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, 1997
[ ] 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
214 Carnegie Center, Suite 100, Princeton, New Jersey 08540
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(Address of principal executive offices) (Zip code)
Registrant's telephone number: (800) 825-4325
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
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(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 $4,010,148.
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 26, 1998, was approximately $9,920,988.
The number of shares outstanding of each of the issuer's classes of
common equity, as of March 24, 1998, was 4,567,632.
Documents Incorporated by Reference: None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
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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's executive offices are located at 214
Carnegie Center, Suite 100, Princeton, New Jersey.
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 these wounds primarily afflict the
elderly, the Company markets its products mainly to healthcare providers for the
geriatric community such as nursing homes, similar extended care facilities,
hospitals and home healthcare agencies throughout the United States. In 1997,
sales of wound care products in the United States were estimated at $2.6
billion. This amount is expected to increase at a rate of 5% annually.
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 such as 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 1997, the Company experienced a 12% decrease in annual revenue. This
decrease is primarily attributable to changes in the product distribution
system. Revenues decreased 20% in 1996 and increased 20% and 18% in 1994 and
1995, respectively. Revenues are principally derived from the sale of the
Company's wound care products.
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 increased marketing
emphasis on its proprietary zinc-nutrient technology, introduction of new
products, product acquisitions, product licensing, joint ventures and joint
marketing arrangements.
Chronic Wounds and Wound Care
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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, may be 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. There are approximately 4 million chronic wounds in the United
States and this number is increasing at an approximate rate of 10% annually. Of
these wounds, 2.5 to 3.0 million were diabetic ulcers and pressure sores.
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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 approximately 13%, or 35 million, of the United States population
will be over the age of 65 and that almost 17 million will be over the age of
75. It is also estimated that by the year 2030 more than 20% of all Americans,
or 60 million, will be over the age of 65 and that this segment of the
population will account for 50% of total healthcare costs.
Ten to twenty percent of all patients admitted to nursing homes suffer
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, and may ultimately result in amputation. It is estimated that
diabetes affects nearly 16 million Americans, although only 10.3 million of
those afflicted have been diagnosed. Approximately 15% of diabetics will develop
foot ulcerations in their lifetime.
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
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The Company develops, markets and sells proprietary and non-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. Descriptions of the Company's products follow. Certain of the Company's
products have undergone, or will soon undergo, name changes. These have been
noted.
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Skin Care/Incontinence Protection
Dermagran Ointment. Dermagran Ointment incorporates the Company's
proprietary zinc-nutrient technology. It is a topical ointment with a petrolatum
base 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.
Dermagran Spray. Dermagran Spray incorporates the Company's proprietary
zinc-nutrient technology. It 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.
Dermagran II Moisturizing Spray. Dermagran II Moisturizing Spray, which
may be used either alone or with Dermagran II Ointment, incorporates the
Company's proprietary zinc-nutrient technology. It 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.
Dermagran II Ointment. Dermagran II Ointment, which may be used either
alone or with Dermagran II Moisturizing Spray, incorporates the Company's
proprietary zinc-nutrient technology. It is a topical ointment with a petrolatum
base 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.
NutraWash. Formerly Dermagran Tri-Zinc Incontinent Wash, NutraWash
incorporates the Company's proprietary zinc-nutrient technology. It is a
cleanser packaged in an eight ounce opaque plastic bottle with a pump spray
nozzle. NutraWash removes dry fecal matter, urine and odor resulting from
incontinence. Sales of this product have not been a material revenue producing
factor. However, the Company intends to redirect its marketing efforts relative
to NutraWash and sell the product as a companion to NutraShield.
NutraShield Perineal Protectant. NutraShield Perineal Protectant
incorporates the Company's proprietary zinc-nutrient technology. It is a topical
ointment packaged in tubes. This product is a protective, long lasting barrier
ointment for perineal care associated with incontinency. NutraShield will be
marketed as a companion product to NutraWash. Marketing and sales of this
product are estimated to commence in the second quarter, 1998.
Wound Cleanser
NutraCleanse. Formerly Dermagran Wound Cleanser with Zinc, NutraCleanse
incorporates the Company's proprietary zinc-nutrient technology. It is a
saline-based 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. NutraCleanse addresses the traditional
wound care factors of moisture, pH balance and nutrition. The indicated use of
this product is to cleanse dermal wounds while contributing to the maintenance
of a mildly acidic wound environment. Sales of NutraCleanse have not been a
material revenue producing factor. The Company intends to refocus its marketing
efforts relative to this product.
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Transparent Films
DermaFilm. DermaFilm is an intelligent film dressing, sold in various
sizes, with a high moisture vapor transfer rate. The FDA has granted a Section
510(k) approval for the marketing and sale of this product. DermaFilm addresses
the traditional wound care factor of protection. The indicated uses of this
product are as a primary dressing on partial thickness wounds and as a secondary
dressing on full thickness wounds with moderate to heavy exudate. Marketing and
sales of DermaFilm commenced in the first quarter, 1998.
DermaSite. DermaSite is a transparent film with low vapor permeability
and is sold in various sizes. The FDA has granted a Section 510(k) approval for
the marketing and sale of this product. DermaSite addresses the traditional
wound care factors of moisture and protection. The indicated uses of this
product are as a dressing for partial thickness wounds and utilization as a
fixation device. Marketing and sales of DermaSite commenced in the first
quarter, 1998.
Hydrocolloid Dressings
NutraCol. NutraCol incorporates the Company's proprietary zinc-nutrient
technology. It is an intelligent hydrocolloid dressing and is sold in various
sizes. The FDA has granted a Section 510(k) approval for the marketing and sale
of this product. NutraCol addresses the traditional wound care factors of
moisture, protection and nutrition. The indicated uses of this product are as a
primary or secondary dressing for the management of moderately exudating wounds.
Marketing and sales of NutraCol commenced in the first quarter, 1998.
DermaCol. DermaCol is similar to NutraCol described above, but without
zinc. The FDA has granted a Section 510(k) approval for the marketing and sale
of this product. DermaCol addresses the traditional wound care factors of
moisture and protection. The indicated uses of this product are as a primary or
secondary dressing for the management of moderately exudating wounds. Marketing
and sales of DermaCol commenced in the first quarter, 1998.
Hydrogel/Wound Fillers
NutraVue. Formerly Dermagran Zinc-Saline Hydrogel, NutraVue
incorporates the Company's proprietary zinc-nutrient technology. It is a clear
hydrogel packaged in tubes. The FDA has granted a Section 510(k) approval for
the marketing and sale of this product. NutraVue addresses all five traditional
wound care factors. The indicated uses of this product are the management of all
stages of pressure sores, surgical incisions, thermal burns, cuts and abrasions
and venous stasis ulcerations. Marketing and sale of NutraVue began in the third
quarter, 1996.
NutraFil. Formerly Dermagran Hydrophilic Wound Dressing-B (bulk),
NutraFil incorporates the Company's proprietary zinc-nutrient technology. It is
an advanced zinc hydrogel formulation packaged in tubes. The FDA has granted a
Section 510(k) approval for the marketing and sale of this dressing. NutraFil
addresses all five traditional wound care factors. Indicated uses are the
management of stages II-IV pressure sores, diabetic ulcers, venous stasis
ulcerations, thermal burns, surgical incisions and superficial lacerations, cuts
or abrasions.
Impregnated Gauze Dressings
NutraGauze. Formerly Dermagran Hydrophilic Wound Dressing, NutraGauze
incorporates the Company's proprietary zinc-nutrient technology. It is an
advanced zinc hydrogel formulation impregnated in gauze and is available in
various sizes. The FDA has granted a Section 510(k) approval for the marketing
and sale of this dressing. NutraGauze addresses all five traditional wound care
factors. Indicated uses are the management of stages II-IV pressure sores,
diabetic ulcers, venous stasis ulcerations, thermal burns, surgical incisions
and superficial lacerations, cuts or abrasions.
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,
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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.
NutraDress. Formerly, Dermagran Zinc-Saline Wet Dressing, NutraDress
incorporates the Company's proprietary zinc-nutrient technology. It is similar
to Dermagran Wet Dressing (Saline) described above. The FDA has granted a
Section 510(k) approval for the marketing and sale of this dressing. NutraDress
addresses all five traditional wound care factors. The medical indications for
NutraDress are the same as for Dermagran Wet Dressing (Saline).
Exudate Absorptives
NutraStat. NutraStat incorporates the Company's proprietary
zinc-nutrient technology. It is a calcium alginate dressing, containing zinc,
packaged in various sizes. The FDA has granted a Section 510(k) approval for the
marketing and sale of this product. NutraStat addresses the traditional wound
care factors of moisture and nutrition. The medical indications for NutraStat
are the management of moderately to heavily exudating wounds such as pressure
ulcers, venous stasis ulcers and dermal lesions. Marketing and sales of
NutraStat commenced in the first quarter, 1998.
DermaStat. DermaStat is a calcium alginate dressing, without zinc,
packaged in various sizes. The FDA has granted a Section 510(k) approval for the
marketing and sale of this product. DermaStat addresses the traditional wound
care factor of moisture. The medical indications are similar to those for
NutraStat. Marketing and sales of DermaStat commenced in the first quarter,
1998.
Chronicure. Chronicure is a protein hydrolysate powder made from avian
derived collagen peptides. The FDA has granted a Section 510(k) approval for the
marketing and sale of this product. This product addresses all five traditional
wound care factors. Indicated uses are the management of moderate to heavily
exudating wounds.
Product Development
The Company has incurred expenditures for product development in 1996
and 1997 of $803,744 and $386,283, respectively. The reduction in product
development expense is attributable to decreases in the Company's product
development staff together with increased outsourcing of product development
functions. It is the Company's current intention to work with other companies in
the development of additions to its product line. Other than as described below,
the Company has no product development agreements with other companies.
The Company has two five-year product development and supply agreements
with Innovative Technologies Limited (London Exchange: ITG.L) for the
development and manufacture of advanced wound care products involving both the
Company's proprietary zinc-nutrient technology and non-proprietary technology.
The Product Development and Manufacturing Agreement (the "PDM agreement")
provides that Innovative Technologies will develop and manufacture new
zinc-based wound care products for the Company. Product development costs,
estimated to aggregate approximately $150,000, are being borne by the Company.
The Company owns all rights to the developed products within the United States
and its territories. It has granted to Innovative Technologies the right to sell
and license the products outside the United States in return for fifty percent
of the gross margins and fifty percent of the fees derived from such sales and
licenses, respectively.
NutraCol and NutraStat, discussed above under "The Company's Products,"
were developed and are being manufactured pursuant to the PDM agreement.
Marketing and sale of these products began in the first quarter, 1998.
The Generic Products Agreement (the "GP agreement") appoints the
Company as a non-exclusive United States distributor of certain non-proprietary
wound care products manufactured by Innovative Technologies. DermaCol,
DermaStat, DermaSite and DermaFilm are products that are manufactured by
Innovative Technologies and distributed by the Company pursuant to the GP
agreement. Marketing and sale of these products commenced in the first quarter,
1998.
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Management believes that combining the Company's zinc-based nutrient
technology with Innovative Technologies' biomaterial processing technology will
yield a highly effective, differentiated line of advanced wound care products.
Product Sourcing and Quality Assurance
The Company does not maintain manufacturing facilities and it
outsources contracts for the production and packaging of its entire product
line. The following table lists the Company's manufacturers as of December 31,
1997, together with the products manufactured by each:
MANUFACTURER PRODUCT
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Ambix Laboratories NutraCleanse (Dermagran Wound Cleanser with Zinc)
East Rutherford, New Jersey NutraVue (Dermagran Zinc-Saline Hydrogel)
Hydrophilic compound for NutraFil and NutraGauze
(Dermagran Hydrophilic Wound Dressing)
Applied Labs Dermagran Spray
Columbus, Indiana NutraWash (Dermagran Tri-Zinc Incontinent Wash)
Zinc-Saline solution for NutraDress (Dermagran
Zinc-Saline Wet Dressing)
Contract Pharmaceuticals Ltd. Dermagran II Ointment
Mississauga, Ontario Dermagran II Moisturizing Spray
Innovative Technologies DermaCol
Limited NutraCol
Cheshire, United Kingdom DermaStat
NutraStat
DermaSite
DermaFilm
Kendall Health Care Products Dermagran Wet Dressing (Saline)
Mansfield, Massachusetts NutraDress (Dermagran Zinc-Saline Wet Dressing)
Kimberly-Clark Tecnol NutraGauze (Dermagran Hydrophilic Wound Dressing)
Fort Worth, Texas
Topiderm, Inc. Dermagran Ointment
Bohemia, New York NutraFil (Dermagran Hydrophilic Wound Dressing-B)
NutraShield
The Company's products utilize readily available components. Numerous
laboratories and production facilities are capable 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.
Patents and Proprietary Technology
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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
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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
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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
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* 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. Dermagran II is a registered
trademark of the Company 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. Inability to license proprietary
wound care technology could have a material adverse effect on the Company's
business.
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The Company relies upon trade secrets and other unpatented proprietary
information relative to its products. 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.
Distribution and Sales
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Domestic
The Company has reorganized its domestic sales and distribution system.
Formerly, the Company sold the majority of its products to "master
distributors." Master distributors typically entered into long-term master
distributorship agreements with the Company providing for large, exclusive
territories and commissions relative to all products distributed within the
territory. This distribution system frequently resulted in commission payments
to distributors who had little or no responsibility for the subject sale. This
would be the case, for example, when products were shipped into several
distributors' territories by large, multi-state customers of the originating
distributor. The practice of paying distributors sales commissions in addition
to permitting distributors to mark up products often resulted in excessive cost
to the products' end-users, excessive compensation to distributors and
relatively small profit margins to the Company.
Under its reorganization in 1997, the Company terminated or
renegotiated relationships with its master distributors. The Company currently
distributes its products through drug wholesalers and medical/surgical
distributors retained on a non-territorial and non-exclusive basis. Compensation
of the Company's wholesalers and distributors is now derived from markups on the
products and various product pricing and sales growth incentives provided by the
Company. No commissions are payable under these new distribution agreements.
The Company also seeks to improve sales and distribution through the
institution of a direct sales force. To this end, the Company has retained a
senior sales executive (Executive Vice President for Field Operations), three
regional sales managers and five sales representatives. These managers and
representatives maintain the dual responsibilities of supporting the Company's
expansion in the alternate site markets as well as supporting the wholesalers
and distributors of the Company's products.
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 seeks to establish the markets in Europe, Japan, the Pacific Rim and the
Middle East. To date, international sales have not been a material revenue
producing factor.
Third Party Reimbursement
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The Company's products are sold to nursing homes, hospitals and home
healthcare agencies. Many of these institutions seek reimbursement for the cost
of the Company's products from third party payors such as Medicare, Medicaid,
health maintenance organizations and private insurers, including Blue Cross/Blue
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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 that pharmaceutical
companies, as a condition of the eligibility of its products for Medicaid
reimbursement, 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, the Company's products have been the subject of past Medicare
reimbursement cutbacks.
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 is no assurance that reimbursements relative to the Company's products
will continue to be available or that the Company's rebate obligations will not
increase.
Competition
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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:
9
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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." The Company has products in all of the above described
categories except antimicrobials, antiseptics and antibiotics. See "Description
of Business-The Company's Products."
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 many 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, 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, commercialize and market wound care technologies which are superior to
those of its competitors.
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, as amended, ("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.
10
<PAGE>
Medical Devices
The following products are registered with the FDA as "devices"
pursuant to the regulations under Section 510(k) of the FDC Act: Dermagran Wet
Dressing (Saline), Dermagran Zinc-Saline Wet Dressing, NutraCleanse, DermaFilm,
DermaSite, NutraCol, DermaCol, NutraFil, NutraVue, NutraGauze, NutraDress,
NutraStat, DermaStat and Chronicure.
The FDC Act requires that all devices for human use marketed in the
United States prior to May 28, 1976 ("Pre-amendment 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 sufficient
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.
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
submission of extensive safety and effectiveness data which is both
time-consuming and expensive to compile. Consequently, the FDA approval process
relative to Class III devices may require several years.
Devices marketed after May 28, 1976 belong to one of two categories:
those that are and those that are not substantially equivalent to a
Pre-amendment Device. Those that are substantially equivalent to a Pre-amendment
Device are given the same classification as the equivalent pre-amendment
product. Those new devices which are not substantially equivalent to
Pre-amendment Devices are automatically placed in Class III thereby requiring
pre-market approval.
All manufacturers are required to give the FDA ninety days notice
before they can place 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
Pre-amendment Device. If the FDA determines that the device is not substantially
equivalent to a Pre-amendment Device, the manufacturer must submit to the FDA a
Pre-market Approval Application ("PMA") containing evidence that the device is
safe and effective prior to publicly marketing the device. However, the
manufacturer may seek 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 Pre-amendment Device.
Regulation of Drugs
Dermagran Spray and Dermagran Ointment are classified as drugs pursuant
to the FDC Act. See "Status of Dermagran Spray and Dermagran Ointment" below.
The FDC Act gives the FDA 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
11
<PAGE>
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.
Prescription and 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 the FDA has not yet completed the
rulemaking process based upon these reviews.
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 depending upon whether
a drug is considered: (1) generally recognized as safe and effective and not
misbranded (Category I), (2) not generally recognized as safe and effective or
misbranded (Category II), or (3) lacking 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
not to 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.
Status of Dermagran Spray and Dermagran Ointment
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.
12
<PAGE>
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.
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 current
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
- ---------
The Company currently maintains twenty full time employees, four of
whom serve in executive capacities, two of whom serve in business development
and regulatory capacities, eight of whom serve in marketing, sales and
distribution capacities and six of whom serve in administrative capacities. The
Company considers its employee relations to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
Effective May 1, 1997, the Company's executive offices relocated from
Old Forge, Pennsylvania to Princeton, New Jersey. The Company leases these
offices on a month-to-month basis at a cost of approximately $1,600 per month.
The Company also leases a branch office in Wilkes-Barre, Pennsylvania under a
lease expiring June 30, 2000, at a rate of approximately $3,000 per month. The
Company leases an additional branch office in Scottsdale, Arizona, under a lease
expiring October 31, 1998, at a rate of $700 per month. The Company also has a
month-to-month lease for 8,200 square feet of warehouse space in Old Forge at a
rate of $1,750 per month.
ITEM 3. LEGAL PROCEEDINGS
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." 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 the foregoing license agreement with ABS. The license agreement
13
<PAGE>
generally provided that ABS sell to the Company, and license the Company to
resell, the wound care products Chronicure and Viaderm. 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.
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, 1997.
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
during the quarters indicated for the Company's Common Stock as reported by
Nasdaq:
QUARTER ENDED HIGH LOW
------------- ------ ------
March 31, 1996 $4.750 $2.250
June 30, 1996 $4.750 $2.625
September 30, 1996 $3.875 $2.250
December 31, 1996 $3.125 $1.750
March 31, 1997 $2.125 $1.125
June 30, 1997 $2.063 $0.625
September 30, 1997 $1.250 $0.625
December 31, 1997 $1.750 $0.813
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 23, 1998, there were 995 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. In 1997 and 1996, the Company experienced a 12%
and 20% decrease, respectively, in annual revenue. The Company incurred a net
14
<PAGE>
loss of $2,416,244 and $1,436,265 in 1997 and 1996, respectively. The Company's
net loss for 1997 was primarily attributable to; (1) decrease in net sales as a
result of both the restructuring of the Company's distribution system and the
elimination or reduction of Medicare reimbursement for certain product lines;
and (2) increase in selling, general and administrative expense primarily
attributable to increases in wages and benefits expense including the incurrence
of severance expense and an increase in bad debt expense. At December 31, 1997
and 1996, the Company's accumulated deficits were $4,080,853 and $1,664,609,
respectively.
Results of Operations
- ---------------------
The following table presents selected financial information for the
periods indicated expressed as a percentage of net sales:
1997 1996
------------- -------------
Net sales .......................... 100.0% 100.0%
Cost of sales ...................... 19.8 23.3
------------- -------------
Gross profit .................. 80.2 76.7
Operating Expenses:.................
Product development ............. 9.6 17.7
Selling, general and
administrative ................. 133.1 94.5
------------- -------------
Total operating expenses 142.7 112.2
------------- -------------
Loss from operations ............... (62.5) (35.5)
Other income ....................... 2.2 1.9
Income taxes - benefit ............. -- 2.1
------------- -------------
Net loss (60.3%) (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 1997 compared to 1996 by 12%. This decrease is
primarily attributable to both the restructuring of the Company's distribution
system and the elimination or reduction of Medicare reimbursement for certain
product lines. These decreases were partially offset by a price increase during
1997.
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The following table presents sales, by product, expressed in dollars
and as a percentage of net sales:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996
--------------------- ---------------------
Product:
Dermagran Ointment........... $2,782,000 69% $3,236,000 71%
Dermagran Spray.............. 273,000 7% 274,000 6%
Wet Dressings................ 77,000 2% 123,000 3%
Hydrophilic Wound Dressing... 838,000 21% 882,000 19%
Other Products............... 40,000 1% 43,000 1%
===================== =====================
Total...................... $4,010,000 100% $4,558,000 100%
===================== =====================
1997 compared to 1996
- ---------------------
Net Sales and Gross Profit
Net sales decreased in 1997 by $547,783, or 12%, to $4,010,148 from
$4,557,931 in 1996. This decrease is primarily attributable both to
restructuring of the Company's distribution system and the elimination or
reduction of Medicare reimbursement for certain product lines. Sales of
Dermagran Ointment decreased $454,000, or 14%, from $3,236,000 in 1996 to
$2,782,000 in 1997. Sales of Dermagran Hydrophilic Wound Dressing decreased
$44,000, or 5%, from $882,000 in 1996 to $838,000 in 1997. Dermagran Spray net
sales decreased $1,000 from $274,000 in 1996 to $273,000 in 1997. Sales of
Dermagran Wet Dressing (Saline) and Dermagran Zinc-Saline Wet Dressing
collectively decreased $46,000, or 37%, from $123,000 in 1996 to $77,000 in
1997.
Cost of sales expressed as a percentage of net sales decreased from 23%
in 1996 to 20% in 1997. This decrease is attributable primarily to an increase
in net sales resulting from a price increase during 1997. Aggregate cost of
sales decreased $269,180, or 25%, to $793,212 in 1997 from $1,062,392 in 1996.
The decrease in aggregate cost of sales is attributable to a decrease in net
sales discussed above.
Gross profit expressed as a percentage of net sales increased from 77%
in 1996 to 80% in 1997. Aggregate gross profit decreased $278,603, or 8%, to
$3,216,936 in 1997 from $3,495,539 in 1996. The increase in the gross profit
percentage is attributable to the price increase discussed above. The decrease
in the aggregate gross profit is primarily attributable to the sales decreases
discussed above.
Operating Expenses
Operating expenses increased $609,035, or 12%, from $5,112,715 in 1996
to $5,721,750 in 1997. Product development expense decreased $417,461, or 52%,
from $803,744 in 1996 to $386,283 in 1997 and decreased as a percentage of sales
from 18% in 1996 to 10% in 1997. The decrease in product development expense is
primarily attributable to a decrease in product development staffing together
with increased outsourcing of product development functions.
Selling, general and administrative expense for 1997 increased
$1,026,496, or 24%, to $5,335,467 from $4,308,971 in 1996 and increased as a
percentage of sales from 95% in 1996 to 133% in 1997. The increase in selling,
general and administrative expense is primarily attributable to increases in
wages and benefits expense including the incurrence of severance expense and an
increase in bad debt expense.
Wages and benefits expense expressed as a percentage of net sales
increased in 1997 to 45% from 30% in 1996. Aggregate wages and benefits expense
increased $429,754 to $1,817,961 in 1997 from $1,388,207 in 1996. These
increases are attributable to an increase in severance costs of $159,665 to
$386,992 and compensation incident to the hiring of marketing and sales
personnel of $554,015.
Bad debt expense for 1997 expressed as a percentage of sales increased
in 1997 to 14% from 3% in 1996. Aggregate bad debt expense increased $436,924 to
$558,530 in 1997 from $121,606 in 1996. These increases are primarily
16
<PAGE>
attributable to the reserve and write off of uncollectible accounts relating to
the restructuring of the Company's distribution system.
Recruiting fees of $97,000 were incurred in 1997 in connection with the
hiring of marketing and sales personnel. No comparable costs were incurred in
1996.
Loss from Operations
The Company incurred a loss from operations for 1997 and 1996 of
$2,504,814 and $1,617,176, respectively. This loss is attributable to lower
sales and higher operating expenses as discussed above.
Net Loss
The Company incurred a net loss in 1997 and 1996 of $2,416,244 and
$1,436,265, or $0.58 and $0.35 per share, respectively.
Financial Ratios
- ----------------
The following table presents selected financial ratios for the periods
indicated:
DECEMBER 31,
-----------------
1997 1996
------ ------
Current Ratio......................... 1.65 2.04
Quick Ratio........................... 1.20 1.55
Liabilities-to-Assets Ratio........... .51 .43
Liabilities-to-Equity Ratio........... 1.03 .76
Inventory Turnover.................... .98 1.11
The 1997 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 working capital together with increased accounts payable and
accrued expenses. See "Liquidity and Capital Resources" and "Notes to Financial
Statements." The 1997 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."
Liquidity and Capital Resources
- -------------------------------
At December 31, 1997 and 1996 the Company had working capital of
$1,451,239 and $2,280,348, respectively. The 1997 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 and related 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 were
invested in U.S. Treasury Bills having an aggregate market value of $1,887,171
on December 31, 1996. These amounts were utilized in operations during 1997 to
fund the Company's losses.
17
<PAGE>
On November 19, 1997, the Company successfully closed on its $1,800,000
securities offering (exclusive of commissions and related expenses). On November
24, 1997, $400,000 of such securities were converted directly into common stock
and warrants. The remaining $1,400,000 of the securities were converted to
preferred stock and warrants, effective as of December 31, 1997. The proceeds of
the convertible securities are invested in short term, investment grade
commercial paper having an aggregate market value of $1,808,000 on December 31,
1997.
The Company has a short-term line of credit for $800,000 at a
fluctuating rate per annum equal to the bank's base rate (8.50% at December 31,
1997). This line of credit is secured by accounts receivable, inventory and the
company's United States patent and trademarks. In 1997 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, based on increased accounts receivable.
The Company is currently defending a civil action brought against it by
ABS LifeSciences, Inc. As of December 31, 1997, the Company had expended
approximately $279,000 attributable to the lawsuit in the form of legal expense,
travel expense and other administrative expenses.
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.
ITEM 7. FINANCIAL STATEMENTS
INDEX
Description Page
----------- ----
Report of Independent Auditors........................ 19
Balance Sheets........................................ 20
Statements of Operations.............................. 21
Statements of Shareholders' Equity.................... 22
Statements of Cash Flows.............................. 23
Notes to Financial Statements......................... 24
18
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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, 1997 and 1996 and the related statements of operations,
shareholders' equity, and cash flows for the years then ended. 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, 1997 and 1996, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
February 18, 1998
19
<PAGE>
DERMA SCIENCES, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 60,208 $ 2,173,893
Short-term investments 1,887,171 0
Accounts receivable, net of allowance for doubtful accounts of $86,000 in 1996
and $50,000 in 1997 1,319,853 487,407
Current portion of officers' notes receivable 150,177 19,330
Inventory 837,659 774,672
Prepaid expenses and other current assets 224,774 215,204
------------ ------------
Total Current Assets 4,479,842 3,670,506
------------ ------------
PROPERTY AND EQUIPMENT, NET 112,510 144,591
------------ ------------
OTHER ASSETS:
Officers notes receivable 155,554 90,979
Intangibles, net 514,439 410,779
Other assets 52,957 54,985
------------ ------------
Total Assets $ 5,315,302 $ 4,371,840
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit $ 800,000 $ 549,633
Accounts payable 745,542 920,753
Accrued expenses 653,952 748,881
------------ ------------
Total Current Liabilities 2,199,494 2,219,267
------------ ------------
OTHER LIABILITIES 95,000 0
------------ ------------
Total Liabilities 2,294,494 2,219,267
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 15,000,000 shares, issued and
outstanding 4,079,233 shares in 1996, 4,567,632 shares in 1997 40,792 45,676
Convertible preferred stock, $0.01 par value, authorized 1,750,000 shares,
issued and outstanding 1,750,000 shares 0 17,500
Additional paid-in capital 4,644,625 6,170,250
Accumulated deficit (1,664,609) (4,080,853)
------------ ------------
Total Shareholders' Equity 3,020,808 2,152,573
------------ ------------
Total Liabilities and Shareholders' Equity $ 5,315,302 $ 4,371,840
============ ============
</TABLE>
See accompanying notes.
20
<PAGE>
DERMA SCIENCES, INC.
STATEMENTS OF OPERATIONS
Year ended December 31,
---------------------------
1996 1997
------------ ------------
NET SALES $ 4,557,931 $ 4,010,148
COST OF SALES 1,062,392 793,212
------------ ------------
GROSS PROFIT 3,495,539 3,216,936
------------ ------------
OPERATING EXPENSES:
Product development 803,744 386,283
Selling, general and administrative 4,308,971 5,335,467
------------ ------------
Total Operating Expenses 5,112,715 5,721,750
------------ ------------
LOSS FROM OPERATIONS (1,617,176) (2,504,814)
------------ ------------
OTHER INCOME (EXPENSE):
Interest and miscellaneous income 151,854 154,155
Interest expense (63,919) (65,585)
------------ ------------
Total Other Income 87,935 88,570
------------ ------------
LOSS BEFORE INCOME TAXES: (1,529,241) (2,416,244)
Income taxes (benefit) (92,976) 0
------------ ------------
NET LOSS ($1,436,265) ($2,416,244)
============ ============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED ($ 0.35) ($ 0.58)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 4,079,233 4,150,965
============ ============
See accompanying notes.
21
<PAGE>
DERMA SCIENCES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Convertible Additional Accumulated Shareholders'
Preferred Stock Common Stock Paid-In Capital Deficit Equity
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 0 $40,542 $4,584,719 ($ 228,344) $4,396,917
Issuance of 25,000
common shares 0 250 59,906 0 60,156
Net loss 0 0 0 (1,436,265) (1,436,265)
-----------------------------------------------------------------------------------------------
Balance, December 31, 1996 0 40,792 4,644,625 (1,664,609) 3,020,808
Tender of common shares
by officers for payment
of notes receivable in
January, 1997 0 (116) (23,086) 0 (23,202)
Issuance of 2,250,000
convertible securities in
November, 1997, net of
issuance costs 22,500 0 1,548,711 0 1,571,211
Conversion of convertible
securities into 500,000
common shares in
November, 1997 (5,000) 5,000 0 0 0
Net loss 0 0 0 (2,416,244) (2,416,244)
-----------------------------------------------------------------------------------------------
Balance, December 31, 1997 $17,500 $45,676 $6,170,250 ($4,080,853) $2,152,573
===============================================================================================
</TABLE>
See accompanying notes.
22
<PAGE>
DERMA SCIENCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss ($1,436,265) ($2,416,244)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation and amortization 113,049 205,393
Provision for bad debts 121,606 558,530
Deferred taxes, net (46,672) 0
Loss on abandonment 82,589 0
Charge related to issuance of common shares 60,156 0
Changes in operating assets and liabilities:
Accounts receivable (95,446) 273,916
Inventory 232,026 62,987
Prepaid expenses and other current assets (11,660) 9,570
Other assets (7,836) (2,028)
Accounts payable 363,909 175,211
Accrued expenses and other liabilities 206,859 (71)
------------ ------------
Net Cash Used in Operating Activities (417,685) (1,132,736)
------------ ------------
INVESTING ACTIVITIES:
Decrease in short-term investments 492,304 1,887,171
Purchases of property and equipment, net (65,464) (85,969)
Acquisition of contract rights (160,000) 0
Increase in patents and trademarks (44,384) (47,855)
------------ ------------
Net Cash Provided by Investing Activities 222,456 1,753,347
------------ ------------
FINANCING ACTIVITIES:
Net change in bank line of credit 100,000 (250,367)
(Advances to) collection of officers' notes receivable (40,089) 172,230
Proceeds from issuance of convertible securities,
net of issuance costs 0 1,571,211
Principal payments on long-term debt and capitalized
lease obligations (247) 0
------------ ------------
Net Cash Provided by Financing Activities 59,664 1,493,074
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (135,565) 2,113,685
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 195,773 60,208
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 60,208 $ 2,173,893
============ ============
</TABLE>
See accompanying notes.
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. THE COMPANY
Derma Sciences, Inc. (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 principally 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 useful 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 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.
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.
24
<PAGE>
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, 1996, represented primarily U.S.
Treasury Bills that were carried at amortized cost which approximated fair
value. All investments were available for sale and matured within 12 months of
year end. Realized gains and losses, based on the specific identification
method, were not material.
Cash Flow Information
Interest paid during 1997 and 1996 amounted to $63,035 and $63,919,
respectively. Income taxes paid during 1997 and 1996 amounted to $-0- and
$14,185, respectively.
Non-cash transactions in 1997 included receipts of 11,601 shares of
common stock in repayment of officers' note receivable.
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 Loss Per Common Share
Net loss per common share is calculated based upon the weighted average
number of shares of common stock, on an as if converted basis, outstanding
during each period. All options and warrants were excluded in the calculation of
weighted average shares outstanding since their inclusion would have had, in the
aggregate, an anti-dilutive effect.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings per Share." The
statement is effective for financial statements for periods ending after
December 15, 1997, and changes the method in which earnings per share are
determined. Adoption of this statement by the Company did not have an impact on
earnings per share as the Company incurred losses in both 1997 and 1996.
Impact of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
Statements No. 130, "Reporting Comprehensive Income" and Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," both of
which are required to be adopted on January 1, 1998. Statement 130 requires
financial statement reporting of all non-owner related changes in equity for the
periods being presented. Statement 131 requires disclosure of revenue, earnings
and other financial information pertaining to business segments by which a
company is managed, as well as factors used by management to determine segments.
The Company believes adoption of Statement 130 will have no effect on its
financial reporting and is currently evaluating the requirements of Statement
131 to determine the impact it will have on financial statement disclosures.
25
<PAGE>
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.
Revenue Recognition
The Company's products are primarily sold to independent distributors.
Sales are recorded when product is shipped.
3. PROPERTY AND EQUIPMENT
Property and equipment comprise the following:
DECEMBER 31,
-------------------
1997 1996
-------- --------
Furniture and equipment $318,734 $232,775
Leasehold improvements 14,543 14,543
-------- --------
333,277 247,318
Less: Accumulated depreciation 188,686 134,808
-------- --------
$144,591 $112,510
======== ========
4. INTANGIBLES
Intangibles comprise the following:
DECEMBER 31,
-------------------
1997 1996
-------- --------
Goodwill $ 50,731 $ 50,731
Patents and trademarks 406,859 359,004
Contract rights 350,000 350,000
-------- --------
807,590 759,735
Less: Accumulated amortization 396,811 245,296
-------- --------
$410,779 $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, 1997 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 currently has manufacturing arrangements in place with
contract manufacturers with respect to all of its products. The Company believes
that the raw materials used in manufacturing its products are available in
adequate quantities from multiple sources.
Although the Company typically has a manufacturing agreement with a
single source for each product, multiple sources are generally available. The
Company has never experienced a material interruption of supply from any of its
manufacturers. However, in those instances in which it has only a single source
of supply, any material delay or cessation of production by the Company's
26
<PAGE>
contract manufacturers could have a material adverse impact on the Company's
results of operations. The Company does not believe that the level of
manufacturing over-capacity in the industry is likely to change significantly in
the near future and, accordingly, does not believe that its reliance upon
contract manufacturers will have a material adverse effect on the Company's
operations.
The Company is dependent on two distributors who purchase products
directly from the Company. These two distributors accounted for 18% and 33% of
net sales in 1997 and 1996, respectively. Included in accounts receivable are
amounts representing 39% of the total receivables for these two distributors at
December 31, 1997.
6. ACCRUED EXPENSES
Accrued expenses comprise the following:
DECEMBER 31,
-------------------
1997 1996
-------- --------
Commissions payable $ 19,433 $235,681
Accrued severance 195,000 191,521
Medicaid rebates payable 163,787 58,669
Other 370,661 168,081
-------- --------
$748,881 $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. BANK LINE OF CREDIT
The Company has a $800,000 revolving line of credit with a bank, with
$549,633 and $800,000 outstanding at December 31, 1997 and 1996, respectively,
which amounts approximate fair value. The maturity date of the line is May 31,
1998. The line of credit agreement requires monthly interest payments at the
bank's base rate, as defined, (8.5% at December 31, 1997). 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 an office
and one automobile. Rent expense under these agreements amounted to $27,612 and
$35,689 in 1997 and 1996, respectively. As of December 31, 1997, the 1998
minimum lease payments under these agreements total $46,080.
10. INCOME TAXES
At December 31, 1997, the Company has Pennsylvania and New Jersey net
operating loss carryforwards of approximately $3,100,000 and $463,000,
respectively for state income tax purposes that expire in years 1998 through
2000. For Federal tax purposes, the Company has a net operating loss
carryforward of approximately $3,240,000 expiring in years 2011 and 2016.
27
<PAGE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
DECEMBER 31,
--------------------------
1997 1996
----------- ------------
Deferred tax liabilities:
Prepaid insurance ($ 9,233) ($ 12,864)
Patent amortization (82,748) (66,493)
----------- -----------
Total deferred tax liabilities (91,981) (79,357)
Deferred tax assets:
Net operating loss carryforwards 1,332,878 413,103
Depreciation 26,760 17,067
Amortization of intangibles 55,513 7,501
Foreign tax, research and development credits 24,559 24,559
Allowance for bad debts 20,297 34,911
Other 70,610 71,592
----------- -----------
1,530,617 568,733
Valuation allowance (1,438,636) (489,376)
----------- -----------
Total deferred tax assets 91,981 79,357
----------- -----------
Net deferred tax assets $ 0 $ 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:
1997 1996
--------- ---------
Current:
Federal -- ($46,304)
State -- --
Total current -- (46,304)
Deferred:
Federal -- (12,118)
State -- (34,554)
Total deferred -- (46,672)
-------- ---------
Total provision for
Income taxes -- ($92,976)
======== =========
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense (benefit)
is:
1997 1996
---------- ----------
Tax at U.S. statutory rates ($821,523) ($521,655)
State income taxes, net of federal benefit (148,589) (78,491)
Increase in valuation allowance 949,260 489,376
Nondeductible expenses 11,686 (8,372)
Effect of graduated tax rates 11,750 20,082
Other (2,584) 6,084
========== ==========
Total provisions for income taxes $ 0 ($ 92,976)
========== ==========
28
<PAGE>
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 was to be
paid in two equal non-interest installments of $95,000 on or before December 31,
1997 and 1998, respectively.
Subsequent to the initial compromise, the Company renegotiated the
arrangement to provide for a $125,000 remittance which represented payment in
full of the remaining purchase price of $190,000.
12. SHAREHOLDERS' EQUITY
Convertible Securities Offering
On November 19, 1997, the Company successfully closed a private
placement of Convertible Securities ("Securities") in which an aggregate of $1.8
million was raised (net proceeds were $1,571,211 after related costs). Terms of
the Securities required that upon approval by the Company's shareholders of a
new class of Series A Convertible Shares ("Preferred Stock"), the Securities
automatically convert into Units at the rate of $0.80 per Unit. Each Unit
consists of one share of Preferred Stock convertible into one share of Common
Stock and one warrant to purchase one share of Common Stock exercisable at $0.90
per share. As the Securities were not payable in cash, the unconverted
Securities at year end have been classified as Preferred Stock. Warrants issued
in connection with this offering totaled 2,250,000.
Conversion to Common Stock
On November 24, 1997, the Company accepted the offer of investors
owning $400,000 of Securities to convert these Securities directly into Common
Stock and Warrants in like manner as if: (1) these Securities had been converted
into Units and (2) the Preferred Stock comprising the Units had been converted
into Common Stock.
Preferred Stock
The Company's shareholders, at a special meeting of shareholders held
on January 7, 1998, authorized creation of 1,750,000 shares of Series A
convertible preferred stock. Upon the shareholders' authorization of preferred
stock, the $1,400,000 of outstanding Securities were automatically converted
into 1,750,000 Units (effective as of December 31, 1997). The preferred stock
bears no dividend and there are no conversion price reset or anti-dilution
provisions. It has a liquidation preference of $1,225,000 at December 31, 1997.
Stock Purchase Warrants
At December 31, 1997, the Company had 2,390,000 warrants outstanding to
purchase the Company's common stock, all of which are currently exercisable at
prices ranging from $.90 to $6.25 expiring 1998 through 2001.
13. 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. 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,
compensation expense is recognized if the exercise price of the Company's stock
options is less than the market price of the underlying stock on the date of
grant.
The Company has a stock option plan under which options to purchase a
maximum of 450,000 shares of common stock may be issued. The plan permits the
granting of both incentive stock options and nonqualified stock options to
employees and directors of the Company, excluding members of the Compensation
29
<PAGE>
Committee, and certain outside consultants and advisors to the Company. The
option exercise price may 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 the option. The duration of each
option may not exceed 10 years from the date of grant (five years for owners of
more than 10% of the common stock of the Company). No options granted under the
plan have been exercised.
In addition to the options granted under the stock option plan, during
1996 options to purchase 375,000 shares of common stock were granted to officers
and directors with exercise prices ranging from $2.31 to $2.50 per share. During
1997, options to purchase 856,000 shares of common stock were granted to
officers and directors with exercise prices ranging from $.80 to $1.125 per
share. No options have been 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 1997 and 1996: risk-free interest rate of 6.25% and 6.0%,
respectively; dividend yield of 0%; a volatility factor of the expected market
price of the Company's common stock of 0.830 and 0.511, respectively; 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. The Company's stock options have characteristics significantly
different from those of traded options. Further, changes in the subjective input
assumptions related to the options can materially affect the fair value
estimate. Therefore, in management's opinion the existing models do not
necessarily provide a reliable single measure of the fair value of the Company's
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:
1997 1996
------------ ------------
Pro forma net loss ($2,813,852) ($1,529,232)
Pro forma loss per common share ($0.68) ($0.37)
Statement 123 is applicable only to options granted subsequent to
December 31, 1994. As such, the pro forma effect is not fully reflected until
1997.
A summary of the Company's stock option activity and related
information for the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------ ----------------------------
Weighted Weighted
Average Average
Options Exercise Price Options Exercise Price
----------------------------- ------------------------------ ----------------------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 420,125 $2.46 270,125 $2.44
Granted 906,000 1.12 150,000 2.50
Exercised 0 -- 0 --
Forfeited (155,125) 2.46 0 --
---------------------------- ------------------------
Outstanding-end of year 1,171,000 $1.57 420,125 $2.46
============= =========== ========================
Exercisable at end of year 674,833 142,500
</TABLE>
Exercise prices for options outstanding under the stock option plan,
non-statutory option agreements and employment agreements at December 31, 1997
ranged from $0.80 to $3.60.
30
<PAGE>
14. 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 for
alleged breach by the Company of a license agreement with ABS. The Company has
been advised by counsel that its defenses to this action are meritorious. No
provision has been made for this action in the accompanying financial
statements.
15. RELATED PARTY TRANSACTIONS
The Company leased office space from a shareholder of the Company under
an operating lease which was terminated January 31, 1998. Rent expense under
this lease was $43,200 for the years ended December 1997 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 1997 and 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. In 1997 the officer repaid the promissory note.
In 1997, the Company entered into a consulting arrangement with a firm
with which the Company's Chief Financial Officer is affiliated to provide
financial and accounting services. Total expenses for these services were
$85,000 in 1997.
16. OFFICERS' NOTES RECEIVABLE
Various officers of the Company received draws against incentive
compensation during 1994 totaling approximately $296,165. 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 (10) 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.
During 1997, the Compensation Committee approved forgiveness of one
officer's promissory note in the amount of $74,248 as part of the officer's
severance package. Repayments of other officers' notes receivable during 1997
totaled $134,031 inclusive of principal and interest.
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.
31
<PAGE>
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 (2) 47 Chairman of the Board
Mary G. Clark, RN 64 Special Consultant and Director
Richard S. Mink 45 Chief Operating Officer
Charles F. Caudell, III 45 Executive Vice President
Stephen T. Wills, CPA 41 Chief Financial Officer
John T. Borthwick (3) 44 Director of Business Development and
Director
Laurence F. Lane (1)(2)(3) 52 Director
Timothy J. Patrick 39 Director
- ----------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) 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 Palatin Technologies, 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.
MARY G. CLARK, RN, founded the Company and has served as a Special
Consultant for Scientific Affairs to the Company since March, 1994. 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.
RICHARD S. MINK, has served as Chief Operating Officer of the Company
since November, 1997, having previously served the Company as Vice President for
Marketing since April, 1997. Prior to joining the Company, Mr. Mink was Senior
Vice President/General Manager, Marketing Information Services Division of Bio
Imaging Technologies, Inc., a medical image data and information management
company, from November, 1996 to April, 1997. He was a self-employed marketing
32
<PAGE>
consultant from May, 1995 to October, 1996, Executive Vice President for Sales
and Marketing for MedChem, Inc. from August, 1994 to May, 1995, Vice President
for Sales and Marketing for Life Medical Sciences from July, 1993 to August,
1994, and had risen to the position of Director of Marketing for Becton
Dickinson Company during his tenure there from August, 1977 to July, 1993.
During May, 1996 through April, 1997, Mr. Mink was a member of the New Jersey
Technology Council Healthcare Advisory Board. He earned a Bachelor of Science
degree in Biology/Chemistry and a Master of Business Administration degree from
Rutgers University, Newark, New Jersey in 1975 and 1977, respectively.
CHARLES F. CAUDELL III, has served as Executive Vice President for
Field Operations of the Company since November, 1997 having previously served
the Company as Vice President for Sales since April, 1997. Prior to joining the
Company, Mr. Caudell was Division Director of CalgonVestal, a former Merck & Co.
wound care subsidiary, and later Division Director of ConvaTec upon the purchase
of this company by Bristol Myers-Squibb, from January, 1984 to April, 1997. He
has thirteen years experience in management and sales. Mr. Caudell earned a
Bachelor of Arts degree in Communications from Wake Forest University,
Winston-Salem, North Carolina in 1974 and a Master of Business Administration
from Ohio University, Athens, Ohio in 1993.
STEPHEN T. WILLS, CPA, MST has served as Chief Financial Officer of the
Company since July, 1997 and Vice President since November, 1997. Mr. Wills also
serves as President and Chief Operating Officer of Golomb, Wills & Company, PC,
a public accounting firm, and as Vice President and Chief Financial Officer of
Palatin Technologies, Inc., a publicly traded biopharmaceutical company. He has
eighteen years experience in financial and corporate accounting matters. Mr.
Wills is a member of the American Institute of Certified Public Accountants, New
Jersey Society of Certified Public Accountants and Pennsylvania Institute of
Certified Public Accountants. He earned a Bachelor of Science degree in
Accounting from West Chester University, West Chester, Pennsylvania in 1979 and
a Master of Science in Taxation from Temple University, Philadelphia,
Pennsylvania in 1994.
JOHN T. BORTHWICK has served as Director of Business Development of the
Company since November, 1997 and served as President and Chief Executive Officer
of the Company from February, 1991 to November, 1997 and February, 1991 to May,
1997, respectively. 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.
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.
33
<PAGE>
TIMOTHY J. PATRICK has served as director of the Company since
February, 1998. Mr. Patrick has been the President and Chief Executive Officer
of Proxima Therapeutics, Inc., a medical device company developing proprietary
site-specific delivery systems for the treatment of solid tumors, since April,
1996. He previously served as President of Gesco International, a subsidiary of
MedChem Products that manufactured and marketed PICC vascular access catheters,
from July, 1994 to January, 1996. Mr. Patrick served McGaw, Inc. for 13 years in
various sales executive positions the last of which was President of Central
Admixture Pharmacy Services, a business unit of McGaw, Inc. that provided
patient-specific intravenous solution products to hospitals and home care
companies. Mr. Patrick earned a Bachelor of Arts degree in Biology from Miami
University, Oxford, Ohio in 1981.
Family Relationships
- --------------------
Mary G. Clark is the mother 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.
ITEM 12. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows all compensation paid by the Company to its
Chairman, Chief Financial Officer and each of the Company's executive officers
whose compensation exceeded $100,000 for their services in all capacities during
the years 1995, 1996 and 1997:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) COMPENSATION
---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Edward J. Quilty(1) 1997 $ 149,986 -- 300,000(2) --
Chairman 1996 $ 59,615 -- 150,000
Richard S. Mink 1997 $100,961 $25,000(3) 200,000 --
Chief Operating Officer
Charles F. Caudell, III 1997 $100,961 -- 200,000 --
Executive Vice President
for Field Operations
Stephen T. Wills, CPA(4) 1997 $ 85,000 -- 75,000 --
Vice President and
Chief Financial Officer
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) COMPENSATION
---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
John T. Borthwick(5) 1997 $180,000 -- 50,000 $ 9,962 (6)
Director of Business Development 1996 $180,000 -- -- $ 10,861 (6)(7)
1995 $150,000 $40,000 100,000 $ 10,712 (6)(7)
Gary L. Borthwick(8) 1997 $ 67,500 -- 59,000(9) $216,762 (10)(11)
Vice President for Finance & Operations 1996 $135,000 -- -- $ 7,514 (11)
and Chief Financial Officer 1995 $119,000 $20,000 50,000 $ 7,514 (11)
</TABLE>
- ----------------------------------
(1) Mr. Edward J. Quilty is the Principal Executive Officer of the Company.
(2) Includes 100,000 options granted in November, 1997, 50,000 options granted
to members of senior management and 150,000 options originally granted in
1996 and repriced by the Executive Committee of the Board of Directors on
April 8, 1997.
(3) Sign-on bonus.
(4) Represents compensation earned during the period July through December,
1997.
(5) Mr. John T. Borthwick resigned as Chief Executive Officer and President in
May, 1997 and November, 1997, respectively.
(6) 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.
(7) Matching contributions made pursuant to the Company's 401(k) plan.
(8) Mr. Gary L. Borthwick resigned as of July 1, 1997.
(9) Options to purchase 59,000 shares of Common Stock were granted to Mr.
Borthwick during 1997. However only 19,000 of these options had vested
prior to his resignation.
(10) This amount consists of $135,000 consulting fees and $74,248 in debt
forgiveness. For additional information relative to Mr. Borthwick's
severance, please refer to the Company's Form 8-K filed with the
Securities and Exchange Commission on July 1, 1997.
(11) The Company enrolled Gary L. Borthwick in a split-dollar life insurance
program on February 1, 1993. The monthly premiums were $626.15 for
$500,000 coverage.
Option Grants Table
The following table sets forth information regarding grants of stock
options to the named executive officers made for the year ended December 31,
1997:
<TABLE>
<CAPTION>
PERCENT OF TOTAL EXERCISE
OPTIONS OPTIONS GRANTED TO PRICE
NAME GRANTED (#) EMPLOYEES IN 1997 ($/SHARE) EXPIRATION DATE
------- ------------- ------------------ ---------- -----------------
<S> <C> <C> <C> <C>
Edward J. Quilty 50,000 (1) 6.4% $1.125 April 8, 2007
100,000 (2) 12.8% $0.80 January 29, 2008
150,000 (3) N/A(3) $1.125 May 22, 2007
Richard S. Mink 50,000 (1) 6.4% $1.125 April 8, 2007
118,000 (4) 15.1% $1.125 April 14, 2007
32,000 (5) 4.1% $1.125 April 14, 2007
Charles F. Caudell, III 50,000 (1) 6.4% $1.125 April 8, 2007
118,000 (6) 15.1% $1.125 April 21, 2007
32,000 (7) 4.1% $1.125 April 21, 2007
Stephen T. Wills, CPA 45,000 (8) 5.7% $1.00 July 22, 2007
30,000 (9) 3.8% $1.00 July 22, 2007
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF TOTAL EXERCISE
OPTIONS OPTIONS GRANTED TO PRICE
NAME GRANTED (#) EMPLOYEES IN 1997 ($/SHARE) EXPIRATION DATE
------- ------------- ------------------ ---------- -----------------
<S> <C> <C> <C> <C>
John T. Borthwick 50,000 (1) 6.4% $1.125 April 8, 2007
Gary L. Borthwick 50,000(1)(10) 6.4% $1.125 July 1, 2002
</TABLE>
- -------------------
(1) These non-qualified options to purchase Common Stock were granted to
members of the Company's Senior Management on April 8, 1997. Options to
purchase 10,000 shares were vested upon the grant and the remainder of the
options vest in 10,000 increments on April 8 of each year through April 8,
2001 at which time the options will be fully vested. Vesting may
accelerate as follows: (a) 25,000 of the options will vest if either net
sales exceed $6,000,000 in a 12 consecutive month period or the Company's
Common Stock price for 180 consecutive days exceeds $3.00 per share; and
(b) all 50,000 of the options will vest if either net sales exceed
$8,000,000 in a 12 consecutive month period or the Company's Common Stock
price for 180 consecutive days exceeds $5.00 per share. For further
information relative to these options, please refer to the Company's Form
8-K filed with the Securities and Exchange Commission on May 6, 1997.
(2) These incentive stock options to purchase Common Stock were granted in
November, 1997 and are vested.
(3) These non-qualified options to purchase Common Stock were granted in 1996
pursuant to Mr. Quilty's Employment Agreement at a price of $2.50 per
share. These options were repriced by the Executive Committee of the Board
of Directors on April 8, 1997.
(4) These options to purchase Common Stock were part of an April 14, 1997
grant of 150,000 non-qualified options pursuant to Mr. Mink's Employment
Agreement. Of the original grant, 118,000 options were converted from
non-qualified to incentive stock options on November 5, 1997. Options to
purchase 59,000 shares vested on November 14, 1997. Options to purchase
two additional increments of 29,500 shares each will vest on November 14,
1998 and April, 14, 1999, respectively. For further information relative
to these options, please refer to "Employment Arrangements" below.
(5) These options to purchase Common Stock constitute the non-qualified
options component of the 150,000 options grant discussed in note (3)
above. Options to purchase 16,000 shares vested on November 14, 1997.
Options to purchase two additional increments of 8,000 shares each will
vest on November 14, 1998 and April, 14, 1999, respectively. For further
information relative to these options, please refer to the Company's Form
8-K filed with the Securities and Exchange Commission on May 6, 1997.
(6) These options to purchase Common Stock were part of an April 21, 1997
grant of 150,000 non-qualified options pursuant to Mr. Caudell's
employment Agreement. Of the original grant, 118,000 options were
converted from non-qualified to incentive stock options on November 5,
1997. Options to purchase 59,000 shares vested on November 21, 1997.
Options to purchase two additional increments of 29,500 shares each will
vest on November 21, 1998 and April, 21, 1999, respectively. For further
information relative to these options, please refer to "Employment
Arrangements" below.
(7) These options to purchase Common Stock constitute the non-qualified
options component of the 150,000 options grant discussed in note (5)
above. Options to purchase 16,000 shares vested on November 21, 1997.
Options to purchase two additional increments of 8,000 shares each will
vest on November 21, 1998 and April, 21, 1999, respectively. For further
information relative to these options, please refer to the Company's Form
8-K filed with the Securities and Exchange Commission on May 6, 1997.
(8) These options to purchase Common Stock were part of a July 23, 1997 grant
of 75,000 non-qualified options pursuant to Mr. Wills' Stock Option
Agreement. Of the original grant, 45,000 options were converted from
non-qualified to incentive stock options on November 5, 1997. These
options vest over the period March 22, 1998 through January 22, 1999 at an
average rate of 4,090 shares per month.
(9) These options to purchase Common Stock constitute the non-qualified
options component of the 75,000 options grant discussed in note (7) above.
Options to purchase 20,833 shares were vested on December 22, 1997.
Options to purchase an additional 9,167 shares were vested on March 22,
1998.
(10) Pursuant to Mr. Borthwick's severance agreement, these options ceased
vesting at 10,000 shares. For further information relative to this
agreement, please refer to the Company's Form 8-K filed with the
Securities and Exchange Commission on July 1, 1997.
36
<PAGE>
Aggregate Year End Option Value Table
The following table sets forth information regarding the number and
value of options to purchase Common Stock held by the named executive officers
as of December 31, 1997. No options have been exercised:
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1997 (#) AT DECEMBER 31, 1997 ($)(1)
-------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Edward J. Quilty ................... 112,500 37,500 0 0
10,000 40,000 0 0
100,000 0 $32,500 0
Richard S. Mink .................... 10,000 40,000 0 0
59,000 59,000 0 0
16,000 16,000 0 0
Charles F. Caudell, III ............ 10,000 40,000 0 0
59,000 59,000 0 0
16,000 16,000 0 0
Stephen T. Wills, CPA............... 0 45,000 0 $5,625
20,833 9,167 $ 2,604 $1,146
John T. Borthwick .................. 60,000 40,000 0 0
10,000 40,000 0 0
Gary L. Borthwick .................. 10,000 0 0 0
20,000 0 0 0
9,000 0 0 0
</TABLE>
- -------------------
(1) Determined based on a fair market value for the Company's Common Stock at
December 31, 1997 of $1.125 per share.
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 $5,000. Inside
directors receive no compensation for their services as directors.
Certain directors of the Company resigned and were granted options to
purchase a total of 61,000 shares of Common Stock in April, 1997. The following
table sets forth information with respect to the grant of non-qualified stock
options to Laurence F. Lane, a current director of the Company, exclusive of the
Stock Option Plan:
<TABLE> <CAPTION>
OPTIONS EXERCISABLE OPTIONS AT EXERCISE PRICE
NAME GRANTED (#) DECEMBER 31, 1997 (#) ($/SHARE) EXPIRATION DATE
---- ----------- --------------------- --------- ---------------
<S> <C> <C> <C> <C>
Laurence F. Lane 10,000(1) 6,000 $1.125 November 21, 2006
10,000(2) 10,000 $1.125 April 7, 2007
</TABLE>
- ------------------
(1) These options began vesting at a rate of 20% per year on November 21, 1995
and were repriced by the Executive Committee on April 8, 1997.
(2) These options were granted on April 8, 1997.
37
<PAGE>
EMPLOYMENT ARRANGEMENTS
The Company entered into a three-year employment agreement on August 1,
1996, as amended on May 2, 1997, (the "Agreement") with Edward J. Quilty, its
Chairman of the Board. The Agreement provides that Mr. Quilty will receive base
salary of $150,000 per year, together with 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 $1.125 per share, of
which 112,500 were vested as of October 8, 1997 and the remaining 37,500 will
vest on April 8, 1998. 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 $1.125 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 $125,000. 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.
The Company entered into a two-year employment agreement on April 14,
1997, as amended on November 5, 1997, (the "Agreement") with Richard S. Mink,
its Chief Operating Officer and former Vice President for Marketing. The
Agreement provides that Mr. Mink receive the following: (1) base salary of
$150,000 per year, together with a $25,000 sign-on bonus; (2) incentive
compensation as may be awarded upon the recommendation of the Office of the
Chief Executive and approved by the Board of Directors; provided, however,
incentive compensation, if any, shall be predicated upon the extent to which the
Company attains its earnings goals and the extent of Mr. Mink's contributions
thereto; and (3) 118,000 incentive and 32,000 non-qualified stock options,
exercisable at $1.125, which options become exercisable to the extent of 50%,
75% and 100% upon completion of six, eighteen and twenty-four months of
employment, respectively. These options become 100% exercisable if Mr. Mink
becomes disabled, the Agreement is terminated by the Company other than "for
cause," the Agreement is terminated by Mr. Mink for the Company's breach, upon
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. Upon 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. Mink a severance payment
equal to the greater of his salary for the remaining term of the Agreement or
$150,000. Mr. Mink 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 two-year employment agreement on April 21,
1997, as amended on November 5, 1997, (the "Agreement") with Charles F. Caudell,
III, its Executive Vice President for Field Operations and former Vice President
for Sales. The Agreement provides that Mr. Caudell receive the following: (1)
base salary of $150,000 per year; (2) incentive compensation as may be awarded
upon the recommendation of the Office of the Chief Executive and approved by the
Board of Directors; provided, however, incentive compensation, if any, shall be
predicated upon the extent to which the Company attains its earnings goals and
the extent of Mr. Caudell's contributions thereto; and (3) 118,000 incentive and
32,000 non-qualified stock options, exercisable at $1.125, which options become
exercisable to the extent of 50%, 75% and 100% upon completion of six, eighteen
and twenty-four months of employment, respectively. These options become 100%
exercisable if Mr. Caudell becomes disabled, the Agreement is terminated by the
Company other than "for cause," the Agreement is terminated by Mr. Caudell for
the Company's breach, upon 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. Upon 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. Caudell a severance payment equal to the greater of his salary for the
38
<PAGE>
remaining term of the Agreement or $150,000. Mr. Caudell 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 on December
29, 1995, as amended on March 5, 1997, (the "Agreement") with John T. Borthwick,
its Director of Business Development and former President and Chief Executive
Officer. 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; 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 were 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 three-year employment agreement on December
29, 1995, as amended on April 30, 1997, (the "Agreement") with Robert P.
DiGiovine, RPh, its Director of Regulatory and Clinical Affairs and former
Director of Regulatory Compliance and Product Development. The Agreement
provides that Mr. DiGiovine will receive base salary of $100,000, together with
such incentive and/or bonus compensation as may be awarded upon the
recommendation of the Office of the Chief Executive and approved by 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 a given 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. These options
become 100% exercisable if Mr. DiGiovine becomes disabled, the Agreement is
terminated by the Company other than "for cause," the Agreement is terminated by
Mr. DiGiovine for the Company's breach, upon 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. Upon 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. DiGiovine a severance payment equal to the greater of
his salary for the remaining term of the Agreement or $100,000. 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.
39
<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.
Stock options are not assignable or transferable except by will or the laws of
descent and distribution. 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, 1997, there were 381,000 shares subject to options
(ISOs) granted under the Plan with exercise prices ranging from $0.80 to $1.125
per share.
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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 24, 1998 certain information
regarding the current beneficial ownership of shares of the Company's Common
Stock, whether held outright or by virtue of Preferred Stock ownership, 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:
40
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED BENEFICIALLY OWNED(14)
---------------------------------------- ------------------ ----------------------
<S> <C> <C>
Hambrecht & Quist California (2).......................... 1,225,000 21.15%
Galen III Partnerships (3)................................ 1,000,000 17.96%
Mary G. Clark, RN ........................................ 775,474 16.98%
Aries Funds (4)........................................... 750,000 14.10%
Edward J. Quilty (5)...................................... 670,500 13.34%
Redwood Asset Management (6).............................. 500,000 9.87%
John T. Borthwick (7)..................................... 339,414 7.30%
First Taiwan Investment Holding, Inc. (8)................. 248,000 5.43%
Charles F. Caudell, III (9) .............................. 160,000 3.41%
Richard S. Mink (9) ...................................... 157,500 3.36%
Stephen T. Wills, CPA (10)................................ 119,166 2.56%
Laurence F. Lane (11)..................................... 24,000 (*)
Timothy J. Patrick ....................................... 0 (*)
All directors and officers as a group (8 persons) (12) ... 2,246,054 41.16%
</TABLE>
- -------------------
(*) Less than one percent
(1) Except as otherwise noted, the address of each of the persons listed is
214 Carnegie Center, Suite 100, Princeton, New Jersey 08540.
(2) Hambrecht & Quist California can be reached at: One Bush Street, San
Francisco, California 94104. Ownership consists of 612,500 shares of Class
A Convertible Preferred Stock ("Preferred Stock") which is directly
convertible to Common Stock and 612,500 warrants to purchase Common Stock
exercisable at $0.90 per share ("Warrants").
(3) The Galen III Partnerships can be reached at: 610 Fifth Avenue, Fifth
Floor, New York, New York 10020. Includes shares owned by Galen Partners
III, L.P., Galen Partners International III, L.P. and Galen Employee Fund
III, L.P. Ownership consists of 250,000 shares of Common Stock, 375,000
shares of Preferred Stock and 375,000 Warrants.
(4) The Aries Funds can be reached at: Paramount Capital, Inc., The Aries
Fund, 787 Seventh Avenue, 48th Floor, New York, New York 10019. Includes
shares owned by The Aries Fund, A Cayman Islands Trust and Aries Domestic
Fund, L.P. Ownership consists of 375,000 shares of Preferred Stock and
375,000 Warrants.
(5) Includes 412,500 shares subject to options and Warrants currently
exercisable and 47,500 additional shares subject to options that will
become exercisable within 60 days of March 24, 1998.
(6) Redwood Asset Management can be reached at: Ovre Ullorn Terrasse 32, 0358
Oslo, Norway. Ownership consists of 250,000 shares of Preferred Stock and
250,000 Warrants.
(7) Includes 70,000 shares subject to options currently exercisable and 10,000
additional shares subject to options that will become exercisable within
60 days of March 24, 1998.
(8) First Taiwan Investment Holding, Inc. can be reached at: 15/F, 563, Chung
Hsiao, East Road, Section 4 Taipei, Taiwan R.O.C.
(9) Includes 116,250 shares subject to options and Warrants currently
exercisable and 10,000 additional shares subject to options that will
become exercisable within 60 days of March 24, 1998.
(10) Includes 72,083 shares subject to options and Warrants currently
exercisable and 8,333 shares subject to options that will become
exercisable within 60 days of March 24, 1998.
(11) Includes 16,000 shares subject to options currently exercisable. No
additional shares subject to options will become exercisable within 60
days of March 24, 1998.
(12) Includes 888,916 shares subject to options and Warrants currently
exercisable and exercisable within 60 days of March 24, 1998 by directors
and officers of the Company.
(13) The percent beneficially owned by each entity or individual assumes the
exercise of all exercisable options (including those that would be
exercisable within 60 days of March 24, 1998) and the exercise of all
Warrants owned by such entity or individual.
41
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into a five-year consulting agreement with Mary
G. Clark, a director and the Company's founder and former President. 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 1997 was $99,000.
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 Amendment to the Articles of Incorporation effective February 10, --
1998 (Previously filed as Exhibit A to the Company's Proxy
Statement filed on December 22, 1997 and incorporated herein by
reference.)
3.3 Bylaws effective May 14, 1997 (Previously filed as Exhibit 3.1 to --
the Company's Form 10-QSB filed on August 15, 1997 and incorporated
herein by reference.)
10.1* Stock Option Plan, dated July 18, 1991 (Previously filed as Exhibit --
10.01 to the Company's statement filed on Form SB-2, No.
33-52246-NY, declared effective on May 13, 1994 ["Registration
Statement"] and incorporated herein by reference.)
10.2* 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.)
10.3* 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.)
10.4* Employment Agreement, dated August 1, 1996, between the Company and --
Edward J. Quilty. (Previously filed as Exhibit 10.41 to the
Company's Form 10-KSB on March 24, 1997 ["1997Form 10-KSB"] and
incorporated herein by reference.).
10.5* Employment Agreement - Amendment and Restatement, dated May 2, --
1997, between the Company and Edward J. Quilty. (Previously filed
as Exhibit 10.04 to the Company's Form 8-K filed on May 6, 1997 and
incorporated herein by reference.)
10.6* Senior Management Stock Option Agreement, dated April 30, 1997, --
between the Company and Edward J. Quilty. (Previously filed as
Exhibit 10.05 to the Company's Form 8-K filed on May 6, 1997 and
incorporated herein by reference.)
10.7* Employment Agreement, dated April 14, 1997 between the Company and --
Richard S. Mink. (Previously filed as Exhibit 10.01 to the
Company's Form 8-K filed on May 6, 1997 and incorporated herein by
reference.)
10.8* Employment Agreement, dated April 21, 1997 between the Company and --
Charles F. Caudell, III. (Previously filed as Exhibit 10.02 to the
Company's Form 8-K filed on May 6, 1997 and incorporated herein by
reference.)
10.9* Senior Management Stock Option Agreement, dated April 14, 1997, --
between the Company and Richard S. Mink. (Previously filed as
Exhibit 10.10 to the Company's Form 8-K filed on May 6, 1997 and
incorporated herein by reference.)
10.10* Senior Management Stock Option Agreement, dated April 21, 1997, --
between the Company and Charles F. Caudell, III. (Previously filed
as Exhibit 10.08 to the Company's Form 8-K filed on May 6, 1997 and
incorporated herein by reference.)
10.11* Stock Option Agreement, dated July 23, 1997, between the Company --
and Stephen T. Wills, CPA, MST. (Previously filed as Exhibit 10.01
to the Company's Form 10-QSB filed on August 15, 1997.)
10.12* 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.)
42
<PAGE>
10.13* Addendum to Employment Agreement, dated March 5, 1997, between the --
Company and John T. Borthwick. (Previously filed as Exhibit 10.38
to the Company's 1997 Form 10-KSB and incorporated herein by
reference.)
10.14* Senior Management Stock Option Agreement, dated April 30, 1997, --
between the Company and John T. Borthwick. (Previously filed as
Exhibit 10.06 to the Company's Form 8-K filed on May 6, 1997 and
incorporated herein by reference.)
10.15* 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.)
10.16* Employment Agreement - Amendment and Restatement, dated April 30, --
1997, between the Company and Robert P. DiGiovine (Previously filed
as Exhibit 10.03 to the Company's Form 8-K filed on May 6, 1997 and
incorporated herein by reference.)
10.17* Senior Management Stock Option Agreement, dated April 30, 1997, --
between the Company and Robert P. DiGiovine. (Previously filed as
Exhibit 10.09 to the Company's Form 8-K filed on May 6, 1997 and
incorporated herein by reference.)
10.18* 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.)
10.19* 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.)
10.30 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.)
10.31 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.)
10.32 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.)
10.33 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.)
10.34 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.)
10.35 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.)
10.36 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.)
10.37 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.)
10.38 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.)
10.39 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.)
10.40 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.)
10.41 Rider to 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.)
43
<PAGE>
10.42 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.)
10.43 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.)
10.44 Lease Agreement, dated July 1, 1997, between the Company and Cross --
Creek Pointe.
10.45 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.)
10.46 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.)
10.47 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.)
10.48 License Agreement, dated October 31, 1996, between the Company and --
Gamida-MedEquip Ltd. (Previously filed as Exhibit 10.33 to the
Company's 1997 Form 10-KSB and incorporated herein by reference.)
10.49 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.)
10.50 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.)
10.51 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.)
10.52 Private Label Agreement, dated September 29, 1997, between the --
Company and Innovative Technologies Limited. (Previously filed as
Exhibit 10.02 to the Company's Form 10-QSB filed on November 10,
1997.)
10.53** Product Development and Manufacturing Agreement, dated November --
11, 1997, between the Company and Innovative Technologies Limited.
10.54 Generic Products Agreement, dated September 29, 1997, between the --
Company and Innovative Technologies Limited (Previously filed as
Exhibit 10.01 to the Company's Form 10-QSB filed on November 10,
1997.)
10.55 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.)
10.56 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.)
10.57 Agreement and Release, dated May 29, 1997, between the Company and --
Gary L. Borthwick (Previously filed as Exhibit 10 to the Company's
Form 8-K filed on July 1, 1997.)
10.58 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.)
10.59 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* 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.
** The Company has requested confidential treatment of certain provisions
contained in Exhibit 10.53. The copy filed as an exhibit omits the
information subject to the confidentiality request.
44
<PAGE>
(b) Reports on Form 8-K
A current report on Form 8-K was filed on November 24, 1997 relative
to the Company's private placement of securities.
45
<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.
DERMA SCIENCES, INC.
March 27, 1998 By: /s/ Edward J. Quilty
---------------------
Edward J. Quilty
Chairman of the Board
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 27, 1998.
Signatures: Title:
/s/ Edward J. Quilty Chairman of the Board (Principal
- --------------------------- Executive Officer)
Edward J. Quilty
/s/ Stephen T. Wills Vice President and Chief Financial Officer
- -------------------------- (Principal Financial and Accounting Officer)
Stephen T. Wills
/s/ Mary G. Clark Director
- --------------------------
Mary G. Clark
/s/ John T. Borthwick Director
- --------------------------
John T. Borthwick
/s/ Laurence F. Lane Director
- --------------------------
Laurence F. Lane
/s/ Timothy J. Patrick Director
- --------------------------
Timothy J. Patrick
LEASE
This lease ("Lease") is made". as of July 1, 1997 between Mark Kornfeld
and Gary Kornfeld, t/a CROSS CREEK POINTE, hereinafter "Lessor" and DERMA
SCIENCES "Lessee".
WITNESSETH
Lessor hereby leases to Lessee and Lessee hereby leases from Lessor that
certain office space known as Suite 403, consisting of approximately 2003 sq.ft.
on the fourth floor, of that certain office building located at Cross Creek
Pointe Office Building, situated at Route 315, Wilkes-Barre, Pennsylvania
referred to below as the Premises'.
1. Term. This Lease is for a term of three years, beginning on July 1, 1997 and
ending on June 30, 2000 (the "Term").
2. Rent. The total rent per year, will, be Thirty-Seven Thousand Fifty-Five end
50/100 dollars ($37,055.50), payable in equal monthly sums of Three Thousand
Eighty-Seven and 95/100 dollars ($3,087.95) on or before the first day of each
month during the Terra.
3. Use. The Premises may be used for the operation of offices and related
services.
4. Assignment and Subletting. Lessee may assign and/or Sublet the premises with
written permission of Lessor. Lessor's permission shall not unreasonably
withheld.
5. Maintenance and Repairs. Lessor, at its own expense, will put the Premises in
good order and repair on or before the commencement of this Lease and subject to
Lessee's inspection. Lessor, at its own expense, will maintain all structural
elements of the Premises, the plumbing, electric and other utility lines
servicing the Premises, and walls, roof, doors, and windows of the Premises.
Lessee, at its own expense, will otherwise maintain the Premises in good and
safe condition and will surrender the Premises, at termination of this lease, in
as good condition as received, normal wear and tear excepted.
6. Services and Utilities. Lessor, at its own expense, will furnish janitorial
services and all utilities except telephone.
7. Entry and Inspection. Lessee will permit Lessor or Lessor's agents to enter
the Premises at reasonable times and upon reasonable notice, for the purpose of
inspection, and to exhibit them for purposes of sale or rental at any time
within sixty (60) days prior to the termination of this Lease.
<PAGE>
8. Indemnification. Lessor will not be liable for any damage or injury caused
solely by Lessee on the Premises. Lessee will indemnify and hold Lessor harmless
for any claims for damages caused solely by an act or omission of Lessee, its
agents or employees that occurs on the Premises. Lessor will indemnify and hold
Lessee harmless for any claims for damages caused by an act or omission of
Lessor, its agents or employees.
9. Condemnation. If any part of the Premises is taken or condemned for public
use or purpose than the Term will cease from the date of the taking or
condemnation and Lessee will have no further obligation to pay rent after such
date. All sums which may be payable on account of any condemnation will belong
to Lessor, provided however, that Lessee shall be entitled to retain any amount
awarded to it for the value of the leasehold, loss of business, moving expenses
and any other damages and/or compensation as provided in law or equity.
10. Bankruptcy. If before or during the Term, a petition in bankruptcy is filed
by or against Lessor or Lessee and is not dismissed within ninety (90) days, or
if either party makes an assignment for the benefit of creditors or is
adjudicated bankrupt ("Bankrupt Party"), this Lease will be terminated at the
option of the other party, after ten (10) days written notice to the Bankrupt
Party.
11. Casualty. If any part of the Premises are damaged by fire or other cause to
the extent that the Premises are rendered untenantable and cannot be reasonably
rendered in as good condition as existed prior to the damage within (60) days
from the date of the damage, this Lease may be terminated by Lessee by giving
written notice to Lessor and rent will be abated from the date of the damage. If
the damage is not such as to permit a termination of this Lease as described
above, or if Lessee does not terminate this Lease, Lessor will promptly repair
the Premises to its original condition. The obligation for rent will be abated
during the period that the Premises are being repaired.
12. Insurance. Lessor, at its own expense, will pay fire insurance premiums on
the building of which the Premises are a part in an amount sufficient to cover
the entire building. Such insurance will name both Lessee and Lessor as insureds
in proportion of their interests in the building or its contents. Lessor will
provide Lessee with proof of such insurance upon Lessee's demand. Lessee, at its
option, will provide fire insurance on the personal property that Lessee moves
into the Premises, and any casualty insurance desired by Lessee, both at the
expense of Lessee. To the maximum extent permitted by insurance policies which
may be owned by Lessor or Lessee, Lessee and Lessor, for the benefit of each
other, waive any and all rights of subrogation which might otherwise exist.
<PAGE>
13. Possession. If Lessor is unable to deliver possession of the Premises at the
commencement of the Term, Lessor will reimburse Lessee for Lessee's
out-of-pocket expenses as a result of such delay, and Lessee will not be liable
for any rent until possession is delivered. Lessee may terminate this Lease if
possession is not delivered within ten (10) days of the commencement of the
Term.
14. Lessee's Default. In the event the monthly rental provided above remains
unpaid after the due date and fifteen (15) days prior to written notice, or in
the event Lessee ahs not properly corrected any other defaults under this Lease
after thirty (30) days written notice form Lessor to do so, then Lessor will
have the option to terminate this Lease or pursuing any other remedies which
Lessor may have at law or equity or under any state statute or regulation. The
election by Lessor of any remedy afforded Lessor will not be deemed a waiver of
any other remedies available to Lessor, Lessor's remedies being cumulative.
15. Lessor's Default. In the event of a breach of this lease by Lessor, and
Lessor's failure to cure such breach within thirty (30) days of Lessee's written
notice of breach to Lessor, Lessee will have the option of: (1) taking
reasonable steps to cure such breach, (2) terminating this Lease upon ten (10)
days written notice, and/or (3) pursuing any other remedies which Lessee may hat
at law or equity or under any state statute or regulation. Should Lessee elect
to cure Lessor's breach, Lessee may offset the costs of cure incurred by Lessee
against any future sums due Lessor under the Lease and/or submit an invoice to
Lessor specifying the amount due Lessee, which amount Lessor will pay within ten
(10) days of receipt of Lessee's invoice. The election by Lessee of any remedy
afforded Lessee will not be deemed a waiver of any other remedies available to
Lessee, Lessee's remedies being cumulative.
16. Waiver. The waiver by either Lessor or Lessee of any breach by the other
will not be deemed a waiver of any other breach similar of otherwise.
17. Consents. Any consent required of either Lessor or Lessee will not be
unreasonable withheld.
18. Notice. Any notice which wither party may or is required to give, will be
given by registered or certified mail, upon receipt requested, postage prepaid,
to the address(es) shown below, or at such other places as may be designated by
the parties form time to time.
<PAGE>
To Lessor at:
Mark Kornfeld and Cary Kornfeld
Cross Creek Pointe
1065 Highway 315
Wilkes-Barre, PA 18702
To Lessee At:
Derma Sciences
121 W. Grace Street
Old Forge, PA 18518
Mr. John T. Borthwick
19. Option to Renew. Lessor grants to Lessee, an option to renew this lease
with all the terms and conditions of the renewal lease being the same as terms
and conditions in this Lease. To exercise this option, Lessee must give Lessor
written notice of its intention to renew at least sixty (60) days prior to the
expiration of each such term.
20. Quite Enjoyment. Lessor covenants that Lessee will have quit enjoyment of
the Premises for the duration of this Lease, and any renewal thereof.
21. Parties. The covenants and agreement in this Lease will be binding on and
will inure to the parties and may be amended only by a writing signed by both
parties.
IN WITNESS WHEREOF, the lessor and Lessee have executed this Lease as
of the day and year first above written.
LESSOR LESSEE
CROSS CREEK POINT DERMA SCIENCES, INC.
By: /s/ Lena Sidelmen By: /s/ John T. Borthwick
------------------------- ---------------------------
Manager President
Attest: /s/ Ann Scarantino Attest: /s/ Robert DiGiovine
-------------------- -----------------------
This Agreement is made the 11th of November, 1997
BETWEEN
INNOVATIVE TECHNOLOGIES Limited ("IT") a British Company (registered number
2666957) whose principal place of business is at Road Three, Industrial Estate,
Winsford, Cheshire CW7 3PD, United Kingdom; and
DERMA SCIENCES INCORPORATED ("DERMA"), an American Corporation, whose principal
place of business is at 214 Carnegie Center, Suite 100, Princeton, NJ 08540,
USA.
WHEREAS:
A. DERMA is engaged in the marketing, distribution and sale of products for
the treatment of chronic non-healing skin ulcerations such as pressure and
venous ulcers, surgical incisions and burns ("chronic wounds").
B. IT is engaged in the development and manufacture of products for the
treatment of chronic wounds.
C. DERMA desires to retain IT, and IT desires to be retained by DERMA to
develop and manufacture certain zinc products for the treatment of chronic
wounds.
IT IS AGREED as follows: -
1 RETENTION
1.1 DERMA hereby retains IT and IT hereby agrees to be retained to develop,
manufacture and obtain United States Food and Drug Administration (FDA)
clearance for the three woundcare products ("The Products") which IT is
currently developing and shall continue to develop:-
1.1.1 A zinc-containing alginate;
1.1.2 A zinc-containing intelligent hydrocolloid dressing; and
1.1.3 A zinc-containing flat sheet hydrogel
as specified in Enclosure l.
2 PRODUCT OWNERSHIP
2.1 DERMA shall have title and ownership of the Products together with
associated Intellectual Property Rights.
2.2 Nothing in the Agreement shall constitute IT as owner, part owner or
licensee.
2.3 Notwithstanding this, IT shall have the right to manufacture, use and
sell the Products, subject to the terms herein.
3 DEVELOPMENT TIMETABLE
3.1 Development and dispatch of the zinc hydrocolloid and zinc alginate
Products shall be completed before April 30th, 1998.
<PAGE>
3.2 Development and dispatch of the flat sheet zinc hydrogel shall be
completed before 31st December, 1998.
4 DEVELOPMENT COSTS
4.1 IT has carried out and continues to carry out work in connection with
the development of the Products, in consideration of which, DERMA
agrees to reimburse IT for the development costs of each individual
Product.
4.2 Commencing on the last day of the month of dispatch of the launch
stock, of each of the Products, DERMA shall make to IT:-
4.2.1 the initial payments as specified in Enclosure 2 for each
individual Product; and
4.2.2 monthly, on the last day of each month thereafter, for a
period of seventeen (17) months, seventeen (17) equal
payments, as specified in Enclosure 2 for each individual
Product.
5 RIGHT OF MANUFACTURE
5.1 DERMA grants to IT during the term of this Agreement:-
5.1.1 the exclusive right to manufacture the Products; and
5.1.2 the exclusive right to sell and license the Products outside
the United States of America and its possessions.
5.2 In consideration of such grant, IT shall pay to DERMA:-
5.2.1 A proportion of profit in respect of each Product calculated
at fifty per cent (50%) of the gross margin;
5.2.2 Fifty per cent (50%) of any license fees obtained by IT in
consideration of granting a license to sell any of the
Products;
5.2.3 "Gross margin" shall be computed as net sales revenue less
fully allocated standard costs of Products.
6 TRANSFER PRICE, MINIMUM ORDERS AND STANDARD COSTS
6.1 Product transfer prices and minimum order requirements shall be as
specified in Enclosure 3, and are fixed until December 31st 1998.
6.2 Prior to 1st December 1998, and on a yearly basis thereafter, DERMA and
IT shall exchange information relative to their respective average
gross sales margins and average manufacturing costs for the Products
and, if necessary, shall re-negotiate the current transfer prices in
good faith.
6.3 Any suggested review of current transfer prices, which reflects up to a
5% increase or reduction, shall be deemed to be reasonable and
acceptable.
<PAGE>
7 TERM AND TERMINATION
7.1 The Agreement shall commence on the date as written on the first page
and shall continue in force until December 31st 2002.
7.2 Either party may terminate this Agreement, at any time, by written
notice to the other party if:-
7.2.1 the other party commits a material breach of this Agreement
and in the case of a breach capable of remedy, has not
remedied the breach within thirty (30) days of receipt of
written notice requiring it to do so: or
7.2.2 the other party becomes insolvent, has a receiver appointed of
the whole or any part of its assets or business, makes any
composition or arrangement with its creditors, takes or
suffers any similar action in consequence of debt, or an order
or resolution is made for its dissolution or liquidation.
7.3 IT may give DERMA sixty (60) days written notice of termination
notwithstanding any other remedy which maybe available to IT if DERMA
makes default in the payment of any money which shall have become due
hereunder for more than thirty (30) days after the due date for
payment.
7.4 Either party may give the other six (6) months written notice of
termination if either party undergoes a change of control and "control"
for this purpose means ownership of more than half the capital,
business or assets of or the power to exercise more than half the
voting rights of or the power to appoint more than half the members of
the Board of Directors of or the right to manage the affairs of a party
and a "change" shall take place where some person other than the person
or persons enjoying such control at the time of the Effective Date
acquire either party whether alone or acting in concert with others.
7.5 Upon termination of this Agreement from any cause, IT will complete all
orders for the Products which it has accepted from DERMA, and DERMA
shall pay for all such Products subject to the terms of this Agreement.
8 PRODUCT ORDERING / SUPPLY AND DELIVERY
8.1 IT shall supply DERMA with the Products for distribution in the United
States of America and it possessions on IT's standard terms of supply
and delivery as specified in Enclosure 4.
9 PAYMENT TERMS AND CONDITIONS
9.1 All invoices and payments made shall be in US dollars.
9.2 DERMA shall be invoiced for the price of the Products on dispatch.
9.3 Terms of payment shall be forty five (45) days from the date of
invoice.
10 WARRANTIES AND INDEMNITIES
10.1 IT warrants that at the time of delivery of the Products to DERMA
that:-
10.1.1 the Products shall be of satisfactory quality, free from
defects and fit for their purpose; and
<PAGE>
10.1.2 the Products shall meet the specifications referred to in
Enclosure 1; and
10.2 DERMA warrants that:-
10.2.1 its formulations, packaging and label specifications comply
with all applicable regulatory requirements relating to the
sale or use of the Products established by the United States
Food and Drug Administration (FDA) administration; and
10.2.2 the Products shall not be adulterated or misbranded within the
meaning of the Food, Drug and Cosmetic Act, nor be goods which
may not under the provisions of Section404, 505 or 512 of such
Act be introduced into interstate commerce.
10.2.3 it will comply with all storage, handling and other such
instructions in respect of the Products issued by IT.
10.3 IT shall indemnify and hold harmless DERMA for all claims, demands,
actions, liabilities, losses, damages and reasonable attorneys' fees,
arising from a defect in the design or manufacture by IT of any Product
sold and delivered to DERMA under the terms of this Agreement.
10.4 DERMA shall indemnify and hold harmless IT from all claims arising from
the mishandling or misuse of the Products by DERMA, or its customers,
or arising from DERMA's formulations, packaging or labeling of the
Products.
10.5 Liability for the breach of warranties shall be limited to Product
Liability Insurance cover, which shall be maintained by each party for
an amount not less than two million US dollars ($2,000,000).
11 RIGHT OF FIRST REFUSAL
11.1 IT grants DERMA the right of first refusal, for a period of sixty (60)
days from the date of first offer in writing by IT to become the
distributor for each zinc containing product, and that IT may develop,
in the United States and its possessions. If DERMA declines to exercise
its right of first refusal, IT may offer the product for distribution
by or sale to a third party on terms not better than those offered to
DERMA.
12 [INFORMATION OMITTED AND FILED SEPARATELY WITH THE COMMISSION UNDER
EXCHANGE ACT RULE 24b-2.]
<PAGE>
13 FORCE MAJEURE
13.1 If the performance by either party of any of its obligations (other
than the obligation to make payments hereunder) shall be in any way
prevented, interrupted or hindered in consequence of an act of God,
war, civil disturbance, strike, lock-out, cessation of work,
combination of workmen or employees, legislation or restriction of any
governmental or other authority, breakdown or interruption of
transport, force majeure or any other circumstances beyond the control
of such party the obligations of the party concerned shall be wholly or
partially suspended during the continuance and to the extent of such
prevention, interruption or hindrance. If a force majeure situation has
continued for more than one hundred and eighty days (180) days, either
party may terminate this Agreement by notice to the other party.
14 CONFIDENTIALITY AGREEMENT
14.1 All information received by one party from the other concerning
materials, volumes, costs, prices, market information and production
techniques, and the terms and conditions of this Agreement, shall be
regarded as confidential and shall not be disclosed by either IT or
DERMA to third parties, without the prior written consent of the other.
On 15th November 1996 IT and DERMA signed a secrecy agreement. They
agree to observe and continue to be bound by the terms of that
agreement in respect of information disclosed independently of, or
pursuant to, or in relation to, the terms of that agreement.
15 ENTIRE AGREEMENT, VARIATION AND CONFLICT
15.1 This Agreement contains the entire agreement between the parties as at
the date as written on the first page hereof and supersedes all prior
agreements and understandings between the parties whether oral or in
writing in relation to the subject matter herein contained except that
both parties hereto agree to observe and continue to be bound by the
terms of the secrecy agreement dated 15th November 1996.
15.2 Valid amendments to or modifications to this Agreement shall be made in
writing and signed by both parties hereto.
15.3 In the event of any conflict between this Agreement and any other
contract, the terms of this Agreement shall prevail.
16 GOVERNING LAW AND JURISDICTION
16.1 The formation, construction, performance, validity and all aspects
whatsoever of this Agreement and any individual contract for the
purchase of the Products by DERMA made hereunder shall be governed by
and construed in accordance with the laws of the state in which the
defendant, in any proceedings, is domiciled. Any proceedings for the
determination of any question or dispute arising in connection with
this Agreement shall be held in New Jersey if initiated by IT and in
London if initiated by DERMA.
<PAGE>
17 NOTICES
17.1 Any notice authorized or required to be given pursuant to this
Agreement shall be in writing and given as follows: -
Attn: Edward J Quilty Attn: Roy Smith
Chairman Chief Executive Officer
Derma Sciences Incorporated Innovative Technologies Group Plc
214 Carnegie Center, Suite 100 Road Three
Princeton Industrial Estate
NJ 08540 USA Cheshire CW7 3PD UK
Facsimile: 001 609 514 0502 Facsimile: 44 1606 86 3600
Any such notice may be given by post or facsimile transmission. To
prove service in the case of a notice given by post it shall be
sufficient to show that the notice was dispatched by airmail recorded
delivery service in a correctly addressed and adequately stamped
envelope and to prove service in the case of a notice given by
facsimile transmission it shall be sufficient to show that it was
dispatched to the correct telephone number with a transmission "OK"
printed message. Service by facsimile shall be deemed to have been
affected 24 (twenty-four) hours after dispatch by facsimile
transmission and service by post shall be deemed to have been affected
seven (7) days after the date of postmark
Signed by: /s/ Roy Smith Date: November 25, 1997
------------------------------- -----------------
For and on behalf of Innovative Technologies Ltd.
Signed by: /s/ Edward J. Quilty Date: December 1, 1997
------------------------------- ----------------
For and on behalf of Derma Sciences Incorporated
<PAGE>
ENCLOSURE 1 - PRODUCTS
Product 1 - Zinc Containing Alginate
Alginate dressings and rope containing the following:-
zinc chloride, at a nominal value 0.06mg/g fibre vitamin B6( pyridoxine
HCL), at a nominal value 0.833 mg/g fibre
Product 2 - Zinc Containing Intelligent Hydrocolloid
Intelligent hydrocolloid dressing containing the following: -
zinc chloride, at a nominal value 0.9 mg/g
pyridoxine HCL, at a nominal value 1.8mg/g
vitamin A palmitate, at a nominal value 0.1242 mg/g
Product 3 - Zinc Containing Flat Sheet Hydrogel
Flat sheet hydrogel containing trace elements of zinc and nutrients.
(To be decided)
<PAGE>
ENCLOSURE 2 - PRICES
DEVELOPMENT COSTS
Initial Payment
- ---------------
Zinc Containing Alginate $4,000
Zinc Containing Hydrocolloid $7,000
Zinc Containing Flat Sheet Hydrogel $4,000
17 Equal Monthly Payments
- -------------------------
Zinc Containing Alginate $2,400
Zinc Containing Hydrocolloid $2,600
Zinc Containing Flat Sheet Hydrogel $2,400
<PAGE>
ENCLOSURE 3 - PRICES
A zinc-containing alginate
Size Price US$
---- ---------
2" x 2" *
4" x 4" *
16" Rope *
A zinc-containing intelligent hydrocolloid dressing
Size Price US$
---- ---------
3" x 3" *
5" x 5" *
Sacral *
A zinc-containing flat sheet hydrogel
Size Price US$
---- ---------
(To be advised)
The Minimum Order Requirement for each individual Product is five thousand
(5,000) units. Prices FOB port of shipment
- -------------------
* [INFORMATION OMITTED AND FILED SEPARATELY WITH THE COMMISSION UNDER
EXCHANGE ACT RULE 24b-2.]
<PAGE>
ENCLOSURE 4 - TERMS OF SUPPLY & DELIVERY
DERMA shall submit its artwork to IT, at least 90 days prior to the requested
delivery date.
DERMA agrees to pay for the full costs associated with printing set up utilizing
their artwork and for any subsequent changes to artwork required by DERMA.
DERMA shall submit to IT it's twelve month non-binding rolling forecast
quarterly to IT, on or before the first day of each calendar quarter.
DERMA shall submit it's purchase orders not less than 60 days prior to its
requested delivery date.
DERMA undertakes that any purchase order made for the Products, for any one
particular size or format, will be for a quantity in excess of five thousand
(5,000) units.
IT shall deliver the Products FOB port of shipment, excluding all shipping
costs, import duties, insurance tariffs and custom charges directly or
indirectly involved with so shipping the Products.
DERMA shall inform IT without delay in the event of any complaint in respect of
any of the Products, and DERMA shall provide IT with complete information,
including names and addresses of complainants and all facts concerning the
complaint (including whether the complaint concerns an alleged reaction to the
Product or an alleged defect in the Product). DERMA shall be responsible for
acknowledging, dealing with and investigating any complaint made to it in
respect of the Products. DERMA shall without delay inform IT of any material
developments in respect of either the complaint or DERMA investigation. DERMA
shall be responsible for making any necessary reports on such complaints to the
US Food and Drug Administration ("FDA") and DERMA shall attempt to consult IT on
the content of such reports before submitting them to the FDA. Each of the
parties hereto shall give the other all reasonable assistance if requested by
the other in investigating the complaint or in locating and recovering any
Products alleged to be unsaleable or defective and in preventing their sale to
third parties. Any request by IT as aforesaid shall not of itself be an
admission of liability to DERMA or any other party as to the condition of the
Products
IT hereby undertakes during the term of this Agreement:-
to manufacture and package quantities of Products in conformance with
DERMA's purchase orders subject to the following provisions:-
only to the extent that the purchase order is for a quantity in
excess of five thousand (5,000) units for each individual product
size and format;
only to the extent that they comply with DERMA's most recent
non-binding quarterly forecast provided that DERMA shall accept
such quantities being 5% (five per cent) above or below the
quantity specified in the purchase order;
to use reasonable efforts to manufacture Products ordered by
DERMA that are in quantities in excess of DERMA's most recent
non-binding quarterly forecast provided by DERMA to accept all
DERMA purchase orders that conform with the most recent
non-binding quarterly forecast.
to keep in stock such packaging materials, bearing artwork submitted by
DERMA as needed to package the quantities of Products specified in
DERMA's most recent non-binding quarterly forecast provided that, in
the event of such materials not being used, DERMA shall reimburse IT
for all direct costs reasonably incurred in the procurement of such.
<PAGE>
ENCLOSURE 5 - A LIST OF PRODUCTS
Dermagran Ointment Tubes
Dermagran Ointment Jars
Dermagran Spray
Dermagran Hydrogel
Dermagran Hydrophilic Ointment
Barrier Cream
Perineal Cleanser
Derma Wound Cleanser
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's audited financial statements for the fiscal year ended December 31,
1997 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000892160
<NAME> Derma Sciences, Inc.
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,173,893
<SECURITIES> 0
<RECEIVABLES> 487,407
<ALLOWANCES> 0
<INVENTORY> 774,672
<CURRENT-ASSETS> 3,670,506
<PP&E> 144,591
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,371,840
<CURRENT-LIABILITIES> 2,219,267
<BONDS> 0
0
17,500
<COMMON> 45,676
<OTHER-SE> 2,089,397
<TOTAL-LIABILITY-AND-EQUITY> 4,371,840
<SALES> 4,010,148
<TOTAL-REVENUES> 4,010,148
<CGS> 793,212
<TOTAL-COSTS> 793,212
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65,585
<INCOME-PRETAX> (2,416,244)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,416,244)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,416,244)
<EPS-PRIMARY> (.58)
<EPS-DILUTED> (.58)
</TABLE>
