota, Missouri,Montana, Nebraska,North
Dakota, South Dakota, Wisconsin
Med Surg Systems, Inc. Alaska, Idaho, Montana, Oregon, Washington
Seattle, Washington
<PAGE>
Distributor Sales Territories
----------- -----------------
Medical Marketing, Inc. Utah
Salt Lake City, Utah
Medical Resources, Inc. Alabama, Delaware, Florida, Georgia,
Richmond, Virginia Kentucky, Maryland, Mississippi, North
Carolina, Ohio, South Carolina, Tennessee,
Virginia, Washington DC, West Virginia
Positive Health Products, Inc. Arkansas, Louisiana, Oklahoma, Texas
Katy, Texas (selected areas)
Resource Medical, Inc. Texas (selected areas)
Fort Worth, Texas
Transworld Home Healthcare, Inc. Puerto Rico, U.S. Virgin Islands
Red Bank, New Jersey
Two of the Company's master distributors are responsible for a significant
portion of its product revenues, representing approximately 33% of total net
sales in 1996. GMI, Inc. and Medical Resources, Inc. were responsible for
approximately 21% and 12%, respectively, of the Company's total net sales in
1996. The loss of one of these master distributors could have a material adverse
effect on the Company's business.
Dealers, representatives and wholesalers are subject to the authority of
master distributors and must satisfy various criteria established by the Company
as a prerequisite to distributing the Company's products. Among these
requirements are the maintenance of reasonable product inventories, employment
of sales personnel knowledgeable in the marketing, sale and use of the products,
and the conduct of various marketing activities, including in-service and
educational seminars relative to the products. Dealers, representatives and
wholesalers may market to pharmacies or may distribute directly to nursing
homes, hospitals and home healthcare agencies. Compensation of dealers,
representatives and wholesalers is derived from markups on the Company's
products distributed by them.
In addition to product distribution through master distributors, the
Company distributes products through its national accounts program. A national
account is a customer who purchases products in one master distributor's
territory and then reships the products to places of business in other master
distributors' territories. The Company sells its products directly to a national
account and receives a tracking list indicating the ultimate destinations of the
products. Once the tracking list is received, the Company makes payments to the
affected master distributors equivalent to the difference between the master
distributor price and the actual price paid by the national account, net of
discounts and fifty percent of freight costs. The national accounts program
represented 33% of the Company's total net sales in 1996.
International
The Company's wound care products are distributed and sold internationally
pursuant to various licensing and distribution agreements. The Company has
licensing and/or distribution agreements with companies in Egypt, Indonesia,
Canada, the Philippines, the South African region and Israel. The Company
currently seeks to penetrate the European and Latin American markets.
All of the Company's wound care products are currently sold in Egypt. The
Company's distributor for Egypt is Pharmaserve, Ltd., Cairo. Pharmaserve
established a scientific office in Cairo in August, 1995 to disseminate
information about the Company's products. Sales in Egypt in 1996 totaled
approximately $50,000. Presently, the parties are operating under an exclusive
agency agreement which provides for a 12% commission payable to Pharmaserve but
does not provide for minimum purchase quotas. The Company expects that a written
distributorship agreement providing for minimum purchase quotas and territorial
exclusivity will be executed in the near future.
On June 24, 1994, the Company granted an exclusive license to manufacture,
distribute, market and sell all of its products in a designated territory to
P.T. Tempo Scan Pacific ("Tempo"), Jakarta, Indonesia. Tempo's territory
consists of Indonesia, Malaysia, Singapore, Myanmar, Thailand, Brunei, Vietnam,
Laos, Cambodia, Hong Kong and Macao. Tempo has commenced distribution of the
Company's products in Indonesia and is prepared to further introduce the
Company's products to other countries in its territory as the products receive
approval by each country's health authority. Pursuant to the Agreement, Tempo is
required to make the following minimum annual purchases: $314,500 in 1995,
$439,325 in 1996; $458,950 in 1997; $505,950 in 1998; and $548,800 in 1999. In
addition, Tempo is required to make royalty payments of 3.5% of its sales (net
of sales taxes) to the Company. Purchases by Tempo in 1995 and 1996 were in the
amounts of $76,191 and $45,000, respectively, and fell short of minimum purchase
requirements. The Company has determined that Tempo's failure to meet 1995 and
1996 minimum purchase requirements were attributable to delays in receiving the
necessary regulatory approvals from Indonesian authorities. Accordingly, the
Company has waived Tempo's 1995 and 1996 minimum purchase requirements.
On May 10, 1995, the Company granted an exclusive license to manufacture,
distribute, market and sell Dermagran II Ointment and Dermagran II Moisturizing
Spray in Canada to Trans CanaDerm, Inc. ("TCD"), Montreal, Quebec. The Agreement
requires that TCD pay the Company a $100,000 (CDN) prepaid royalty upon Quality
Control verification of the first batch of product together with prepaid
royalties of $85,000 (CDN), $60,000 (CDN) and $30,000 (CDN) upon provincial
formulary listings in Ontario, Quebec and British Columbia, respectively.
Royalties, net of the foregoing prepayments, will be based on 15% of net sales
during the life of the Company's patent. In addition, once certain sales targets
are achieved, TCD will pay the Company milestone payments of up to $750,000
(CDN). The Company did not receive any royalties from TCD in 1996.
On April 8, 1995, the Company granted an exclusive license to distribute,
market and sell all of its products in the Philippines to Inter-Health, Inc.
("Inter-Health"), Manila. Inter-Health has filed registration applications
relative to the Company's products with the appropriate health agencies of the
Philippines. Upon completion of product registration, Inter-Health is required
to make the following minimum annual purchases: $164,436 in the first year;
$193,696 in the second year; $266,396 in the third year; $294,818 in the fourth
year; $325,186 in the fifth year; and $350,947 in the sixth year. Sales have not
yet commenced in the Philippines.
On January 29, 1996, the Company granted an exclusive license to
distribute, market and sell all of its products in Malawi, Mozambique, Namibia,
South Africa and Zimbabwe to Manta Medical ("Manta"), Bryanston, South Africa.
Product registration applications are being processed. Upon completion of
product registration, Manta is required to make the following minimum annual
purchases: $115,000 in the first year; $138,000 in the second year; $165,000 in
the third year; $198,000 in the fourth year; and $237,600 in the fifth year.
Sales have not yet commenced in Manta's territory.
On October 31, 1996, the Company granted an exclusive license to
distribute, market and sell seven of its products in Israel to Gamida-MedEquip,
Ltd. ("Gamida"), Givat Savyon, Israel. Minimum purchase requirements are to be
established after December 31, 1997. Sales have not yet commenced in Israel.
Third Party Reimbursement
The Company sells its wound care products to nursing homes, hospitals and
home healthcare agencies. Several of the Company's dealers seek reimbursement
from third party payors such as Medicare, Medicaid, health maintenance
organizations and private insurers, including Blue Cross/Blue Shield. The
availability of reimbursement from such third party payors is a significant
factor in the Company's sales of wound care products.
Medicaid is a federally funded program administered by the states. Medicaid
insurance is available to individuals who have no Medicare or private health
insurance or to individuals who have exhausted their Medicare benefits. Included
in the Medicaid insurance coverage are in-patient stays in long term care
facilities, hospitalization and drugs.
Medicaid reimbursement of the Company's products is dependent upon Company
paid rebates to state Medicaid agencies. Effective January 1, 1991, the Omnibus
Budget Reconciliation Act of 1990 requires pharmaceutical companies, as a
condition of the eligibility of its products for Medicaid reimbursement, to
enter into a rebate agreement with the federal government. Only drugs of the
pharmaceutical companies having such rebate agreements are covered by state
Medicaid programs. Pharmaceutical companies participating in the Medicaid rebate
program must remit to state Medicaid agencies a formula-based rebate which
varies from quarter to quarter in accordance with the Company's quarterly net
sales and the average manufacturer price of the individual products.
Historically, Medicaid rebates have ranged between 3% and 5% of the Company's
net sales.
Medicare is a federally funded program administered by four private
insurance companies. Medicare insurance generally is available to individuals
who have paid social security taxes and are over the age of 65 years. The
majority of the Company's products are eligible to receive reimbursement from
Medicare. However, certain of these products have been the subject of past
Medicare reimbursement cutbacks. In 1991 the Health Care Financing
Administration ("HCFA") implemented a 73.3% reduction in reimbursements for
wound care kits. These cutbacks were applicable to all claims submitted for
Medicare reimbursement and were sought to be applied retroactively. Wound care
kit reimbursements by Medicare were temporarily suspended pending determination
of the legality of the retroactive aspect of the cutbacks. Reimbursements were
resumed in the first quarter, 1992.
Since 1991, Medicare reimbursement relative to wound care kits was limited
to wound dressings necessitated by, and used within two weeks of, surgery.
Non-dressing components of the kits were ineligible for reimbursement. Dressings
used in non-surgical applications or outside of the two-week period following
surgery were, likewise, ineligible for reimbursement. On June 1, 1994, HCFA
adopted amendments liberalizing the Medicare Carrier's Manual relative to
reimbursement of wound care products. Effective with the adoption of these
amendments, all dressings utilized after debridement of a wound became eligible
for Medicare reimbursement. In addition to dressings, components of wound care
kits utilized to secure dressings, such as tape and gauze, also became eligible
for reimbursement. The HCFA amendments restructured the manner in which wound
care products were classified. Such restructuring served to place products in
separate categories thereby allowing for reimbursement pricing by category. All
of the Company's products except Dermagran Spray and Dermagran Tri-Zinc
Incontinent Wash were listed as eligible for reimbursement.
Recently HCFA amended its policies to exclude Wound Care Kits from Medicare
reimbursement. However, sold separately, the Company's products, with the
exception of Dermagran Spray, Dermagran Wound Cleanser with Zinc and Dermagran
Tri-Zinc Incontinent Wash, continue to be eligible for Medicare reimbursement.
For this reason, the Company phased out the sale of Wound Care Kits in the first
quarter, 1996.
Federal and state governments, as well as private insurers, will continue
their pursuit of programs designed to control or reduce the cost of health care.
These cost cutting measures may include reductions in reimbursements and/or
increases in rebates for wound care products. As such, there can be no assurance
as to whether reimbursements for the Company's products will continue to be
available or as to the future extent of the Company's rebate obligations.
Competition
The Wound Care Industry
The wound care sector of the pharmaceutical industry is characterized by
rapidly evolving technology and intense competition. The Company's competitors
include major pharmaceutical, chemical and specialized pharmaceutical companies,
many of which have financial, technical and marketing resources significantly
greater than those of the Company. In addition, many specialized pharmaceutical
companies have formed collaborations with large, established companies to
support research, development and commercialization of wound care products which
may be competitive with those of the Company. Academic institutions, government
agencies and other public and private research organizations are also conducting
research activities and may commercialize wound care products on their own or
through joint ventures. The existence of competing products or treatments, or
products or treatments that may be developed in the future, may adversely affect
the marketability of products developed by the Company.
Competing Product Descriptions
The Company's competitors market several varieties of wound care products
which compete with those of the Company. The following table sets forth generic
descriptions of these products:
Product Description
------- -----------
Skin protectants ............Creams, gels, pastes or foams used to protect
the skin from friction, abrasions and moisture.
Wound cleansers .............Cleansing solutions used to remove wound debris,
exudate and bacteria.
Gauze dressings .............Impregnated and dry dressings used to protect
and/or deliver substances to the wound site.
Antimicrobials, antiseptics,
antibiotics..................Drugs, often in topical application format, used
to prevent and control infection.
Transparent films ...........Clear, plastic-like wound coverings used to provide
protection and maintain moisture in the wound site.
Hydrocolloids ...............Fluid-absorbing dressings which maintain a moist
wound environment and provide infection control and
pH balance.
Gels/hydrogels ..............Water based preparations used to provide moisture,
protection and drainage absorption to the wound.
Calcium alginates ...........Highly absorbent dressings used to remove wound
exudate.
The foregoing products are similar in many respects to those of the Company
in that they are designed to address one or more of the "traditional wound care
factors."
Competitive Analysis
Although the Company is considerably smaller than, and lacks the resources
of, the majority of its competitors, the Company believes that its products
compare favorably with those of its competitors with respect to: (1) wound
management, (2) cost effectiveness, and (3) convenience and ease of use. All
five traditional wound care factors are addressed by the majority of the
Company's products. Additionally, the proprietary technology that is employed by
the majority of these products, in the opinion of management, would be
difficult, time consuming and expensive to circumvent. For these reasons,
<PAGE>
management believes the Company possesses attributes which will enable it, for
the near term, to compete successfully in the wound care field. The ultimate
ability of the Company to remain competitive depends upon its ability to develop
or acquire, and commercialize, wound care technologies which are superior to
those of its competitors.
The following table lists the Company's major competitors, their competing
products and the Company's competitive products:
Competitor Competitor's Product Company's Competitive Product
- ---------- -------------------- -----------------------------
Sween Corporation Sween Cream Dermagran Ointment/Dermagran Spray
Peri-Wash(R)Incontinent Dermagran Tri-Zinc Incontinent Wash
Cleanser-Deodorizer
Carrington Labs Cara-Klenz TM Dermagran Wound Cleanser with Zinc
Carra Foam TM Skin
Perineal Cleanser Dermagran Tri-Zinc Incontinent Wash
Carrington Dermal
Wound Gel TM Dermagran Hydrophilic Wound Dressing
Dermagran Zinc-Saline Hydrogel
Carrasyn TM Dermagran Hydrophilic Wound Dressing
Dermagran Zinc-Saline Hydrogel
C.R. Bard Biolex Wound Gel Dermagran Hydrophilic Wound Dressing
Dermagran Zinc-Saline Hydrogel
Biolex Wound Cleanser Dermagran Wound Cleanser with Zinc
Hygiene1(R) Dermagran Tri-Zinc Incontinent Wash
Calgon Vestal Aloe Vesta(R) Perineal Dermagran Tri-Zinc Incontinent Wash
Solution
Dow B. Granulex TM Dermagran Ointment/Dermagran Spray
Hickman/steriseal
Smith & Nephew Intrasite Gel TM Dermagran Hydrophilic Wound Dressing
United Dermagran Zinc-Saline Hydrogel
Southwest Elastogel TM Dermagran Hydrophilic Wound Dressing
Technologies Dermagran Zinc-Saline Hydrogel
Kendall Health Curity Wet Dressings(R) Dermagran Wet Dressing (Saline)
Care Products Dermagran Zinc-Saline Wet Dressing
Dermagran Hydrophilic Wound Dressing
Dermagran Zinc-Saline Hydrogel
Government Regulation
Scope of Regulation
The manufacture, distribution and advertising of the Company and its
products are subject to regulation by numerous federal and state governmental
agencies in the United States and by similar agencies in foreign countries. The
United States Food and Drug Administration ("FDA") is responsible for
enforcement of the Federal Food, Drug and Cosmetic Act ("FDC Act") which
regulates drugs and devices manufactured and distributed in interstate commerce.
The Company's products are either drugs or medical devices pursuant to the FDC
Act. The Federal Trade Commission ("FTC") administers the Federal Trade
Commission Act ("FTC Act") which regulates the advertising of products including
drugs and devices. All states have individual laws which resemble the FDC Act
and the FTC Act.
<PAGE>
Medical Devices
The following products are devices within the meaning of the FDC Act:
Dermagran Wet Dressing (Saline), Dermagran Zinc-Saline Wet Dressing, Dermagran
Hydrophilic Wound Dressing, Dermagran Wound Cleanser with Zinc and Dermagran
Zinc-Saline Hydrogel. Dermagran Hydrocolloid Dressing, which is currently under
development by the Company, is also a device within the meaning of the FDC Act.
The FDC Act requires that all devices for human use marketed in the United
States prior to May 28, 1976 ("Preamendment Devices") be classified by the FDA,
based on recommendations of expert panels, into one of three regulatory classes.
Class I products are subject only to the general controls which apply to all
devices, irrespective of class. General controls include the registration of
manufacturers, recordkeeping requirements, labeling requirements, and Good
Manufacturing Practice ("GMP") regulations.
Class II devices are those for which general controls are not sufficient to
ensure safety and effectiveness, and for which enough information exists to
develop a standard. These devices are required to meet performance standards
established by the FDA. Performance standards may specify materials,
construction components, ingredients, labeling and other properties of the
device. A standard may also provide for the testing of devices to ensure that
different lots of individual products conform to the requirements.
The most restrictive controls are applied to devices placed in Class III.
Class III devices are required to have FDA approval for safety and effectiveness
before they can be marketed unless the FDA determines that pre-market approval
is not necessary. Pre-market approval necessitates the compilation of extensive
safety and effectiveness data which is extremely expensive to compile and it
would take years to achieve approval.
Devices marketed after May 28, 1976 are considered to be one of two kinds:
those that are and those that are not substantially the same as a Preamendment
Device. Those that are substantially equivalent to a Preamendment Device are
classified the same as the equivalent pre-amendment product. Those new devices
which are not substantially equivalent to Preamendment Devices are automatically
in Class III, requiring pre-market approval.
All manufacturers are required to give the FDA ninety days notice before
they can introduce a device on the market. During the ninety-day period, the FDA
will determine whether the device is or is not substantially equivalent to a
Preamendment Device. If the FDA determines that the device is not substantially
equivalent to a Preamendment Device, it is automatically in Class III and the
manufacturer will have to provide the FDA with a Premarket Approval Application
("PMA") containing evidence that the device is safe and effective before the
device may be commercially distributed to the public. The manufacturer may,
however, try to convince the FDA to reclassify the device by filing a
reclassification petition.
All of the devices currently marketed by the Company have been found by the
FDA to be substantially equivalent to a Preamendment Device. Also, it appears
that the devices under development by the Company are substantially identical to
Preamendment Devices and will not require the submission and approval of a PMA.
Drugs
The Company's products which are classified as drugs pursuant to the FDC
Act are Dermagran Spray and Dermagran Ointment. Pursuant to the provisions of
the FDC Act the FDA has been given extensive authority to regulate the
manufacture and distribution of drugs.
"New" drugs are very closely regulated by the FDA. A drug is a "new drug"
if it is not generally recognized among scientifically qualified experts as safe
and effective for use under the conditions indicated in its labeling. In
addition, a drug is a new drug if it has not been used to a material extent or
for a material time under the indicated conditions, apart from use in safety and
effectiveness investigations, even if the drug has become generally recognized
as safe and effective as a result of such investigation. The definition applies
not only to active ingredients but to finished drug products as well.
A new drug may not be commercially marketed in the United States unless it
has been approved as safe and effective by the FDA. Such approval is based on a
New Drug Application ("NDA") submitted by the sponsor of the drug containing
acceptable scientific data including the results of tests to evaluate its safety
and substantial evidence of effectiveness for the conditions for which the drug
is to be offered. Drugs that are not "new" are not subject to the "new drug"
procedure, but must comply with all other drug requirements, including
registration, labeling, and GMP regulations.
Prior to the commencement of clinical studies to compile the data necessary
for approval of a NDA, the sponsor must obtain approval of an Investigational
New Drug Application to commence investigations regarding the safety and
effectiveness of drugs.
<PAGE>
Over-the-Counter Drugs
Prescription drugs may be dispensed only by or on the prescription of a
licensed practitioner and must be labeled: "Caution: Federal law prohibits
dispensing without prescription." In general, a drug is restricted to the
prescription class if it is not safe for use except under professional
supervision. All drugs having characteristics that do not require prescription
dispensing are considered to be over-the-counter ("OTC") drugs. The Company's
drug products are classified as OTC drugs.
In 1972, the FDA began a comprehensive review of the safety, efficacy, and
labeling of all OTC drugs for the purpose of establishing the conditions under
which such drugs could be generally recognized as safe, effective, and not
misbranded. To facilitate the review, these drug products were grouped into
therapeutic classes, and advisory panels were established to review each class.
The panels completed their review in 1983, and it remains for the FDA to
complete the rulemaking process.
On the basis of the recommendations submitted by the panels, the FDA issues
monographs setting forth the conditions under which OTC drugs in each class are
deemed to be generally recognized as safe, effective, and not misbranded.
Generally, the administrative process includes the publication of a
"Preliminary," "Tentative Final," and "Final Monograph." During the rulemaking
process, products are placed into one of three categories describing whether a
drug is deemed to be generally recognized as safe and effective and not
misbranded (Category I), to be not generally recognized as safe and effective or
misbranded (Category II), or to lack sufficient data for categorization
(Category III). Products that do not comply with general OTC regulations or an
applicable Final Monograph are subject to a regulatory action. Any OTC drug not
in compliance with the content and labeling requirements of a Final Monograph is
subject to a regulatory action unless it is the subject of an approved new drug
application. The FDA has issued a Compliance Policy Guide in which it determined
that it would not pursue regulatory action against OTC drugs prior to the
adoption of a final regulation unless failure to do so presents a potential
public health hazard.
Dermagran Spray and Dermagran Ointment are currently being marketed as
over-the-counter skin protectant drug products. Skin protectant products are the
subject of an ongoing FDA rule making procedure which will result in the
issuance of a final regulation specifying those active ingredients which are
permitted in, and designating labeling requirements for, such products.
Preliminary Monographs and Tentative Final Monographs applicable to Dermagran
Spray and Dermagran Ointment have been issued by the FDA in 1978 and 1984,
respectively.
Dermagran Spray and Dermagran Ointment have been formulated and labeled in
accordance with the proposals outlined in the Preliminary Monograph. The
Dermagran Spray and Dermagran Ointment labels carry treatment indications of
"For symptoms of oozing and weeping due to rubbing or friction" and "For the
temporary protection and lubrication of minor skin irritations such as
intertrigo, chafing, galling, rubbing or friction," respectively.
Under the Tentative Final Monograph, products formulated and identified in
the manner of Dermagran Spray and Dermagran Ointment would be required to carry
treatment indications of "Dries the oozing and weeping of poison ivy, poison oak
and poison sumac." Thus, if the proposals outlined in the Tentative Final
Monograph are adopted without modification in a final regulation, and if no
modifications were made to the formulations of Dermagran Spray and Dermagran
Ointment, the treatment indications on the current Spray and Ointment labels
would have to be revised.
It is currently impossible to predict when the FDA will promulgate a final
regulation, what the final regulation will provide or how a final regulation
(monograph) will affect either of these products or their labels. Pursuant to
the FDA's Compliance Policy Guide, discussed above, Dermagran Spray and
Dermagran Ointment may be marketed under their current monographs until one year
following the issuance of a Final Monograph. It is the Company's intention to
manufacture Dermagran Spray and Dermagran Ointment pursuant to the FDA's Final
Monograph relative to "skin protectants" and to make whatever formulation and
labeling changes are necessary to fully comply with the final regulation.
Foreign Approval
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of marketing of the product in such countries. The requirements
governing the conduct of clinical trials and product approval vary widely from
country to country, and the time required for approval may be longer or shorter
than that required for FDA approval. Although there are procedures for unified
filings for certain European countries, most countries currently maintain their
own product approval procedures and requirements.
<PAGE>
Other Regulatory Requirements
In addition to the regulatory framework for product approvals, the Company
is subject to regulation under state and federal law, including requirements
regarding occupational safety, laboratory practices, environmental protection
and hazardous substance control, and may be subject to other present and
possible future local, state, federal and foreign regulation.
The Company is subject to federal, state and foreign laws and regulations
adopted for the protection of the environment and the health and safety of
employees. Management believes that the Company is in compliance with all such
laws, regulations and standards currently in effect and that the cost of
compliance with such laws, regulations and standards will not have a material
adverse effect on the Company.
Employees
Prior to the restructuring of its operations, the Company employed
twenty-two full time employees. The Company currently maintains sixteen full
time employees, two of whom serve in executive capacities, nine of whom serve in
marketing, sales and distribution capacities, two of whom serve in
administrative capacities and three of whom serve in product development
capacities. The Company also employs three part time employees. The Company
considers its employee relations to be satisfactory.
Item 2. Description of Property
The Company's executive offices, occupying approximately 4,440 square feet
of leased space in Old Forge, Pennsylvania, are leased from Amos M. Clark, a
shareholder and former Vice President and director of the Company. This lease
has a five-year term expiring December 31, 1999, at the rate of $3,600 per
month, subject to cancellation upon six months notice at the option of the
Company. The Company also has a lease for 8,200 square feet of warehouse space
in Old Forge with a three-year term expiring December 31, 1997, at a rate of
$1,750 per month.
<PAGE>
Item 3. Legal Proceedings
Morgan Paris, Inc. v. Derma Sciences, Inc.
On September 21, 1994, the Company terminated its master distributorship
agreement with Morgan Paris, Inc. ("Morgan Paris") "for cause." Morgan Paris
filed a civil action against the Company in the United States District Court for
the Southern District of Ohio on September 7, 1994, with amendments on September
19, 1994, and January 17, 1995. The complaint, as amended, generally alleges
that the Company violated the Sherman Antitrust Act and the Ohio Valentine Act
and that it breached the Master Distributorship Agreement between Morgan Paris
and the Company. The Complaint sought compensatory damages of $9 million,
trebled to $27 million, relative to alleged anti-trust violations, together with
a temporary restraining order and preliminary injunction enjoining the Company
from the "unlawful practices" alleged in the complaint. Morgan Paris'
application for a temporary restraining order was denied on September 23, 1994.
The Company, in its response to the Morgan Paris complaint, denied the
factual basis and legal sufficiency of the anti-trust and breach of contract
claims. In addition, the Company filed counterclaims against Morgan Paris in
which it alleges that Morgan Paris breached the master distributor contract by:
(1) failing to pay invoices within thirty days after written notice and demand
for payment, and (2) publishing and distributing information defamatory and
harmful to the reputation and business interests of the Company by publishing
and distributing defamatory statements concerning the Company to the news media.
In addition, the Company's counterclaims alleged that Morgan Paris had: (1)
willfully and intentionally infringed on the Company's tradename and trademarks,
and (2) engaged in deceptive trade practices. The Company sought compensatory
damages in the amount of the outstanding invoices, $60,154.61 plus interest,
$60,000 for its breach of contract claim and reasonable costs and attorneys'
fees and a permanent injunction enjoining Morgan Paris from using the Company's
tradename and/or trademarks and from representing itself as an authorized agent
or representative of the Company or its products.
This litigation was settled in the second quarter, 1996 at no loss to the
Company.
Derma Sciences, Inc. v. Geritrex Corporation
The Company filed a complaint on January 5, 1995, in the United States
District Court for the Southern District of New York against Geritrex
Corporation ("Geritrex"). The complaint seeks injunctive relief and damages
under several counts, including false advertising of goods sold in interstate
commerce under the Lanham Act, false advertising and deceptive practices under
various New York statutes and unfair competition under the common law of the
State of New York. The complaint alleges that Geritrex Corporation, the producer
of Dermadrox Ointment and Dermadrox Moisturizing Spray, falsely advertised that
its products were "equivalent" to Dermagran products manufactured and sold by
the Company.
The Company has ascertained that Geritrex ceased claiming that Geritrex
products are equivalent to the Company's products. Accordingly, the Geritrex
litigation has been terminated.
ABS LifeSciences, Inc. v. Derma Sciences, Inc.
The Company on September 6, 1995 abrogated its license agreement with ABS
LifeSciences, Inc. ("ABS") due to the failure of ABS to produce and make
available to the Company the wound care product "Viaderm". The Company ceased
sales of Chronicure on that date.
ABS, a subsidiary of Integra LifeSciences Corporation (Nasdaq: IART), filed
a civil action against the Company in the United States District Court for the
District of New Jersey in which it claims damages in excess of $50,000 for
alleged breach by the Company of a license agreement with ABS. The license
agreement generally provided that ABS will sell to the Company, and license the
Company to resell, the wound care products Chronicure(R) and Viaderm(R). The
complaint alleges that the Company: (1) breached its license agreement with ABS
by failing to make certain payments and minimum purchases provided therein, and
(2) committed business libel against ABS by publicly announcing that ABS had
failed to honor its obligations under the license agreement.
The Company, in its response to the ABS complaint, denied the claims of ABS
and asserted counterclaims of fraudulent misrepresentation, breach of contract
and fraud in the inducement. In its counterclaims, the Company seeks the
following remedies and damages: (1) recission of the license agreement, (2)
compensatory damages in excess of $700,000 representing unearned royalties,
unsold and unsalable product, production expenses, general and administrative
expenses, injury to business interests and reputation, and (3) punitive damages.
<PAGE>
The parties are currently engaged in the discovery process.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matter to a vote of shareholders during the
fourth quarter, 1996.
<PAGE>
Part II
Item 5. Market for Common Equity and Related Shareholder Matters
The Common Stock of the Company is traded on Nasdaq under the symbol
"DSCI." The Common Stock is also traded on the Boston and Pacific Stock
Exchanges under the symbol "DMS." The Company's Common Stock commenced trading
on May 13, 1994. The following table sets forth the high and low bid prices for
the Company's Common Stock as reported by Nasdaq:
Quarter Ended High Low
------------------ ------ -----
March 31, 1995 5 1/4 4 3/4
June 30, 1995 5 1/4 2 1/2
September 30, 1995 3 1/4 1 7/8
December 31, 1995 3 1/4 2
March 31, 1996 4 3/4 2 1/4
June 30, 1996 4 3/4 2 5/8
September 30, 1996 3 7/8 2 1/4
December 31, 1996 3 1/8 1 3/4
The stock prices reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
As of the close of business on March 3, 1997, there were 1,033 holders of
record of the Common Stock.
The Company has paid no cash dividends in respect of its Common Stock and
the Company has no intention to pay cash dividends in the near future.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
Since its formation in September of 1984, the Company has been engaged in
the development, marketing and sale of topical preparations for the treatment of
chronic, non-healing wounds. Revenues increased 20% and 18% in 1994 and 1995,
respectively. In 1996, the Company experienced a 20% decrease in annual revenue.
The Company earned net income of $88,728 and $75,347 in 1994 and 1995,
respectively, and incurred a net loss of $1,436,265 in 1996. The Company's net
loss for 1996 was primarily attributable to: (1) the decrease in sales; (2)
legal costs incurred in connection with the settlement of litigation with a
master distributor; (3) restructuring of the Company's operations; (4) write
down of obsolete inventory; (5) increase in sales and marketing expense; and (6)
the write off of capitalized costs relative to construction of a new
headquarters facility. At December 31, 1994, 1995 and 1996, the Company's
retained deficits were $303,691, $228,344 and $1,664,609, respectively.
<PAGE>
Results of Operations
The following table presents selected financial information for the periods
indicated expressed as a percentage of net sales:
Year Ended December 31,
------------------------------------
1994 1995 1996
---------- --------- ----------
Net sales .......................... 100.0% 100.0% 100.0%
Cost of sales ...................... 30.2 22.7 23.3
-------------------------------------
Gross profit .................... 69.8 77.3 76.7
Operating Expenses:
Product development ............. 8.2 12.0 17.7
Selling, general and
administrative ................. 58.5 61.0 94.5
-------------------------------------
Total operating expenses 66.7 73.0 112.2
-------------------------------------
Income (loss) from operations ...... 3.1 4.3 (35.5)
Other income (expense).............. 0.7 (2.4) 1.9
Income taxes ....................... (2.0) (0.6) 2.1
-------------------------------------
Net income (loss)................... 1.8% 1.3% (31.5%)
=====================================
Sales Overview
The Company's net sales are primarily derived from Dermagran Ointment,
Dermagran Spray, Dermagran Wet Dressings and Dermagran Hydrophilic Wound
Dressing. Net sales decreased in 1996 compared to 1995 by 20%. This decrease is
primarily attributable to decreases in Medicare reimbursement relative to a
portion of the Company's product line. Net sales increased in 1994 and 1995 over
prior years by 20% and 18%, respectively. In 1994, the Company implemented a 5%
price increase relative to Dermagran Spray and Dermagran Ointment. In 1995 and
1996, the Company implemented a 5% price increase relative to all of their
products. Apart from these price increases, sales increases for 1994 and 1995
resulted from increased sales volume.
The following table presents sales, by product, expressed in dollars and as
a percentage of net sales:
Year Ended December 31,
-----------------------------------------------------
1994 1995 1996
------------------ ----------------- ---------------
Product:
Dermagran Ointment........ $2,634,000 55% $3,407,000 60% $3,236,000 71%
Dermagran Spray........... 389,000 8% 434,000 8% 274,000 6%
Wound Care Kits (1)....... 338,000 7% 67,000 1% --- ---
Wet Dressings............. 501,000 10% 303,000 5% 123,000 3%
Hydrophilic Wound Dressing 779,000 16% 1,345,000 24% 882,000 19%
Chronicure (2)............ 154,000 3% 85,000 1% --- ---
Other Products............ 51,000 1% 84,000 1% 43,000 1%
------------------ ----------------- -----------------
Total................... $4,846,000 100% $5,725,000 100% $4,558,000 100%
================== ================= =================
(1) The Company phased out sales of Wound Care Kits in the first quarter, 1996.
See "Item 1. Description of Business - Third Party Reimbursement."
(2) The Company ceased sales of Chronicure in September, 1995. See "Item 3.
Legal Proceedings."
<PAGE>
1996 compared to 1995
Net Sales and Gross Profit
Net sales decreased in 1996 by $1,166,647, or 20%, to $4,557,931 from
$5,724,578 in 1995. This decrease is primarily attributable to decreases in
Medicare reimbursement relative to a portion of the Company's product line.
Sales of Dermagran Ointment decreased $171,000, or 5%, from $3,407,000 in 1995
to $3,236,000 in 1996. Sales of Dermagran Hydrophilic Wound Dressing decreased
$463,000, or 34%, from $1,345,000 in 1995 to $882,000 in 1996. Dermagran Spray
net sales decreased $160,000, or 37%, from $434,000 in 1995 to $274,000 in 1996.
Sales of Dermagran Wet Dressing (Saline) and Dermagran Zinc-Saline Wet Dressing
collectively decreased $180,000, or 59%, from $303,000 in 1995 to $123,000 in
1996.
Cost of sales and gross profit, expressed as a percentage of net sales,
remained relatively constant at 23% and 77%, respectively, in both 1996 and
1995. Aggregate cost of sales decreased $235,716, or 18%, to $1,062,392 in 1996
from $1,298,108 in 1995. Aggregate gross profit decreased $930,931, or 21%, to
$3,495,539 in 1996 from $4,426,470 in 1995. These decreases are directly
attributable to the decrease in sales.
Operating Expenses
Operating expenses increased $936,045, or 22%, from $4,176,670 in 1995 to
$5,112,715 in 1996. Product development expense increased $115,603, or 17%, from
$688,141 in 1995 to $803,744 in 1996, and increased as a percentage of sales
from 12% in 1995 to 18% in 1996. The increase in product development expense is
primarily attributable to: (1) research incident to expansion of the Company's
product line into the dermatology market; (2) submission of a patent application
and the commencement of clinical trials relative to a new product; (3)
submission of a FDA 510(k) application relative to extended claims with respect
to one of the Company's products; and (4) hiring of a Director of Research and
Medical Communications in July, 1995.
Selling, general and administrative expense for 1996 increased $820,442, or
24%, to $4,308,971 from $3,488,529 in 1995, and increased as a percentage of
sales from 61% in 1995 to 95% in 1996. The increase in selling, general and
administrative expense is primarily attributable to: (1) increased sales and
marketing expense; (2) severance expense due to the restructuring of the
Company's operations; (3) increased legal expense; and (4) write off of
capitalized costs relative to construction of a new headquarters facility.
Sales and marketing expense for 1996 increased $291,306, or 61%, to
$771,455 from $480,149 in 1995. This increase is attributable to the development
of the Company's interactive wound care brochure, development and continuance of
the Company's disease management program and increased advertising and product
promotional expenses. Severance expense totaled $227,327 for 1996 and is
attributable to the elimination of the positions of Vice President for Sales and
Marketing, Director of Purchasing and Director of International Development
together with several support positions as part of the Company's restructuring
of operations.
Legal expense for 1996 increased $107,830, or 84%, to $235,806 from
$127,976 in 1995. This increase is primarily attributable to costs associated
with the Company's litigation defense and settlement negotiations in Morgan
Paris, Inc. v. Derma Sciences, Inc. and ABS LifeSciences, Inc. v. Derma
Sciences, Inc. The Morgan Paris litigation has been settled at no loss to the
Company. The Company has deferred indefinitely plans to build a new headquarters
facility. Accordingly, the Company expensed $82,589 representing previously
capitalized design and site selection costs.
Loss from Operations
The Company incurred a loss from operations for 1996 of $1,617,176 compared
to income from operations of $249,800 in 1995. This loss is attributable to
lower sales and higher operating expenses as discussed above.
<PAGE>
Other Income (Expense)
During 1995, the Company recognized a loss on the write off of deferred
merger and acquisition costs relative to the termination of a contemplated
merger with Scherer Healthcare, Inc. and (potentially) ProCyte Corporation. No
such expenses were recognized in 1996.
Net Loss
The Company incurred a net loss in 1996 of $1,436,265, or $0.35 per share,
as compared to net income of $75,347, or $0.02 per share, in 1995.
1995 compared to 1994
Net Sales and Gross Profit
Net sales increased in 1995 by $878,674, or 18%, to $5,724,578 from
$4,845,904 in 1994. This increase is primarily attributable to increased sales
of Dermagran Hydrophilic Wound Dressing (gauze) and Dermagran Ointment. Sales of
Dermagran Hydrophilic Wound Dressing (gauze) rose $558,000, or 72%, from
$779,000 in 1994 to $1,337,000 in 1995. Sales of Dermagran Ointment rose
$773,000, or 29%, from $2,634,000 in 1994 to $3,407,000 in 1995. Dermagran Spray
sales increased $45,000, or 12%, from $389,000 in 1994 to $434,000 in 1995.
Sales of Dermagran Hydrophilic Wound Dressing (bulk) and Dermagran Wound
Cleanser with Zinc commenced in December, 1995 and totaled $8,300 and $2,000,
respectively. Sales of Dermagran Wet Dressing (Saline) and Dermagran Zinc-Saline
Wet Dressing decreased collectively $198,000. Wound Care Kit sales decreased
$271,000, or 80%, from $338,000 in 1994 to $67,000 in 1995. The foregoing
decreases are primarily attributable to certain changes in the Health Care
Financing Administration's policies the effect of which was to reduce, and, in
the case of Wound Care Kits, eliminate Medicare reimbursements relative to these
products.
The Company has increased sales internationally from $64,000 in 1994 to
$206,963 in 1995. This increase is attributable to initiating product sales in
Indonesia, Canada and Puerto Rico. Product sales in various other countries will
commence once product approvals are received from appropriate regulatory
authorities. See "Item 1. Description of Business - Distribution and Sales -
International."
During the third quarter, 1995, the Company ceased all sales of Chronicure,
a product licensed from ABS LifeSciences, Inc. See "Item 3. Legal Proceedings."
Cost of sales, expressed as a percentage of net sales, decreased from 30%
in 1994 to 23% in 1995. Aggregate cost of sales decreased $166,545, or 11%, to
$1,298,108 in 1995 from $1,464,653 in 1994. These decreases are a result of
shifts in the product mix toward relatively higher margin products and the
renegotiation (lowering) of prices by several of the Company's product
manufacturers.
Expressed as a percentage of net sales, gross profit increased from 70% in
1994 to 77% in 1995. Aggregate gross profit increased in 1995 by $1,045,219, or
31%, to $4,426,470 from $3,381,251 in 1994 as a result of the factors discussed
in the preceding paragraph.
Operating Expenses
Operating expenses increased $943,673, or 29%, from $3,232,997 in 1994 to
$4,176,670 in 1995. Product development expense increased $288,940, or 72%, from
$399,201 in 1994 to $688,141 in 1995, and increased as a percentage of sales
from 8.2% in 1994 to 12% in 1995. The increase in product development expense is
primarily attributable to the preparation of several applications to the FDA for
Section 510(k) product approval and the hiring of a Director of Research and
Medical Communications in July, 1995.
Selling, general and administrative expense for 1995 increased $654,733, or
23%, to $3,488,529 from $2,833,796 in 1994, and increased as a percentage of
sales from 58.5% in 1994 to 61% in 1995. The increase in selling, general and
administrative expense is attributable to increases in commissions expense,
general administrative expense, nonrecurring severance expense and legal
expense.
Commissions expense for 1995 increased $317,702 to $995,349 from $677,647
in 1994. This increase is attributable to the increase in national account sales
and the increase in sales of Dermagran Ointment and Dermagran Hydrophilic Wound
Dressing (gauze), which products generate relatively higher commissions. General
administrative expense for 1995 increased $172,473 to $269,112 from $96,639 in
1994. General administrative expense includes expenses incurred relative to
public relations and participation in various brokerage/investor shows,
directors' and officers' liability insurance, territory license fees and board
of directors' compensation. Severance expense in the amount of $131,292 was
incurred relative to the elimination of the position of Vice President for
Marketing as a result of the consolidation of the Company's sales and marketing
departments. Legal expense for 1995 increased $103,445 to $350,911 from $247,466
in 1994. This increase is primarily attributable to costs associated with the
Company's litigation defense in Morgan Paris, Inc. v. Derma Sciences, Inc. and
ABS LifeSciences, Inc. v. Derma Sciences, Inc. See "Item 3. Legal Proceedings."
<PAGE>
Income from Operations
The Company's income from operations for 1995 increased $101,546, or 68%,
to $249,800 from $148,254 in 1994. This increase in income is primarily
attributable to the increase in gross profit.
Deferred Merger and Acquisition Costs
The Company incurred investment banking and legal expenses totaling
$294,268 in connection with negotiations and document preparation relative to
the contemplated merger of the Company with Scherer Healthcare, Inc. and
(potentially) ProCyte Corporation. Discussions relative to this merger were
terminated during the second quarter, 1995. For further information please refer
to the Company's Form 10-KSB filed on March 31, 1995.
Net Income
The Company's net income in 1995 decreased $13,381, or 15%, to $75,347 from
$88,728 in 1994. This decrease is primarily attributable to the nonrecurring
merger and acquisition costs discussed above.
Financial Ratios
The following table presents selected financial ratios for the periods
indicated:
December 31,
------ -- ------- -- -------
1994 1995 1996
------ ------- -------
Current Ratio................................. 3.69 3.64 2.04
Quick Ratio................................... 2.87 2.75 1.55
Liabilities-to-Assets Ratio................... .23 .25 .43
Liabilities-to-Equity Ratio................... .30 .34 .76
Inventory Turnover............................ 2.45 1.35 1.11
The 1996 decreases in the Company's current and quick ratios are primarily
attributable to the use of the Company's proceeds of its initial public offering
for the purchase of certain assets of Morgan Paris, Inc. and for working capital
together with increased accounts payable and accrued expenses. See "Liquidity
and Capital Resources" and "Notes to Financial Statements." The 1996 increases
in the Company's liabilities-to-assets and liabilities-to-equity ratios are
primarily attributable to increased accounts payable and accrued expenses. See
"Notes to Financial Statements."
The 1995 increases in the Company's liabilities-to-assets and
liabilities-to-equity ratios are primarily attributable to the increased use of
its line of credit. The decrease in the rate of inventory turnover is
attributable to increased inventory levels necessary to support the Company's
expanding product line and decreased sales of Wet Dressings coupled with
contractual minimum purchase requirements of these products. See "Liquidity and
Capital Resources."
Liquidity and Capital Resources
At December 31, 1994, 1995 and 1996, the Company had working capital of
$3,398,096, $3,788,582 and $2,280,348, respectively. The 1996 decrease is
primarily attributable to the use of a portion of the proceeds of the Company's
public offering as discussed below, together with increased accounts payable and
accrued expenses. See "Notes to Financial Statements."
The Company publicly sold 900,000 shares of its common stock at $5.00 per
share (exclusive of commissions, discounts and offering expenses) on May 13,
1994. On May 23, 1994, the Company used $470,000 of the proceeds of its offering
to repay the outstanding balance on its bank line of credit. In 1995, the
Company used approximately $300,000 of the proceeds of its offering for
investment banking and legal expenses relative to the contemplated ProCyte
Corporation/Scherer Healthcare, Inc. merger. In 1996, the Company used $160,000
of the proceeds for the purchase of Morgan Paris, Inc.'s assets (see "Notes to
Financial Statements") and $439,000 for working capital. The balance of the
proceeds are invested in U.S. Treasury Bills having an aggregate market value of
$1,887,171 on December 31, 1996.
The Company's President, John T. Borthwick, Vice President for Finance and
Operations, Gary L. Borthwick and former Vice President for Sales and Marketing,
Donald F. McHale, RN received draws against incentive compensation during 1994
in the amounts of $99,530, $84,436 and $77,893, respectively. The Compensation
Committee of the Board of Directors subsequently determined that no incentive
compensation was payable relative to 1994. Accordingly, the foregoing executives
executed promissory notes requiring repayment of the subject incentive
compensation over a period of ten years with interest of 8.01% per annum.
Pursuant to its recent restructuring, the Company terminated the services of
Donald F. McHale. Mr. McHale repaid his promissory note in January, 1997. In
January, 1997, John T. Borthwick and Gary L. Borthwick tendered common stock of
the Company at the stock's closing price quoted by Nasdaq on the date of tender
($2.00 per share) in satisfaction of payments due during 1996 with respect to
the foregoing promissory notes.
<PAGE>
The Company has a short-term line of credit for $1,000,000 at a fluctuating
rate per annum equal to the bank's prime rate (8.25% at December 31, 1996). This
line of credit is secured by accounts receivable, inventory and the Company's
United States patent and trademarks. In 1996, the Company utilized its line of
credit primarily as working capital. Although the Company believes that funds
generated from operations and available from its line of credit will be
sufficient to serve its working capital requirements for the near term,
increased sales volume may require that the credit line be increased. The
Company believes that it has the ability to secure appropriate increases in its
credit line if required.
The Company is currently defending a civil action brought against it by ABS
LifeSciences, Inc. See "Item 3. Legal Proceedings." As of December 31, 1996, the
Company had expended approximately $188,000 attributable to the lawsuit in the
form of legal expense, travel expense and other administrative expenses.
The Company has a three year manufacturing contract, expiring January 1,
1998, with Kendall Health Care Products, the manufacturer of the Company's Wet
Dressings. This contract provides for minimum purchases in 1997 of $189,034.
Failure to meet minimum purchase requirements could result in contract
cancellation.
Statements that are not historical facts, including statements about the
Company's confidence and strategies, expectations about new or existing
products, technologies and opportunities, and market demand or acceptance of new
or existing products are forward-looking statements that involve risks and
uncertainties. These uncertainties include, but are not limited to, product
demand and market acceptance risks, impact of competitive products and prices,
product development, commercialization or technological delay or difficulties,
and trade, legal, social and economic risks.
<PAGE>
Item 7. Financial Statements
Index
-----
Description Page
- ----------- ------
Report of Independent Auditors..................................... 25
Balance Sheets..................................................... 26
Statements of Operations........................................... 27
Statements of Shareholders' Equity................................. 28
Statements of Cash Flows........................................... 29
Notes to Financial Statements...................................... 30
<PAGE>
Report of Independent Auditors
Board of Directors
Derma Sciences, Inc.
We have audited the accompanying balance sheets of Derma Sciences, Inc. as
of December 31, 1995 and 1996, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Derma Sciences, Inc. at
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
January 17, 1997
<PAGE>
DERMA SCIENCES, INC.
BALANCE SHEETS
ASSETS
December 31,
--------------------------
1995 1996
------------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 195,773 $ 60,208
Short-term investments 2,379,475 1,887,171
Accounts receivable, net of allowance
for doubtful accounts of 1995-$66,00;1996-$86,000 1,346,013 1,319,853
Current portion of officers' notes receivable 18,248 150,177
Inventory 1,069,685 837,659
Prepaid expenses and other current assets 213,114 224,774
------------- ------------
Total Current Assets 5,222,308 4,479,842
PROPERTY AND EQUIPMENT, NET 171,566 112,510
OTHER ASSETS:
Officers' notes receivable 247,394 155,554
Intangibles, net 191,173 514,439
Other assets 45,121 52,957
------------- ------------
Total Other Assets 483,688 722,950
------------- ------------
Total Assets $ 5,877,562 $ 5,315,302
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Demand note payable $ 700,000 $ 800,000
Accounts payable 381,633 745,542
Accrued expenses 352,093 653,952
------------- ------------
Total Current Liabilities 1,433,726 2,199,494
DEFERRED TAXES 46,672 0
OTHER LIABILITIES 247 95,000
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 15,000,000
shares, issued and outstanding 1995-4,054,233;
1996--4,079,233 shares 40,542 40,792
Additional paid-in capital 4,584,719 4,644,625
Retained deficit (228,344) (1,664,609)
------------- ------------
Total Shareholders' Equity 4,396,917 3,020,808
------------- ------------
Total Liabilities and Shareholders' Equity $ 5,877,562 $ 5,315,302
============= ============
See accompanying notes.
<PAGE>
DERMA SCIENCES, INC.
STATEMENTS OF OPERATIONS
Year ended December 31,
-----------------------------------------
1994 1995 1996
------------ ------------ -------------
NET SALES $ 4,845,904 $ 5,724,578 $ 4,557,931
COST OF SALES 1,464,653 1,298,108 1,062,392
------------ ------------ -------------
GROSS PROFIT 3,381,251 4,426,470 3,495,539
OPERATING EXPENSES:
Product development 399,201 688,141 803,744
Selling, general and administrative 2,833,796 3,488,529 4,308,971
------------ ------------ -------------
Total Operating Expenses 3,232,997 4,176,670 5,112,715
------------ ------------ -------------
INCOME (LOSS) FROM OPERATIONS 148,254 249,800 (1,617,176)
OTHER INCOME (EXPENSE):
Interest income 70,913 209,333 151,854
Interest expense (32,697) (54,672) (63,919)
Deferred merger and acquisition costs 0 (294,268) 0
------------ ------------ ------------
Total Other Income (Expense) 38,216 (139,607) 87,935
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES: 186,470 110,193 (1,529,241)
Income taxes (benefit) 97,742 34,846 (92,976)
------------ ------------ -------------
NET INCOME (LOSS) $ 88,728 $ 75,347 ($ 1,436,265)
============ ============ =============
NET INCOME (LOSS) PER COMMON SHARE $ 0.02 $ 0.02 ($ 0.35)
============ ============ =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 3,722,808 4,054,233 4,079,233
============ ============ =============
See accompanying notes.
<PAGE>
DERMA SCIENCES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Additional Total
Common Paid-In Retained Shareholders'
Stock Capital Deficit Equity
----------------------------------------------
Balance, January 1, 1994 $31,542 $1,373,622 ($ 392,419) $1,012,745
Net proceeds from the Company's
initial public offering 9,000 3,211,097 0 3,220,097
Net Income 88,728 88,728
---------------------------------------------
Balance, December 31, 1994 $40,542 $4,584,719 ($ 303,691) $4,321,570
Net Income 75,347 75,347
---------------------------------------------
Balance, December 31, 1995 $40,542 $4,584,719 ($ 228,344) $4,396,917
Issuance of 25,000 common shares 250 59,906 0 60,156
Net Loss 0 0 (1,436,265) (1,436,265)
----------------------------------------------
Balance, December 31, 1996 $40,792 $4,644,625 ($1,664,609) $3,020,808
----------------------------------------------
See accompanying notes.
<PAGE>
DERMA SCIENCES, INC.
STATEMENTS OF CASH FLOWS
Year ended December 31,
-------------------------------
1994 1995 1996
--------- --------- -----------
OPERATING ACTIVITIES:
Net Income (Loss) $ 88,728 $ 75,347 ($1,436,265)
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by (Used in) Operating Activities:
Depreciation and amortization 44,143 46,116 113,049
Provision for bad debts 83,999 (17,999) 121,606
Write off of deferred merger & acquisition costs 0 300,000 0
Deferred taxes, net 30,217 16,455 46,672)
Loss on abandonment 0 0 82,589
Charge related to issuance of common shares 0 0 60,156
Changes in operating assets and liabilities:
Accounts receivable (454,625) (281,622) (95,446)
Inventory (520,728) (212,177) 232,026
Prepaid expenses and other current assets (58,963) (73,457) (11,660)
Other assets 7,711 22,072 (7,836)
Accounts payable 230,656 (63,770) 363,909
Accrued expenses 53,569 117,145 206,859
Income taxes payable 24,491 (54,671) 0
--------- --------- ---------
Net Cash Used in Operating Activities (470,802) (126,561) (417,685)
INVESTING ACTIVITIES:
(Increase) decrease in short-term
investments (2,392,423) 201,778 492,304
Deferred merger & acquisition costs (300,000) 0 0
Purchases of property and equipment, net (19,342) (55,452) (65,464)
Acquisition of contract rights 0 0 (160,000)
Increase in patents and trademarks (41,420) (26,739) (44,384)
------------ --------- ----------
Net Cash (Used in) Provided by
Investing Activities (2,753,185) 119,587 222,456
FINANCING ACTIVITIES:
Net change in revolving line of credit 80,000 170,000 100,000
Principal payments on long-term debt and
capitalized lease obligations (15,682) (6,460) (247)
Officers' notes receivable (296,156) 30,514 (40,089)
Decrease in deferred offering costs 134,878 0 0
Net proceeds from initial public offering 3,220,097 0 0
----------- -------- --------
Net Cash Provided by Financing Activities 3,123,137 194,054 59,664
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (100,850) 187,080 (135,565)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 109,543 8,693 195,773
----------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,693 $ 195,773 $ 60,208
=========== ========== =========
See accompanying notes.
<PAGE>
Notes to Financial Statements
December 31, 1996
1. The Company
Derma Sciences, Inc. (the "Company") was incorporated under the laws of
Colorado on September 10, 1984 for the purpose of marketing various medical
products developed under a U.S. Patent. On June 3, 1996, the Company changed its
state of domicile to Pennsylvania. The Company is engaged in the development,
marketing and sale of primarily proprietary sprays, ointments and dressings for
the management of certain chronic non-healing skin ulcerations such as pressure
and venous ulcers, surgical incisions and burns. The Company markets its
products through independent distributors, mainly to healthcare agencies
throughout the United States. In addition, the Company's products are available
in selected markets throughout the world through strategic alliances with local
companies.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Inventory
Inventory is stated at the lower of cost (using the first-in, first-out
method), or market. The Company's inventory consists primarily of finished
goods.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is recorded using
accelerated methods over the estimated useful lives of the assets. Depreciation
expense includes the amortization of equipment recorded under capital leases.
The Company had engaged an architectural firm to design new corporate
headquarters for the anticipated relocation of the Company's offices. All costs
incurred were capitalized as construction in progress. As of December 31, 1995,
costs incurred totaled $82,589. All costs previously capitalized were written
off during 1996 when the Company deferred indefinitely plans for construction.
Intangible Assets
Goodwill represents the excess of estimated fair market value over cost of
net tangible assets at the time of acquisition of product lines acquired.
Goodwill is being amortized using the straight-line method over forty years.
The patent rights, which were assigned to the Company, are being amortized
using the straight-line method over the remaining life of the patent, which is
ten (10) years. Patents and trademarks acquired are recorded at cost and are
amortized using the straight-line method over the remaining legal lives.
Contract rights, which were acquired by the Company, are being amortized
using the straight-line method over the remaining thirty month term of the
master distributorship agreement expiring December 31, 1998.
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Asset Impairment
The carrying value of long-lived assets including identifiable intangibles
and goodwill related to those assets are reviewed if the facts and circumstances
suggest that an item may be impaired. If this review indicates that a long-lived
asset will not be recoverable, as determined based on the future undiscounted
cash flows of the asset, the Company's carrying value of the long-lived asset is
reduced to fair value.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying value
of these investments approximates fair value.
Short-term Investments
Short-term investments at December 31, 1995 and December 31, 1996 represent
primarily U.S. Treasury Bills that are carried at amortized cost which
approximates fair value. All investments are available for sale and mature
within 12 months of year end. Realized gains and losses, based on the specific
identification method, were not material.
Deferred Merger Costs
Expenses deferred in 1994 relative to the possible combination of companies
were written off in 1995 when those merger discussions ceased.
Cash Flow Information
Interest paid during 1994, 1995 and 1996 amounted to $32,697, $54,672 and
$63,919, respectively. Income taxes paid during 1994, 1995 and 1996 amounted to
$22,818, $53,922 and $14,185, respectively.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly,
recognizes no compensation expense for the stock option grants.
Net Income (Loss) Per Common Share
Net income (loss) per share of common stock is computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding during each period presented. Stock options were not considered in
the calculation of net income (loss) per share in 1996 because they were
anti-dilutive.
Income Taxes
The Company accounts for income taxes under the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition
The Company's products are primarily sold to independent distributors.
Sales are recorded when product is shipped.
Reclassifications
Certain amounts in the balance sheet and statement of cash flows at
December 31, 1995 have been reclassified to conform to the 1996 presentation.
3. Property and Equipment
Property and equipment comprise the following:
December 31,
---------------------------
1995 1996
----------- ----------
Furniture and equipment $169,844 $232,775
Leasehold improvements 12,009 14,543
Construction in progress 82,589 0
----------- ----------
264,442 247,318
Less: Accumulated depreciation 92,876 134,808
----------- ----------
$171,566 $112,510
=========== ==========
4. Intangibles
Intangibles comprise the following:
December 31,
---------------------------
1995 1996
----------- ----------
Goodwill $ 50,731 $ 50,731
Patents and trademarks 314,620 359,004
Contract rights 0 350,000
----------- ----------
365,351 759,735
Less: Accumulated amortization 174,178 245,296
----------- ----------
$191,173 $514,439
=========== ==========
5. Concentration of Credit Risk
The Company sells almost all of its products to medical supply companies,
pharmacies and healthcare providers. At December 31, 1995 and 1996, primarily
all of the Company's accounts receivable are from companies in the healthcare
industry. Credit is extended based on an evaluation of the customer's financial
condition and collateral is not required.
The Company is dependent on two distributors who purchase products directly
from the Company. These two distributors accounted for 42%, 34% and 33% of net
sales in 1994, 1995 and 1996, respectively.
<PAGE>
6. Accrued Expenses
Accrued expenses comprise the following:
December 31,
----------------------------
1995 1996
----------- ------------
Commissions payable $224,275 $235,681
Accrued severance 0 191,521
Medicaid rebates payable 42,418 58,669
Other 85,400 168,081
---------- -------------
$352,093 $653,952
=========== ============
7. Medicaid Rebates Payable
Medicaid reimbursement for the Company's products is dependent upon Company
paid rebates to state Medicaid agencies. The Company is required to remit to
Medicaid agencies a formula-based rebate on quarterly net product sales and the
average price per product of the Company's products subject to Medicaid
reimbursement.
8. Demand Note Payable
The Company has a $1,000,000 revolving line of credit with a bank, with
$700,000 and $800,000 outstanding at December 31, 1995 and 1996, respectively,
which amounts approximate fair value. The maturity date of the line is June 30,
1997. The line of credit agreement requires monthly interest payments at the
bank's base rate, as defined, (8.25% at December 31, 1996). The line of credit
is secured by a general lien on accounts receivable, inventory and the Company's
United States patents and trademarks.
9. Operating Leases
The Company has noncancellable operating lease agreements for a warehouse
and two automobiles. Rent expense under these agreements amounted to $35,141,
$35,653 and $35,689 in 1994, 1995 and 1996, respectively. As of December 31,
1996, the 1997 minimum lease payments under these agreements total $30,435.
<PAGE>
10. Income Taxes
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $1,140,000 for state income tax purposes that expire in years 1997
through 1999. These carryforwards are the result of the reenactment of the net
operating loss provisions, effective for tax years beginning on January 1, 1995,
by the state in which the Company files its corporate tax returns. For Federal
tax purposes, the Company has a net operating loss carryforward of $923,000.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
December 31,
--------------------------------
1995 1996
------------- -------------
Deferred tax liabilities:
Depreciation ($12,876) $ 0
Prepaid insurance (19,253) (12,864)
Patent amortization (55,600) (66,493)
------------- -------------
Total deferred liabilities (87,729) (79,357)
Deferred tax assets:
Net operating loss carryforwards 520 413,103
Inventory 0 35,424
Depreciation 0 17,067
Capital loss 2,622 2,622
Trademark amortization 6,963 7,501
Research and development credit 0 21,249
Foreign tax credit 4,160 3,310
Allowance for bad debts 26,792 34,911
Other 0 33,546
------------- -------------
41,057 568,733
Valuation allowance 0 (489,376)
------------- -------------
Total deferred tax assets 41,057 79,357
------------- -------------
Net deferred tax (liabilities) assets ($46,672) $ 0
============= =============
The majority of the current year valuation allowance relates to net
operating loss carryforwards for which realization is not assured.
Significant components of the provision for income taxes are as follows:
Year ended December 31,
-------------------------------------------------
1994 1995 1996
------------- ------------- -------------
Current:
Federal $35,771 $18,391 ($46,304)
State 31,754 0 0
------------- ------------- ------------
Total current 67,525 18,391 (46,304)
Deferred:
Federal 37,617 (3,063) (12,118)
State (7,400 ) 19,518 (34,554)
------------- ------------- -------------
Total deferred 30,217 16,455 (46,672)
------------- ------------- -------------
$97,742 $34,846 ($92,976)
============= ============= =============
<PAGE>
10. Income Taxes (continued)
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense(benefit)
is:
Year ended December 31,
-----------------------------------
1994 1995 1996
----------- ---------- -----------
Tax at U.S. statutory rates $63,399 $37,507 ($521,655)
State income taxes, net of federal benefit 16,074 7,273 (78,491)
(Reduction) increase in valuation allowance (16,586) 0 489,376
Research and development credits 0 (7,648) 0
Nondeductible expenses 42,282 11,663 (8,372)
Effect of graduated tax rates (7,427) (11,750) 20,082
Other 0 (2,199) 6,084
----------- ---------- -----------
$97,742 $34,846 ($ 92,976)
=========== ========== ===========
11. Morgan Paris Acquisition
During May, 1996, the Company acquired the contract rights under the Morgan
Paris, Inc. Master Distributorship Agreement for $350,000. The Company paid
$160,000 at the date of closing. The remaining purchase price will be paid in
two equal non-interest installments of $95,000 on or before December 31, 1997
and 1998, respectively. The note payable relating to the remaining purchase
price represents a non-cash transaction which has not been reflected in the
statement of cash flows.
The cost of the acquisition has been capitalized and is being amortized
over the remaining thirty month term of the master distributorship agreement
expiring December 31, 1998.
12. Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its stock options because, as discussed below,
the alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing stock options. Under APB 25,
because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
The Company has a stock option plan under which there have been authorized
a maximum of 450,000 shares. The plan permits the granting of both incentive
stock options and nonqualified stock options to key employees and directors of
the Company, excluding members of the Compensation Committee, and certain
outside consultants and advisors to the Company. The purchase price will not be
less than 100% (110% for owners of more than 10% of common stock of the Company
on the date of grant) of the fair market value of the stock on the date of the
grant of such option. The duration of each option will not exceed 10 years from
the date of grant (five years for owners of more than 10% of the common stock of
the Company). Options vest at a rate of 20% per year. There have been no options
exercised under the plan.
<PAGE>
12. Stock Options (continued)
In addition to the options granted under the stock option plan at December
31, 1996, there were also 375,000 shares subject to options granted to officers
and directors pursuant to agreements with exercise prices ranging from $2.31 to
$2.50. Options vest at a rate of 20% per year. There have been no options
exercised.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its stock options granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996: risk-free interest rate of 6.0%; dividend yield
of 0%; a volatility factor of the expected market price of the Company's common
stock of 0.511; and a weighted average life of the option of 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of traded
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
1995 1996
------- -----------
Pro forma net income (loss) $72,193 ($1,529,232)
Pro forma earnings (loss) per common share $ 0.02 ($ 0.37)
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.
A summary of the Company's stock option activity and related information
for the years ended December 31 follows:
1994 1995 1996
---------------- ----------------- -----------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Option Price Option Price Option Price
-------- ------ -------- -------- --------- ---------
Outstanding-beginning
of year 11,125 $3.60 35,125 $2.85 270,125 $2.44
Granted 24,000 2.50 235,000 2.38 150,000 2.50
Exercised 0 0 0
Forfeited 0 0 0
--------- ------ -------- -------- ---------- ------
Outstanding-end of year 35,125 $2.85 270,125 $2.44 420,125 $2.46
========== ====== ======== ======== ========== ======
Exercisable at end of year 4,450 58,475 142,500
Weighted-average fair value
of options granted during
the year $1.08 $1.16
<PAGE>
12. Stock Options (continued)
Exercise prices for options outstanding under the stock option plan and
other agreements at December 31, 1996 ranged from $2.31 to $3.60. Options
granted during 1994 had an original exercise price of $5.00. These options were
repriced by the Board of Directors during 1995 at $2.50.
13. Commitments and Contingencies
ABS LifeSciences, Inc. ("ABS"), a subsidiary of Integra LifeSciences
Corporation, filed a civil action against the Company in the United States
District Court for the District of New Jersey in which it claims damages in
excess of $50,000 for alleged breach by the Company of a license agreement with
ABS. Management believes it will prevail in this action and therefore, no
provision has been made for this action in the accompanying financial
statements.
The Company has entered into an agreement to purchase inventory from a
supplier which specifies the quantities to be purchased. The minimum commitments
for inventory purchases for 1997 are $189,034.
14. Related Party Transactions
The Company leases office space from a shareholder of the Company under an
operating lease that expires in December, 1999. The Company can terminate the
lease at any time upon giving 180 days written notification. Annual rent expense
under this lease was $43,200 for the years ended December, 1995 and 1996.
In 1994, the Company entered into a five-year consulting agreement with a
director and shareholder. The agreement provides that this individual will
provide consulting services to the Company in return for annual compensation of
$70,000, to be adjusted from time to time by the Company's President and Chief
Executive Officer. In 1996, such compensation was $99,000.
In 1995, the Company loaned an officer $28,000 on demand at an interest
rate of 9.0%. This loan was guaranteed by an individual who is a director and
shareholder. Subsequent to December 31, 1996, the officer repaid the promissory
note.
15. Officers' Notes Receivable
Various officers of the Company received draws against incentive
compensation during 1994 totaling approximately $296,156. The Compensation
Committee of the Board of Directors subsequently determined that no incentive
compensation was payable relative to 1994. Accordingly, the officers executed
promissory notes requiring repayment of the incentive compensation over a period
of ten years with interest of 8.01% per annum. The Board of Directors has
determined that the officers may tender either common stock of the Company or
cash in payment of the promissory notes.
In 1995, the Compensation Committee approved forgiveness of one officer's
promissory note in the amount of $34,292 as part of the officer's severance
package. Subsequent to December 31, 1996, another officer repaid his promissory
note of $77,893 inclusive of principal and interest.
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in or disagreements with accountants on accounting
and financial disclosure matters during any period covered by the financial
statements filed herein or any period subsequent thereto.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
Directors and Executive Officers
The directors and executive officers of the Company are:
Name Age Position held with the Company
- --------------------------- --- -----------------------------------------
Edward J.Quilty (1) ....... 46 Chairman of the Board
John T.Borthwick (1)(4) ... 43 President,Chief Executive Officer and Director
Mary G.Clark, RN (1)....... 64 Vice Chairman of the Board and Special Consultant
Gary L.Borthwick .......... 38 Vice President for Finance and Operations,
Chief Financial Officer, Treasurer and Director
Robert P.DiGiovine, RPh ... 40 Director of Regulatory Affairs and Product
Development, Secretary and Director
Margaret R. Spencer (4) ... 70 Director
Joseph V. Villasin, MD (2) 56 Director
Dr. Hsia-Fu Chao .......... 60 Director
Robert W. Naismith, Ph.D. . 51 Director
Herbert Grossman,RPh (2)(3) 66 Director
Laurence F. Lane (3)(4).... 51 Director
_______________
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Member of the Nominating Committee.
Information Relative to Directors and Executive Officers
Edward J. Quilty has served as Chairman of the Board since May, 1996 and a
director of the Company since March, 1996. Mr. Quilty has been the Chairman of
the Board of RhoMed, Inc., a biopharmaceutical company specializing in peptide
drug design for diagnostic and therapeutic agents, since November, 1995. From
July, 1994 through November, 1995, he was President and Chief Executive Officer
of MedChem Products, Inc., a publicly traded developer and manufacturer of
specialty medical products acquired by C.R. Bard in November, 1995. From March,
1992 through July, 1994, Mr. Quilty served as President and Chief Executive
Officer of Life Medical Sciences, Inc., a developer and manufacturer of
specialty medical products including wound healing agents. The assets of Life
Medical Sciences were purchased by MedChem Products Inc. Mr. Quilty has over 25
years of experience in the healthcare industry primarily in strategic planning,
management and sales and marketing. Mr. Quilty is a member of the Healthcare
Manufacturing Marketing Council. He earned a Bachelor of Science from Southwest
Missouri State University, Springfield, Missouri in 1972 and his M.B.A from Ohio
University, Athens, Ohio in 1987.
John T. Borthwick has served as President and Chief Executive Officer of
the Company since February, 1991. He has served as a director of the Company
since November, 1984 and served as Vice Chairman of the Board from September,
1994 to June, 1995. Previously, he was Vice President for Marketing and National
Sales Manager of the Company from 1984 through 1990. Mr. Borthwick serves on the
board of directors of Plansoft Corporation, a developmental stage employee
benefit plan administration software company. During 1988 and 1989, Mr.
Borthwick also served as President of Wound Management Services, a Medicare
billing service specializing in wound care. In 1993, Mr. Borthwick served as a
member of the board of directors of the National Association for the Support of
Long Term Care, an organization which represents the legislative and regulatory
interests of the long term care industry. Mr. Borthwick earned a Bachelor of
Arts in Biology from Temple University in 1975.
Mary G. Clark, RN, founded the Company and has served as a Special
Consultant for Scientific Affairs to the Company and Vice Chairman of the Board
since March, 1994 and June, 1995, respectively. She served as Chairman of the
Board of the Company from February, 1991 through March, 1994. Mrs. Clark served
as the Company's President from 1984 to 1990, and as director of the Company
from November, 1984 to March, 1994. She is the inventor and original patent
holder of the Company's flagship products, Dermagran Spray and Dermagran
Ointment. She is also the founder, owner and operator of the Primary Medical and
Nutritional Clinic, Old Forge, Pennsylvania, a clinic specializing in medical
and nutritional preventative therapies. She has over 32 years of clinical
medical experience of which 18 years are in the nutritional biochemistry and
ortho-molecular medicine fields. Mrs. Clark earned a Registered Nurse degree
from Scranton State General Hospital in 1954 and a Clinical Nurse Therapist
degree in Intensive Cardiovascular Care from Mechanicsburg Rehabilitation Center
in 1972. She was appointed by former Pennsylvania Governor Robert P. Casey to
membership on the Entrepreneurial Advisory Board for the Commonwealth of
Pennsylvania.
<PAGE>
Gary L. Borthwick was appointed Vice President for Finance and Operations
in March, 1995 and has served as Vice President for Finance and Chief Financial
Officer of the Company since February, 1991. He has served as a director of the
Company since July, 1988. He joined the Company in 1985 as Operations Manager
and served as Comptroller from 1987 through 1990. Mr. Borthwick owned and
operated K&G Health Foods, a health food store in Old Forge, Pennsylvania, from
1979 through 1992. In addition, he served from 1988 to 1989 as
Secretary/Treasurer of Wound Management Services, Dunmore, Pennsylvania. Mr.
Borthwick earned an Associate Degree in Accounting and Business Administration
from Keystone Junior College in 1979.
Robert P. DiGiovine, RPh, serves as Director of Regulatory Affairs and
Product Development of the Company. Formerly, Mr. DiGiovine served as Assistant
Director of Scientific Affairs of the Company from December, 1993. He has served
as Assistant Secretary since July, 1994, and as a director of the Company since
July, 1988. Mr. DiGiovine is a registered pharmacist and formerly owned and
operated DiGiovine Drug Store, a retail pharmacy in Old Forge, Pennsylvania,
from 1985 to 1993. He attended Bloomsburg State College and the University of
Scranton and earned his Bachelor of Science in Pharmacology from Temple
University, Philadelphia, Pennsylvania, in 1980.
Margaret R. Spencer has served as a director of the Company since November,
1984. She served as Vice Chairman of the Board of the Company from February,
1991 through September, 1994 and Chairman of the Board from December, 1985
through February, 1991. She is a Pennsylvania licensed Nursing Home
Administrator and served from 1977 until her retirement in October, 1992, as
Executive Director and Chief Executive Officer of Heritage House, a continuum
care community for persons 62 years of age and older located in Wilkes Barre,
Pennsylvania. Mrs. Spencer earned a Bachelor of Arts in Economics from the
University of Pennsylvania in 1948.
Joseph V. Villasin, MD, has served as a director of the Company since July,
1985. He has been a staff physician and Medical Director at Clarks Summit State
Hospital Long Term Care Facility in Clarks Summit, Pennsylvania, since 1980 and
1990, respectively. Previously, Dr. Villasin served as the President, Medical
Staff, at Clarks Summit State Hospital. He has also maintained a general medical
practice clinic in Scranton, Pennsylvania, since 1980 and performs clinical
studies relative to the Company's products. Dr. Villasin earned his
undergraduate degree from the University of the Philippines College of Arts &
Sciences in 1962 and graduated from the University of the Philippines College of
Medicine in 1967. He completed his post-graduate training at the Philippine
General Hospital, St. Michael Hospital, Milwaukee, Wisconsin, Mercy Hospital,
Pittsburgh, Pennsylvania, and Wilson Memorial Hospital, Johnson City, New York,
during 1967 through 1978. He has instructed anatomy at the University of the
Philippines and pathology at the University of Pittsburgh College of Medicine.
Dr. Hsia-Fu Chao has served as a director of the Company since July, 1994.
Dr. Chao also serves on the board of directors of Hymedix, Inc., a publicly
traded developer and distributor of pharmaceutical products. He has been the
Chairman of First Taiwan Investment Holding, Inc. and a director of First Taiwan
Investment Banking Group since 1986. Dr. Chao previously served as Chairman, and
presently serves as a Consultant Physician and a director, of the China Medical
Center, Taipei, Taiwan R.O.C. He graduated from the National Defense Medical
Center (Taiwan) in 1961 and was a Fellow in medicine at Washington University.
Dr. Chao completed his residency and ultimately served as Chief of Division of
Gastroenterological Oncology at the Veterans General Hospital, Taipei, Taiwan
R.O.C. He has held professorships at the National Yang Ming Medical University
and the National Defense Medical Center.
Robert W. Naismith, Ph.D., has served as a director of the Company since
March, 1994 and served as Chairman of the Board from January, 1995 through May,
1996. He currently serves as the Managing Director of Healthcare at BlueStone
Capital Partners, L.P. and Chairman of William Naismith Associates, a strategic
business consulting firm. He is also a Senior Fellow at the Institute of
Molecular Biology & Medicine at the University of Scranton, Scranton,
Pennsylvania. Dr. Naismith co-founded, and served as the President, Chief
Executive Officer and a director of Biofor, Inc., a biopharmaceutical research
and discovery company specializing in rational drug design via computer assisted
molecular analysis, from 1986 to 1995. In addition, he served as Vice President
of Scherer Healthcare, Inc., an Atlanta based healthcare company whose
subsidiaries address various medical service and product markets from 1986 to
1995. Dr. Naismith has served as Chairman of the Compensation Committee of the
Board of Directors of Penn Security Bank & Trust Company, Scranton, Pennsylvania
since 1988, as a director and Chairman of the Joint Conference Committee of the
Community Medical Center, Scranton, Pennsylvania from 1980 to 1992 and as
Chairman and director of a publicly traded bridge fund. He holds an adjunct
associate professorship in the School of Medicine at Case Western Reserve
University and adjunct professorships in the Department of Biology at
Pennsylvania State University and the Department of Biology at the University of
Scranton. Dr. Naismith also serves as a Trustee of the William Harvey Medical
Foundation, London, U.K. He is a member of the Editorial Board of the Journal of
Applied Toxicology and the Journal of Hazardous Waste and is the author of over
30 publications. Dr. Naismith received his Bachelor of Science in Biology from
East Stroudsburg University in 1966 and his Ph.D. in Genetics from Pennsylvania
State University in 1971. He was awarded a tenured Associate Professorship at
Pennsylvania State University in Biology in 1977.
<PAGE>
Herbert Grossman, RPh, has served as a director of the Company since June,
1995. Mr. Grossman has been President, Chief Executive Officer and a director of
Beacon Laboratories LLC, a development stage research company specializing in
the development of technology for the treatment of cancer, since July, 1995. He
has over forty years experience in general management, corporate planning,
marketing, advertising and publishing in the domestic and worldwide healthcare
industry. From 1992 to 1995 Mr. Grossman served as a strategic business
consultant to the Ortho Diagnostic Systems division of Johnson & Johnson. He was
Chairman of the Board and a director of the Zambon Corporation, the United
States subsidiary of the Zambon Group, an Italian based research-intensive,
multinational healthcare manufacturer of pharmaceuticals, fine chemicals and
hospital products, from 1990 through 1992 and 1988 through 1992, respectively.
Mr. Grossman previously served as the founding President and Chief Executive
Officer of the Zambon Corporation. He serves on the boards of directors of the
following corporations: Biofor, Inc., Opticare Centers, Inc., Strategic Medical
Communications, Inc., Jenner Technologies and REMBIS Associates. Mr. Grossman
has served on numerous government and business committees, most recently on
Deloitte Haskins & Sells' National Emerging Business Advisory Board in
conjunction with the White House Conference on Small Business. He earned a
Bachelor of Science in Pharmacy from Long Island University, Brooklyn College of
Pharmacy, New York, in 1951. Mr. Grossman also attended the University of Miami
Graduate Business School and New York University Graduate Business School.
Laurence F. Lane has served as a director of the Company since June, 1995.
Mr. Lane has been the Senior Vice President of Regulatory Affairs of NovaCare,
Inc., a publicly traded medical rehabilitation corporation, since November,
1986. He has over twenty years of government relations and policy experience.
Mr. Lane has served as the Director for Special Programs of the American Health
Care Association, Director for Policy Development of the American Association of
Homes for the Aging and legislative representative of the American Association
of Retired Persons. He managed the 1980 White House Mini-Conference on Long Term
Care and served as a credentialed resource person for the 1981 White House
Conference on Aging. Mr. Lane is a member of the following organizations:
National Association for the Support of Long Term Care, International Subacute
Healthcare Association, National Association for Rehabilitation Agencies,
National Health Lawyers Association, and Healthcare Financial Management
Association. He earned a Bachelor of Arts and M.A. from the School of Public and
International Affairs of George Washington University, Washington, D.C. Mr. Lane
has pursued doctoral studies at the Washington Public Affairs Center, University
of Southern California and received a Gerontology certificate from Andrus
Gerontology Center, University of Southern California in 1974.
Family Relationships
Mary G. Clark is the mother of John T. Borthwick and Gary L. Borthwick.
Margaret R. Spencer is the mother-in-law of John T. Borthwick.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers, and persons who own
more than ten percent of a registered class of the Company's equity securities,
to file with the Securities and Exchange Commission (the "Commission") initial
reports of ownership and reports of changes in ownership of common stock and
other equity securities of the Company. Officers, directors and greater than ten
percent shareholders are required by Commission regulation to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company, all reports under Section 16(a) required to be
filed by its officers, directors and greater than ten-percent beneficial owners
were timely filed.
<PAGE>
Item 12. Executive Compensation
Summary Compensation Table
The following table shows all compensation paid by the Company to its Chief
Executive Officer and to each of its executive officers whose compensation
exceeded $100,000 for their services in all capacities during the years 1994,
1995 and 1996:
Annual Compensation
------------------- Options All Other
Name and Principal Position Year Salary Bonus (#) Compensation
- ----------------------------- ---- ------- ------- ------- --------------
John T. Borthwick 1996 $180,000 --- --- $10,861 (1)(2)
President and Chief 1995 150,000 $40,000 100,000 10,712 (1)(2)
Executive Officer 1994 93,500 --- --- 9,962 (1)
Gary L. Borthwick 1996 135,000 --- --- 7,514 (3)
Vice President for 1995 119,000 20,000 50,000 7,514 (3)
Finance & Operations and 1994 72,800 --- --- 7,514 (3)
Chief Financial Officer
Donald F. McHale, RN 1996 150,000 --- --- 2,289 (4)
Vice President for Sales 1995 129,000 13,800 --- 645 (2)
& Marketing 1994 65,000 --- 50,000 ---
____________________________
(1) The Company enrolled John T. Borthwick in a split-dollar life insurance
program on July 1, 1993. The monthly premiums are $830.18 for $500,000
coverage.
(2) Matching contributions made pursuant to the Company's 401(k) plan.
(3) The Company enrolled Gary L. Borthwick in a split-dollar life insurance
program on February 1, 1993. The monthly premiums are $626.15 for $500,000
coverage.
(4) This amount consists solely of matching contributions made pursuant to the
Company's 401(k) plan. Mr. McHale's employment terminated on December 31,
1996. His severance payment, in the amount of $189,000, was accrued for
accounting purposes in 1996 but was not paid until January, 1997. For
information relative to Mr. McHale's severance, please refer to Exhibit
10.54.
Option Grants Table
The following table sets forth information regarding grants of stock
options made for the year ended December 31, 1996:
Percent of Total Exercise
Options Options Granted to Price
Name Granted (#) Employees in 1996 ($/Share) Expiration Date
---------------- ------------ ------------------ ---------- ----------------
Edward J. Quilty 150,000(1) 100% 2.50 May 22, 2007
__________________
(1) These options began vesting at a rate of 20% per year on May 22, 1996.
<PAGE>
Aggregate Year End Option Value Table
The following table sets forth information regarding the aggregate number
and value of options held by the above executive officers as of December 31,
1996. No options have been exercised:
Value of Unexercised
Number of Shares In-The-Money Options
Underlying Unexercised at December 31, 1996
Options at December 31, 1996 ($)(1)
----------------------------- ---------------------
Name Exercisable Unexercisable Exercisable Unexercisable
----------------------- ----------- ------------- ----------- -------------
John T. Borthwick........ 20,000(2) 80,000 0 0
Gary L. Borthwick........ 10,000(2) 40,000 0 0
Donald F. McHale, RN .... 4,000(3) 0 0 0
20,000(4) 0 0 0
___________________________
(1) Determined based on a fair market value for the Company's common stock at
December 31, 1996 of $2.00 per share.
(2) These options began vesting at a rate of 20% per year on January 1, 1996
and are exercisable at $2.31 per share.
(3) These options are exercisable at $3.60 per share and will expire on March
31, 1997 if not exercised.
(4) These options were granted in 1994 in the following amounts and exercise
prices: 10,000 at $4.50 per share; 20,000 at $5.00 per share and 20,000 at
$6.50 per share. All of these options were repriced by the Board of
Directors and are exercisable at $2.50 per share. If unexercised by March
31, 1997, these options will expire.
Compensation of Directors
All directors are reimbursed for expenses incurred in connection with each
board and committee meeting attended. Each outside director receives $500 for
every board meeting and for each separately held committee meeting attended. In
addition, each outside director receives an annual retainer of $5,000. Inside
directors receive no compensation for their services as directors.
The following table sets forth certain information with respect to the
grant of all options under the Stock Option Plan to the directors of the
Company:
Exercisable
Options Options at Exercise
Granted December 31, 1996 Price
Name (#) (#) ($/Share) Expiration Date
- ------------------------ -------- ------------------ --------- ---------------
Dr. Hsia-Fu Chao......... 10,000(1) 4,000 2.50 November 21, 2006
Robert P. DiGiovine, RPh 1,500(2) 1,200 3.60 August 14, 1997
Robert W. Naismith, Ph.D. 10,000(1) 4,000 2.50 November 21, 2006
Margaret R. Spencer ..... 3,125(2) 2,500 3.60 August 14, 1997
10,000(1) 4,000 2.50 November 21, 2006
Joseph V. Villasin, MD .. 1,500(2) 1,200 3.60 August 14, 1997
10,000(1) 4,000 2.50 November 21, 2006
________________________
(1) These options began vesting at a rate of 20% per year on November 21, 1995.
(2) These options began vesting at a rate of 20% per year on August 14, 1993.
<PAGE>
The following table sets forth certain information with respect to the
grant of options to directors of the Company exclusive of the Stock Option Plan:
Exercisable
Options Options at Exercise
Granted December 31, 1996 Price
Name (#) (#) ($/Share) Expiration Date
- ------------------------ -------- ------------------ --------- ---------------
Herbert Grossman, RPh. 10,000(1) 4,000 2.50 November 21, 2006
Laurence F. Lane...... 10,000(1) 4,000 2.50 November 21, 2006
________________________
(1) These options began vesting at a rate of 20% per year on November 21, 1995.
Employment Arrangements
The Company entered into a five-year employment agreement (the "Agreement")
with John T. Borthwick, its President and Chief Executive Officer, on December
29, 1995, and amended on March 5, 1997. The Agreement provides that Mr.
Borthwick will receive base compensation of $180,000 during the calendar years
1996, 1997 and 1998 and base compensation for the calendar years 1999 and 2000
to be determined by the Board of Directors upon the recommendation of the
Compensation Committee, together with such incentive and/or bonus compensation
as may be awarded upon the recommendation of the Compensation Committee of the
Board of Directors; provided, however, incentive and/or bonus compensation, if
any, will be predicated upon the extent to which the Company attains its
earnings goals and the extent of Mr. Borthwick's contributions thereto. As
additional compensation, the Agreement grants Mr. Borthwick 100,000
non-qualified stock options, exercisable at a price of $2.31 per share, of which
20,000 are vested as of January 1, 1996 and the remaining 80,000 vest at a rate
of 20% per year. If the Company sells additional common stock during the term of
the Agreement in a transaction, or related series of transactions, the result of
which is to increase the number of shares of common stock outstanding by 40%,
then Mr. Borthwick will be granted such additional stock options, exercisable at
$2.31 per share, as may be necessary to enable him to purchase the same
percentage of outstanding common stock as he maintained prior to such sale or
issuance. In addition, in the event of a sale of substantially all of the stock
or assets of the Company, or a merger or consolidation of the Company in which
the Company is not the surviving entity, or upon the written agreement of the
Company to effect such sale, merger or consolidation, Mr. Borthwick will have
the option of completing the remaining term of his employment under the
Agreement or receiving severance compensation equal to his total compensation
accrued during the twelve-month period immediately preceding such sale, merger
or consolidation. Further, in the event of such sale, merger or consolidation:
(1) the stock options granted pursuant to the Agreement will become exercisable
in their entirety and will remain exercisable for a period of not less than
thirty (30) days; and (2) the promissory note between Mr. Borthwick and the
Company dated January 17, 1995 in the original principal amount of $99,530.34
will be forgiven. The Agreement further provides that Mr. Borthwick will receive
a severance payment of 100% of his total compensation accrued during the
twelve-month period immediately preceding the expiration of the Agreement if the
Company does not renew or extend the term of the Agreement upon expiration
thereof. The Agreement also provides that Mr. Borthwick will receive: (i) a
vehicle for use primarily (but not exclusively) in the conduct of Company
business, (ii) split-dollar life insurance in the face amount of $500,000, and
(iii) disability income insurance providing for payments of 50% of compensation.
Mr. Borthwick may not disclose any confidential information of the Company
during or after the term of the Agreement, and may not compete with the Company
during the term of the Agreement and for a period of one year thereafter.
The Company entered into a five-year employment agreement (the "Agreement")
with Gary L. Borthwick, its Vice President for Finance and Operations and Chief
Financial Officer, on December 29, 1995, and amended on March 5, 1997. The
Agreement provides that Mr. Borthwick will receive base compensation of $135,000
during the calendar years 1996, 1997 and 1998 and base compensation for the
calendar years 1999 and 2000 to be determined by the Board of Directors upon the
recommendation of the Compensation Committee, together with such incentive
and/or bonus compensation as may be awarded upon the recommendation of the
Compensation Committee of the Board of Directors; provided, however, incentive
and/or bonus compensation, if any, shall be predicated upon the extent to which
the Company attains its earnings goals and the extent of Mr. Borthwick's
contributions thereto. As additional compensation, the Agreement grants Mr.
Borthwick 50,000 non-qualified stock options, exercisable at a price of $2.31
per share, of which 10,000 are vested as of January 1, 1996 and the remaining
40,000 vest at a rate of 20% per year. If the Company sells additional common
stock during the term of the Agreement in a transaction, or related series of
transactions, the result of which is to increase the number of shares of common
stock outstanding by 40%, then Mr. Borthwick will be granted such additional
stock options, exercisable at $2.31 per share, as may be necessary to enable him
to purchase the same percentage of outstanding common stock as he maintained
prior to such sale or issuance. In addition, in the event of a sale of
substantially all of the stock or assets of the Company, or a merger or
consolidation of the Company in which the Company is not the surviving entity,
or upon the written agreement of the Company to effect such sale, merger or
consolidation, Mr. Borthwick will have the option of completing the remaining
term of his employment under the Agreement or receiving severance compensation
equal to his total compensation accrued during the twelve-month period
immediately preceding such sale, merger or consolidation. Further, in the event
of such sale, merger or consolidation: (1) the stock options granted pursuant to
the Agreement will become exercisable in their entirety and will remain
exercisable for a period of not less than thirty (30) days; and (2) the
promissory note between Mr. Borthwick and the Company dated January 17, 1995 in
the original principal amount of $84,436.11 will be forgiven. The Agreement
further provides that Mr. Borthwick will receive a severance payment of 100% of
his total compensation accrued during the twelve-month period immediately
preceding the expiration of the Agreement if the Company does not renew or
extend the term of the Agreement upon expiration thereof. The Agreement also
provides that Mr. Borthwick will receive: (i) split-dollar life insurance in the
face amount of $500,000, and (ii) disability income insurance providing for
payments of 80% of compensation. Mr. Borthwick may not disclose any confidential
information of the Company during or after the term of the Agreement, and may
not compete with the Company during the term of the Agreement and for a period
of one year thereafter.
The Company entered into a three-year employment agreement (the
"Agreement") with Robert P. DiGiovine, RPh, its Director of Regulatory
Compliance and Product Development, on December 29, 1995. The Agreement provides
that Mr. DiGiovine will receive base compensation of $75,000, $80,000 and
$85,000 for the calendar years 1996, 1997 and 1998, respectively, together with
such incentive and/or bonus compensation as may be awarded upon the
recommendation of the Compensation Committee of the Board of Directors;
provided, however, incentive and/or bonus compensation, if any, shall be
predicated upon the extent to which the Company attains its earnings goals and
the extent of Mr. DiGiovine's contributions thereto; provided, further, that
such incentive and/or bonus compensation shall not exceed 35% of Mr. DiGiovine's
base compensation for that year. In addition, as further compensation under the
Agreement, the Company has granted Mr. DiGiovine 15,000 non-qualified stock
options which vest in three installments during the period January 1, 1996
through January 1, 1998 at an exercise price of $2.50 per share. In the event of
the sale of substantially all of the stock or assets of the Company, or upon the
merger or consolidation of the Company in which the Company is not the surviving
entity, or upon the written agreement of the Company to effect such sale, merger
or consolidation, Mr. DiGiovine will have the option of completing the remaining
term of his employment under the Agreement or receiving severance compensation
equal to his total compensation accrued during the twelve-month period
immediately preceding such sale, merger or consolidation. Further, in the event
of such sale, merger or consolidation the stock options granted pursuant to the
Agreement will become exercisable in their entirety and shall remain exercisable
for a period of not less than thirty (30) days. The Agreement further provides
that Mr. DiGiovine will receive a severance payment of 100% of his total
compensation accrued during the twelve-month period immediately preceding the
expiration of the Agreement if the Company does not renew or extend the term of
the Agreement upon expiration thereof. The Agreement also provides that Mr.
DiGiovine will receive disability income insurance providing for payments of 50%
of compensation. Mr. DiGiovine may not disclose any confidential information of
the Company during or after the term of the Agreement, and may not compete with
the Company during the term of the Agreement and for a period of one year
thereafter.
The Company entered into a three-year employment agreement (the
"Agreement") with Edward J. Quilty, its Chairman of the Board, on August 1,
1996. The Agreement provides that Mr. Quilty will receive base salary of $75,000
per year, together with a $25,000 annual bonus and such additional incentive
compensation as may be awarded upon the recommendation of the Compensation
Committee of the Board of Directors; provided, however, additional incentive
compensation, if any, shall be predicated upon the extent to which the Company
attains its earnings goals and the extent of Mr. Quilty's contributions thereto.
As additional compensation, the Agreement grants Mr. Quilty 150,000
non-qualified stock options, exercisable at a price of $2.50 per share, of which
30,000 are vested as of May 22, 1996 and the remaining 120,000 vest at a rate of
20% per year. These options become 100% exercisable if Mr. Quilty becomes
disabled, the Agreement is terminated by the Company other than "for cause," the
Agreement is terminated by Mr. Quilty for the Company's breach, or in the event
of the sale of substantially all of the stock or assets of the Company, or upon
the merger or consolidation of the Company in which the Company is not the
surviving entity. If the Company sells additional common stock during the term
of the Agreement in a transaction, or related series of transactions, the result
of which is to increase the number of shares of common stock outstanding by 40%,
then Mr. Quilty will be granted such additional stock options, exercisable at
$2.50 per share, as may be necessary to enable him to purchase the same
percentage of outstanding common stock as he maintained prior to such sale or
issuance. In addition, in the event of the sale of substantially all of the
stock or assets of the Company, or upon the merger or consolidation of the
Company in which the Company is not the surviving entity, the Company shall pay
Mr. Quilty a severance payment equal to the greater of his salary for the
remaining term of the Agreement or $100,000. Mr. Quilty may not disclose any
confidential information of the Company during or after the term of the
Agreement, and may not compete with the Company during the term of the Agreement
and for a period of one year thereafter.
<PAGE>
Stock Option Plan
The Company adopted the Stock Option Plan, (the "Plan") in July 1991, and
amended the Plan in January, 1994 and November 21, 1995. The number of shares of
common stock ("Common Stock") reserved for issuance pursuant to the Plan is
450,000 shares. The Plan authorizes the Company to grant two types of equity
incentives: (i) options intended to qualify as "incentive stock options"
("ISOs") as defined in Section 422 of the Internal Revenue Code of 1986, as
amended, and (ii) non-qualified stock options ("NQSOs"). The Plan authorizes
options to be granted to directors, officers, key employees and consultants of
the Company, except that ISOs may be granted only to employees. The Plan is
administered by a committee of disinterested directors designated by the Board
of Directors (the "Compensation Committee"). Subject to the restrictions of the
Plan, the Compensation Committee determines who is eligible to receive stock
options, the nature, amount and timing of options granted under the Plan, the
exercise price and vesting schedule of any options granted, and all other terms
and conditions of the options to be granted.
Under the Plan, ISOs and NQSOs may have a term of up to ten years. Many
options which have been granted under the Plan vest over the five-year period
following the date of grant. Stock options are not assignable or transferable
except by will or the laws of descent and distributi on. Shares subject to
options granted under the Plan which have lapsed or terminated may again become
available for options granted under the Plan.
At December 31, 1996, there were 66,125 shares subject to options granted
under the Plan, with exercise prices ranging from $2.50 to $3.60 per share.
Options to purchase 6,125 shares began vesting in August, 1993 at a rate of 20%
per year. In October, 1994, options to purchase 20,000 shares were granted to
Donald F. McHale under the Plan at an exercise price of $5.00. These options
were repriced by the Board of Directors at $2.50 and began vesting in October,
1995 at a rate of 20% per year. On March 31, 1997, Mr. McHale's right to
exercise his options will terminate. Options to purchase an aggregate of 40,000
shares were granted and began vesting in November, 1995 at a rate of 20% per
year.
Special Consultant to the Company
The Company entered into a five-year consulting agreement ("Agreement")
with Mary G. Clark, on March 14, 1994. The Agreement provides that Mrs. Clark
will receive annual compensation of $70,000 with compensation to be adjusted
from time to time by the President and Chief Executive Officer of the Company.
In addition, in the event of a sale of substantially all of the stock or assets
of the Company, or a merger or consolidation of the Company in which the Company
is not the surviving entity, Mrs. Clark will have the option of completing the
remaining term of the Agreement or receiving severance compensation equal to her
annual compensation. The Agreement further provides that Mrs. Clark will receive
a severance payment equal to her annual compensation if the Company does not
renew or extend the term of the Agreement upon expiration thereof and disability
income insurance providing for payments of 50% of her annual compensation. Mrs.
Clark may not disclose any confidential information of the Company during or
after the term of the Agreement, and may not compete with the Company during the
term of the Agreement and for a period of one year thereafter.
Mrs. Clark serves as the Company's acting Director of Scientific Affairs.
In this capacity, she maintains primary responsibility for quality control,
product formulations, clinical studies and liaison with the Food and Drug
Administration.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of March 3, 1997, certain information
regarding the current beneficial ownership of shares of the Company's Common
Stock by (i) each person known by the Company to own beneficially more than 5%
of the outstanding shares of Common Stock, (ii) each director of the Company,
(iii) each officer of the Company, and (iv) all directors and officers of the
Company as a group:
Percent
Number of Shares Beneficially
Name and Address of Beneficial Owner (1) Beneficially Owned Owned
- --------------------------------------------- -------------------- ------------
Mary G. Clark, RN............................... 1,025,474 25.14%
John T. Borthwick (2)........................... 299,414 7.30%
Dr. Hsia-Fu Chao (3)............................ 252,000 6.18%
Gary L. Borthwick (4)........................... 187,788 4.60%
Edward J. Quilty (5)............................ 50,500 1.24%
Joseph V. Villasin, MD (6)...................... 27,825 *
Robert P. DiGiovine, RPh (7).................... 15,075 *
Laurence F. Lane (8)............................ 12,000 *
Margaret R. Spencer (9)......................... 7,000 *
Robert W. Naismith, Ph.D. (8)................... 4,000 *
Herbert Grossman, RPh (8)....................... 4,000 *
All directors and officers as a group
(11 persons) (10)............................... 1,885,076 46.21%
___________________________
* Less than one percent
(1) Except as otherwise noted, the address of each of the persons listed is 121
West Grace Street, Old Forge, Pennsylvania 18518.
(2) Includes 40,000 shares subject to options currently exercisable. No
additional shares subject to options will become exercisable within 60
days.
(3) First Taiwan Investment Holding, Inc., 15/F, 563, Chung Hsiao, East Road,
Section 4 Taipei, Taiwan R.O.C., beneficially owns 248,000 shares of the
Company's Common Stock. These shares are also beneficially owned by First
Taiwan Investment & Development, Inc., First Taiwan Investment Banking
Group and Dr. Chao by virtue of his position as Chairman of First Taiwan
Investment Holding, Inc. Includes 4,000 shares subject to options currently
exercisable. No additional shares subject to options will become
exercisable within 60 days.
(4) Includes 20,000 shares subject to options currently exercisable. No
additional shares subject to options will become exercisable within 60
days.
(5) Includes 30,000 shares subject to options currently exercisable. On May 22,
1997, 30,000 additional shares subject to options will become exercisable.
(6) Includes 5,200 shares subject to options currently exercisable. No
additional shares subject to options will become exercisable within 60
days.
(7) Includes 11,200 shares subject to options currently exercisable. No
additional shares subject to options will become exercisable within 60
days.
(8) Includes 4,000 shares subject to options currently exercisable. No
additional shares subject to options will become exercisable within 60
days.
(9) Includes 6,500 shares subject to options currently exercisable. No
additional shares subject to options will become exercisable within 60
days.
(10) Includes 128,900 shares subject to options currently exercisable.
Item 12. Certain Relationships and Related Transactions
The Company has entered into a five-year consulting agreement with its Vice
Chairman of the Board, founder and former President, Mary G. Clark. The
agreement provides that Mrs. Clark will provide services to the Company as its
Special Consultant for Scientific Affairs with annual compensation of $70,000,
to be adjusted from time to time by the Company's President and Chief Executive
Officer. Mrs. Clark's annual compensation for 1996 was $99,000.
The Company has entered into a five-year lease agreement with a
shareholder, Amos M. Clark, for the lease of its executive offices. The Company
can terminate the lease at any time upon giving six months notice. The annual
rental payment for 1996 was $43,200. Amos M. Clark is a former Vice President
and director of the Company and is the husband of Mary G. Clark.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description Page
----------- ----
3.1 Articles of Incorporation effective June 3, 1996 (Previously filed --
as Exhibit B to the Company's Proxy Statement filed on April 23,
1996 and incorporated herein by reference.)
3.2 Bylaws effective June 3, 1996 (Previously filed as Exhibit C to --
the Company's Proxy Statement filed on April 23, 1996 and
incorporated herein by reference.)
10.01* Stock Option Plan, dated July 18, 1991 (Previously filed as --
Exhibit 10.01 to the Company's Registration Statement filed
on Form SB-2, No. 33-52246-NY, declared effective on May 13,
1994 ["Registration Statement"] and incorporated herein by
reference.)
10.02* Stock Option Plan Amendment, dated January 14, 1994 (Previously --
filed as Exhibit 10.02 to the Company's Registration
Statement and incorporated herein by reference.)
10.03* Stock Option Plan Amendment, dated November 21, 1995 (Previously --
filed as Exhibit 10.03 to the Company's Form 10-KSB on March
29, 1996 ["1996 Form 10-KSB"] and incorporated herein by
reference.).
10.04 Master Distributorship Agreement, dated November 4, 1994, between --
the Company and Dimensions Distributing, Inc. (Previously
filed as Exhibit 10.03 to the Company's Form 10-KSB on March
31, 1995 ["1995 Form 10-KSB"] and incorporated herein by
reference.)
10.05 Master Distributorship Agreement, dated December 5, 1994, between --
the Company and GMI, Inc. (Previously filed as Exhibit 10.04
to the Company's 1995 Form 10-KSB and incorporated herein by
reference.)
10.06 Master Distributorship Agreement, dated November 16, 1994, --
between the Company and D-LUX Products, Inc. (Previously
filed as Exhibit 10.05 to the Company's 1995 Form 10-KSB and
incorporated herein by reference.)
10.07 Master Distributorship Agreement, dated December 14, 1994, --
between the Company and Positive Health Products, Inc.
(Previously filed as Exhibit 10.06 to the Company's 1995
Form 10-KSB and incorporated herein by reference.)
10.08 Master Distributorship Agreement, dated October 1, 1994, between --
the Company and Resource Medical, Inc. (Previously filed as
Exhibit 10.07 to the Company's 1995 Form 10-KSB and
incorporated herein by reference.)
10.09 Master Distributorship Agreement, dated July 1, 1993, between the --
Company and Medical Resources, Inc. (Previously filed as
Exhibit 10.07 to the Company's Registration Statement and
incorporated herein by reference.)
10.10 Master Distributorship Agreement, dated November 21, 1994 --
between the Company and Med Surg Systems, Inc. (Previously
filed as Exhibit 10.10 to the Company's 1995 Form 10-KSB and
incorporated herein by reference.)
10.11 Master Distributorship Agreement, dated July 12, 1993, between --
the Company and Medical Marketing, Inc. (Previously filed as
Exhibit 10.11 to the Company's 1995 Form 10-KSB and
incorporated herein by reference.)
10.12 Master Distributorship Agreement, dated August 3, 1994, between --
the Company and Med Net, Inc. (Previously filed as Exhibit
10.12 to the Company's 1995 Form 10-KSB and incorporated
herein by reference.)
10.13 Master Distributorship Agreement, dated January 23, 1996, between
the Company and InnerQuest Sales, Inc.
10.14 Manufacturer Purchase Agreement, dated December 22, 1994, between --
the Company and Kendall Healthcare Products Company
(Previously filed as Exhibit 10.20 to the Company's 1995
Form 10-KSB and incorporated herein by reference. )
10.15 Loan Agreement, dated July 15, 1993, between the Company and PNC --
Bank (Previously filed as Exhibit 10.40 to the Company's
Registration Statement and incorporated herein by
reference.)
10.16 Commitment Letter, dated June 17, 1993, to the Company from --
PNC Bank relative to line of credit (Previously filed
as Exhibit 10.41 to the Company's Registration
statement and incorporated herein by reference.)
10.17 Promissory Note, dated July 15, 1993, from the Company to --
PNC Bank (Previously filed as Exhibit 10.42 to the
Company's Registration Statement and incorporated
herein by reference.)
<PAGE>
10.18 Commercial Security Agreement, dated July 15, 1993, between --
the Company and PNC Bank (Previously filed as Exhibit
10.43 to the Company's Registration Statement and
incorporated herein by reference.)
10.19 Assignment of Trademarks from the Company in connection with --
the PNC Bank financing (Previously filed as Exhibit
10.44 to the Company's Registration Statement and
incorporated herein by reference.)
10.20 Trademark Security Agreement between the Company and PNC --
Bank (Previously filed as Exhibit 10.45 to the
Company's Registration Statement and incorporated
herein by reference.)
10.21 Assignment of Patents from the Company in connection with --
the PNC Bank financing (Previously filed as Exhibit
10.46 to the Company's Registration Statement and
incorporated herein by reference.)
10.22 Patent Security Agreement between the Company and PNC Bank --
(Previously filed as Exhibit 10.47 to the Company's
Registration Statement and incorporated herein by
reference.)
10.23 Financing Statement executed July 15, 1993 between the --
Company and PNC Bank (Previously filed as Exhibit 10.48
to the Company's Registration Statement and
incorporated herein by reference.)
10.24 Agreement to Provide Insurance, dated July 15, 1993, between --
the Company and PNC Bank (Previously filed as Exhibit
10.49 to the Company's Registration Statement and
incorporated herein by reference.)
10.25 Patent Assignment, dated April 22, 1994, from PNC Bank to --
the Company (Previously filed as Exhibit 10.91 to the
Company's Registration Statement and incorporated
herein by reference.)
10.26 Riderto the Security Agreement - Patents, dated April 27, --
1994, between the Company and PNC Bank (Previously
filed as Exhibit 10.92 to the Company's Registration
Statement and incorporated herein by reference.)
10.27 Changes in Terms Agreement, dated June 27, 1994, between the --
Company and PNC Bank. (Previously filed as Exhibit
10.52 to the Company's 1995 Form 10-KSB incorporated
herein by reference.)
10.28 Changes in Terms Agreement, dated July 7, 1995, between the --
Company and PNC Bank (Previously filed as Exhibit 10.28
to the Company's 1996 Form 10-KSB incorporated herein
by reference.)
10.29 Lease Agreement, dated January 14, 1994, between the Company --
and Amos M. Clark (Previously filed as Exhibit 10.50
to the Company's Registration Statement and
incorporated herein by reference.)
10.30 Lease Agreement, dated September 1, 1993, between the --
Company and Mariotti Building Products (Previously
filed as Exhibit 10.51 to the Company's Registration
Statement and incorporated herein by reference.)
10.31 License Agreement, dated June 24, 1994, between the Company --
and P.T. Tempo Scan Pacific (Previously filed as
Exhibit 1 to the Company's Form 8-K dated June 24, 1994
and incorporated herein by reference.)
10.32 License Agreement, dated May 10, 1995, between the Company --
and Trans CanaDerm, Inc.(Previously filed as Exhibit
10.03 to the Company's Form 10-QSB filed on June 30,
1995 and incorporated herein by reference.)
10.33 License Agreement, dated October 31, 1996, between the
Company and Gamida- MedEquip Ltd.
10.34 License Agreement, dated May 1, 1995, between the Company --
and Canadian Medical Supply, Inc. (Previously filed as
Exhibit 10.04 to the Company's Form 10-QSB filed on
June 30, 1995 and incorporated herein by reference.)
10.35 Distribution Agreement, dated April 8, 1995, between the --
Company and Inter-Health, Inc. (Previously filed as
Exhibit 10.02 to the Company's Form 10-QSB filed on
June 30, 1995 and incorporated herein by reference.)
10.36 Distribution Agreement, dated January 29, 1996, between the --
Company and Manta Medical (Previously filed as Exhibit
10.36 to the Company's 1996 Form 10-KSB and
incorporated herein by reference.)
10.37* Employment Agreement, dated December 29, 1995, between the --
Company and John T. Borthwick (Previously filed as
Exhibit 10.37 to the Company's 1996 Form 10-KSB and
incorporated herein by reference.)
10.38* Addendum to Employment Agreement, dated March 5, 1997, between
the Company and John T. Borthwick.
10.39* Employment Agreement, dated December 29, 1995, between the --
Company and Gary L. Borthwick (Previously filed as Exhibit
10.38 to the Company's 1996 Form 10-KSB and incorporated
herein by reference.)
10.40* Addendum to Employment Agreement, dated March 5, 1997, between
the Company and Gary L. Borthwick.
10.41* Employment Agreement, dated August 1, 1996, between the Company
and Edward J. Quilty.
10.42* Employment Agreement, dated December 29, 1995, between the --
Company and Robert P. DiGiovine (Previously filed as Exhibit
10.41 to the Company's 1996 Form 10-KSB and incorporated
herein by reference.)
10.43* Promissory Note, dated January 17, 1995, between the Company and --
John T. Borthwick (Previously filed as Exhibit 10.73 to the
Company's 1995 Form 10-KSB incorporated herein by
reference.)
10.44* Promissory Note, dated January 17, 1995, between the Company and --
Gary L. Borthwick (Previously filed as Exhibit 10.74 to the
Company's 1995 Form 10-KSB incorporated herein by
reference.)
10.45* Stock Option Agreement, dated November 21, 1995, between the --
Company and Margaret R. Spencer (Previously filed as Exhibit
10.48 to the Company's 1996 Form 10-KSB and incorporated
herein by reference.)
10.46* Stock Option Agreement, dated November 21, 1995, between the --
Company and Robert W. Naismith, Ph.D. (Previously filed as
Exhibit 10.50 to the Company's 1996 Form 10-KSB and
incorporated herein by reference.)
10.47* Stock Option Agreement, dated November 21, 1995, between the --
Company and Laurence F. Lane (Previously filed as Exhibit
10.51 to the Company's 1996 Form 10- KSB and incorporated
herein by reference.)
10.48* Stock Option Agreement, dated November 21, 1995, between the --
Company and Herbert Grossman (Previously filed as Exhibit
10.52 to the Company's 1996 Form 10-KSB and incorporated
herein by reference.)
10.49* Stock Option Agreement, dated November 21, 1995, between the --
Company and Joseph V. Villasin (Previously filed as Exhibit
10.53 to the Company's 1996 Form 10-KSB and incorporated
herein by reference.)
10.50 Asset Purchase Agreement, dated June 21, 1996, between the --
Company and Morgan Paris, Inc. (Previously filed as Exhibit
10.01 to the Company's Form 8-K filed on June 27, 1996.)
10.51 Settlement Agreement and Mutual Release, dated June 21, 1996, --
between the Company and Morgan Paris, Inc. (Previously filed
as Exhibit 10.02 to the Company's Form 8-K filed on June 27,
1996.)
10.52 Network Services Agreement, dated May 8, 1996, between the --
Company and CompuServe, Inc. (Previously filed as Exhibit
10.01 to the Company's Form 10-QSB filed on August 13,
1996.)
10.53 Consulting Agreement, dated March 14, 1994, between the Company --
and Mary G. Clark (Previously filed as Exhibit 10.80 to the
Company's Registration Statement and incorporated herein by
reference.)
10.54 Agreement and Release, dated December 23, 1996, between the --
Company and Donald F. McHale. (Previously filed as Exhibit
10.01 to the Company's Form 8-K filed on January 6, 1997)
10.60* The Company's 401(k) Plan, dated June 30, 1995 (Previously filed --
as Exhibit 10.56 to the Company's 1996 Form 10-KSB and
incorporated herein by reference.)
27 Financial Data Schedule
____________________
* Management contract or compensatory plan.
(b) Reports on Form 8-K
No report on Form 8-K was filed by the Company during the fourth quarter,
1996.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
March 21, 1997
DERMA SCIENCES, INC.
By: /s/ John T. Borthwick
-----------------
John T. Borthwick
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 21, 1997.
Signatures: Title:
/s/ Edward J. Quilty Chairman of the Board
----------------
Edward J. Quilty
/s/ Mary G. Clark Vice Chairman of the Board
-------------
Mary G. Clark
/s/ John T. Borthwick President, Chief Executive Officer
----------------- and Director
John T. Borthwick
/s/ Gary L. Borthwick Vice President for Finance and Operations,
----------------- Chief Financial Officer and Director
Gary L. Borthwick
/s/ Joseph V. Villasin Director
------------------
Joseph V. Villasin, MD
/s/ Margaret R. Spencer Director
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Margaret R. Spencer
/s/ Robert W. Naismith Director
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Robert W. Naismith, Ph.D.
/s/ Robert P. DiGiovine Director
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Robert P. DiGiovine, RPh
LICENSE AGREEMENT
This Agreement is made and entered into as of the 31 day of October, 1996
(the "Effective Date"), by and among DERMA SCIENCES, INC. a Pennsylvania
Corporation with its principal offices at 121 West Grace Street, Old Forge,
Pennsylvania, 18518 ("Derma Sciences"), and Gamida-MedEquip Ltd., with its
principal office at 54, Harey Yehuda Street, Givat Savyon, Israel.
RECITALS
WHEREAS, Derma sciences is in the business of developing, manufacturing and
selling topical wound care products including without limitation the Products
defined in, and meeting the specifications attached to, Exhibit A hereto;
WHEREAS, Gamida-MedEquip Ltd. is in the business of developing, and
marketing medical products;
WHEREAS, Derma Sciences has obtained U.S. FDA 510K approvals with respect
to the Products;
WHEREAS, Derma Sciences owns or controls patents, licensing rights, and/or
proprietary technology relating to the process of manufacturing the products;
WHEREAS, Gamida-MedEquip Ltd. desires to distribute the Products;
WHEREAS, Derma Sciences is willing to license Gamida-MedEquip Ltd. to
market the Products and in connection therewith the trademarks and
Gamida-MedEquip Ltd. is willing to license and purchase the Products from Derma
Sciences, all on the terms and subject to the conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual benefits to
be derived hereunder, Derma Sciences and Gamida-MedEquip Ltd. hereby agree as
follows:
I. DEFINITIONS
1.01 "Agreement" shall mean this License, Marketing and Distribution
Agreement.
1.02 "Agreement Field" shall mean the field for which the Products are
approved in the treatment of wounds.
1.03 "Confidential Information" shall mean all written and oral information
and data provided by the parties to each other hereunder and (in the case or
oral information and data, reduced to writing and) identified as confidential,
except any portion thereof which:
(a) is known to the receiving party, as evidenced by the
receiving party's written record, before receipt thereof
under this Agreement;
(b) is disclosed to the receiving party by a third person who
has a right to make such disclosure;
(c) is or becomes part of the public domain through no fault of
the receiving party; or
(d) is independently developed by the receiving party as
evidenced by the receiving party's written record.
1.04 "Developments" shall mean all inventions, ideas and improvement
developed during or arising out of the project (hereinafter defined) which are
made or conceived by Derma Sciences and its officer, employees and agents at any
time before or during the term of this Agreement.
1.05 "Project" shall mean the development of a particular design of the
Products to include Product improvements, new product ideas, and line extension
such as packaging changes.
1.06 "Effective Date" shall mean the date on which this Agreement is first
executed by both parties.
1.07 "FDA" shall mean the United States Food and Drug Administration.
1.08 "510K" shall mean a concurrence by the FDA with Manufacturer'
submissions under Section 510(K) of the Food, Drug and Cosmetics Act #895920.
1.09 "Net Trade Sales" shall mean the aggregate billing revenue for Product
sold by Gamida-MedEquip Ltd. or any of its affiliates to an unaffiliated entity
minus (i) discounts allowed on a uniform basis in a manner consistent with other
products sold by Gamida-MedEquip Ltd. or such affiliate(s), (ii) credits for
allowances and returns, (iii) prepaid freight, and (iv) taxes and other
governmental charges added to the face of the invoices for such Product and paid
by Gamida-MedEquip Ltd. and/or any of its affiliates; provided, however, that
the Net Trade Sales for Product sold by Gamida-MedEquip Ltd. shall be the
billing revenue charges to the first unaffiliated entity to which Product is
sold.
1.10 "Products" shall mean the products and wound dressings (described in
Exhibit A) and any product improvements and line extensions in such forms as
lotions, sprays, gels and creams for the treatment of chronic wounds based on
the technology.
1.11 "Product Improvement" shall mean (a) the use, without substantial
modification, of Product to perform a function not initially intended for it or
(b) any improvement, redesign, or modification of any Product.
1.12 "Technology" shall mean the technology related to the manufacture of
the products listed in Exhibit A.
1.13 "Territory" shall mean a particular country, state or other political
subdivision of the world (attached as Exhibit B).
1.14 "Trademarks" shall mean the Trademarks listed in Exhibit C.
1.15 "Unit" shall mean a single, separate Product.
1.16 "Year" shall mean each 12 month period during the Term, each of which
shall commence with the first day of the month, the first of which shall be the
first full month following the Effective Date.
II. LICENSE AND TERRITORY
2.01 Grant of License. Subject to the terms of this Agreement, Derma
Sciences hereby grants to Gamida-MedEquip Ltd. an exclusive license (the
"License") to distribute, market and sell the Products in the agreement field in
the territory for a term of five (5) years from the Effective Date of this
Agreement (the "Initial Term"). Subject to satisfaction of the minimum annual
purchase requirement in Section 4.09, each party shall have the option to
continue the term of this Agreement after the Initial Term for an additional
term of five (5) years (the RENEWAL Term), which option may be exercised by
giving written notice to each other not later than two-hundred and seventy (270)
days prior to the expiration of the Initial Term. Subject as aforesaid, the same
shall apply after each successive period of five (5) years of this Agreement.
The Term of the License, as it may be shortened or lengthened pursuant hereto is
referred as the "License Term".
2.02 Territory. The territory is defined in Exhibit B. If Gamida-MedEquip
Ltd. fails to introduce or sub license the Products into any country in the
territory within 24 months of the signing of the Agreement, the rights to market
the products in such country will revert to Derma Sciences.
2.03 Sub License. Subject to approval of Derma Sciences which approval will
not be unreasonably withheld, Gamida-MedEquip Ltd. may be granted the right to
sub license the Product in countries in the Territory.
III. TRADEMARKS AND REGISTRATIONS
3.01 Rights to Trademarks. Gamida-MedEquip Ltd. during the License Term, is
authorized to use the TRADEMARKS in the Territory listed in Exhibit C (the
initial Trademarks). Gamida-MedEquip Ltd. may only market the Products under
Derma Sciences' Trademarks. Gamida-MedEquip Ltd. may add additional Trademarks
at its discretion. Gamida-MedEquip Ltd. rights in and to the Trademarks shall
revert to Derma Sciences upon expiration of the License Term or earlier
termination thereof.
IV. MANUFACTURE AND SUPPLY
4.01 Exclusive Supplier. During the license term, Gamida-MedEquip Ltd.
agrees that it shall purchase the Products exclusively from Derma Sciences
pursuant to the provisions of this Agreement and that during the license term
Derma Sciences will sell the products in the Territory exclusively to
Gamida-MedEquip Ltd., its Sub Licensees or assigns pursuant to the provisions of
this Agreement.
4.02 Pricing. Gamida-MedEquip Ltd. agrees to pay Derma Sciences for the
Products ordered by and delivered to it in accordance with the price schedule
attached as Exhibit D, provided, however, all Products ordered for delivery in a
particular contract year in accordance with the provisions of this Agreement,
shall be priced and paid for at the 3. Transfer Price for such Product, as set
forth on Exhibit D, applicable at the time of shipment. The transfer prices are
subject to adjustment as provided on Exhibit D.
4.03 Purchase Forecasts. Not later than ten (10) days following execution
of this Agreement, Gamida-MedEquip Ltd. shall deliver to Derma Sciences its
purchase forecast for the first four (4) quarters of the License Term for each
Product, the first quarter to begin December 31, 1997. Thereafter, at least
fourteen (14) days prior to the end of each quarter, Gamida-MedEquip Ltd. shall
furnish Derma Sciences with a further forecast for an additional quarter, so
that the estimate at all times reflects estimated requirements for four (4)
quarters. The purchase forecast provided by Gamida-MedEquip Ltd. pursuant to
this Sub-Section are solely for the convenience of Derma Sciences and shall
under no circumstances be binding upon either party.
4.04 Orders. As soon as is practicable after the execution of this
Agreement, and ninety (90) days prior to the beginning of each calendar month
thereafter, Gamida-MedEquip Ltd. shall deliver to Derma Sciences its firm
purchase order for the Products to be delivered during such month. If the
quantity of any Product ordered on the purchase order for delivery during a
month is more than its forecasted quantity, then Derma Sciences may reschedule
the delivery of such excess in accordance with its production requirements and
schedule. Derma Sciences agrees to ship forecasted monthly purchase orders
accepted for entry within ninety (90) days of the receipt of the order.
4.05 Freight, Insurance & Title. All shipments of the Products will be
F.O.B. from such Derma Sciences facility to Gamida-MedEquip Ltd. or other
destinations designated by Gamida-MedEquip Ltd. Gamida-MedEquip Ltd. agrees to
bear all costs for transporting and insuring the Products to such destination.
Gamida-MedEquip Ltd. shall have the right to determine the mode of
transportation or carrier utilized for shipments of the Products in its
discretion.
4.06 Labeling. Derma Sciences agrees to supply all products with packaging
having the labeling presently used at Derma Sciences' expense and further agrees
to otherwise meet, at Derma Sciences' expense, all packaging and labeling
requirements of then existing governmental requirements or approvals, with the
exception of all expenses related to converting approved packaging and labeling
into non-English format, which shall include but not be limited to the costs of
translation, art work, mechanical and printing plates, which shall be borne by
Gamida-MedEquip Ltd. This cost will be included in pricing. Gamida-MedEquip Ltd.
agrees that all advertising and promotional materials for the Products will not
be in conflict with or violation of then existing governmental requirements and
approvals and will refer to Derma Sciences as the manufacturer of the Products
and the owner of the Trademarks. All labeling changes shall be subject to the
written approval of Derma Sciences given in advance of the use of such changes,
which approval shall not be unreasonably withheld.
4.07 Quality Assurance. Derma Sciences agrees that each lot of Products
shipped to Gamida-MedEquip Ltd. will have passed all in-process and finished
product Quality Assurance testing and will meet the specifications for the
Products set forth in the applicable government regulations as the case may be,
as this may be amended and supplemented from time to time. Derma Sciences agrees
that the Products will be manufactured according to Good Manufacturing Practices
(GMPs) promulgated by U.S. FDA and in a facility registered with and approved
for such purposes by the U.S. FDA. Gamida-MedEquip Ltd. shall have the right,
from time to time, but subject to reasonable notice and other requirements
imposed by Derma Sciences, to have its quality control personnel inspect Derma
Sciences' manufacturing processes and its quality control procedures. While such
personnel shall be subject to the provisions of Section 7.0, Derma Sciences may
require such personnel to sign individual confidentiality agreements.
4.08 Expiration Date. Subject to the provisions of Section 4.06, all
Products sold to Gamida-MedEquip Ltd. shall have (i) not less than twenty-four
(24) months remaining shelf life or (ii) not less than six (6) months less than
the maximum shelf life approved by the applicable government authority for such
Product, at the time of delivery to Gamida-MedEquip Ltd., whichever shall be the
lesser. Product having a shorter shelf life, provided such shelf life is at
least nine (9) months, may be shipped to Gamida-MedEquip Ltd. with its prior
consent, which consent shall not be unreasonably withheld.
4.09 Minimum Purchase Requirement. During each year of the License Term,
Gamida-MedEquip Ltd. agrees that if the revenue as defined in Exhibit E to Derma
Sciences from Gamida-MedEquip Ltd. purchases of Products for delivery during any
such year shall be less than 70% of the purchase forecast for such year set
forth in Exhibit E attached hereto, then Gamida-MedEquip Ltd. shall be deemed in
default of this contract. At Derma Sciences' option, the exclusive agreement
will convert to a non-exclusive agreement as cure for Gamida-MedEquip Ltd.
breach of the Agreement for failure to meet the annual minimum purchase
requirement. If Derma Sciences fails to fulfill a purchase order placed by
Gamida-MedEquip Ltd. in accordance with the provisions of Section 4.04 hereof,
then the amount of such purchase order shall be deemed to have been purchased by
Gamida-MedEquip Ltd. for delivery in such year for purposes of determining
Gamida-MedEquip Ltd. satisfaction of its then-applicable Minimum Purchase
Requirement. Minimum purchase requirements will be set up on yearly basis and a
business plan will be submitted by Gamida-MedEquip Ltd. annually at which time a
minimum purchase will be set for the forthcoming year. This will be submitted by
December 31 of each year, starting December 31, 1997.
V. PAYMENT TERMS; PRICING FREEDOM
5.01 Payment Terms. Product monies due and payable will be paid by
Gamida-MedEquip Ltd. to Derma Sciences within ninety (90) days from shipping
date. All payments required by this Agreement shall be made by wire transfer to
the bank account designated by Derma Sciences from time to time, payable in
United States currency at a U.S. Bank, subject to collection.
5.02 Pricing Freedom. Derma Sciences acknowledges that Gamida-MedEquip Ltd.
may sell the Products at such price as Gamida-MedEquip Ltd. determines at
Gamida-MedEquip Ltd.'s sole discretion.
VI. OTHER TERMS AND CONDITIONS
6.01 Marketing and Sales Efforts. Gamida-MedEquip Ltd. shall exercise
reasonable efforts to lawfully promote and market Products so as to maximize
sales of Products within the Territory, and shall do no thing or act to derogate
from, diminish, or injure the market for Products in the Territory.
Gamida-MedEquip Ltd. marketing efforts may include, but not limited to;
(i) use of sales techniques and sales aids, as Gamida-MedEquip
Ltd. may in its judgment determine to be appropriate, such
as the following: literature, print advertising, sample
kits, direct sales calls, telemarketing and telemarketing
follow-up, direct mail, video presentations and preparation
and distribution of surgical procedure manuals;
(ii) exhibiting at appropriate professional meetings and
providing speaker support as required;
(iii)providing sufficient time at national sales meetings to
adequately train and motivate sales force as well as to
provide for the introduction and training with respect to
new product lines.
As soon as practicable after the execution of this Agreement, Gamida-MedEquip
Ltd. will prepare a marketing plan and submit a copy to Derma Sciences for its
review and comments. The marketing plan shall be reviewed with Derma Sciences on
a yearly basis. Gamida-MedEquip Ltd. will provide Derma Sciences with quarterly
report of its unit sales within thirty (30) days after the end of each calendar
quarter during the term of this Agreement. Gamida-MedEquip Ltd. agrees that the
Products sold hereunder shall be marketed in the Territory under the Trademark
licensed hereunder and in connection with packaging, labeling and literature
prepared by or otherwise approved in advance by Derma Sciences.
6.02 Marketing Participation. Derma Sciences will render assistance to
Gamida-MedEquip Ltd. in sales training and promotional effort; trade and
professional shows; in preparing annual sales and marketing plans; and in
offering technical and customer support for products. Derma Sciences upon
receipt of marketing plans from Gamida-MedEquip Ltd., will promptly review and
provide its input. Derma Sciences may also participate, as may be reasonably
requested and required by Gamida-MedEquip Ltd., in product training,
professional meetings, and strategic planning meetings. Derma Sciences shall
also provide technical sales support as may reasonably be requested. Derma
Sciences reasonable out-of-pocket expenses for such participation and support,
if it requires travel out of the United States or it is required on occasion in
excess of what would reasonably be expected, shall be reimbursed by
Gamida-MedEquip Ltd., provided that Derma Sciences has received Gamida-MedEquip
Ltd.'s prior approval for such expenditures.
6.03 Product Improvements and Line Extensions. In the event that
Gamida-MedEquip Ltd. requests that Derma Sciences develop line extensions or
product improvements beyond the specifications for the Products outlined in
Exhibit A, Derma Sciences agrees to provide a development plan with estimated
funding requirements. Upon negotiated agreement to fund the Project, Derma
Sciences agrees to provide its reasonable efforts to effect the product
improvements or line extension. Gamida-MedEquip Ltd. will have an exclusive
right to market such products in the defined Agreement Field. These line
extensions and/or improvements shall be granted to Gamida-MedEquip Ltd. under
substantially the same term and conditions contained in this Agreement.
6.04 Right of First Refusal. In the event that Derma Sciences develops new
powder, gel or cream wound care products utilizing its technology, Derma
Sciences agrees that it shall first offer Gamida-MedEquip Ltd. the right to fund
development and market such new products in the Defined Agreement Field before
offering such right to market to third parties. The offer to market will be made
in accordance with the following:
(a) Derma Sciences shall give Gamida-MedEquip Ltd. written
notice of such New Product, which notice shall describe the
New Product and its use in reasonable detail. The notice
shall also, if then determined, set forth the terms and
conditions under which the marketing rights are offered to
Gamida-MedEquip Ltd. In addition, Derma Sciences shall
provide Gamida-MedEquip Ltd. with such other information
which Gamida-MedEquip Ltd. might reasonably request in order
for it to make its Initial Decision as described below.
(b) Within sixty (60) days after receipt of such notification
from Derma Sciences, Gamida-MedEquip Ltd. shall advise Derma
Sciences as to whether or not it is interested in obtaining
such marketing rights ("Initial Decision").
(c) If Gamida-MedEquip Ltd.'s Initial Decision is that it does
not wish to market the New Product, then Derma Sciences
shall be free to market such New Product as it determines in
its discretion. If Gamida-MedEquip Ltd.'s Initial Decision
is that it wishes to market such New Product, Gamida-
MedEquip Ltd. shall have, without payment, an option to
acquire marketing rights to such New Product on the terms
and conditions offered for a period of ninety (90) days from
Gamida-MedEquip Ltd.'s Initial Decision (the "Option
Period"). During the Option Period, Derma Sciences shall
provide such samples of the New Product, if it has been
developed and is available, to Gamida- MedEquip Ltd. as it
may reasonably request without charge for use as samples in
its market research. In addition, during such Option Period,
the parties shall negotiate the terms and conditions of a
development agreement, if required, and a marketing
agreement, the provisions of which may include the payment
of a non-refundable license fee for the marketing rights to
the New Product. In the event such Marketing Agreement is
not executed prior to the expiration of the Option Period,
Gamida- MedEquip Ltd.'s option shall expire and Derma
Sciences shall be free to offer such marketing rights to
others.
6.05 Loss of Exclusivity. In the event that Gamida-MedEquip Ltd. fails to
exercise its option for the Renewal Term, pursuant to Section 2.01, then Derma
Sciences, as its option, upon thirty (30) days written notice to Gamida-MedEquip
Ltd., may convert Gamida-MedEquip Ltd. exclusive right to the License to a
non-exclusive right, effective during the last three (3) months of the Initial
Term during which period, any other provision of this Agreement notwithstanding,
Derma Sciences may market the Products in the Territory or license third parties
to do so, provided, however, if Derma Sciences DOES EXERCISE SUCH RIGHT, the
Minimum Purchase Requirements for the last year shall be proportionally reduced
to reflect the reduction in period of exclusivity.
6.06 Repurchase of Inventory. Upon the expiration of the License Term or
earlier termination thereof, Derma Sciences will have the option, exercisable
upon six (6) months prior written notice, or purchasing from Gamida-MedEquip
Ltd. all of its salable inventory of Products. The purchase price for the
inventory shall be equal to the last landed cost paid by Gamida-MedEquip Ltd.
prior to Derma Sciences' offer to repurchase the inventory; provided, however,
if Derma Sciences does not exercise such option, Gamida-MedEquip Ltd. may
continue to sell its inventory after the expiration or termination of the
License Term.
6.07 Transfer of Business. Promptly after the execution of this Agreement,
and for the period of the License Term during which the License granted
Gamida-MedEquip Ltd. hereunder remains exclusive, Derma Sciences shall refer all
orders and inquiries for orders for the Territory to Gamida-MedEquip Ltd.
6.08 Regulatory Notification and Reports. Gamida-MedEquip Ltd. shall be
responsible to maintain files and documentation on all complaints or other
adverse information received concerning the Products and their use and agrees to
immediately notify Derma Sciences in writing, of any such complaint or
information received and provide copies of all documentation received.
Gamida-MedEquip Ltd. shall retain such responsibility under the applicable laws
of Countries in the territory.
6.09 Foreign Government Approval. Prior to selling the Products in any
country, nation, territory or other political subdivision in which
Gamida-MedEquip Ltd. is permitted to make sales hereunder, Gamida-MedEquip Ltd.
shall, if required, apply for at its own expense and in Derma Sciences' name
(wherever not prohibited) and, at Gamida-MedEquip Ltd.'s election, in
Gamida-MedEquip Ltd.'s name, and shall have received, all governmental or other
licenses, consents or approvals necessary for the sale or use of Products in
such country, nation, territory or other political subdivision. Copies of all
applications and related documents for such approvals shall be provided to Derma
Sciences.
VII. CONFIDENTIAL DISCLOSURE
7.01 Definition. The term "Confidential Information" as used herein shall
include, but not be limited to, inventions, processes, formulas, products,
equipment, know-how, technology, data and information except where said
information (i) presently is or hereinafter becomes part of the public domain,
(ii) is already in the non-disclosing party's possession at the time of the
disclosure, (iii) comes into the non-disclosure party's possession from a third
party without breach of this Agreement, or (iv) is independently developed by
the non-disclosing party or a third party without recourse to or utilization of
any portion of the Confidential Information imparted or transmitted hereunder.
7.02 Mutual Covenants. In consideration of the willingness of each party to
disclose confidential information to the other, each party agrees for the term
of this Agreement and a period of five (5) years thereafter (i) to use the
Confidential Information only for the purpose of conducting the business
arrangement in-tended by the terms of this Agreement, (ii) to take precautions
to keep Confidential Information secret and to prevent its disclosure to third
parties except with the written consent of the disclosing party, with such
precautions being at least equivalent to those taken by the non-disclosing party
with respect to its own Confidential Information, and (iii) to return all
documents containing Confidential Information upon request of the disclosing
party.
VIII. INDEMNIFICATION
8.01 Indemnification of Derma Sciences - Product Liability. Derma Sciences
agrees, at its own expense, to defend, indemnify, and hold harmless
Gamida-MedEquip Ltd., its officers, agents, and employees from and against any
and all claims, losses, damages, causes of action, suits and liability of every
kind, including all expenses of litigation, court costs, and attorney's fees,
for injury to or death of any person, or for damage to any property, arising
from the negligence of Derma Sciences with respect to the design, manufacture,
implantation or use of any product supplied under this Agreement.
8.02 Indemnification by Gamida-MedEquip Ltd. Gamida-MedEquip Ltd. agrees to
hold harmless, protect and indemnify Derma Sciences from any and all claims for
property damage or personal injury arising out of the negligent activities of
Gamida-MedEquip Ltd., its employees, agents and representatives in the marketing
and sale of the Products on or after the date of this Agreement provided,
however, such indemnification shall not cover claims with respect to which Derma
Sciences has agreed to indemnify Gamida-MedEquip Ltd. pursuant to Section 8.01
above. Such indemnification shall include, but not be limited to, the cost of an
attorney's fees and other fees, damages, liabilities, and customary expenses
related to such litigation or claims.
8.03 General Indemnification Provisions. The right to each party hereto to
claim indemnification pursuant to the provisions set forth above is conditioned
upon (i) such party (the "Indemnified Party") notifying the other party (the
"Indemnitor") of such claim or suit within adequate time to avoid default
judgment being taken and (ii) notice of the claim or suit being received by
Indemnitor prior to the expiration of the applicable statute of limitations.
Indemnitor shall have the right to select defense counsel and direct the defense
or settlement of such claim or suit as it shall deem appropriate and Indemnified
Party agrees to cooperate, at its expense, in the defense of such claim or suit.
In no event shall an Indemnitor be liable where the claim arises out of the
negligence or willful misconduct of the Indemnitee or of any employee, agent, or
representative of the Indemnified Party or any party claiming through the
Indemnified Party. The provisions of Article 8 will survive termination of this
Agreement for any reason.
8.04 Insurance. Derma Sciences will maintain general liability/product
liability insurance, written on an events basis, during the term of this
Agreement in the minimum amount of two million dollars ($2,000,000) so long as
such insurance is available and the cost is not prohibitive. The product
liability/general liability insurance so maintained will be written by an
insurance carrier acceptable to Gamida-MedEquip Ltd. with Gamida-MedEquip Ltd.
named as an additional insured.
<PAGE>
IX. FORCE MAJEURE
9.01 Definition. "Force Majeure" shall mean any act of God, governmental
act or regulation, judicial decree or order, outbreak of hostilities (whether or
not war is declared), insurrection, riot, civil disturbance, climatic
conditions, fire, flood, explosion, accident, theft, shortage of materials,
energy shortages, delay or failure of carriers, subcontractors or suppliers,
strike or other labor difficulty, lockout or trade dispute (whether involving
Gamida-MedEquip Ltd. or Derma Sciences' employees or other parties), or any
other events or circumstances (whether or not of the same or similar kind to
those enumerated) beyond Gamida-MedEquip Ltd. or Derma Sciences', as the case
may be, reasonable control.
9.02 Failure to Perform. Notwithstanding any other provisions of this
Agreement to the contrary, if either party to this Agreement is unable to
perform any of its obligations hereunder by reason of the occurrence of an event
of Force Majeure, despite such party's best efforts to correct the cause and
resume performance, the period for performance of such obligation will be
suspended during the continuance of such event of Force Majeure, provided such
party continues to use its best efforts to correct the cause and resume
performance of such obligations, provided, however, the party whose performance
is affected promptly notifies the other party, and further provided that no
event of Force Majeure shall be deemed to prevent or excuse the payment of any
amounts due under this Agreement, whether for Product delivered, services
provided or otherwise.
X. TERMINATION
10.01 Termination. Notwithstanding the stated five (5) year term or any
other provision of this Agreement, this Agreement may be terminated prior to the
expiration of its stated term as set forth below.
10.02 Termination for Default. If either party defaults in its observance
or performance of any material term or provision on its respective part to be
observed and performed under this Agreement between Derma Sciences and
Gamida-MedEquip Ltd., the other party will have the right to give that party
sixty (60) days notice to cure such default or breach. If such default or breach
is cured within such 60-day period, then at the written election of the party
giving such notice, this Agreement will terminate. Notwithstanding the
foregoing, the cure period for Gamida-MedEquip Ltd. failure to pay Derma
Sciences monies due shall be five (5) business days.
10.03 Deliveries After Termination Notice. If Derma Sciences gives any
notice under Section 10.02, it will have no obligation to deliver any further
shipments of the Product to Gamida-MedEquip Ltd. notwithstanding any previously
acknowledged and accepted purchase orders from Gamida-MedEquip Ltd., unless and
until the breach is cured within the applicable period. If Gamida-MedEquip Ltd.
gives any notice under Section 10.02, it will have no obligation to accept any
further deliveries of Products unless and until the breach is cured within the
60-day period.
10.04 Survival. All representatives or warranties made in this Agreement
and all terms and provisions hereof intended to be observed and performed after
the termination hereof, shall survive such termination and continue, thereafter,
in full force and effect.
10.05 No Damages on Termination. Both parties have considered the
expenditures necessary in preparing for performance of and performing this
Agreement, and the possible losses and damages incident to each in the event of
termination. Each party understands that this Agreement will terminate
automatically pursuant to Section 2.01, and neither party is obligated to extend
the Agreement.
XI. MISCELLANEOUS PROVISION
11.01 Assignment. This Agreement shall be binding upon and shall inure to
the benefit of and be enforceable by the permitted successors and assigns of
each party. This Agreement may not be assigned by any party without the prior
written consent of the other party, which consent shall not be unreasonably
withheld. The foregoing notwithstanding, no consent shall be required with
respect to an assignment by either Gamida-MedEquip Ltd. or Derma Sciences of its
rights and obligations hereunder to an affiliated company, provided, however,
any such assignee shall become obligated hereunder and such assignment shall not
relieve the assignor of its obligations under this Agreement, or to assign its
rights of the payments due hereunder to a financial institution. For the
purposes of this Agreement an "affiliated company" shall mean a company
controlling or controlled by Gamida-MedEquip Ltd. or Derma Sciences, or at least
50% owned by Gamida-MedEquip Ltd. or Derma Sciences as the case may be, neither
directly or indirectly or controlled by a company which controls Gamida-MedEquip
Ltd. or Derma Sciences, as the case may be, either directly or indirectly.
11.02 Waiver. Any term or provision of this Agreement may be waived at any
time by the party entitled to the benefit thereof by a written instrument
executed by such party.
11.03 Notices. Any notice, request, demand, waiver, consent, approval or
other communication which is required or permitted hereunder shall be in writing
and shall be deemed given only if delivered to the address set forth below (to
the attention of the person identified below) or sent by telegram, telex,
telecopy or sent by Courier as follows:
If to Gamida-MedEquip Ltd., to:
Gamida-MedEquip Ltd.
54, Harey Yehuda Street
(P.O.B. 94 Savyon 56530)
Givat Savyon, Israel
Attention: Jacob Niv, Managing Director
With required copies to:
_______________________________
_______________________________
If to Derma Sciences, to:
Derma Sciences
121 West Grace Street
Old Forge, Pennsylvania 18518
Attention: John Borthwick, Chief Executive Officer
or to such other address as the addressee may have specified in a notice duly
given to the sender and to counsel as provided herein. Such notice, request,
demand, waiver, consent, approval or other communication will be deemed to have
been given, if delivered, as of the date so delivered, if by telex, telecopy or
telegraph, when received or, if via courier, three business days after the date
so sent.
11.04 Governing Law. This Agreement shall be governed by and interpreted
and enforced in accordance with the substantive laws of the State of
Pennsylvania, USA
11.05 Remedies Not Exclusive. Nothing in this Agreement shall be deemed to
limit or restrict in any manner other rights or remedies that any party may have
against any other party at law, in equity or otherwise.
11.06 No Benefit to Others. The representations, warranties, covenants and
agreements contained in this Agreement are for the sole benefit of the parties
hereto and their successors and assigns, and shall not be construed as
conferring, and are not intended to confer, any rights on any other persons.
11.07 Contents of Agreement. This Agreement, together with any documents
referred to herein, sets forth the entire agreement of the parties hereto with
respect to the transactions contemplated hereby. This Agreement may not be
amended except by an instrument in writing signed by the parties hereto, and no
claimed amendment, modification, termination or waiver shall be binding unless
in writing and signed by the party against which such claimed amendment
modification, termination or waiver is sought to be enforced.
11.08 Section Headings and Gender. All section headings and the use of a
particular gender are for convenience only and shall in no way modify or
restrict any of the terms or provisions hereof. Any reference in this Agreement
to a Section, Exhibit or Schedule shall be deemed to be a reference to a
Section, Exhibit or Schedule of this Agreement unless the context otherwise
expressly requires.
11.09 Schedules and Exhibits. All attachments, Exhibits and Schedules
referred to herein are intended to be and hereby are specifically made a part of
this Agreement.
11.10 Cooperation. Subject to the provisions hereof, the parties hereto
shall use their best efforts to take, or cause to be taken, such action, to
execute and deliver, or cause to be executed and delivered, such additional
documents and instruments and to do, or cause to be done, all things necessary,
proper or advisable under the provisions of this Agreement and under applicable
law to consummate and make effective the transactions contemplated by this
Agreement.
11.11 Severability. Any provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall be ineffective to the extent of such
invalidity or unenforceability without invalidating or rendering unenforceable
the remaining provisions hereof, and any such invalidity or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.
11.12 Counterparts. This Agreement may be executed in two or more
counterparts, each of which is an original and all of which together shall be
deemed to be one and the same instrument. This Agreement shall become binding
when one or more counterparts taken together shall have been executed and
delivered by each of the parties to the other.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their authorized officers as of the date first above written.
GAMIDA-MEDEQUIP, LTD.
By: /s/ Jacob Niv
---------
Jacob Niv
Title: Managing Director
DERMA SCIENCES
By: /s/ John T. Borthwick
-----------------
John T. Borthwick
Title: President; CEO
<PAGE>
EXHIBIT A
(Amended 01/24/97)
"THE PRODUCT"
Dermagran Ointment (all sizes)
Dermagran Spray (all sizes)
Dermagran Wet Saline Dressing
Dermagran Zinc-Saline Dressing
Dermagran Hydrophilic Wound Dressing (all sizes)
Dermagran Hydrophilic-B Wound Dressing
Dermagran Wound Cleanser with Zinc
Dermagran (Zinc-Saline) Hydrogel Wound Dressing (85 grm)
<PAGE>
EXHIBIT B
TERRITORY
Israel, Israeli-administered territories and
areas of Palestinian autonomy.
<PAGE>
EXHIBIT C
TRADEMARKS
All products with the Dermagran Trademark on them.
<PAGE>
EXHIBIT D
PRICING
Name Unit Size Item Code Unit Price
Dermagran Ointment (Jar) 2 oz. DG2 $4.00
Dermagran Ointment (Jar) 4 oz. DG4 $4.00
Dermagran Ointment (Tube) 4 oz. DT4 $4.00
Dermagran Spray 4 oz. DM4 $1.85
Dermagran Hydrophilic
Wound Dressing 2 x 2 SPD20 $ .85
4 x 4 SPD21 .85
5 x 9 SPD22 .85
8 x 4 SPD24 .85
Dermagran Hydrophilic B 3 oz. SPD03 $5.00
Dermagran Zinc-Saline
Dressing 8 x 4 ZSD10 $ .75
Dermagran Tri-Zinc
Incontinent Wash 8 oz. DIW8 $ .95
Dermagran Wound Cleanser 4 oz. WC04 $ .95
Dermagran Moisturizing
Hydrogel 1 oz. DH01 $ .35
Following the first twelve (12) months after the execution date, Derma Sciences
may increase its price once every year, upon at least ninety (90) days advance
written notice of such increase. Such price increase may not exceed the
documented increase in manufacturing cost.
<PAGE>
EXHIBIT E
"MINIMUM PURCHASE REQUIREMENT"
The "Minimum Purchase Requirement" for any year shall mean the purchase of
the Products by Gamida-MedEquip Ltd. for delivery during such year, adjusted by
any subsequent cancellations, of such orders by Gamida-MedEquip Ltd., whether or
not permitted under the Agreement, in an aggregate amount of no less than the
unit amounts set forth below opposite such year. For the purpose of this
Agreement, a unit equals one gram of existing Product. In the event that
additional sizes are added, the contribution to the unit Minimum Purchase
Requirement would be prorated on the basis of the ratio of the dry weight of the
Product to such one gram unit.
Revenue to Gamida-MedEquip at First Year Transfer Price
Year Units Exclusive of Royalties
Year 1 _______Units $__________
Year 2 _______Units $__________
Year 3 _______Units $__________
Year 4 _______Units $__________
Year 5 _______Units $__________
TO BE MUTUALLY DETERMINED NO LATER THAN DECEMBER 31, 1997.
MASTER DISTRIBUTORSHIP AGREEMENT
THIS MASTER DISTRIBUTORSHIP AGREEMENT (hereinafter called "Agreement")
dated this 23rd day of January, 1996, between DERMA SCIENCES, INC. a corporation
organized under the laws of the state of Colorado (hereinafter "DSI") and
InnerQuest Sales, a corporation organized under the laws of the state of
________________ (hereinafter "IS").
WHEREAS, DSI is engaged in the manufacture, sale and distribution of
various proprietary and non-proprietary pharmaceutical products,
WHEREAS, DSI desires to retain the services of D.M. as a distributor of its
pharmaceutical products,
WHEREAS, IS is skilled in the distribution of pharmaceutical products and
desires to perform distribution services for the account of DSI,
NOW, THEREFORE, the parties hereto, in consideration of the mutual promises
and covenants herein contained, and intending to be legally bound, hereby agree
as follows:
Article 1
Appointment and General Terms
1.01 Appointment. DSI hereby appoints IS as a "Master Distributor" with
respect to its pharmaceutical products, and IS hereby accepts such appointment,
upon the terms and conditions hereinafter set forth.
1.02 Term. The term on this Agreement shall begin on the date hereof and
end on December 31, 1998.
1.03 Products. Pursuant to this Agreement, IS shall assume responsibility
for the sale and marketing, within the Territory below defined, of such
pharmaceutical and related products marketed by DSI as the parties shall, from
time to time, mutually determine (hereinafter "Products"). Without limiting the
generality of the foregoing, IS shall engage in the sale and distribution of
those pharmaceutical and other products marketed by DSI as are enumerated in
Exhibit A attached hereto.
1.04 Territory. This Appointment shall be effective with respect to the
territory described in Exhibit B attached hereto (hereinafter "Territory"). The
Territory is exclusive and DSI warrants that it shall not sell any products to
any third party in the Territory.
1.05 Distributor's Rights and Duties. IS shall have the right and duty to
market, sell and distribute the Products in accordance with sound marketing and
sales practices and in accordance with the terms and conditions of this
Agreement. IS shall sell and deliver the Products exclusively to dealers
(resellers) who DSI and IS shall determine to satisfy the following standards
(hereinafter "Authorized Dealer" or "Dealer"):
(a) The Dealer stocks and actively markets reasonable quantities
of the Products;
(b) The Dealer employs sales personnel knowledgeable in the
marketing, sale and use of the Products;
(c) The Dealer possesses technical expertise relative to
applications of the Products;
(d) The Dealer provides, on a regular basis, pre-sale and
post-sale support to end users of the Products;
(e) All of the end users to whom the Dealer markets and sells
the Products are located within the Territory;
[Those firms listed on Exhibit C hereto are Authorized Dealers.] - [Not
Applicable] IS may, from time to time, approve additional firms as Authorized
Dealers. Upon determination that such firms satisfy the criteria set forth
above, such firms shall become Authorized Dealers for purposes of this
Agreement. Likewise, DSI and IS may "deauthorize" any Authorized Dealer for
failure to maintain the foregoing standards. Deauthorization of an Authorized
Dealer is effective immediately upon notification thereof by either DSI or IS.
1.06 Product Purchases. IS shall purchase Products from DSI at the rate,
and in the amounts, set forth in Exhibit D hereto (the "Annual Purchase Quota").
Not later than the first day of October prior to the term of this Agreement, DSI
and IS shall review the Annual Purchase Quota and endeavor mutually to agree on
the Annual Purchase Quota for the following year. Upon failure of the parties to
so agree, this Agreement, at the option of either party, shall terminate at a
point to be negotiated.
<PAGE>
1.07 Product Prices. DSI's prices to IS relative to the Products are
subject to change at any time subject to DSI's sole discretion. Price increases
shall be effective with respect to Products shipped not earlier than thirty (30)
days prior to notification to IS of such price increase(s). Price decreases
shall be effective with respect to Products shipped on and after the date of
such prices decrease(s). In no event shall the price charged by DSI to a
national account located within the Territory be less than the published Dealer
cost at the time of sale.
1.08 Distributor's Marketing and Sales. IS shall maintain a program for the
effective marketing, sale and delivery of the Products. Without limiting the
generality of the foregoing, IS shall undertake the following:
(a) Sales Activities:
(1) Maintain an effective and aggressive sales and service
organization skilled in the marketing and sale of the
Products and in the provision of advisory and support
services relative to the Products to Authorized Dealers;
(2) Cooperate with DSI in the training of IS sales personnel;
(3) Cooperate with DSI in the conduct of seminars for IS
Dealers;
(4) Actively solicit Dealers for the Products;
(5) Cooperate with DSI relative to all matters pertaining to
sales of the Products and post-sale support services;
(6) Conduct such other and further support activities as may be
necessary to effectuate the purposes of this Agreement.
(7) IS shall not market any products which DSI regards as
competitive to any DSI products.
(b) Authorized Dealers Support:
(1) Where applicable, conduct in store merchandising
activities;
(2) Where applicable, advise on display placement and
arrangement;
(3) Provide sales support;
(4) Encourage enrollment by Authorized Dealers in IS
conducted seminars and programs;
(5) Distribute DSI's literature and technical data on a
regular basis;
(6) Provide technical support;
(7) Stock such quantities of the Products as reasonably
required to meet delivery requirements of Authorized
Dealers and end users;
(8) Conduct such other and further support activities as
may be necessary to effectuate the purposes of this
Agreement.
1.09 Packaging and Shipping. DSI will determine, in its sole discretion,
the packaging and routing of the Products purchased by IS.
1.10 Risk of Loss and Title. Risk of loss and title to all Products shall
pass to IS F.O.B. DSI's designated shipping facility unless otherwise
specifically agreed in writing by DSI.
1.11 Distributor's Literature. IS shall deliver to DSI for its review and
approval all printed materials to be used by IS in connection with the marketing
or sale of the Products, including therein, without limitation, catalogs,
advertising, brochures and price lists.
1.12 DSI Support. DSI, in support of the activities of IS in furtherance of
this Agreement, shall provide to IS, in such form and amounts as DSI shall
determine, sales assistance, technical support, product seminars, product
literature and samples.
<PAGE>
Article 2
National Accounts
2.01 Establishment. DSI may at anytime, in its discretion, designate a
given Authorized Dealer, a potential dealer, reseller, former Dealer, managed
care account, cooperative, buying group, wholesaler, institution, government
agency, end user or other entity, as a "National Account", providing that DSI
has determined that any of the above accounts ships Products across IS's
territorial boundaries. Prior to the above mentioned designation DSI will
consult with each affected Master Distributor as to various aspects of the
designation.
2.02 Sales Administration. Sales administration relative to all National
Accounts shall be effected exclusively by DSI and shall include:
(a) Acceptance and processing of orders;
(b) Tracking;
(c) Warehousing;
(d) Billing;
(e) Commission payment;
DSI shall require that all National Accounts provide it with timely
information concerning the identity and location of the ultimate purchaser or
end user of Products sold to such Accounts for use in computing the commission
due to Master Distributor as provided in paragraph 2.03. All Sales by National
Accounts to any Account within the Territory shall be credited toward the
satisfaction by IS of its Annual Purchase Quota described in Exhibit D. The
amount of such credit(s) shall be the number of cases of subject Products.
2.03 Distributor's Commission. DSI shall pay to IS a commission on all
sales made by DSI to D.M. at the rate of 10% of the sales price, exclusive of
insurance costs, upon receipt of paid invoices from IS to DSI. In the event that
DSI designates any account as a National Account, DSI shall pay to IS a
commission on sales made by DSI to National Accounts of Products ultimately
utilized in Master Distributor's Territory. The amount of this Commission shall
be the difference between the sale price of the Products, exclusive of insurance
costs, and the price thereof currently in effect for IS.
2.04 Duties of Distributor. IS shall have those duties relative to National
Accounts, and their distributees, as enumerated in paragraph 1.05, excepting
therefrom the duties of DSI enumerated in paragraph 2.02.
2.05 Distributor's Responsibilities Relative to National Accounts: IS shall
be responsible to identify all National Accounts within the Territory as they
are brought to IS attention, at which time IS must notify DSI of the situation.
At that time, DSI will determine the Account's status.
<PAGE>
Article 3
Territorial Rights and Obligations
3.01 Sales Out of Territory. IS shall not, without the prior written
consent of DSI, (1) effect sales of the Products to dealers located outside the
Territory, or (2) effect sales of the Products to dealers for resale to end
users located outside the Territory.
3.02 Distributor's Enforcement Obligations. In the event IS becomes aware
of resales of the Products to end users located outside the Territory in
violation of paragraph 3.01, IS shall utilize its best efforts to prevent such
resales; provided, however, nothing contained herein shall be deemed to require
IS to bring legal action against any dealer, reseller or other entity.
3.03 Sales Into Territory. DSI shall utilize its best efforts to prevent
sales by other distributors or dealers to end users located within the
Territory; provided, however, nothing contained herein shall be deemed to
require DSI to bring legal action against any dealer, reseller or other entity.
<PAGE>
Article 4
Events of Default
4.01 Enumeration. Any one of the following acts or omissions on the part of
IS shall constitute an Event of Default and shall justify the immediate
termination of this Agreement by DSI "for cause":
(a) Failure of IS to perform any of its obligations hereunder which
failure shall continue for a period of thirty (30) days after
notice thereof, and demand for cure, to IS from DSI;
(b) Failure of IS to pay any invoice of DSI in accordance with its
terms which failure shall continue for a period of fifteen (15)
days after notice thereof, and demand for payment, to IS from
DSI;
(c) Filing by IS for protection under the Federal Bankruptcy Code or
similar statute of any jurisdiction;
(d) Admission by IS of its inability to pay its debts as they mature
or the making by DSI of an assignment for the benefit of
creditors;
(e) Sale by DSI of substantially all of its assets outside the normal
course of its business;
(f) Change, or agreement to change, the ownership or control of DSI,
to the extend of over 50% thereof, whether by sale of stock,
merger, consolidation, liquidation or other means;
(g) Sale by IS of any of the Products to a person or entity who has
not been designated an Authorized Dealer in accordance with
paragraph 1.05.
(h) Publication or distribution by IS, regardless of means or extent,
of proprietary information, trade secrets, confidential data,
internal memoranda or like documents or information of DSI;
(i) Publication or distribution by IS, regardless of means or extent,
of information defamatory or harmful to the reputation or
business interests of DSI;
(j) Failure of IS to purchase that "Annual Purchase Quota" of
Products specified in Exhibit D, as from time to time amended.
(k) Failure of IS to notify DSI of any account that is shipping
products outside of the Territory.
4.02 Performance Excused. During the pendency of any act or omission of IS
as enumerated above, DSI shall be relieved of any obligations imposed upon it
under this Agreement.
<PAGE>
Article 5
Remedies and Damages
5.01 Exclusive Remedy. In the event either DSI or IS breaches this
Agreement, regardless of whether such breach is willful, and including therein
the abrogation or cancellation of this Agreement prior to the expiration
thereof, the breaching party shall immediately forfeit all rights to future
benefits under this Agreement saving and excepting therefrom benefits to which
the breaching party has theretofore become entitled. In the event of breach, the
sole and exclusive remedy of the non-breaching party against the breaching party
shall be to withhold further performance hereunder. Without limiting the
foregoing, neither party shall be liable to the other party for monetary damages
based upon any claim arising from the performance or non-performance of this
Agreement or the breach of any warranty, express or implied, associated
therewith, including therein damages for loss of opportunity or profits or any
other special or consequential damages of whatsoever nature. Furthermore, in the
event of breach, no equitable action shall lie by the non-breaching party
against the breaching party including therein an action for specific
performance.
5.02 Independent Causes of Action Not Barred. Nothing contained in this
Article shall preclude either party from bringing suit against the other for
damages arising independently of the rights and obligations created by this
Agreement.
<PAGE>
Article 6
Warranties, Defense and Indemnity
6.01 Limited Nature of Warranties. DSI warrants that the Products, when
properly utilized and applied in accordance with the directives furnished
therewith, are safe and will not cause or contribute to sickness or injury to
the users of the Product or associated medical personnel. DSI shall promptly
replace any Product or Products which, in the opinion of DSI, are defective. The
foregoing represents the sole warranties of DSI relative to the Products. DSI
makes no other warranties with respect to the Products, or any of them,
INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
6.02 Duty to Indemnify and Defend. IS shall indemnify DSI and hold DSI
harmless from and against, and shall defend DSI against, any and all claims and
damages of every kind for injury or death to any person or persons and for
damages to or loss of property arising out of or attributed, directly or
indirectly, to the conduct, operations or performance of IS relative to the
Products.
6.03 DSI's Duty to Indemnify and Defend. DSI shall indemnify IS and hold IS
harmless from and against, and shall defend IS against, any and all claims and
damages of every kind arising out of any defects, failures or malfunctions of
any of the Products, saving and excepting those caused by IS or otherwise
arising out of or attributed, directly or indirectly, to the conduct, operations
or performance of IS.
<PAGE>
Article 7
Miscellaneous
7.01 Independent Contractor Relationship. The relationship between DSI and
IS created and contemplated hereby is that of independent contractors. Nothing
contained herein shall be construed to create any other relationship, including
therein employer-employee, agency, joint venture or partnership. Neither DSI nor
IS shall have authority to act for or bind the other to any extent or in any
manner whatsoever.
7.02 No Waiver. Failure of DSI to insist upon strict performance of any
term of this Agreement, or the waiver by DSI of any breach of this Agreement by
IS, shall not constitute a waiver by DSI of the subsequent strict enforcement by
DSI on any such term or terms.
7.03 Written Notices. All written notices required hereunder shall be
deemed delivered if delivered by hand or if mailed by United States certified
mail, return receipt requested, postage pre-paid and addressed as follows or to
such other address as maybe specified by notice by either party specifically
referring to this paragraph:
To DSI:
Derma Sciences, Inc.
121 West Grace Street
Old Forge, PA 18518
To IS:
InnerQuest Sales
818 State Street
Lemont, IL 60439
7.04 Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the Commonwealth of Pennsylvania. Any
and all actions to determine or enforce any rights or obligations created under
this Agreement shall be initiated in the court of Common Pleas of Lackawanna
County, Pennsylvania. The parties hereby irrevocably consent to the exclusive
jurisdiction of the court of Common Pleas of Lackawanna County, Pennsylvania,
relative to the adjudication of any and all disputes arising under this
Agreement or any alleged breach thereof.
7.05 Assignment. IS shall not assign any of its rights or obligations
hereunder without the prior written consent of DSI which consent may be withheld
in the sole and unfettered discretion of DSI.
7.06 Entire Agreement. This Agreement sets forth the entire Agreement and
understanding of the parties with respect to the subject matter treated herein
and supersedes all prior and contemporaneous agreements, understandings,
representations and warranties, whether oral or written, save that neither party
shall be relieved hereby from making payment of any amounts due and owing under
any agreement entered into prior to the date hereof. This Agreement may not be
amended, modified or altered, nor may any of its provisions be waived, except by
writing signed by the party against whom such amendment or modification is
sought to be enforced.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized Presidents the day and year first hereinabove written.
DERMA SCIENCES, INC. INNERQUEST SALES
BY /s/ Don McHale BY /s/ James Hutchinson
---------- ----------------
Don McHale James Hutchinson
Vice President,Sales & Marketing
<PAGE>
EXHIBIT A
1. Dermagran Ointment (all sizes)
2. Dermagran Spray (all sizes)
3. Dermagran Wet Saline Dressing
4. Dermagran Zinc-Saline Dressing
5. Dermagran Hydrophilic Wound Dressing (all sizes)
6. Wound Care Kits Containing Any Of
The Above Products
7. Dermagran Wound Cleanser with Zinc
<PAGE>
EXHIBIT B
TERRITORY
States of: NEBRASKA
IOWA
MISSOURI
KANSAS
ILLINOIS
MICHIGAN
INDIANA
WISCONSIN
MINNESOTA
NORTH DAKOTA
SOUTH DAKOTA
<PAGE>
EXHIBIT C
[NOT APPLICABLE]
1. ____________________ 16. ____________________
2. ____________________ 17. ____________________
3. ____________________ 18. ____________________
4. ____________________ 19. ____________________
5. ____________________ 20. ____________________
6. ____________________ 21. ____________________
7. ____________________ 22. ____________________
8. ____________________ 23. ____________________
9. ____________________ 24. ____________________
10. ____________________ 25. ____________________
11. ____________________ 26. ____________________
12. ____________________ 27. ____________________
13. ____________________ 28. ____________________
14. ____________________ 29. ____________________
15. ____________________ 30. ____________________
<PAGE>
EXHIBIT D
Total Cases
1996 - 350 cases a month/4,200 cases annually
1997 - 500 cases a month/6,000 cases annually
1998 - 650 cases a month/7,800 cases annually
ADDENDUM TO EMPLOYMENT AGREEMENT
THIS ADDENDUM made this 5th day of March, 1997 to that certain Employment
Agreement made December 29, 1995 ("Agreement") by and between Derma Sciences,
Inc., ("Employer") and John T. Borthwick ("Employee").
WHEREAS, Employer and Employee are parties to the aforesaid Agreement,
WHEREAS, Employer and Employee desire to amend and modify certain terms and
provisions of the Agreement,
NOW THEREFORE, the parties hereto, in consideration of the mutual promises
and covenants herein contained, and intending to be legally bound, hereby agree
as follows:
1. Stock Options. There is hereby added to paragraph 4 of the Agreement a
subparagraph 4.(g) entitled Adjustments which subparagraph reads, in its
entirety, as follows:
(g) Adjustments. The number of Option Shares and the Option Price
shall be adjusted as set forth herein:
(i) In the event that a stock dividend shall be declared on the
Common Stock payable in shares of the Common Stock, the Option Shares
shall be adjusted by adding to each Option Share the number of shares
which would be distributable thereon if such Option Share had been
outstanding on the date fixed for determining the shareholders
entitled to receive such stock dividend.
(ii) In the event that the outstanding shares of the Common Stock
shall be changed into or exchanged for a different number or kind of
shares of stock or other securities of Employer whether through
recapitalization, stock split, combination of shares, or otherwise,
then there shall be substituted for each Option Share the number and
kind of shares of stock or the securities into which each outstanding
share of the Common Stock shall be so changed or for which each such
share shall be exchanged.
(iii) In the event that the outstanding shares of the Common
Stock shall be changed into or exchanged for shares of stock or other
securities of another corporation, whether through reorganization,
sale of assets, merger or consolidation in which Employer is the
surviving corporation, then there shall be substituted for each Option
Share the number and kind of shares of stock or the securities into
which each outstanding share of the Common Stock shall be so changed
or for which each such share shall be exchanged.
(iv) In the event that any sale of shares of Common Stock (except
any such sale made pursuant to any right, option, warrant or
convertible security outstanding prior to the date of this Agreement),
or the issuance of any rights, options, or warrants to subscribe for
or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) occurs after the date of this
Agreement, which sale or issuance will increase the number of shares
of Common Stock outstanding during the Term by Forty percent (40%),
then, upon each such sale or issuance, Employee shall be issued
additional Option Shares such that, when the additional Option Shares
are aggregated with the Option Shares heretofore owned by Employee,
Employee has the right to purchase, at the same times set forth in
paragraph 4(c), the same percentage of Common Stock at the same price
per share as Employee maintained prior to such sale or issuance.
2. Sale or Merger of Employer. There is hereby added to paragraph 12. of
the Agreement a subparagraph 12.(c) entitled Note Forgiveness which subparagraph
reads, in its entirety, as follows:
(c) Note Forgiveness. In the event Employee exercises his option to
receive severance compensation under subparagraph 12.(a) hereof, Employer
shall, in addition to, and not in lieu of, the payment of such severance
compensation, forgive the balance due, if any, relative to Employee's debt
obligation to Employer represented by the promissory note of Employee dated
January 17, 1995 in the original principal amount of $99,530.34.
<PAGE>
3. Savings Clause. Save as expressly modified herein, the Agreement and all
provisions thereof remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have hereunder set their hands on
the date first hereinabove written.
EMPLOYER
DERMA SCIENCES, INC.
By: /s/ Edward J. Quilty
----------------
Edward J. Quilty, Chairman
EMPLOYEE
By: /s/ John T. Borthwick
-----------------
John T. Borthwick
ADDENDUM TO EMPLOYMENT AGREEMENT
THIS ADDENDUM made this 5th day of March, 1997 to that certain Employment
Agreement made December 29, 1995 ("Agreement") by and between Derma Sciences,
Inc., ("Employer") and Gary L. Borthwick ("Employee").
WHEREAS, Employer and Employee are parties to the aforesaid Agreement,
WHEREAS, Employer and Employee desire to amend and modify certain terms and
provisions of the Agreement,
NOW THEREFORE, the parties hereto, in consideration of the mutual promises
and covenants herein contained, and intending to be legally bound, hereby agree
as follows:
1. Stock Options. There is hereby added to paragraph 4 of the Agreement a
subparagraph 4.(g) entitled Adjustments which subparagraph reads, in its
entirety, as follows:
(g) Adjustments. The number of Option Shares and the Option Price
shall be adjusted as set forth herein:
(i) In the event that a stock dividend shall be declared on the
Common Stock payable in shares of the Common Stock, the Option Shares
shall be adjusted by adding to each Option Share the number of shares
which would be distributable thereon if such Option Share had been
outstanding on the date fixed for determining the shareholders
entitled to receive such stock dividend.
(ii) In the event that the outstanding shares of the Common Stock
shall be changed into or exchanged for a different number or kind of
shares of stock or other securities of Employer whether through
recapitalization, stock split, combination of shares, or otherwise,
then there shall be substituted for each Option Share the number and
kind of shares of stock or the securities into which each outstanding
share of the Common Stock shall be so changed or for which each such
share shall be exchanged.
(iii) In the event that the outstanding shares of the Common
Stock shall be changed into or exchanged for shares of stock or other
securities of another corporation, whether through reorganization,
sale of assets, merger or consolidation in which Employer is the
surviving corporation, then there shall be substituted for each Option
Share the number and kind of shares of stock or the securities into
which each outstanding share of the Common Stock shall be so changed
or for which each such share shall be exchanged.
(iv) In the event that any sale of shares of Common Stock (except
any such sale made pursuant to any right, option, warrant or
convertible security outstanding prior to the date of this Agreement),
or the issuance of any rights, options, or warrants to subscribe for
or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) occurs after the date of this
Agreement, which sale or issuance will increase the number of shares
of Common Stock outstanding during the Term by Forty percent (40%),
then, upon each such sale or issuance, Employee shall be issued
additional Option Shares such that, when the additional Option Shares
are aggregated with the Option Shares heretofore owned by Employee,
Employee has the right to purchase, at the same times set forth in
paragraph 4(c), the same percentage of Common Stock at the same price
per share as Employee maintained prior to such sale or issuance.
2. Sale or Merger of Employer. There is hereby added to paragraph 12. of
the Agreement a subparagraph 12.(c) entitled Note Forgiveness which subparagraph
reads, in its entirety, as follows:
(c) Note Forgiveness. In the event Employee exercises his option to
receive severance compensation under subparagraph 12.(a) hereof, Employer
shall, in addition to, and not in lieu of, the payment of such severance
compensation, forgive the balance due, if any, relative to Employee's debt
obligation to Employer represented by the promissory note of Employee dated
January 17, 1995 in the original principal amount of $84,436.11.
<PAGE>
3. Savings Clause. Save as expressly modified herein, the Agreement and all
provisions thereof remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have hereunder set their hands on
the date first hereinabove written.
EMPLOYER
DERMA SCIENCES, INC.
By: /s/ John T. Borthwick
-----------------
John T. Borthwick
President and Chief Executive Officer
EMPLOYEE
By: /s/ Gary L. Borthwick
-----------------
Gary L. Borthwick
EMPLOYMENT AGREEMENT
THIS AGREEMENT made this 1st day of August, 1996, by and between Derma
Sciences, Inc., a Pennsylvania corporation (hereinafter referred to as
"Employer") and Edward J. Quilty (hereinafter referred to as "Employee").
WHEREAS, Employer desires to employ Employee as the Chairman of the Board
of Employer, and
WHEREAS, Employee desires to so act,
NOW, THEREFORE, the parties hereto, in consideration of the mutual promises
and covenants herein contained, and intending to be legally bound, hereby agree
as follows:
1. Employment. Employer employs Employee, and Employee accepts employment,
as the Chairman of the Board of Employer with powers and duties as may be
determined, from time to time, by Employer's Board of Directors which powers and
duties shall not be inconsistent with the powers and duties customarily
performed, undertaken and exercised by persons holding the position of chairman
of the board or equivalent thereof. Provided, however, the employment of
Employee hereunder is contingent upon Employee's election as director of
Employer by the shareholders of Employer. Provided, further, Employer shall
undertake and perform all acts reasonably necessary or desirable to effect such
election.
2. Term. The term of this Agreement shall begin on May 22, 1996, and shall
terminate on May 21, 1999, unless sooner terminated pursuant to paragraph 9
hereof or unless extended by mutual consent of the parties hereto (the "Term").
3. Compensation. Employer shall pay Employee compensation for services
rendered under this Agreement as set forth hereunder ("Compensation"):
(a) Base Compensation. Base salary of $75,000 per year, payable weekly
("Salary").
(b) Bonus. Bonus Compensation of $25,000 per year payable monthly in
consideration of Employee's experience in building value via the
establishment of strategic alliances and relationships.
(c) Incentive Compensation. Incentive Compensation as may, from time
to time, be recommended by Employer's Compensation Committee and approved
by its Board of Directors. Provided, however, such Incentive Compensation,
if any, shall be based upon, inter alia, the following factors: (1) the
extent to which Employer attains its objectives relative to net sales,
income from operations and net income, (2) the extent to which Employee, by
virtue of his responsibilities, is able to, and does, influence the
foregoing results, and (3) Employee's strategic contributions to Employer.
Provided further, that any such incentive compensation shall not exceed
$25,000 in any year.
4. Stock Options. As additional compensation for services rendered,
Employer grants to Employee on the date hereof the right and option to purchase
all or any part of an aggregate of 150,000 shares of Employer's Common Stock
(the "Option"), subject to the vesting schedule set forth in subparagraph c
hereof and the adjustments set forth in subparagraph g hereof, which Option is a
nonqualified stock option. The Option is in all respects limited and conditioned
as provided hereunder.
(a) Purchase Price. Except as otherwise provided in subparagraph g
hereof, the purchase price (the "Option Price") of the shares covered by
the Option ("Option Shares") shall be the closing price of Employer's
Common Stock on the last day on which the Common Stock has traded on the
National Association of Securities Dealers Automated Quotation System
(Nasdaq) preceding the date of execution of this Agreement, to wit:
$2.50.
(b) Option Term. Except as otherwise provided herein, the Option shall
expire on the first to occur of: (i) Ninety (90) days following Employee's
termination of employment with Employer, or (ii) May 22, 2007.
(c) Exercise of Option. (i) Except as otherwise provided herein, the
right of Employee to exercise the Option is conditioned upon Employee: (A)
being in the employ of the Employer, whether pursuant to this Agreement or
otherwise, or (B) serving as a director of Employer. The Option shall be
exercisable: (1) during the period commencing on May 22, 1996 and ending on
May 21, 1997 with respect to up to 20% of the Option Shares, (2) during the
period commencing on May 22, 1997 and ending on May 21, 1998 with respect
to up to 40% of the Option Shares, (3) during the period commencing on May
22, 1998 and ending on May 21, 1999 with respect to up to 60% of the Option
Shares, (4) during the period commencing on May 22, 1999 and ending on May
21, 2000 with respect to up to 80% of the Option Shares, and (5) during the
period commencing on May 22, 2000 and ending on May 22, 2007 (subject to
subparagraph b hereof) 100% of the Option Shares.
(ii) The Option may be exercised, in whole or in part, at any
time or times prior to the expiration or other termination thereof.
(iii) If this Agreement, and Employee's employment with Employer,
is terminated other than For Cause (as defined in paragraph 9) prior
to the expiration date of the Option, such Option may be exercised by
Employee, to the extent the Options are exercisable on the date of
such termination, or to any greater extent permitted by the
Compensation Committee, at any time prior to the earlier of: (i) Three
(3) months after the date of termination, or (ii) the expiration date
of such Option. Provided, however, if this Agreement, and Employee's
employment, was terminated For Cause, Employee shall have no right to
exercise his Option on or after the date of such termination.
(iv) The Option shall accelerate and become 100% exercisable upon
the occurrence of the following: (A) Employee's Legal Disability; (B)
Employer's termination of this Agreement other than For Cause; (C)
"Change in Control" of Employer (as hereinafter defined) or (D)
termination of this Agreement by Employee for "Good Reason" (as
hereinafter defined).
(v) The Option shall accelerate in the following manner upon the
occurrence of Employee's death: 25% exercisable if Employee's death
occurs within 6 months of the beginning date of this Agreement; 50%
exercisable if Employee's death occurs between 6 months and 1 year
from the beginning date of this Agreement; and 100% exercisable if
Employee's death occurs thereafter.
(vi) For purposes of this Agreement the following definitions
apply:
(A) "Legal Disability" shall mean either Employee has been unable
to substantially perform his duties hereunder by reason of illness,
accident or other physical or mental disability for a continuous
period of 180 days or an aggregate period of 270 days during any
continuous twelve-month period, or that in the opinion of the Board of
Directors, such opinion to be derived from the reports of three (3)
physicians of its choosing, Employee will be unable to substantially
perform his duties hereunder by reason of illness, accident or other
physical or mental disability for a continuous period of 180 days or
an aggregate period of 270 days during any continuous twelve-month
period.
(B) "Good Reason" shall mean a breach by Employer of its
obligations under this Agreement. Provided, however, "Good Reason"
shall not include any failure of shareholders of Employer to elect
Employee as a director of Employer under paragraph 1 hereof.
(C) "Change in Control" shall mean: (1) the sale by Employer of
all or substantially all of its assets to any person (as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934), the consolidation of Employer with any person, or the merger of
Employer with any person as a result of which merger Employer is not
the surviving entity, or if the surviving entity, Employer is owned by
a parent company; or (2) the sale or transfer by one or more of
Employer's shareholders in one or more transactions, related or
unrelated, to one or more persons under circumstances whereby any
person and its "affiliates" (as defined herein) shall own, as a result
of such sale or transfer thereafter, at least Fifty percent (50%) of
the outstanding shares of Employer. Nothing contained in this
definition shall limit or restrict the right of Employee, in his
capacity as Chairman of the Board of Directors, from participating in
any discussions or voting on any matter relative to a Change in
Control of Employer at any meeting of the Board of Directors. An
"affiliate" shall mean any person that directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under
common control with, any other person.
(d) Method of Exercising Option. (i) The Option may be exercised by
giving written notice, in form substantially as set forth in Exhibit 1
hereof, to Employer at its principal office, specifying the number of
Option Shares to be purchased and accompanied by payment in full of the
aggregate purchase price for the Shares. Only full Shares shall be
delivered and any fractional share which might otherwise be deliverable
upon exercise of an Option granted hereunder shall be forfeited.
(ii) The purchase price shall be payable in cash or its
equivalent.
(iii) Upon receipt of such notice and payment, Employer,
within three (3) business days after Exercise, shall deliver or
cause to be delivered a certificate or certificates representing
the Shares with respect to which the Option is exercised. The
certificate or certificates for such Shares shall be registered
in the name of the person exercising the Option (or, if Employee
shall so request in the notice exercising the Option, in the name
of Employee and his spouse, jointly, with right of survivorship)
and shall be delivered as provided above to or upon the written
order of the person exercising the Option. In the event the
Option is exercised by any person after the death or Legal
Disability of Employee, such notice shall be accompanied by
appropriate proof of the right of such person to exercise the
Option. All shares purchased upon the exercise of the Option as
provided herein shall be fully paid and nonassessable by
Employer.
(e) Non-transferability of Option. The Option is not assignable or
transferable, in whole or in part, by Employee, otherwise than by will or
by the laws of descent and distribution. During the lifetime of Employee,
the Option shall be exercisable only by Employee or, in the event of his
Legal Disability, by his legal representative.
(f) Withholding of Taxes. The obligation of Employer to deliver Shares
upon the exercise of any Option shall be subject to any applicable federal,
state and local tax withholding requirements.
(g) Adjustments. The number of Option Shares and the Option Price
shall be adjusted as set forth herein: (i) In the event that a stock
dividend shall be declared on the Common Stock payable in shares of the
Common Stock, the Option Shares shall be adjusted by adding to each Option
Share the number of shares which would be distributable thereon if such
Option Share had been outstanding on the date fixed for determining the
shareholders entitled to receive such stock dividend.
(ii) In the event that the outstanding shares of the Common Stock
shall be changed into or exchanged for a different number or kind of
shares of stock or other securities of Employer whether through
recapitalization, stock split, combination of shares, or otherwise,
then there shall be substituted for each Option Share the number and
kind of shares of stock or the securities into which each outstanding
share of the Common Stock shall be so changed or for which each such
share shall be exchanged.
(iii) In the event that the outstanding shares of the Common
Stock shall be changed into or exchanged for shares of stock or other
securities of another corporation, whether through reorganization,
sale of assets, merger or consolidation in which Employer is the
surviving corporation, then there shall be substituted for each Option
Share the number and kind of shares of stock or the securities into
which each outstanding share of the Common Stock shall be so changed
or for which each such share shall be exchanged.
(iv) In the event that any sale of shares of Common Stock (except
any such sale made pursuant to any right, option, warrant or
convertible security outstanding prior to the date of this Agreement),
or the issuance of any rights, options, or warrants to subscribe for
or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) occurs after the date of this
Agreement, which sale or issuance will increase the number of shares
of Common Stock outstanding during the Term by Forty percent (40%),
then, upon each such sale or issuance, Employee shall be issued
additional Option Shares such that, when the additional Option Shares
are aggregated with the Option Shares heretofore owned by Employee,
Employee has the right to purchase, at the same times set forth in
paragraph 4(c), the same percentage of Common Stock at the same price
per share as Employee maintained prior to such sale or issuance.
(h) Share Ownership. Neither Employee nor Employee's legal
representatives nor the executors or administrators of his estate shall be
or be deemed to be the holder of any share of Common Stock covered by an
Option unless and until a certificate for such share shall have been
issued.
5. Time and Efforts. Employee shall devote approximately 15 hours per week
of his business time and efforts to the affairs of Employer.
6. Disclosure of Information. Employee recognizes and acknowledges that he
will have access to certain confidential information of Employer and that such
information constitutes valuable, special and unique property of Employer.
Employee will not, during or after the term of his employment, disclose any of
such confidential information to any person, firm, corporation, association, or
other entity for any reason or purpose whatsoever unless ordered to do so by a
court or other tribunal or government agency with jurisdiction over the subject
matter and Employee. In the event of a breach or threatened breach by Employee
of the provisions of this paragraph, Employer shall be entitled to an injunction
restraining Employee from disclosing, in whole or in part, confidential
information of Employer, or from rendering any services to any person, firm,
corporation, association, or other entity to whom such confidential information,
in whole or in part, has been disclosed or is threatened to be disclosed.
Nothing herein shall be construed as prohibiting Employer from pursuing any
other remedies available to Employer for such breach or threatened breach,
including the recovery of damages from Employee.
7. Expenses. Employee may incur reasonable expenses for promoting
Employer's business, including expenses for entertainment, travel, and similar
items. Employer will reimburse Employee for all such expenses in accordance with
Employer's applicable policies, rules and regulations as from time to time
issued and amended.
8. Insurance. During the term of this Agreement, Employee will be covered
under Employer's Directors' and Officers' liability insurance to the same extent
Employer's directors and officers are covered.
9. Termination of Agreement. (a) This Agreement may be terminated by
Employer in the following instances:
(i) For Cause. If Employee willfully breaches or habitually
neglects or fails to perform the duties which he is required to
perform under the terms of this Agreement, materially fails to follow
the reasonable directives or policies established by or at the
direction of the Board of Directors, or conducts himself in a manner
materially detrimental to the interests of Employer and such breach or
failure of performance is not cured within Thirty (30) days of the
delivery to Employee of written notice thereof, which notice shall
have been approved by a majority of Employer's Board of Directors,
Employer may terminate this Agreement and Employee's employment For
Cause.
(ii) Failure of Shareholders to Elect. If the shareholders of
Employer fail to elect Employee as director of Employer, this
Agreement shall forthwith terminate, cease and determine.
(b) This Agreement may be terminated by Employee for: (i) Good Reason
(as defined in paragraph 4(c)(vi)(B)) if Employer fails to cure its breach
of obligation within Thirty (30) days of the delivery to Employer of
written notice of such breach, or (ii) upon a Change in Control of
Employer.
(c) This Agreement, and therefore Employee's employment with Employer,
shall terminate automatically upon Employee's death. If Employee has been
unable to substantially perform his duties hereunder by virtue of his Legal
Disability (as defined in paragraph 4(c)(vi)(A)), and Employee has not
resumed his duties to the satisfaction of the Board of Directors within
Thirty (30) days of the delivery to Employee of written notice thereof,
which notice shall have been approved by a majority of Employer's Board of
Directors, Employer may terminate this Agreement and Employee's employment.
10. Payments on Termination.
(a) If, prior to the expiration of this Agreement, Employee's
employment is terminated by Employee by reason of a Change in Control of
Employer, Employer shall pay to Employee: (i) Employee's full Salary
through the date of his termination, and (ii) an amount equal to the
greater of the aggregate Salary payments which Employee would have received
during the balance of the Term if such termination had not occurred, or
$100,000. All such Salary payments shall be made not later than the fifth
business day following the date of his termination.
(b) During the Term, if Employee's employment is terminated pursuant
to paragraph 9, Employee shall receive, on the next normal pay date
following the date of his termination, the Salary to which he is entitled
through the date of his termination.
(c) Employee shall not be required to mitigate the amount of any
payment provided for herein by seeking other employment or otherwise, nor
shall the amount of any payment provided for herein be reduced by any
compensation or retirement benefits heretofore or hereafter earned by
Employee as the result of employment by any other person, firm or
corporation.
11. Restrictive Covenant. For a period of One (1) year after the
termination by Employer For Cause or by Employee other than for Good Reason or
pursuant to a Change in Control or expiration of this Agreement, Employee will
not, within the greater of the currently existing marketing area of Employer or
any future marketing area of Employer established during Employee's employment
under the terms of this Agreement, directly or indirectly, own, manage, operate,
control, be employed by, participate in, or be connected in any manner with the
ownership, management, operation, or control of any business related to wound
care therapeutics or otherwise similar to the type of business conducted by
Employer at the time of the termination or expiration of this Agreement.
Provided, however, the aforementioned restrictions shall not be applicable to
activities in which Employee was, and continued to be, engaged in on the date of
this Agreement. In the event of Employee's actual or threatened breach of the
provisions of this paragraph, Employer shall be entitled to an injunction
restraining Employee therefrom. Nothing herein shall be construed as prohibiting
Employer from pursuing any other available remedies for such breach or
threatened breach, including the recovery of damages from Employee.
12. Waiver of Breach. The waiver by Employer of a breach of any provision
of this Agreement by Employee shall not operate or be construed as a waiver of
any subsequent breach by Employee. No waiver shall be valid unless in a writing
signed by an authorized officer of Employer and approved by an absolute majority
of Employer's board of directors.
13. Assignment. Employee acknowledges that the services to be rendered by
him are unique and personal. Accordingly, Employee may not assign any of his
rights or delegate any of his duties or obligations under this Agreement. The
rights and obligations of Employer under this Agreement shall inure to the
benefit of and shall be binding upon the successors and assigns of Employer.
14. Entire Agreement. This Agreement contains this entire understanding of
the parties. It may be changed only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension,
or discharge is sought to be charged.
IN WITNESS WHEREOF, the parties have set their hands and seals the day and
year first written above.
EMPLOYER
DERMA SCIENCES, INC.
By: /s/ John T. Borthwick
-----------------
John T. Borthwick, President
EMPLOYEE
By: /s/ Edward J. Quilty
----------------
Edward J. Quilty
<PAGE>
EXHIBIT 1
DERMA SCIENCES, INC.
NOTICE OF EXERCISE OF STOCK OPTION
I hereby exercise the nonqualified stock options granted to me as of
_______________ by Derma Sciences, Inc. with respect to the following number of
shares of Derma Sciences, Inc. Common Stock, $.01 par value per share,
("Shares") covered by said option:
Number of Shares to be purchased: ________________
Option price per Share: ________________
Total option price: ________________
Enclosed is my check in the amount of $_________. Please have the
certificate or certificates representing the purchased Shares registered in the
following name(s)1 ______________________________________and sent to
_________________________________.
DATED: ______________, ____.
OPTIONEE
__________________________________
1. Certificates may be registered in the name of the Optionee alone or in the
joint names of the Optionee and his spouse.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet at December 31, 1996 (unaudited) and the Statement of Operations for the
year ended December 31, 1996 (unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000892160
<NAME> Derma Sciences, Inc.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 60,208
<SECURITIES> 0
<RECEIVABLES> 1,319,853
<ALLOWANCES> 0
<INVENTORY> 837,659
<CURRENT-ASSETS> 4,479,842
<PP&E> 112,510
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,315,302
<CURRENT-LIABILITIES> 2,199,494
<BONDS> 0
0
0
<COMMON> 40,792
<OTHER-SE> 2,980,016
<TOTAL-LIABILITY-AND-EQUITY> 5,315,302
<SALES> 4,557,931
<TOTAL-REVENUES> 4,557,931
<CGS> 1,062,392
<TOTAL-COSTS> 1,062,392
<OTHER-EXPENSES> 5,112,715
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63,919
<INCOME-PRETAX> (1,529,241)
<INCOME-TAX> (92,976)
<INCOME-CONTINUING> (1,436,265)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,436,265)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> 0
</TABLE>
