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, 1998
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from _____ to ______
Commission file number: 1-31070
DERMA SCIENCES, INC.
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2328753
- - -------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
214 Carnegie Center, Suite 100, Princeton, New Jersey 08540
- - -------------------------------------------------------------- ---------------
(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:
Title of Class
Common Stock, $.01 par value
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 $9,208,594.
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, 1999, was approximately $5,677,774.
The number of shares outstanding of each of the issuer's classes of
common equity, as of March 26, 1999, was 6,235,789.
Documents Incorporated by Reference: None
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
Derma Sciences, Inc. ("Derma Sciences") was incorporated under the
laws of Colorado on September 10, 1984. On June 3, 1996 Derma Sciences changed
its state of domicile to Pennsylvania. In September 1998, pursuant to an
Agreement and Plan of Merger dated as of July 8, 1998, Derma Sciences acquired
Genetic Laboratories Wound Care, Inc. ("Genetic Labs") by means of a tax-free
reorganization whereby Genetic Labs became a wholly-owned subsidiary of Derma
Sciences.
In 1998, Derma Sciences purchased the stock of Sunshine Products,
Inc. ("Sunshine Products") in a cash transaction. As a result of the stock
purchase, Sunshine Products became a wholly-owned subsidiary of Derma Sciences.
Derma Sciences and its subsidiaries Genetic Labs and Sunshine
Products are referred to collectively as the "Company." The Company's executive
offices are located at 214 Carnegie Center, Suite 100, Princeton, New Jersey.
The Company engages in the marketing and sale of three dermatological
products lines: (1) sprays, ointments and dressings for the management of
chronic non-healing skin ulcerations such as pressure, diabetic and venous
ulcers, surgical incisions and burns; (2) wound closure strips, specialty
fasteners and net dressings; and (3) skin care products and disinfectants.
The Company's Markets
Chronic Wound Care
The Company markets chronic wound care and related products primarily
to extended care facilities such as nursing homes, rehabilitation centers,
hospitals and home healthcare agencies. Chronic wounds, unlike acute wounds
which heal within a natural timeframe, may linger for weeks, months or years and
may defy all traditional attempts at treatment.
The most common chronic wounds are: (1) bedsores (decubitus ulcers)
which result from prolonged pressure on the skin impairing the blood supply to
the affected area; (2) venous ulcers which result from poorly functioning veins;
and (3) diabetic leg ulcers. 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. However, the foregoing treatments are passive in nature and do not
stimulate or accelerate wound healing. Many of the Company's chronic wound care
products seek to provide an environment conducive to wound healing by
addressing, in addition to healing factors such as protection and infection
control, additional healing factors such as moisture, pH balance and nutrition.
Wound Closure Strips and Fasteners
The Company markets wound closure strips, nasal tube fasteners and a
variety of catheter fasteners to doctors, clinics, nursing homes and hospitals.
These wound closure strips eliminate the need for sutures on the surface of many
surgical wounds, decrease the incidence of scarring and infection and promote
wound healing. In contrast to the characteristics of surgical tapes, these wound
closure strips yield to the movement of the skin thereby reducing traction
blisters at the wound site. In additional, these wound closure strips provide
excellent adherence, optimum surgical wound security and protection from
irritation and skin shearing.
The Company's nasal tube and catheter fasteners facilitate attachment
of suction tubes, feeding tubes, urinary catheters, gastrostomy tubes, wound
drainage systems, IV's and chest tubes. These fasteners incorporate dynamic
tape-to-skin adhesion which minimizes irritation, blistering and skin shear.
Further, the fasteners' single piece construction permits adoption of rapid and
standardized attachment procedures.
1
<PAGE>
Personal Skin Care
The Company markets general purpose and specialized skin care
products to nursing homes, hospitals, home healthcare agencies and other
institutions. These products include antibacterial skin cleansers, soaps,
lotions, and moisturizers. The Company's skin care products are designed to
enable customers to implement and maintain successful skin care/hygiene
programs.
The Company's Products
Descriptions of the Company's products and their intended uses are
set forth below:
Wound Prevention and Treatment
ACCU-Cleanse Wound irrigator that provides an even flow
of irrigation solution into and around the
wound.
DermaCol Hydrocolloid dressing sold in various
sizes. Used as a primary or secondary
dressing for the management of moderately
exudating wounds.
DermaFilm Film dressing, sold in various sizes, with
a high moisture vapor transfer rate. Used
as a primary dressing on partial thickness
wounds and secondary dressing on full
thickness wounds with moderate to heavy
exudate.
Dermagran Ointment Topical ointment with a lanolin odor,
packaged in both jars and tubes.
Active ingredient: aluminum hydroxide
gel. Used to manage stage I and II
pressure and venous ulcers, incisions,
burns and other skin irritations.
Dermagran Spray Colorless, odorless liquid, packaged
in translucent plastic bottles with pump
spray nozzles. Active ingredient: zinc
acetate. Used to manage stage I and II
pressure and venous ulcers, incisions,
burns and other skin irritations.
Dermagran Wet Dressing (Saline) Sterile 4" x 8", 12
ply gauze dressing saturated with sterile
solution, packaged in foil envelopes with
peel-down tabs. Used for the management of
pressure sores, venous ulcers, incisions,
burns and skin irritations.
DermaSite Transparent, vapor permeable film dressing
sold in various sizes. Used as a dressing
for partial thickness wounds and as a
fixation device.
DermaStat Calcium alginate dressing, without zinc,
packaged in various sizes. Used for the
management of moderately to heavily
exudating wounds such as pressure ulcers,
venous stasis ulcers and dermal lesions.
Flexinet/Systenet Woven elastic net dressing for wounds
which reduces dressing time, allows for
proper ventilation of the wound site and
holds dressings in place. Packaged in
various sizes.
In Between Perineal spray skin cleanser. Used
to remove dry fecal matter and odor
resulting from incontinence.
MPH Ointment Topical ointment, packaged in
pumps and jars, containing allantoin and
aloe vera gel. Used to provide protective,
long lasting barrier ointment for perineal
care associated with incontinency.
NutraCleanse Saline wound cleanser with moisturizing
and lubricating properties packaged in a
four ounce plastic bottle. Used to cleanse
dermal wounds and contribute to the
maintenance of a mildly acidic wound
environment.
NutraCol Hydrocolloid dressing with zinc sold in
various sizes. Used as a primary or
secondary dressing for the management of
moderately exudating wounds.
NutraDress Sterile 4" x 8", 12 ply gauze dressing
saturated with sterile solution and trace
amounts of zinc, packaged in foil
envelopes with peel-down tabs. Used for
the management of pressure sores, venous
ulcers, incisions, burns and skin
irritations.
NutraFil Advanced zinc hydrogel formulation
packaged in tubes. Used for the management
of stages II through IV pressure sores,
diabetic ulcers, venous stasis
ulcerations, thermal burns, surgical
incisions and superficial lacerations,
cuts or abrasions.
NutraGauze Advanced zinc hydrogel formulation
impregnated in gauze, available in various
sizes. Used for the management of stages
II through IV pressure sores, diabetic
ulcers, venous stasis ulcerations, thermal
burns, surgical incisions and superficial
lacerations, cuts or abrasions.
NutraShield Perineal Protectant Topical ointment
packaged in tubes. Used to provide
protective, long lasting barrier ointment
for perineal care associated with
incontinency.
NutraStat Calcium alginate dressing, containing
zinc, packaged in various sizes. Used for
the management of moderately to heavily
exudating wounds, such as pressure ulcers,
venous stasis ulcers and dermal lesions.
NutraVue Clear hydrogel packaged in tubes. Used for
the management of all stages of pressure
sores, surgical incisions, thermal burns,
cuts and abrasions and venous stasis
ulcerations.
NutraWash Cleanser packaged in an eight ounce opaque
plastic bottle with a pump spray nozzle.
Used to remove dry fecal matter and odor
resulting from incontinence.
Wound Prevention and Treatment
LCStrip Wound closure strip made of a flexible
material that allows blood and exudate to
escape the wound site. Used for wounds
resulting from minimally invasive surgery.
Suture Strip Latex-free, water-resistant,
economical wound closure strip. Made of
the same non-woven material as Suture
Strip(R) Plus. Used in various surgical
and wound care procedures.
Suture Strip Plus(R) Latex-free, water-resistant
wound closure strip. Made of a macroporous
non-woven polyamide with skin friendly
adhesive. Used for primary closure and
early suture removal.
<PAGE>
Nasal and Catheter Fasteners
NG Strip Tube fastener made of flexible
material designed to maximize adhesion and
minimize irritation, blistering and skin
shear, packaged in various sizes. Used to
secure nasal or feeding tubes to the nose.
Percu-Stay Sterile, self adhesive catheter fastener
for percutaneous drainage catheters. Made
of a combination of a moisture-absorbent
hydrocolloid surrounded by a pressure
sensitive adhesive on a non-woven backing.
Used to secure percutaneous drainage
catheters.
UC Strip/Cath-Strip Catheter tubing fastener
made of a flexible material designed to
maximize adhesion and minimize irritation,
blistering and skin shear, available in
various packages. Used for securing
urinary and gastrostomy catheter tubing to
the skin.
Personal Skin Care
Antibacterial Soap Antibacterial hand soap with glycerin and
aloe vera. Active Ingredient:
chloroxylenol. Used as a hand soap for
protection against both gram-positive
and gram-negative organisms as well as
yeasts and fungi.
ApriVera Odor reducing, non-alkaline lotion body
and hair cleanser with aloe vera.
Bathe Away Body and hair cleanser containing
glycerin, coconut oil products and
chamomile.
Hydro-Soft Concentrated blend of skin emollients and
gentle skin cleansers for moisturizing and
conditioning the skin. Used in any
whirlpool and hydrotherapy unit.
Mysotrol Clear gel no-rinse hand sanitizer packaged
in squeeze bottles. Used as a hand
sanitizer to provide germicidal and
virucidal protection. Meets OSHA protocol
for a healthcare handwash.
Optima Bath additive or after-bath moisturizer
enhanced with acetylated lanolin alcohol.
Used to lubricate and soften the skin.
Skin Care Lotion Lotion to moisturize and soften the skin.
Swash Body and hair cleanser.
Therabath Lotion type body and hair cleanser.
Three to One Economical concentrated body and hair
cleanser.
Whirlpool/Hardsurface Disinfectant Detergent and disinfectant.
Used to clean and disinfect any whirlpool
or hardsurface. Effective against a broad
range of microorganisms.
Distribution and Sales
Domestic
The Company employs a direct sales force and utilizes drug
wholesalers, specialty dealers and medical - surgical distributors to sell and
distribute its products. The Company's direct sales force consists of an
executive vice president for field operations, three regional vice presidents,
four district managers, two managers for manufacturer's representatives and
twenty-one sales representatives.
Sales managers and representatives receive a base salary together
with incentive compensation based on achievement, tenure and sales in their
territories. Compensation to wholesalers, dealers and distributors is derived
from markups on the Company's products.
The Company implemented the restructuring of its direct sales force
and the hiring of the majority of its sales managers and representatives during
the period November, 1998 through January, 1999. The Company's reorganized sales
force underwent extensive training through the period December, 1998 through
February, 1999 and began full-scale field operations in March, 1999.
International
The Company's wound care products are distributed and sold
internationally pursuant to various licensing and distribution agreements. The
Company sells products in the following countries: Austria, Belgium, Canada,
Chile, Columbia, Costa Rica, Denmark, Egypt, Finland, France, Germany,
Guatemala, Indonesia, Israel, Italy, Netherlands, New Zealand, Norway, Panama,
Peru, Philippines, Portugal, Puerto Rico, Spain, Sweden, Switzerland, Taiwan,
United Kingdom, Uruguay and Venezuela. Sales generated from foreign countries
are payable in U.S. dollars and are not material.
Competition
The wound and skin care sectors of the pharmaceutical industry are
characterized by rapidly evolving technology and intense competition. Many
suppliers of competing products are considerably larger and have much greater
resources than the Company. In addition, many specialized pharmaceutical
companies have formed collaborations with large, established companies to
support research, development and commercialization of wound and skin 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 and skin care products on their own or through joint ventures.
The Company's chronic wound care products compete principally with
those of Convatec, Smith & Nephew, Johnson & Johnson and 3M. The Company's
largest competitor in the field of wound closure strips is 3M. However, several
generic products compete with the Company's specialty fasteners, including
hospital and surgical tapes. The Company's personal skin care products compete
with those of Provon, Steris and Sween.
The ultimate ability of the Company to remain competitive depends
upon its ability to acquire, commercialize and market wound and skin care
technologies which are superior to those of its competitors. The existence of
competing products or treatments, or products or treatments that may be
developed in the future by competitors, may adversely affect the marketability
of products sold by the Company. However, the Company believes that the quality
and performance of its products, together with the skill and dedication of its
employees, allow it to successfully compete with larger companies.
Product Sourcing
The Company maintains manufacturing facilities solely for
manufacturing its skin care products. The manufacture of all other products is
outsourced. The principal manufacturers of the Company's products are: Applied
Labs (Dermagran Spray and Nutrawash); Advanced Medical Solutions Ltd., formerly
Innovative Technologies, Inc. (DermaCol, NutraCol, DermaStat, NutraStat,
DermaSite and DermaFilm); Technol, Inc. (NutraFil gauze); Topiderm, Inc.
(Dermagran Ointment and Nutrashield); and TapeMark Company. (LC Strip, Suture
Strip, Suture Strip Plus(R), NG Strip, Percu-Stay, UC Strip/Cath-Strip).
The Company's products utilize readily available components and there
are numerous laboratories and production facilities capable of producing these
products to the standards required by the FDA, the Company and the
pharmaceutical industry. Given the ready 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."
Patents, Proprietary and Non-Proprietary Technology
Under the title "Two-Step Procedure for Indolent Would Healing and
Aqueous Medium and Topical Ointment Used in Connection therewith," the Company's
Dermagran Spray and Dermagran Ointment have received patent protection. Patents
have been obtained in: Australia, Canada, European Community (comprised of:
Austria, Belgium, France, Germany, Italy, Luxembourg, Netherlands, Sweden,
Switzerland and United Kingdom), Ireland, Mexico, Philippines, Spain, and the
United States. These patents begin to expire in the year 2003. Patent
applications relative to these products are pending in various other countries.
The Company also has patents on its Suture Strip, NG Strip,
Cath-Strip and UC Strip products in the United States and United Kingdom. These
patents begin to expire in the year 2005.
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 wound care
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.
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.
An important component of the Company's growth strategy is to
acquire, by purchase or license, both proprietary and non-proprietary wound and
skin care technology. There can be no assurance that the Company will be able to
obtain such technology on acceptable terms, if at all. Future inability to
acquire or license wound care technology could have a material adverse effect on
the Company's business.
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. Many of the Company's products are classified either as 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.
Medical Devices
The following products are registered with the FDA as Class I
"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, Suture Strip, NG Strip, Cath-Strip
and UC Strip.
The FDC Act requires that all devices for human use marketed in the
United States prior to May 28, 1976 ("Preamendment Devices") be classified by
the FDA, based on recommendations of expert panels, into one of three regulatory
classes. Class I products are subject only to the general controls which apply
to all devices, irrespective of class. General controls include the registration
of manufacturers, recordkeeping requirements, labeling requirements, and Good
Manufacturing Practice ("GMP") regulations.
Class II devices are those for which general controls are not
sufficient to ensure safety and effectiveness, and for which enough information
exists to develop a standard. These devices are required to meet performance
standards established by the FDA. Performance standards may specify materials,
construction components, ingredients, labeling and other properties of the
device. A standard may also provide for the testing of devices to ensure that
different lots of individual products conform to the requirements.
The most restrictive controls are applied to devices placed in Class
III. Class III devices are required to have FDA approval for safety and
effectiveness before they can be marketed unless the FDA determines that
pre-market approval is not necessary. Pre-market approval necessitates the
compilation of extensive safety and effectiveness data which is extremely
expensive to compile. Approval of Glass III devices may require several years.
Devices marketed after May 28, 1976 are considered to be one of two
kinds: those that are and those that are not substantially the same as a
Preamendment Device. Those that are substantially equivalent to a Preamendment
Device are given the same classification as the equivalent Preamendment Device.
New devices which are not substantially equivalent to Preamendment 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 introduce a device on the market. During the ninety-day period,
the FDA will determine whether the device is or is not substantially equivalent
to a Preamendment Device. If the FDA determines that the device is not
substantially equivalent to a Preamendment Device, it is automatically placed in
Class III and the manufacturer will have to provide the FDA with a Premarket
Approval Application ("PMA") containing evidence that the device is safe and
effective before the device may be commercially distributed to the public.
However, the manufacturer may request that the FDA reclassify the device by
filing a reclassification petition.
All of the devices currently marketed by the Company have been found
by the FDA to be substantially equivalent to a Preamendment Device.
Drugs
Those of the Company's products which are classified as drugs
pursuant to the FDC Act are: Dermagran Spray, Dermagran Ointment, Mysotrol and
Antibacterial Soap. Pursuant to the provisions of the FDC Act, the FDA has been
given extensive authority to regulate the manufacture and distribution of drugs.
"New drugs" are the most highly regulated category of drugs. 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. These
conditions do not include use in safety and effectiveness investigations even if
the drug has become generally recognized as safe and effective as a result of
such investigations.
A new drug may not be commercially marketed in the United States
unless it has been approved as safe and effective by the FDA. Such approval is
based on a New Drug Application ("NDA") submitted by the sponsor of the drug
containing acceptable scientific data including the results of tests to evaluate
its safety and substantial evidence of effectiveness for the conditions for
which the drug is to be offered. Drugs that are not "new" are not subject to the
"new drug" procedure, but must comply with all other drug requirements,
including registration, labeling, and GMP regulations.
Prior to the commencement of clinical studies to compile the data
necessary for approval of a NDA, the sponsor must obtain approval of an
Investigational New Drug Application to commence investigations regarding the
safety and effectiveness of drugs.
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. Those of the
Company's products which are classified as drugs (see above) are further
classified as OTC drugs.
In 1972, the FDA began a comprehensive review of the safety,
efficacy, and labeling of all OTC drugs for the purpose of establishing the
conditions under which such drugs could be generally recognized as safe,
effective, and not misbranded. To facilitate the review, these drug products
were grouped into therapeutic classes, and advisory panels were established to
review each class. The panels completed their review in 1983, and it remains for
the FDA to complete the rulemaking process.
On the basis of the recommendations submitted by the panels, the FDA
issues monographs setting forth the conditions under which OTC drugs in each
class are deemed to be generally recognized as safe, effective, and not
misbranded. Generally, the administrative process includes the publication of a
"Preliminary," "Tentative Final," and "Final Monograph." During the rulemaking
process, products are placed into one of three categories describing whether a
drug is deemed to be generally recognized as safe and effective and not
misbranded (Category I), to be not generally recognized as safe and effective or
misbranded (Category II), or to lack sufficient data for categorization
(Category III). Products that do not comply with general OTC regulations or an
applicable Final Monograph are subject to regulatory action. Any OTC drug not in
compliance with the content and labeling requirements of a Final Monograph is
subject to regulatory action unless it is the subject of an approved new drug
application. The FDA has issued a Compliance Policy Guide in which it determined
that it would not pursue regulatory action against OTC drugs prior to the
adoption of a final regulation unless failure to do so presents a potential
public health hazard.
Dermagran Spray and Dermagran Ointment are currently being marketed
as over-the-counter skin protectant drug products. Skin protectant products are
the subject of an ongoing FDA rule making procedure which will result in the
issuance of a final regulation specifying those active ingredients which are
permitted in, and designating labeling requirements for, such products.
Preliminary Monographs and Tentative Final Monographs applicable to Dermagran
Spray and Dermagran Ointment have been issued by the FDA in 1978 and 1984,
respectively.
Dermagran Spray and Dermagran Ointment have been formulated and
labeled in accordance with the proposals outlined in the Preliminary Monograph.
The Dermagran Spray and Dermagran Ointment labels carry treatment indications of
"For symptoms of oozing and weeping due to rubbing or friction" and "For the
temporary protection and lubrication of minor skin irritations such as
intertrigo, chafing, galling, rubbing or friction," respectively.
Under the Tentative Final Monograph, products formulated and
identified in the manner of Dermagran Spray and Dermagran Ointment would be
required to carry treatment indications of "Dries the oozing and weeping of
poison ivy, poison oak and poison sumac." Thus, if the proposals outlined in the
Tentative Final Monograph are adopted without modification in a final
regulation, and if no modifications were made to the formulations of Dermagran
Spray and Dermagran Ointment, the treatment indications on the current Spray and
Ointment labels would have to be revised.
It is currently impossible to predict when the FDA will promulgate a
final regulation, what the final regulation will provide or how a final
regulation (monograph) will affect either of these products or their labels.
Pursuant to the FDA's Compliance Policy Guide, discussed above, Dermagran Spray
and Dermagran Ointment may be marketed under their current monographs until one
year following the issuance of a Final Monograph. It is the Company's intention
to manufacture Dermagran Spray and Dermagran Ointment pursuant to the FDA's
Final Monograph relative to "skin protectants" and to make whatever formulation
and labeling changes are necessary to fully comply with the final regulation.
Given the uncertainty with respect to both the timing and provisions of a Final
Monograph relative to Dermagran Spray and Dermagran Ointment, it is not possible
to assess the probable impact of this Final Monograph upon these products'
manufacture, marketing or sale.
Foreign Regulatory Authorities
Whether or not FDA approval has been obtained, approval of medical
drugs and devices by regulatory authorities in foreign countries must be
obtained prior to marketing drugs and devices 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 present
and future local, state, federal and foreign regulation.
The Company is also 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.
Third Party Reimbursement
The Company sells its wound care products to nursing homes,
hospitals, home healthcare agencies and similar institutions. The patients at
these institutions for whose care the Company's products are purchased often are
covered by medical insurance. Accordingly, the Company's customers routinely
seek reimbursement for the cost of the Company's wound care products from third
party payors such as Medicare, Medicaid, health maintenance organizations and
private insurers. The availability of reimbursement from such third party payors
is a significant factor in the Company's sales of wound care products.
Medicaid is a federally funded program administered by the states.
Medicaid insurance is available to individuals who have no Medicare or private
health insurance or to individuals who have exhausted their Medicare benefits.
Included in the Medicaid insurance coverage are in-patient stays in long term
care facilities, hospitalization and drugs.
Medicaid reimbursement of the Company's products is dependent upon
Company paid rebates to state Medicaid agencies. Effective January 1, 1991, the
Omnibus Budget Reconciliation Act of 1990 requires pharmaceutical companies, as
a condition of the eligibility of its products for Medicaid reimbursement, to
enter into a rebate agreement with the federal government. Only drugs of the
pharmaceutical companies having such rebate agreements are covered by state
Medicaid programs. Pharmaceutical companies participating in the Medicaid rebate
program must remit to state Medicaid agencies a formula-based rebate which
varies from quarter to quarter in accordance with the Company's quarterly net
sales and the average manufacturer price of the individual products. Prior to
1998, Medicaid rebates ranged between 3% and 5% of the Company's net sales.
During 1998, Medicaid rebates represented less than 1% of 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 wound care products, together with Cath-Strip and
Percu-Stay, are eligible for Medicare reimbursement.
Several of 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 mandatory rebates for wound
care products. As such, there is uncertainty as to whether, and to what extent,
reimbursements for the Company's products will continue to be available.
Likewise, there is uncertainty as to the future extent of the Company's rebate
obligations.
Product Development
The Company does not conduct in-house product development activities
and relies for the expansion of its product lines upon the purchase or licensing
of products from outside sources.
<PAGE>
Employees
The Company maintained 74 full-time employees at December 31, 1998
and 83 full-time employees at March 30, 1999. The Company considers its employee
relations to be satisfactory. The Company employs no part-time employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices are located in Princeton, New Jersey.
The Company leases these offices on a month-to-month basis at a price of $1,600
per month. The Company has a lease for offices located in Wilkes Barre,
Pennsylvania, at a rate of $3,000 per month, that expires June, 2000. The
Company has a month-to-month lease for 8,200 square feet of warehouse space in
Old Forge, Pennsylvania, at a rate of $1,750 per month. The Company has a five
year lease for 9,500 square feet of office and warehouse space in St. Paul,
Minnesota, at a rate of $7,400 per month, which expires in March, 2002. The
Company has a lease for 24,000 square feet of office and warehouse space in St.
Louis, Missouri, at a rate $7,085 per month which expires in August, 1999 and a
month-to-month lease for 2,000 square feet of warehouse space, also in St.
Louis, at a rate of $1,000 per month.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
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, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Common Stock of the Company is traded on Nasdaq under the symbol
"DSCI." The Common Stock is also traded on the Boston and Pacific Stock
Exchanges under the symbol "DMS." The Company's Common Stock commenced trading
on May 13, 1994. The following table sets forth the high and low bid prices for
the Company's Common Stock as reported by Nasdaq:
QUARTER ENDED HIGH LOW
March 31, 1997 2 1/8 1 1/8
June 30, 1997 2 1/16 5/8
September 30, 1997 1 1/4 5/8
December 31, 1997 1 3/4 13/16
March 31, 1998 2 1/8 1
June 30, 1998 2 1/4 1 1/2
September 30, 1998 1 5/8 5/8
December 31, 1998 1 1/8 5/8
The stock prices reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
There is no public market for the Company's preferred stock.
As of the close of business on March 29, 1999, there were 1,270
holders of record of the Common Stock.
The Company has paid no cash dividends in respect of its Common Stock
and does not intend 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 1998 the Company acquired two
companies, Genetic Laboratories Wound Care, Inc. ("Genetic Labs"), and Sunshine
Products, Inc., ("Sunshine Products"), to become a full-line provider of
advanced wound and skin care products. Genetic Labs specializes in wound
closure, fastener, net dressings and specialty products. Sunshine Products
offers a complete line of skin care products.
Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the historical
consolidated financial statements and notes of the Company.
In 1998 and 1997, the Company experienced a 40% increase and a 10%
decrease, respectively, in annual revenue. The Company incurred a net loss of
$1,816,029 and $2,302,903 in 1998 and 1997, respectively. The Company's net loss
for 1998 was primarily attributable to: (1) restructure and merger costs
relative to the acquisitions of Genetic Labs and Sunshine Products totaling
$550,000 and $254,827, respectively, and (2) litigation settlement expense of
$819,353 (discussed below). At December 31, 1998 and 1997, the Company's
accumulated deficits were $5,343,088 and $3,527,059, respectively.
Results of Operations
The following table presents selected financial information for the
periods indicated expressed as a percentage of net sales:
1998 1997
--------------- ---------------
--------------- ---------------
Net sales 100.0% 100.0%
Cost of sales ............................ 23.4 28.5
--------------- ---------------
--------------- ---------------
Gross profit ............................. 76.6 71.5
Selling, general and administrative:...... 79.5 107.1
Restructuring charges .................... 6.0 0.0
Merger related costs ..................... 2.8 0.0
Litigation settlement 8.9 0.0
Other income and expenses, net (1.1) (1.4)
--------------- ---------------
Loss before income taxes............ (19.5) (34.2)
Income taxes ............................ .2 .7
--------------- ---------------
Net loss (19.7%) (34.9%)
=============== ===============
Sales Overview
The Company's net sales are comprised of chronic wound care products,
wound closure strips and fasteners, and skin care products. Chronic wound care
sales are primarily derived from Dermagran Ointment, Dermagran Spray and
Dermagran Hydrophilic Wound Dressing. Wound closure strips and fastener sales
are primarily derived from the Suture Strips, Percu Stay, NG Strip, and Net
Dressings. Skin care sales are primarily derived from Aprivera and other body
washes and shampoos, in addition to skin conditioners and moisturizers. Net
sales increased in 1998 compared to 1997 by 40%.
<PAGE>
The following table presents sales by product line, expressed in
dollars and as a percentage of total increase in net sales:
YEAR ENDED DECEMBER 31,
% OF TOTAL
PRODUCT LINE 1998 1997 VARIANCE VARIANCE
---------- ---------- ---------- ----------
Chronic wound care $5,534,254 $3,584,765 $1,949,489 75%
Wound closure strips
and fasteners 3,172,006 3,016,759 155,247 6%
Skin care 502,334 502,334 19%
---------- ---------- ----------
0
Total $9,208,594 $6,601,524 $2,607,070 100%
========== ========== ========== ==========
1998 Compared to 1997
- - ---------------------
Net Sales and Gross Profit
Net sales increased in 1998 by $2,607,070, or 40%, to $9,208,594 from
$6,601,524 in 1997. Of this increase, 75% is attributable to the chronic wound
care product line. The increase in net sales for this line is composed of a
$1,174,876 net increase in product sales and a refund of Medicaid rebates of
$774,613. The increase in the wound closure strips and fastener net sales is
attributable to a $162,832 increase in the sale of Percu Stay. The increase of
$502,334, or 19% of total net sales, in the skin care product line is due to the
Sunshine Products acquisition on October 31, 1998. No net sales for the skin
care product line are included in the 1997 results or the first ten months of
1998.
Cost of sales expressed as a percentage of net sales decreased from
28% in 1997 to 23% in 1998. This decrease is attributable primarily to a
favorable sales mix. The chronic wound care product line had the largest
increase in sales and also had the lowest cost of sales as a percentage of net
sales. Cost of sales for the chronic wound care line was 13% and 22% for 1998
and 1997, respectively. This decrease in cost of sales is attributable to
increased sales in 1998 of high margin products coupled with the refund of
Medicaid rebates previously discussed. Cost of sales as a percentage of net
sales for the chronic wound care and wound closure strips and fastener lines
remained consistent at 37% and 36% for 1998 and 1997, respectively. Aggregate
cost of sales increased $271,643 to $2,155,835 in 1998 from $1,884,192 in 1997.
The increase in aggregate cost of sales is attributable to the increase in net
sales discussed above.
Gross profit expressed as a percentage of net sales increased from
72% in 1997 to 77% in 1998. Aggregate gross profit increased $2,335,427, or 50%,
to $7,052,759 in 1998 from $4,717,332 in 1997. Both the increase in the gross
profit percentage and the aggregate gross profit are attributable to the
previously discussed increase in net sales and the more favorable sales mix.
Operating Expenses
Operating expenses increased $1,871,585, or 27%, from $6,975,985 in
1997 to $8,847,570 in 1998. Merger and restructuring costs of $254,827 and
$550,000, respectively, in addition to the ABS Litigation settlement of $819,353
(discussed below), combine for $1,624,180, or 87%, of the total increase.
Selling, general and administrative expense for 1998 increased
$253,021, or 4%, to $7,322,335 from $7,069,314 in 1997 and decreased as a
percentage of sales from 107% in 1997 to 80% in 1998. The increase in selling,
general and administrative expense is primarily attributable to 1998 sales of
skin care products in the amount of $252,034 compared to none for 1997.
Additionally, in 1998 there was an increase in professional fees of $418,457 and
a decrease in bad debt expense of $491,131.
Litigation Settlement
On June 8, 1998 the Company and ABS LifeSciences, Inc. ("ABS"), a
subsidiary of Integra Life Sciences, Inc. agreed to a settlement of their
respective claims and counter claims asserted in the civil action ABS
LifeSciences, Inc. v. Derma Sciences, Inc. (the "Action"). The settlement
provides that the Company pay ABS a total of $550,000 and return all unsold
Chronicure inventory. The settlement further provides for the dismissal of all
claims and counter claims asserted in the action. The settlement resulted in a
charge to operations of $819,353 in the quarter ended June 30, 1998.
Net Loss
The Company incurred a net loss in 1998 and 1997 of $1,816,029 and
$2,302,903, or $0.29 and $0.40 per share, respectively.
Liquidity and Capital Resources
At December 31, 1998 and 1997 the Company had working capital of
$3,293,516 and $2,546,730, respectively.
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 were invested in short term,
investment grade commercial paper having an aggregate market value of $1,808,000
on December 31, 1997.
Further, on July 14, 1998, the Company successfully closed a private
placement of convertible securities ("Class B Securities") in which an aggregate
of $4.0 million was raised (net proceeds were $3,955,000 after related costs).
Terms of the Class B Securities required that upon approval by the Company's
shareholders of at least 3,333,400 additional shares of preferred stock, the
Class B securities automatically convert into Class B Units at the rate of $1.20
per Unit. Each Class B Unit consists of one share of preferred stock convertible
into one share of common stock ("Class B Preferred") and one warrant to purchase
one share of common stock exercisable at $1.35 per share ("Class B Warrants").
The Class B Securities at year-end have been classified as preferred stock.
Class B Warrants issued in connection with this offering totaled 3,333,400.
The Company has a short-term line of credit facility for $1,000,000,
of wich $300,000 was outstanding at December 31, 1998, at a fluctuating rate per
annum equal to the prime rate minus 1%, (6.75% at December 31, 1998). This line
of credit is secured by cash on deposit with the bank. In 1998 the Company
utilized its line of credit primarily for working capital.
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.
The Nasdaq Stock Market Listing
The Company was notified on February 5, 1999 by The Nasdaq Stock
Market ("Nasdaq") that it was not in compliance with the Nasdaq SmallCap Market
("SmallCap Market") listing requirement relative to maintenance of a minimum bid
price per share of $1.00. The Company has until May 4, 1999 to either satisfy
the minimum bid price listing requirement or submit to Nasdaq its plan for
achieving compliance with this requirement.
Ultimately, the Company's failure to maintain a minimum bid price per
share of $1.00 would result in the Company's common stock being delisted from
the SmallCap Market. Were this to occur, the common stock would trade
exclusively on the Nasdaq Bulletin Board, the Boston Stock Exchange and the
Pacific Exchange. Delisting of the Company's common stock from the SmallCap
Market could make it more difficult for the Company's shareholders to sell their
shares and could also make it more difficult for the Company to secure
additional financing.
The Company is reviewing various alternatives for achieving
compliance with Nasdaq's minimum bid price requirement.
Year 2000 Compatibility
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. In other words,
date sensitive software may recognize a date using"00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporary
inability to process transactions and information or engage in similar normal
business activities.
The Company is working to resolve the potential impact of the year
2000 on the ability of the Company's computerized information systems to
accurately process information that may be date-sensitive. The Company believes
that it does not have significant year 2000 issues to its computerized
information systems and is currently reviewing these systems. This review is
expected to be completed during 1999.
In addition, it is also possible that certain computer systems or
software products of the Company's suppliers and contractors may not be year
2000 compatible. The Company is requesting assurances from all software vendors
from which it has purchased or from which it may purchase software that such
software will correctly process all date information at all times. Furthermore,
the Company is querying its suppliers and contractors as to their progress in
identifying and addressing problems that their computer systems will face in
correct processing date information as the year 2000 approaches. The Company
expects this assessment to be completed during 1999 and currently believes that
costs of addressing this issue will not have a material adverse impact on the
Company's financial position. However, if the Company and third parties upon
which it relies are unable to address this issue in a timely manner, it could
result in a material financial risk to the Company. In order to assure that this
does not occur, the Company plans to devote all resources required to resolve
any significant year 2000 issues in a timely manner.
Through 1998, the Company has expended $25,000 on the year 2000 issue
and intends to spend an additional $20,000 in 1999. To date the Company has not
made any contingency plans to address third-party year 2000 risks. The Company
plans to formulate contingency plans to the extent necessary in 1999.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Index
Description Page
- - ----------- ----
Report of Independent Auditors................................ 16
Balance Sheets................................................ 17
Statements of Operations...................................... 18
Statements of Cash Flows...................................... 19
Statements of Shareholders' Equity............................ 20
Notes to Financial Statements................................. 21
15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Derma Sciences, Inc.
We have audited the accompanying balance sheet of Derma Sciences,
Inc., as of December 31, 1998 and the related statements of operations,
shareholders' equity, and cash flows for the two 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, 1998, and the results of its operations and its
cash flows for the two years then ended, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 31, 1999
16
<PAGE>
<TABLE>
<CAPTION>
DERMA SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
- - ----------------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------------
December 31,
ASSETS 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 2,338,552 $ 2,514,560
Accounts receivable, net of allowances of
$140,000 in 1998 and $59,000 in 1997 1,378,219 903,869
Inventories 1,645,556 1,309,511
Current portion of officers' notes receivable 19,330 19,330
Prepaid expenses and other current assets 216,461 274,989
- - ----------------------------------------------------------------------------------------------------------------------------------
Total current assets 5,598,118 5,022,259
Property and equipment, net 409,938 262,332
Other Assets
Officers' notes receivable 76,034 90,979
Goodwill and other intangibles, net 1,674,426 416,666
Other 13,055 60,762
- - ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 7,771,571 $ 5,852,998
- - ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- - ----------------------------------------------------------------------------------------------------------------------------------
Current Liabilities
Bank line of credit $ 300,000 $ 549,633
Accounts payable 1,034,415 1,023,364
Accrued expenses and other
current liabilities 970,187 902,532
- - ----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,304,602 2,475,529
- - ----------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock $.01 par value,
15,000,000 shares authorized;
issued and outstanding: 6,235,789
shares in 1998; 6,249,298 in 1997 62,357 62,493
Convertible preferred stock $.01 par
value; 11,750,000 shares authorized;
issued and outstanding: 5,070,900
shares in 1998; 1,750,000 in 1997 50,709 17,500
Additional paid-in capital 10,696,991 6,824,535
Accumulated deficit ( 5,343,088) (3,527,059)
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 5,466,969 3,377,469
- - ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,771,571 $ 5,852,998
- - ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
17
<PAGE>
DERMA SCIENCES, INC.
Consolidated Statements of Operations
- - ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1998 1997
- - ----------------------------------------------------------------------------------------------------------------------------------
NET SALES $ 9,208,594 $ 6,601,524
Cost of sales 2,155,835 1,884,192
- - ----------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 7,052,759 4,717,332
- - ----------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative 7,322,335 7,069,314
Restructuring charges 550,000 -
Merger related costs 254,827 -
Litigation settlement 819,353 -
Other income and expense, net ( 98,945) ( 93,329)
- - ----------------------------------------------------------------------------------------------------------------------------------
8,847,570 6,975,985
- - ----------------------------------------------------------------------------------------------------------------------------------
Net loss before income taxes $(1,794,811) $(2,258,653)
Provision for income taxes 21,218 44,250
- - ----------------------------------------------------------------------------------------------------------------------------------
NET LOSS $(1,816,029) $(2,302,903)
- - ----------------------------------------------------------------------------------------------------------------------------------
Loss per common share basic and diluted $( 0.29) $( 0.37)
- - ----------------------------------------------------------------------------------------------------------------------------------
Shares used in computing loss per common share 6,261,510 6,249,671
- - ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
18
<PAGE>
DERMA SCIENCES, INC.
Consolidated Statements of Cash Flows
- - ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1998 1997
- - ----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $(1,816,029) $(2,302,903)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 300,634 207,258
Medicaid rebate adjustments ( 475,866) -
Provision for bad debts 21,233 558,530
Changes in operating assets and
liabilities, net of effects
of purchased business
Accounts receivable ( 260,477) 251,150
Inventories ( 200,434) 141,279
Prepaid expenses and other current
assets 63,152 8,294
Other assets 50,002 ( 7,337)
Accounts payable ( 235,683) 193,398
Accrued expenses and other
current liabilities 359,950 34,474
- - ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,193,518) ( 915,857)
- - ----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Decrease in short-term investments - 1,887,171
Purchases of property and equipment, net ( 124,505) ( 149,970)
Increase in patents and trademarks ( 3,826) ( 47,855)
Acquisition of business, net of
cash acquired (1,525,000) -
- - ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing
Activities(1,653,331) 1,689,346
- - ----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in bank line of credit ( 249,633) ( 250,367)
Principal payments on long term debt - ( 5,547)
Proceeds from issuance of convertible
securities, net of issuance costs 3,955,000 1,571,211
Purchase (and retirement) of treasury stock ( 39,633) -
Proceeds from issuance of common stock 9,514 391
Collection of officers' notes receivable ( 4,407) 172,230
- - ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,670,841 1,487,918
- - ----------------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS ( 176,008) 2,261,407
Cash and cash equivalents
Beginning of year 2,514,560 253,153
- - ----------------------------------------------------------------------------------------------------------------------------------
End of year $ 2,338,552 $ 2,514,560
- - ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</TABLE>
19
<PAGE>
DERMA SCIENCES, INC.
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity
- - ---------------------------------------------------------------------------------------------------------------------------------
Convertible Additional Accumu- Total
Preferred Common Paid-In lated Shareholders'
Stock Stock Capital Deficit Equity
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ - $ 57,602 $ 5,298,526 $(1,224,156) $ 4,131,972
Tender of common shares by
officers for payment of
notes receivable - ( 116) ( 23,086) - ( 23,202)
Issuance of 2,250,000 convertible
securities on $1,800,000 private
placement, net of fees 22,500 - 1,548,711 - 1,571,211
Conversion of convertible
securities into 500,000 common
shares in November 1997 ( 5,000) 5,000 - - -
Other - 7 384 - 391
Net loss - - - (2,302,903) (2,302,903)
- - ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 17,500 62,493 6,824,535 (3,527,059) 3,377,469
Tender of common shares by
officers for payment of
notes receivable - ( 97) ( 19,255) - ( 19,352)
Issuance of convertible
securities on $4,000,000
private placement, net of fees 33,334 - 3,921,666 - 3,955,000
Conversion of convertible shares ( 125) 125 - - -
Purchase and retirement of
Treasury stock, at cost - ( 370) ( 39,263) - ( 39,633)
Other - 206 9,308 - 9,514
Net loss - - - (1,816,029) (1,816,029)
- - ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ 50,709 $ 62,357 $ 10,696,991 $(5,343,088) $ 5,466,969
See notes to consolidated financial statements.
</TABLE>
20
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Derma Sciences, Inc., and Subsidiaries (the "Company") is a full line
provider of advanced wound and skin care products. The Company markets its
products principally through independent distributors servicing the long-term
care, home health and acute care markets in the United States and select
international markets.
On September 9, 1998, the Company acquired Genetic Laboratories Wound
Care, Inc. ("Genetic Labs"), in a business combination accounted for as a
pooling of interests. Genetic Labs markets proprietary wound care products;
primarily wound closure strips, specialty fasteners and net dressings. Sales are
made primarily to medical supply distributors throughout the United States and
in foreign countries, mainly Europe, utilizing independent sales
representatives.
On October 29, 1998, the Company acquired all of the issued and
outstanding stock of Sunshine Products, Inc. ("Sunshine Products"), in a
business combination accounted for as a purchase. Sunshine Products is a
manufacturer of general purpose and specialized skincare products for hospitals,
nursing homes and other institutional facilities.
BASIS OF PRESENTATION
Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year presentation.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Derma Sciences, Inc., and its wholly owned subsidiaries,
Genetic Laboratories Wound Care, Inc. and Sunshine Products, Inc. All
significant intercompany accounts and transactions have been eliminated upon
consolidation.
USE OF ESTIMATES - In conformity with generally accepted accounting
principles, the preparation of our financial statements requires our management
to make estimates and assumptions that affect the amounts reported in our
financial statements and accompanying notes. Although these estimates are based
on our knowledge of current events and actions we may undertake in the future,
actual results may ultimately differ from these estimates.
CASH AND CASH EQUIVALENTS - The Company considers cash and cash
equivalents as amounts on hand, on deposit in financial institutions and highly
liquid investments purchased with an original maturity of three months or less.
21
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER 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. No exercise of stock options,
stock purchase warrants or the conversion of preferred stock was included
because the exercise of all these securities would be anti-dilutive.
INVENTORIES - Inventories consist primarily of raw materials,
supplies and finished goods valued at the lower of cost or market. Cost is
determined on the basis of the first-in, first-out method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost
and are depreciated principally by the straight-line method over the estimated
useful lives of the assets ranging from five to fifteen years.
GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill and other intangible
assets are stated on the basis of cost and are amortized, principally on a
straight-line basis, over the estimated future periods to be benefited not
exceeding 40 years. Goodwill on the Sunshine Products acquisition is being
amortized over 12 years.
CASH FLOW INFORMATION - Interest paid during 1998 and 1997 amounted
to $54,638 and $66,369, respectively. Income taxes paid during 1998 and 1997
amounted to $20,000 and $23,000, respectively.
Non-cash transactions in 1998 included receipts of 9,676 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 Option No. 25, "Accounting for Stock Issued to
Employees", and, accordingly recognizes no compensation expense for the stock
option grants.
22
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 operates in one segment and its
products are primarily sold to independent distributors. Sales are recorded when
product is shipped and title passes to our customers.
ADVERTISING COSTS - Advertising costs are generally expensed in the
year incurred.
2. ACQUISITIONS
On September 9, 1998, the Company acquired Genetic Labs, in a
business combination accounted for as a pooling of interests. Genetic Labs
markets proprietary wound care products; primarily wound closure strips,
specialty fasteners and net dressings. Sales are made primarily to medical
supply distributors throughout the United States and in foreign countries,
mainly Europe, utilizing independent sales representatives. Sales generated from
foreign countries are payable in U.S. dollars and are not material. Genetic Labs
became a wholly owned subsidiary of the Company through the exchange of
1,690,791 shares of the Company's common stock for all the outstanding stock of
Genetic Labs. The accompanying financial statements for the years ended December
31, 1998 and 1997 are based on the assumption that the companies were combined
for the full periods, and financial statements of prior periods have been
restated to give effect to the combination.
There were no intercompany transactions or adjustments required to
the net assets or retained earnings of the combined companies due to the
business combination. Summarized results of operations of the separate companies
for the period from January 1 to August 31, 1998 (the date of acquisition is
September 9, 1998), are as follows:
Company Genetic Labs Total
------- ------------ -----
Net sales $ 3,585,853 $ 2,048,992 $ 5,634,845
--------- --------- ---------
Net income (loss) $( 831,845) $ 61,762 $( 770,083)
---------- ----------- ---------
23
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
2. ACQUISITIONS (CONTINUED)
The following is a reconciliation of the amounts of net sales and net
income (loss) previously reported for 1997 with restated amounts:
Year Ended
December 31, 1997
-----------------
Net sales
As previously reported - Company $ 4,010,148
Reclassification ( 425,383)
Genetic Labs 3,016,759
---------
As restated $ 6,601,524
=========
Net income (loss)
As previously reported - Company $(2,416,244)
Genetic Labs 113,341
---------
As restated $(2,302,903)
=========
In 1998, the Company acquired all of the issued and outstanding stock
of Sunshine Products in a business combination accounted for as a purchase.
Sunshine Products is a manufacturer of general purpose and specialized skincare
products for hospitals, nursing homes and other institutional facilities.
The results of operations of Sunshine Products are included in the
accompanying financial statements since the date of acquisition. The following
summarized pro forma (unaudited) information assumes the Sunshine Products
acquisition had occurred on January 1, 1997.
1998 1997
---- ----
Net Sales $ 11,564,647 $ 9,312,874
Net Income $ (1,712,942) $(2,223,970)
Earnings Per Share:
Basic and Diluted $ (.27) $ (.36)
The purchase price was allocated as follows:
Accounts receivable $ 235,106
Inventory 135,610
Fixed assets 133,331
Intangible assets 1,447,000
Liabilities ( 426,047)
-----------
Total $1,525,000
Intangible assets of approximately $1,447,000 are classified as
goodwill and are being amortized using the straight-line method over twelve
years.
24
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
3. RESTRUCTURING CHARGES
Beginning in September 1998, the board of directors of the Company
approved a plan to integrate the acquired companies and consolidate its
corporate and operating facilities, including support services. The
restructuring charges represent certain non-recurring cost and expenses
associated therewith, including but not limited to moving expenses, severance
pay, lease penalty payments and professional fees. Restructuring is expected to
be completed within nine months.
4. INVENTORIES
Inventories comprise the following:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Finished goods $ 1,446,816 $ 1,231,908
Raw materials 31,972 -
Supplies 166,768 77,603
--------- ---------
$ 1,645,556 $ 1,309,511
========= =========
5. PROPERTY AND EQUIPMENT
Property and equipment comprise the following:
December 31,
------------
1998 1997
---- ----
Furniture and equipment $ 867,745 $ 620,248
Leasehold improvements 14,543 14,543
------- -------
882,288 634,791
Less: Accumulated depreciation 472,350 372,459
------- -------
$ 409,938 $ 262,332
======= =======
6. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles comprise the following:
December 31,
------------
1998 1997
---- ----
Goodwill $ 1,497,365 $ 50,731
Patents and trademarks 454,469 450,643
Contract rights 350,000 350,000
--------- -------
25
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
6. GOODWILL AND OTHER INTANGIBLES (CONTINUED)
2,301,834 851,374
Less: Accumulated amortization 627,408 434,708
--------- -------
$ 1,674,426 $ 416,666
========= =======
</TABLE>
7. CONCENTRATION OF CREDIT RISK
The Company sells almost all of its products to medical supply
companies, pharmacies and healthcare providers. At December 31, 1998 and 1997,
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
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.
8. ACCRUED EXPENSES
Accrued expenses comprise the following:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Salary, wages and severance $ 46,889 $ 321,687
Professional fees 205,045 101,200
Restructuring charges 463,183 -
Other 125,554 297,461
Rebates payable 125,068 163,787
---------- -------
$ 965,739 $ 884,135
======= =======
</TABLE>
26
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
9. BANK LINE OF CREDIT
The Company has a $1,000,000 bank line of credit facility, with
$300,000 and $549,633 outstanding at December 31, 1998 and 1997, respectively,
which amounts approximate fair value. The maturity date of the line is October
31, 1999. The line of credit agreement requires monthly interest payments at
prime minus 1%, or 6.75% at December 31, 1998. The line of credit is secured by
cash deposited with the bank of $1,000,000.
10. OPERATING LEASES
The Company has operating lease agreements for its facilities and
equipment expiring in various years through 2002. Expense under these
agreements amounted to $231,660 and $135,658 in 1998 and 1997, respectively.
Minimum future rental payments under non-cancelable operating leases as of
December 31, 1998 are:
Year Ending
December 31,
1999 $ 319,536
2000 192,790
2001 167,222
2002 30,888
-------
Total minimum future rental payments $ 710,436
=======
27
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
11. INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Prepaid insurance $( 10,842) $( 9,233)
Patent amortization ( 76,856) ( 82,748)
--------- ---------
Total deferred tax liabilities ( 87,698) ( 91,981)
--------- ---------
Deferred tax assets:
Net operating loss carryforwards 1,863,403 1,332,878
Depreciation 31,219 26,760
Amortization of intangibles 108,656 55,513
Foreign tax, research and
development credits 24,559 24,559
Allowance for bad debts 32,881 20,297
Other 65,333 70,610
--------- ---------
2,126,051 1,530,617
Valuation allowance (2,038,353) (1,438,636)
--------- ---------
Total deferred tax assets 87,698 91,981
--------- ---------
Net deferred tax assets $ - $ -
=========== ===========
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:
December 31,
------------
1998 1997
---- ----
Current:
Federal $ 19,000 $ 40,000
State 2,218 4,250
------ ------
Total current $ 21,218 $ 44,250
====== ======
Deferred:
Federal $ - $ -
State - -
------- --------
Total deferred $ - $ -
======= ========
28
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
11. INCOME TAXES (CONTINUED)
The reconciliation of income tax attributable to continuing
operations computed at the U.S. federal statutory tax rates to income tax
expense (benefit) is:
December 31,
------------
1998 1997
---- ----
Tax benefit at U.S. statutory rates $(610,236) $(767,942)
State income taxes, net of
federal benefit ( 63,327) (146,580)
Increase in valuation allowance 599,717 949,260
Nondeductible expenses 14,950 11,686
Tax on unconsolidated subsidiary
(pre acquisition) 21,218 44,250
Effect of graduated rates 11,750 11,750
Other 47,146 ( 57,174)
------- -------
$ 21,218 $ 44,250
======= =======
</TABLE>
At December 31, 1998, the Company has net operating loss
carryforwards of approximately $4,780,000 for federal tax purposes that begin to
expire in years 2011 through 2018. For state tax purposes, the Company has net
operating loss carryforwards of $3,750,000 that expire in years 2003 through
2008. During 1998 the Company had a change in control as defined by the Internal
Revenue Code Section 382. Consequently, certain limitations may apply to limit
the timing and amount of such net operating loss carryforwards.
12. SHAREHOLDERS' EQUITY
FIRST CONVERTIBLE SECURITIES OFFERING
On November 19, 1997, the Company successfully closed a private
placement of Convertible Securities ("Class A Securities") in which an aggregate
of $1.8 million was raised (net proceeds were $1,571,211 after related costs).
Terms of the Class A Securities required that upon approval by the Company's
shareholders of a new class of preferred stock, the Class A Securities
automatically convert into Class A Units at the rate of $0.80 per Unit. Each
Class A Unit consists of one share of preferred stock convertible into one share
of common stock ("Class A Preferred") and one warrant to purchase one share of
common stock exercisable at $0.90 per share ("Class A Warrants"). As the Class A
Securities were not payable in cash, the unconverted Class A Securities at
December 31, 1997 were classified as preferred stock. Class A Warrants issued in
connection with this offering totaled 2,250,000.
CONVERSION TO COMMON STOCK
On November 24, 1997, investors owning $400,000 of Class A Securities
converted their Class A Securities directly into 500,000 shares of common stock
and 500,000 Class A Warrants pursuant to the terms of the instruments governing
the Class A Securities.
SECOND CONVERTIBLE SECURITIES OFFERING
Further, on July 14, 1998, the Company successfully closed a private
placement of convertible securities ("Class B Securities") in which an aggregate
of $4.0 million was raised (net proceeds were $3,955,000 after related costs).
Terms of the Class B Securities required that upon approval by the Company's
shareholders of at least 3,333,400 additional shares of preferred stock, the
Class B Securities automatically convert into Class B Units at the rate of $1.20
per Unit. Each Class B Unit consists of one share of preferred stock convertible
into one share of common stock ("Class B Preferred") and one warrant to purchase
one share of common stock exercisable at $1.35 per share ("Class B Warrants").
29
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
12. SHAREHOLDERS' EQUITY (CONTINUED)
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 preferred stock.
The Company's directors then designated all 1,750,000 shares of preferred stock
as Series A Convertible Preferred Stock ("Class A Preferred") with the above and
below described rights and preferences. Upon authorization of the Class A
Preferred, the $1,400,000 of outstanding Class A Securities were automatically
converted into 1,750,000 Class A Units (effective as of December 31, 1997). The
Class A Preferred bears no dividend and there are no conversion price reset or
anti-dilution provisions. It has a liquidation preference of $0.80 per share, or
$1,400,000, at December 31, 1997.
The Company's shareholders, at a special meeting of shareholders held
on September 9, 1998, authorized creation of an additional 10,000,000 shares of
preferred stock. The Company's directors then designated 3,333,400 shares of the
10,000,000 shares of newly authorized preferred stock as Series B Convertible
Preferred Stock ("Class B Preferred") with the above and below designated rights
and preferences. Upon authorization of the Class B Preferred, the $4,000,000 of
the outstanding Class B Securities were automatically converted into 3,333,400
Class B Units. The Class B Preferred bears no dividend and there are no
conversion price reset or anti-dilution provisions. It has a liquidation
preference of $1.20 per share, or $4,000,000, at December 31, 1998.
During 1998, 12,500 shares of Class A Preferred were converted into
12,500 shares of common stock.
STOCK PURCHASE WARRANTS
At December 31, 1998, the Company had 5,723,400 warrants outstanding
to purchase the Company's common stock, all of which are currently exercisable
at prices ranging from $.90 to $6.25 and expiring through 2004.
30
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
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 1,500,000 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
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,
options to purchase 380,273 and 856,000 shares of common stock were granted to
officers and directors in 1998 and 1997 respectively, 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 1998 and 1997: risk-free interest rate of 6.0% and 6.25%,
respectively; dividend yield of 0%; a volatility factor of the expected market
price of the Company's common stock of 0.885 and 0.830, 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.
31
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
13. STOCK OPTIONS (CONTINUED)
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:
<TABLE>
<CAPTION>
1998 1997
-------- ------
<S> <C> <C>
Pro forma net loss $(2,369,376) $(2,715,882)
Pro forma loss per common share ( .38) ( .43)
</TABLE>
A summary of the Company's stock option activity and related
information for the years ended December 31, follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding - beginning of year 1,338,055 $ 1.44 587,180 $ 1.91
Granted 760,773 1.12 906,000 1.12
Exercised - - - -
Forfeited ( - ) - ( 155,125) 2.46
--------- ------ --------- ----
Outstanding - end of year 2,098,828 $ 1.32 1,338,055 $ 1.44
========= ==== ========= ====
Exercisable at end of year 1,770,328 841,888
========= =========
</TABLE>
Exercise prices for options outstanding under the stock option plan,
non-statutory option agreements and employment agreements at December 31, 1998
ranged from $.36 to $3.60. The weighted average fair value of options issued was
$.87 in 1998.
32
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
14. 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 $3,600 and $43,200 for the years ended December 1998 and
1997.
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 1998 and 1997, such compensation was
$99,000.
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 amounted to
$175,000 and $85,000 in 1998 and 1997 respectively.
15. 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 1998
and 1997 totaled $20,000 and $134,031, respectively inclusive of principal and
interest.
16. MEDICAID REBATES
During 1998 the Company negotiated and received $475,000 related to
Medicaid rebate adjustments. Such adjustments are reflected in the accompanying
statemtent of operations.
33
<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
<TABLE>
<CAPTION>
The directors and executive officers of the Company are:
NAME AGE POSITION HELD WITH THE COMPANY
<S> <C>
Edward J. Quilty (2)(3)................................. 48 Chairman of the Board
Richard S. Mink ........................................ 46 Vice President and Chief Operating Officer
Charles F. Caudell, III ................................ 46 Executive Vice President for Field Operations
Stephen T. Wills, CPA .................................. 42 Vice President and Chief Financial Officer
John T. Borthwick ...................................... 45 Director of Business Development and Director
Laurence F. Lane (1)(3)................................. 53 Director
Srini Conjeevaram (1)(2)................................ Director
Timothy J. Patrick (2)(3)............................... 40 Director
- - ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominating Committee.
</TABLE>
Information Relative to Directors and Executive Officers
EDWARD J. QUILTY has served as Chairman of the Board since May, 1996
and as 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 which was 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 degree from Southwest Missouri State University,
Springfield, Missouri in 1972 and a Master of Business Administration degree
from Ohio University, Athens, Ohio in 1987.
RICHARD S. MINK has served as Vice President and Chief Operating
Officer of the Company since November, 1997 having previously serves as its 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 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 the Company as Executive Vice
President for Field Operations since November, 1997 having previously served 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. 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. 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 Bachelor of Arts and Master of Arts
degrees 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.
SRINI CONJEEVARAM has served as director of the Company since May,
1998. Mr. Conjeevaram has been the General Partner and Chief Financial Officer
of Galen Associates, a healthcare venture capital firm, since January, 1991.
Prior to his affiliation with Galen Associates, he was an Associate in Corporate
Finance at Smith Barney from July, 1989 to December, 1990 and a Senior Project
Engineer for General Motors Corporation from April, 1982 to July, 1987. Mr.
Conjeevaram serves as a director of Halsey Drug Company, Inc., a publicly traded
company. He earned a Bachelor of Science degree in Mechanical Engineering from
Madras University, Madras, India, a Master of Science degree in Mechanical
Engineering from Stanford University, Stanford, California and a Master of
Business Administration in Finance from Indiana University, Bloomington,
Indiana.
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.
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 10. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
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 1996, 1997 and 1998:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) COMPENSATION
<S> <C> <C> <C> <C>
Edward J. Quilty 1998 $150,000 $25,000 380,273(1) --
Chairman 1997 $149,986 -- 300,000(2) --
1996 $ 59,615 -- 150,000 --
Richard S. Mink 1998 $157,875 $ 6,000 -- --
Vice President and 1997 $100,961 $25,000(3) 200,000 --
Chief Operating Officer
Charles F. Caudell, III 1998 $157,875 $ 6,000 -- --
Executive Vice President for 1997 $100,961 -- 200,000 --
Field Operations
Stephen T. Wills, CPA, MST 1998 $100,000 (4) -- -- --
Vice President and 1997 $ 85,000 (5) -- 75,000 --
Chief Financial Officer
John T. Borthwick (6) 1998 $180,000 -- -- $ 9,962 (7)
Manager - Manufacturing Representatives 1997 $180,000 -- 50,000 $ 9,962 (7)
1996 $180,000 -- -- $10,861 (7)(8)
</TABLE>
(1) Options issued pursuant to the anti-dilution provisions of Mr.
Quilty's employment agreement, See Option Grants Table below.
(2) Includes 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) Does not include payments of $175,000 made to an affiliate of Mr.
Wills, Golomb, Wills & Company, PC. See Certain Transactions below.
(5) Represents compensation earned during the period July through
December, 1997.
(6) John T. Borthwick resigned as Chief Executive Officer and President
in May, 1997 and November, 1997, respectively. Mr. Borthwick is no
longer an executive officer.
(7) The Company enrolled John T. Borthwick in a split-dollar life
insurance program on July 1, 1993. The monthly premiums are $830.18
for $500,000 coverage.
(8) Matching contributions made pursuant to the Company's 401(k) plan.
Option Grants Table
The following table sets forth information regarding grants of stock
options to the following named executive officer made for the year ended
December 31, 1998:
<TABLE>
<CAPTION>
PERCENT OF TOTAL
OPTIONS OPTIONS GRANTED TO EXERCISE
NAME GRANTED (#) EMPLOYEES IN 1998 PRICE ($/SHARE) EXPIRATION DATE
---- ----------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Edward J. Quilty 380,273 (1) 50.0% $1.185 May 22, 2007
</TABLE>
- - -------------------
(1) Options issued pursuant to the anti-dilution provisions of Mr.
Quilty's employment agreement. See Employment Arrangements below.
Aggregate Year End Option Value Table
The following table sets forth information regarding the aggregate
number and value of options to purchase Common Stock held by the named executive
officers as of December 31, 1998. No options have been exercised:
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1998 (#) AT DECEMBER 31, 1998 ($)(1)
---------------------------------- --------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
NAME
--------------------------------------
<S> <C> <C> <C> <C>
Edward J. Quilty ......................... 650,273 30,000 0 0
--------------------------------------
Richard S. Mink .......................... 132,500 67,500 0 0
--------------------------------------
Charles F. Caudell, III .................. 132,500 67,000 0 0
--------------------------------------
Stephen T. Wills, CPA..................... 66,665 8,335 0 0
--------------------------------------
John T. Borthwick ........................ 100,000 50,000 0 0
- - -------------------
</TABLE>
(1) Determined based on the fair market value for the Company's Common
Stock at December 31, 1998 of $0.75 per share.
COMPENSATION OF DIRECTORS
Outside directors are entitled to an annual retainer of $12,000. Each
outside director may elect, with respect to any calendar year, to receive his or
her retainer in options to purchase Common Stock of the Company. Upon such
election, each electing director will receive options to purchase that number of
shares of Common Stock of the Company determined by dividing $24,000 by the
Common Stock's fair market value. For a given calendar year, the Common Stock's
fair market value is the lowest average between the Common Stock's bid and asked
prices quoted on the Nasdaq SmallCap Market during the period from December 1
through December 15 of the immediately preceding calendar year.
All directors are reimbursed for expenses incurred in connection with
each board and committee meeting attended. Inside directors receive no
compensation for their services as directors.
The following table sets forth information with respect to the
non-qualified stock options owned by directors of the Company in 1998:
<TABLE>
<CAPTION>
OPTIONS GRANTED EXERCISABLE OPTIONS AT EXERCISE PRICE
NAME (#) DECEMBER 31, 1998 (#) ($/SHARE) EXPIRATION DATE
---- --- --------------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Laurence F. Lane 10,000(1) 8,000 $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 on April 8, 1997.
(2) These options were granted on April 8, 1997.
EMPLOYMENT ARRANGEMENTS
Edward J. Quilty
The Company entered into an employment agreement on August 1, 1996,
and amended on May 2, 1997, (the "Agreement") with Edward J. Quilty, its
Chairman of the Board. The term of the Agreement begins on May 21, 1996 and
expires on May 21, 1999. 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, all of
which are currently exercisable. 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 and Mr. Quilty are currently engaged in negotiations with
a view to executing a new employment agreement providing for Mr. Quilty's
continued service as Chairman and his assumption of the roles of President and
Chief Executive Officer.
Richard S. Mink
The Company entered into a two-year employment agreement on April 14,
1997, (the "Agreement") with Richard S. Mink, its Vice President and Chief
Operating Officer. 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 and Mr. Mink are currently engaged in negotiations with a
view to executing a new employment agreement providing for Mr. Mink's continued
service.
Charles F. Caudell, III
The Company entered into a two-year employment agreement on April 21,
1997, (the "Agreement") with Charles F. Caudell, III, its Executive Vice
President for Field Operations. 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 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 and Mr. Caudell are currently engaged in negotiations
with a view to executing a new employment agreement providing for Mr. Mink's
continued service.
Stephen T. Wills, CPA, MST
The Company entered into an employment agreement on February 1, 1999
(the "Agreement") with Stephen T. Wills, CPA, MST, its Vice President and Chief
Financial Officer. The Agreement carries an indefinite term which can be
canceled by either party upon thirty days notice. The Agreement provides that
Mr. Wills receive the following: (1) base salary of $102,000 per year, together
with incentive compensation as may be awarded upon the recommendation of the
Chairman and approved by the Board of Directors; and (2) 100,000 non-qualified
stock options, exercisable at $1.20, which options became exercisable in 25,000
increments commencing on February 1, 1999 and on each anniversary thereof
through February 1, 2002. These options become 100% exercisable upon a change in
ownership of in excess of 75% of the Company or the sale by the Company of
substantially all of its assets. Upon termination of the Agreement by the
Company without cause, the Company will pay Mr. Wills a severance payment equal
to his salary for one year and will extend the period to exercise the options
granted under the Agreement to the earlier of five years or December 14, 2008.
John T. Borthwick
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 80,000 were vested as of January 1, 1999 and the remaining
20,000 vest on January 1, 2000.
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%,
the Agreement provides that Mr. Borthwick will then 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.
STOCK OPTION PLAN
The Company adopted the Stock Option Plan, (the "Plan") in July 1991,
and amended the Plan in January, 1994, November 21, 1995 and September 25, 1998.
The number of shares of common stock reserved for issuance pursuant to the Plan
is 1,500,000 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 provisions of the
Plan, the Compensation Committee determines who is eligible to receive stock
options, together with the nature, amount, timing, exercise price, vesting
schedule 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. Stock options granted under the Plan which have lapsed
or terminated revert to the status of "unissued" and become available for
reissuance.
At December 31, 1998, options to purchase 381,000 shares of the
Company's common stock at prices ranging from $0.80 to $1.125 per share had been
granted under the Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
current beneficial ownership of shares of the Company's Common Stock on March
26, 1999 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:
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED(13) BENEFICIALLY OWNED(13)
---------------------------------------- ---------------------- ----------------------
<S> <C> <C>
Srini Conjeevaram (2).............................................. 5,166,670 45.31%
Hambrecht & Quist California (3)................................... 2,241,668 26.44%
Redwood Asset Management (4)....................................... 1,198,334 16.37%
Edward J. Quilty (5)............................................... 1,144,107 15.96%
Mary G. Clark, RN ................................................. 775,474 12.44%
Aries Funds (6).................................................... 750,000 10.70%
John T. Borthwick (7).............................................. 369,414 5.82%
Charles F. Caudell, III (8) ....................................... 312,668 4.82%
Richard S. Mink (9) ............................................... 284,168 4.38%
Stephen T. Wills, CPA (10)......................................... 279,168 4.31%
Laurence F. Lane (11).............................................. 26,000 (*)
Timothy J. Patrick ................................................ 0 (*)
All directors and officers as a group (8 persons) (12) ............ 7,582,193 72.92%
..........
</TABLE>
(1) Except as otherwise noted, the address of each of the persons listed
is: 214 Carnegie Center, Suite 100, Princeton, New Jersey 08540.
(2) Srini Conjeevaram is a general partner of the Galen III Partnerships. 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: 625,000 shares of Class A Convertible
Preferred Stock ("Class A Preferred"); 375,000 warrants to purchase
Common Stock exercisable at $0.90 per share ("Class A Warrants");
2,083,335 shares of Class B Convertible Preferred Stock ("Class B
Preferred"); and 2,083,335 warrants to purchase Common Stock exercisable
at $1.35 per share ("Class B Warrants").
(3) Hambrecht & Quist California can be reached at: One Bush Street, San
Francisco, California 94104. Ownership consists of: 612,500 shares of
Class A Preferred; 612,500 Class A Warrants; 508,334 shares of Class B
Preferred; and 508,334 Class B Warrants.
(4) Redwood Asset Management can be reached at: Ovre Ullorn Terrasse 32, 0358
Oslo, Norway. Ownership consists of: 115,000 shares of Common Stock;
250,000 Class A Warrants; 416,667 Class B Preferred; and 416,667 Class B
Warrants.
(5) Ownership consists of: 210,500 shares of Common Stock; 190,000 Class A
Warrants; 41,667 shares of Class B Preferred; 41,667 Class B Warrants;
exercisable options to purchase 650,273 shares of Common Stock; and
options to purchase 10,000 shares of Common Stock which will become
exercisable within 60 days of March 26, 1999.
(6) 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 Class A Preferred;
and 375,000 Class A Warrants.
(7) Ownership consists of: 259,414 shares of Common Stock; exercisable
options to purchase 100,000 shares of Common Stock; and options to
purchase 10,000 shares of Common Stock will become exercisable within 60
days of March 26, 1999.
(8) Ownership consists of: 59,750 shares of Common Stock; 31,250 Class A
Warrants; 20,834 shares of Class B Preferred; 20,834 Class B Warrants;
exercisable options to purchase 132,500 shares of Common Stock; and
options to purchase 47,500 shares of Common Stock will become exercisable
within 60 days of March 26, 1999.
(9) Ownership consists of: 31,250 shares of Common Stock; 31,250 Class A
Warrants; 20,834 shares of Class B Preferred; 20,834 Class B Warrants;
exercisable options to purchase 132,500 shares of Common Stock; and
options to purchase 47,500 shares of Common Stock will become exercisable
within 60 days of March 26, 1999.
(10) Ownership consists of 38,750 shares of Common Stock; 38,750 Class A
Warrants; 20,834 shares of Class B Preferred; 20,834 Class B Warrants;
and exercisable options to purchase 160,000 shares of Common Stock. No
additional options to purchase Common Stock will become exercisable
within 60 days of March 26, 1999.
(11) Ownership consists of: 8,000 shares of Common Stock; and exercisable
options to purchase 18,000 shares of Common Stock. No additional shares
subject to options will become exercisable within 60 days of March 26,
1999.
(12) Ownership consists of: an aggregate of 3,420,167 shares of Common Stock,
Class A Preferred and Class B Preferred; and options currently
exercisable and exercisable within 60 days of March 26, 1999 to purchase
4,162,026 shares of Common Stock.
(13) The number of shares beneficially owned and the percent beneficially
owned by each entity or individual assume the exercise of all exercisable
options (including those that would be exercisable within 60 days of
March 26, 1999) and the exercise of all warrants owned by such entity or
individual.
(*) Less than one percent
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company employs the accounting firm of Golomb, Wills & Company,
PC for various tax and financial planning services. Stephen T. Wills, CPA, MST,
Vice President and Chief Financial Officer of the Company, is a principal of
Golomb, Wills & Company, PC. Payments to Golomb, Wills & Company, PC during 1998
totaled $175,500.
The Company has a five-year consulting agreement with its founder and
former President and director, Mary G. Clark. In 1998 compensation under this
agreement was $99,000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- - ------- ----------- ----
<S> <C>
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 Amendment to the Articles of Incorporation effective October 20, 1998 --
(Previously filed as Exhibit A to the Company's Proxy Statement filed
on August 14, 1998 and incorporated herein by reference.)
3.4 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.)
10.01 Agreement and Plan of Merger dated as of July 7, 1998 by and among --
Derma Sciences, Inc., Derma Merging Corporation and Genetic
Laboratories Wound Care, Inc. (previously filed as Appendix A to the
Company's Form S-4 Registration Statement filed on July 17, 1998 and
incorporated herein by reference.)
10.02 Stock Purchase Agreement with annexes dated October 29, 1998 by and --
among Derma Sciences, Inc., the John G. Vogel, Jr. Revocable Trust
U/A dated August 23, 1995, Martha A. Crimmins, the Gordon E. Cory
Revocable Trust U/A dated August 24, 1995, John G. Vogel, Jr., Gordon
E. Cory and Sunshine Products, Inc. (Previously filed as Exhibit 2.1
to the Company's Form 8-K filed on November 13, 1998 and incorporated
by reference.)
10.03* 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 ["1997 Form 10-KSB"] and
incorporated herein by reference.).
10.04* 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.)
10.05* 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.)
10.06* 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.)
10.07* 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.)
10.08* 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.)
10.09* 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.)
10.10* 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.)
10.11* Employment Agreement, dated December 29, 1995, between the Company --
and John T. Borthwick (Previously filed as Exhibit 10.37 to the
Company's Form 10-KSB on March 29, 1996 ["1996 Form 10-KSB"] and
incorporated herein by reference.)
10.12* 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.)
10.13* 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.)
10.14* 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.)
10.15* 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.)
10.16* 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.)
10.17* Promissory Note, dated January 17, 1995, between the Company and John --
T. Borthwick (Previously filed as Exhibit 10.73 to the Company's
Form 10-KSB on March __, 1995 ["1995 Form 10-KSB"] incorporated
herein by reference.)
10.18* 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 Employment Agreement, dated May 1, 1998, between the Company and
Arthur A. Beisang
10.31 Employment Agreement, dated May 1, 1998, between the Company and
Robert A. Ersek
10.32 Employment Agreement, dated May 1, 1998, between the Company and H.
James Thompson
10.33 Stock Option Agreement dated October 29, 1998 by and between Derma --
Sciences, Inc. and John G. Vogel, Jr. (Previously filed as Exhibit
10.01 to the Company's Form 8-K filed on November 13, 1998 and
incorporated by reference.)
10.34 Stock Option Agreement dated October 29, 1998 by and between Derma --
Sciences, Inc. and Martha A. Crimmins. (Previously filed as
Exhibit 10.02 to the Company's Form 8-K filed on November 13, 1998
and incorporated by reference.)
10.35 Stock Option Agreement dated October 29, 1998 by and between Derma --
Sciences, Inc. and Gordon E. Cory. (Previously filed as Exhibit
10.03 to the Company's Form 8-K filed on November 13, 1998 and
incorporated by reference.)
10.36 Settlement Agreement dated June 8, 1998 between Registrant and ABS --
LifeSciences, Inc. (Previously filed as Exhibit 10 to the
Company's Form 8-K filed on June 10, 1998 and incorporated by
reference.)
10.37 Lease Agreement, dated December 16, 1991, betwee Genetic Laboratories
Wound Care, Inc. and KK Three Corporation.
10.38 Lease Agreement, dated January 5, 1994 by and between Sunshine
Products, Inc. and James S. Reid, Frances S. Reid and Joan R.
Milburn.
10.39 Lease Agreement, dated July 1, 1997, between the Company and Cross --
Creek Pointe(Previously filed as Exhibit __ to the Company's Form
10-KSB on March __, 1998 ["1998 Form 10-KSB"] and incorporated by
reference.)
10.40 Lease Agreement, dated September 1, 1993, between the Company and --
Mariotti Building Product (Previously filed as Exhibit 10.51 to
the Company's Registration Statement filed on Form SB-2, No.
33-52246-NY, declared effective on May 13, 1994 ["Registration
Statement"] and incorporated herein by reference.)
10.41 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.)
10.42 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.)
10.43 Generic Products Agreement, dated September 29, 1997, between the --
Company and Innovative Technologies Ltd. (Previously filed as
Exhibit 10.01 to the Company's Form 10-QSB filed on November 10, 1997
and incorporated herein by reference.)
10.44 Private Label Agreement, dated September 29, 1997, between the --
Company and Innovative Technologies Ltd. (Previously filed as
Exhibit 10.02 to the Company's Form 10-QSB filed on November 10, 1997
and incorporated herein by reference.)
10.45 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 and incorporated herein by
reference.)
10.46 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 and
incorporated herein by reference.)
10.47 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 and incorporated herein by reference.)
10.48 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.)
10.49 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.)
10.50 Manufacturers Agreement, dated August 25, 1992, between the Company
and TapeMark Company.
10.60* Stock Option Plan, dated July 18, 1991 (Previously filed as Exhibit --
10.01 to the Company's Registration Statement and incorporated
herein by reference.)
10.61* 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.)
10.62* Stock Option Plan Amendment, dated November 21, 1995 (Previously --
filed as Exhibit 10.03 to the Company's 1996 Form 10-KSB and
incorporated herein by reference.)
10.63* Stock Option Plan Amendment, dated July 14, 1998 (Previously filed as --
Appendix C to the Company's Registration Statement on Form S-4 filed
July 17, 1998 and incorporated herein by reference.)
10.64* The Company's 401(k) Plan, dated June 30, 1995 (Previously filed as --
Exhibit 10.56 to the Company's 1996 Form 10-KSB and incorporated
herein by reference.)
21 Information relative to subsidiaries. --
27 Financial Data Schedule. --
* Management contract or compensatory plan.
</TABLE>
(b) Reports on Form 8-K
A current report on Form 8-K was filed on November 13, 1998, and
amended on January 11 and February 11, 1999, relative to the Company's
acquisition of Sunshine Products, Inc.
<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 30, 1999 By: /s/Edward J. Quilty
-------------------------
Edward J. Quilty
Chairman
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 30, 1999.
Signatures: Title:
/s/ Edward J. Quilty
- - -------------------------- Chairman of the Board (Principal
Edward J. Quilty Executive Officer)
/s/ Stephen T. Wills
- - -------------------------- Vice President and Chief Financial
Stephen T. Wills Officer (Principal Financial Officer)
/s/ Srini Conjeevaram
- - -------------------------- Director
Srini Conjeevaram
/s/ John T. Borthwick
- - --------------------------- Director
John T. Borthwick
/s/ Laurence F. Lane
- - -------------------------- Director
Laurence F. Lane
/s/ Timothy J. Patrick
- - ---------------------------- Director
Timothy J. Patrick
EXECUTIVE AGREEMENT
THIS AGREEMENT IS MADE this 1st day of May, 1998 between Genetic
Laboratories Wound Care, Inc., a Minnesota Corporation (hereinafter called the
"Company") and Dr. Robert A. Ersek (Medical Director) (hereinafter called the
"Executive").
1. DUTIES:
The Company hereby employs the Executive as the Medical Director
of the Company. His powers and duties in that capacity to be such
as may be determined by the Company's Board of Directors are
described below. During the term of this Agreement, the Executive
may also serve in such other offices of the Company which he may
be elected or appointed to by the Board of Directors. Although the
Executive will spend the majority of his working time in the
employ of the Company, the company recognizes that the Executive
is simultaneously employed by other companies and that the
Executive has agreed to sell his interest in any cardiovascular
products developed in the future to Bio-Vascular, Inc., for five
percent (5%) royalties on the net sales of any such product or
invention. The Company shall pay to the Executive a base salary in
bi-weekly installments set forth in Section 3 hereof.
2. TERM:
This Agreement shall be effective from the date hereof through
April 30, 2001, and may be terminated prior to said expiration
date only upon the occurrence of one or more of the following
events:
A. By mutual written agreement of the Company and the Executive;
B. By the Executive at any time upon at least 60 days prior written
notice to the Company;
C. Immediately upon the Executive's death;
D. By the Executive upon occurrence of any of the Material Employment
Changes events as set forth in Section 9 hereof, which termination
shall require the Company to pay the Severance Payment set forth
therein; or
E. At the Company's option upon the Executive's conviction of a
felony arising out of any acts or omissions of the Executive
committed during the term of this Agreement.
<PAGE>
3. COMPENSATION:
As his base monetary compensation for his services to the Company
during the term of this Agreement in whatever capacity rendered,
the Company shall pay to the Executive in bi-weekly installments
the sum of $32,000 per year plus a bonus plan and deferred
compensation. This compensation may be increased annually on the
anniversary date of this Agreement during the term hereof at a
rate equal to the increase in the consumer price index issued by
the United States Department of Labor with July 1, 1996 acting as
the base index equal to 100 unless otherwise mutually agreed upon
by the Executive and the Company. Additional compensation based
upon the pre-tax profits of the Company may be paid annually to
the Executive as incentive pay as determined by the Board of
Directors' Compensation Committee.
4. VACATION:
The Executive shall be entitled to six (6) weeks of vacation
during each year. Said vacation is to be taken at the Executive's
discretion.
5. BENEFITS:
A. Fully paid family coverage (subject to applicable deductible
amounts and limitations) under the Company's current group medical
and dental plans or such comparable coverage as may be selected in
the future;
B. Term life insurance in an amount at least equal to and comparable
to the Executive's life insurance policy presently in force with
policy ownership and proceeds payable as the Executive shall
designate as required by state and federal law;
C. Disability insurance commensurate with such Executive insurance
presently in force, with policy ownership payable as designated by
the Executive;
6. ARBITRATION:
Any controversy or claim arising out of, or related to this
Agreement, or the breach thereof, shall be settled by arbitration
in accordance with the rules of the American Arbitration
Association and judgment upon the award rendered may be entered in
any court having jurisdiction thereof. This agreement shall be
governed by and construed in accordance with the laws of the State
of Minnesota.
7. NOTICE:
Any notice required to be given pursuant to the provisions of the
Agreement shall be in writing and delivered personally or by
registered or certified mail.
<PAGE>
8. COVENANT NOT TO COMPETE:
The Executive agrees that during his employment by the Company and
for a period of one year after termination of the Employment
Period, he shall not, without prior written consent of the
Company, directly or indirectly, and whether as principal or as
agent, officer, director, employee, consultant, or otherwise,
alone or in association with any other person, carry on, be
engaged, concerned, or take part in, render services to, or own,
share in the earnings of or invest in the stocks, bonds or other
securities of any company engaged in the Employer's current
business or reasonably contemplated business activities provided,
however, that the Executive may invest in stocks, bonds, or other
securities of any Similar Business (but without otherwise
participating in such Similar Business) if: (i) such stocks,
bonds, or other securities are publicly traded; (ii) his
investment does not exceed, in the case of any class of the
capital stock of any one issuer, one percent (1%) of the issued
and outstanding shares, or in the case of bonds or other
securities, one percent (1%) of the aggregate principal amount
thereof issued and outstanding; and (iii) such investment would
not prevent, directly or indirectly, the transaction of business
by the Company.
9. MATERIAL EMPLOYMENT CHANGES:
The Executive shall be entitled to terminate his employment upon
at least five days prior written notice to the Company upon the
occurrence of any of the following events: (i) a change in
majority ownership or control of the Company which occurs as the
result of a merger; a sale of all or substantially all of the
Company's assets; or the acquisition of a majority of the
Company's outstanding stock by a single party or a group acting in
concert; (ii) any attempted termination of the Executive's
employment by the Company prior to expiration or not in accordance
with any termination event as set forth in Section 2; or (iii) any
material diminution of, or any adverse change occurs in the terms
or conditions of the Executive's employment duties,
responsibilities or authority, except for any isolated,
unsubstantial, inadvertent matter not occurring in bad faith,
which is remedied by the Company within 30 days of receipt of
notice by the Executive. In the event of such termination by the
Executive, the Company shall immediately pay the Executive
(without discount or offset)a Severance Payment equal to the gross
base compensation otherwise payable to the Executive over the
remaining term of the Agreement under Section 2. The Executive's
rights under this Section 9 shall not limit any other rights he
has in the event of a breach of any provision of this Agreement by
the Company.
10. RESEARCH AND INVENTIONS:
This Agreement recognizes that the Executive is simultaneously
employed by more than one company. Therefore, the Company
recognizes that the Executive is, and intends to remain, an
Executive in other public and private companies, and has entered
into other employment agreements as such. The Executive has a
history of successful medical inventions and products and the
parties agree that the Executive's base and incentive pay is
directly related to his Executive duties and not for research
<PAGE>
leading to the invention of new products or patents. Further, the
Executive and the Company recognize the Executive's right to sell
and assign such rights to corporate entities including the Company
and companies other than the Company.
11. ASSIGNMENT:
This Agreement shall inure to the benefit of, and shall be binding
upon the Company, its successors, or assigns. In witness whereof
the parties have hereunto executed this Agreement.
12. EXPENSES:
The Company will reimburse the Executive for reasonable business
expenses incurred on behalf of the Company.
IN WITNESS WHEREOF, THE parties have hereunto executed this Agreement.
ATTEST: GENETIC LABORATORIES WOUND
CARE, INC.
/s/ Robert A. Ersek, M.D. /s/ John H. Olson
- - - ------------------------------------ -------------------------------------
Robert A. Ersek, M.D. John H. Olson
Medical Director Director Compensation Committee
Member
5/1/98 5/1/98
- - - ------------------------------------ -------------------------------------
Date Date
Notary
/s/ Rebecca J. Bierbalm 5/1/98
- - - ------------------------------------
EXECUTIVE AGREEMENT
THIS AGREEMENT IS MADE this 1st day of May, 1998 between Genetic
Laboratories Wound Care, Inc., a Minnesota Corporation (hereinafter called the
"Company") and Dr. Robert A. Ersek (Medical Director) (hereinafter called the
"Executive").
1. DUTIES:
The Company hereby employs the Executive as the Medical Director
of the Company. His powers and duties in that capacity to be such
as may be determined by the Company's Board of Directors are
described below. During the term of this Agreement, the Executive
may also serve in such other offices of the Company which he may
be elected or appointed to by the Board of Directors. Although the
Executive will spend the majority of his working time in the
employ of the Company, the company recognizes that the Executive
is simultaneously employed by other companies and that the
Executive has agreed to sell his interest in any cardiovascular
products developed in the future to Bio-Vascular, Inc., for five
percent (5%) royalties on the net sales of any such product or
invention. The Company shall pay to the Executive a base salary in
bi-weekly installments set forth in Section 3 hereof.
2. TERM:
This Agreement shall be effective from the date hereof through
April 30, 2001, and may be terminated prior to said expiration
date only upon the occurrence of one or more of the following
events:
A. By mutual written agreement of the Company and the Executive;
B. By the Executive at any time upon at least 60 days prior written
notice to the Company;
C. Immediately upon the Executive's death;
D. By the Executive upon occurrence of any of the Material Employment
Changes events as set forth in Section 9 hereof, which termination
shall require the Company to pay the Severance Payment set forth
therein; or
E. At the Company's option upon the Executive's conviction of a
felony arising out of any acts or omissions of the Executive
committed during the term of this Agreement.
<PAGE>
3. COMPENSATION:
As his base monetary compensation for his services to the Company
during the term of this Agreement in whatever capacity rendered,
the Company shall pay to the Executive in bi-weekly installments
the sum of $32,000 per year plus a bonus plan and deferred
compensation. This compensation may be increased annually on the
anniversary date of this Agreement during the term hereof at a
rate equal to the increase in the consumer price index issued by
the United States Department of Labor with July 1, 1996 acting as
the base index equal to 100 unless otherwise mutually agreed upon
by the Executive and the Company. Additional compensation based
upon the pre-tax profits of the Company may be paid annually to
the Executive as incentive pay as determined by the Board of
Directors' Compensation Committee.
4. VACATION:
The Executive shall be entitled to six (6) weeks of vacation
during each year. Said vacation is to be taken at the Executive's
discretion.
5. BENEFITS:
A. Fully paid family coverage (subject to applicable deductible
amounts and limitations) under the Company's current group medical
and dental plans or such comparable coverage as may be selected in
the future;
B. Term life insurance in an amount at least equal to and comparable
to the Executive's life insurance policy presently in force with
policy ownership and proceeds payable as the Executive shall
designate as required by state and federal law;
C. Disability insurance commensurate with such Executive insurance
presently in force, with policy ownership payable as designated by
the Executive;
6. ARBITRATION:
Any controversy or claim arising out of, or related to this
Agreement, or the breach thereof, shall be settled by arbitration
in accordance with the rules of the American Arbitration
Association and judgment upon the award rendered may be entered in
any court having jurisdiction thereof. This agreement shall be
governed by and construed in accordance with the laws of the State
of Minnesota.
7. NOTICE:
Any notice required to be given pursuant to the provisions of the
Agreement shall be in writing and delivered personally or by
registered or certified mail.
<PAGE>
8. COVENANT NOT TO COMPETE:
The Executive agrees that during his employment by the Company and
for a period of one year after termination of the Employment
Period, he shall not, without prior written consent of the
Company, directly or indirectly, and whether as principal or as
agent, officer, director, employee, consultant, or otherwise,
alone or in association with any other person, carry on, be
engaged, concerned, or take part in, render services to, or own,
share in the earnings of or invest in the stocks, bonds or other
securities of any company engaged in the Employer's current
business or reasonably contemplated business activities provided,
however, that the Executive may invest in stocks, bonds, or other
securities of any Similar Business (but without otherwise
participating in such Similar Business) if: (i) such stocks,
bonds, or other securities are publicly traded; (ii) his
investment does not exceed, in the case of any class of the
capital stock of any one issuer, one percent (1%) of the issued
and outstanding shares, or in the case of bonds or other
securities, one percent (1%) of the aggregate principal amount
thereof issued and outstanding; and (iii) such investment would
not prevent, directly or indirectly, the transaction of business
by the Company.
9. MATERIAL EMPLOYMENT CHANGES:
The Executive shall be entitled to terminate his employment upon
at least five days prior written notice to the Company upon the
occurrence of any of the following events: (i) a change in
majority ownership or control of the Company which occurs as the
result of a merger; a sale of all or substantially all of the
Company's assets; or the acquisition of a majority of the
Company's outstanding stock by a single party or a group acting in
concert; (ii) any attempted termination of the Executive's
employment by the Company prior to expiration or not in accordance
with any termination event as set forth in Section 2; or (iii) any
material diminution of, or any adverse change occurs in the terms
or conditions of the Executive's employment duties,
responsibilities or authority, except for any isolated,
unsubstantial, inadvertent matter not occurring in bad faith,
which is remedied by the Company within 30 days of receipt of
notice by the Executive. In the event of such termination by the
Executive, the Company shall immediately pay the Executive
(without discount or offset)a Severance Payment equal to the gross
base compensation otherwise payable to the Executive over the
remaining term of the Agreement under Section 2. The Executive's
rights under this Section 9 shall not limit any other rights he
has in the event of a breach of any provision of this Agreement by
the Company.
10. RESEARCH AND INVENTIONS:
This Agreement recognizes that the Executive is simultaneously
employed by more than one company. Therefore, the Company
recognizes that the Executive is, and intends to remain, an
Executive in other public and private companies, and has entered
into other employment agreements as such. The Executive has a
history of successful medical inventions and products and the
parties agree that the Executive's base and incentive pay is
directly related to his Executive duties and not for research
<PAGE>
leading to the invention of new products or patents. Further, the
Executive and the Company recognize the Executive's right to sell
and assign such rights to corporate entities including the Company
and companies other than the Company.
11. ASSIGNMENT:
This Agreement shall inure to the benefit of, and shall be binding
upon the Company, its successors, or assigns. In witness whereof
the parties have hereunto executed this Agreement.
12. EXPENSES:
The Company will reimburse the Executive for reasonable business
expenses incurred on behalf of the Company.
IN WITNESS WHEREOF, THE parties have hereunto executed this Agreement.
ATTEST: GENETIC LABORATORIES WOUND
CARE, INC.
/s/ Robert A. Ersek, M.D. /s/ John H. Olson
- - - ------------------------------------ -------------------------------------
Robert A. Ersek, M.D. John H. Olson
Medical Director Director Compensation Committee
Member
5/1/98 5/1/98
- - - ------------------------------------ -------------------------------------
Date Date
Notary
/s/ Rebecca J. Bierbalm 5/1/98
- - - ------------------------------------
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT IS MADE this 1st day of May, 1998 by and between Genetic
Laboratories Wound Care, Inc., a Minnesota Corporation (hereinafter called the
"Company") and H. James Thompson (President) (hereinafter called the
"Executive").
1. DUTIES:
The Company hereby employs the Executive as President of the
Company, his powers and duties in that capacity to be such as may
be determined by the Board of Directors. During the term of this
Agreement, the Executive may also serve in such other offices of
the Company to which he may be elected or appointed by the Board
of Directors. The duties of the Executive shall include: the
implementation of corporate polices and implementation of Company
contracts in the areas of manufacturing, sales, and marketing in
compliance with appropriate governmental regulatory agencies
having jurisdiction over the Company's activities worldwide.
2. COMPENSATION:
As his base monetary compensation for his executive services to
the Company during the term of this Agreement in whatever capacity
rendered, the Company shall pay to the Executive in bi-weekly
installments the sum of $99,600 per year. This compensation may be
increased annually on the anniversary date of this Agreement,
during the term hereof, at a rate equal to the increase in the
consumer price index issued by the United States Department of
Labor with July 1, 1996 acting as the base index equal to 100
unless otherwise mutually agreed upon by the Executive and the
Company. Additional compensation based upon the pre-tax profits of
the Company may be paid annually to the Executive as incentive pay
as determined by the Board of Directors' Compensation Committee.
3. TERM:
The term of this Agreement shall extend through April 30, 2001
except as hereinafter provided.
A. With cause, the Company, on three days written notice to the
Executive, may terminate this Agreement and, thereupon, the
Company shall be obligated to pay the Executive his regular
compensation up to the 30th day following the date of termination.
The term "with cause" shall be defined only as the Executive's
fraudulent activity or the commission of a felony or other offense
involving moral terpitude or immoral conduct by the Executive on
behalf of, or in connection with, Company activities.
<PAGE>
B. If the Executive is absent from his employment by reason of
illness or any other incapacity for more than six consecutive
weeks, the Company shall thereafter pay him fifty percent (50%) of
his regular base compensation until the Executive is able to
resume his duties. If his absence continues for six consecutive
months, this Agreement shall automatically terminate without
notice, but the Company shall be obligated to pay the Executive
fifty percent (50%) of his regular compensation through the date
of such termination.
C. The Executive may terminate this Agreement at anytime upon sixty
(60) days notice to the Company, and the Company shall be
obligated to pay him his regular compensation up to the date of
termination.
4. BENEFITS:
A. Fully paid family coverage (subject to applicable deductible
amounts and limitations) under the Company's current group medical
and dental plans or such comparable coverage as may be selected in
the future;
B. Term life insurance in an amount at least equal to and comparable
to the Executive's life insurance policy presently in force with
policy ownership and proceeds payable as the Executive shall
designate;
C. Disability insurance commensurate with such Executive insurance
presently in force, with policy ownership payable as designated by
the Executive;
D. A monthly automobile allowance to be mutually agreed upon by the
parties.
E. Annual funding of a deferred compensation plan mutually agreed
upon by the Executive and the Company.
5. VACATIONS:
The Executive shall be entitled to four weeks vacation during each
year. Said vacation is to be taken at the Executive's discretion.
6. EXPENSES:
The Company shall reimburse the Executive for all authorized items
of traveling, entertainment, and miscellaneous expenses incurred
while away on business from the principal office of the Company or
the office to which he is assigned, but reimbursement shall be
made only for those items on a signed itemized list of such
expenditures.
7. COVENANT NOT TO DISCLOSE:
The Executive shall not at any time during or after the
termination of the employment period knowingly reveal, divulge or
make known to any
<PAGE>
person (other than the Company), or use for his own account any
customer lists, trade secrets or formula, or secret or
confidential information used by the Company prior to or during
the term of his employment by the Company and made known (whether
with the knowledge and permission of the Company, whether
developed, devised or otherwise created in whole or in part by the
efforts of the Executive and whether a matter of public knowledge
unless as a result of authorized disclosure) to the Executive by
reason of his employment by the Company. The Executive shall
retain all such knowledge and information which he may acquire or
develop during this employment by the Company concerning such
lists, secrets, formula and information in trust for the sole
benefit of the Company.
8. COVENANT TO REPORT:
The Executive shall promptly communicate and disclose to the
Company all information concerning the business or affairs of the
Company obtained by him in the course of his employment by the
Company. All written materials, records and documents made by the
Executive or coming into possession during the employment period
concerning the business or affairs of the Company shall be the
sole property of the Company and, upon termination of the
employment period, or upon the request of the Company during the
employment period, the Executive shall promptly deliver the same
to the Company. The Executive agrees to render to the Company such
reports of the activities undertaken by the Executive or conducted
under the Executive's direction pursuant hereto during the
employment period as the Company may reasonably request.
9. LEGALITY:
The parties covenant and agree that the provisions contained
herein are reasonable and are not known or believed to be in
violation of any federal or state law or regulation. In the event
a court of competent jurisdiction finds any provision contained
herein to be illegal or unenforceable, such court may modify such
provision to make it valid and enforceable. Such modification
shall not affect the remainder of this Agreement which shall
continue at all times to be valid and enforceable.
10. ARBITRATION:
Any controversy or claim arising out of, or relating to, this
Agreement of the breach thereof, shall be settled by arbitration
in accordance with the rules then obtaining of the American
Arbitration Association, and judgment upon the award rendered may
be entered in any court having jurisdiction thereof. The Agreement
shall be governed by and construed in accordance with the laws of
the state of Minnesota.
<PAGE>
11. NOTICE:
Any notice required to be given pursuant to the provisions of the
Agreement shall be in writing and sent by registered mail to the
parties at the following addresses:
Company: Genetic Laboratories Wound Care, Inc.
2726 Patton Road
St. Paul, Minnesota 55113
Executive: H. James Thompson
13625 Henna Court
Apple Valley, Minnesota 55124
12. ASSIGNMENT:
This Agreement shall inure to the benefit of, and shall be binding
upon, the Company, its successors, or assigns.
IN WITNESS WHEREOF, THE parties have hereunto executed this Agreement.
ATTEST:
/s/ Jim Thompson /s/ Arthur A. Beisang
- - - ------------------------------------ -------------------------------------
H. James Thompson Arthur A. Beisang
President Chief Executive Officer
5/1/98 5/1/98
- - - ------------------------------------ -------------------------------------
Date Date
/s/ John H. Olson
---------------------------------------
John H. Olson
Director Compensation Committee
Member
5/1/98
---------------------------------------
Date
Notary
/s/ Rebecca J. Bierbalm 5/1/98
- - - -----------------------------------
LEASE AGREEMENT
This Lease Agreement, made this 16th day of December 1991, between KK
Three Corporation, a Minnesota Corporation, (hereinafter called "Landlord", and
Genetic Laboratories, Wound Care, Inc., a Minnesota Corporation, (hereinafter
called "Tenant",
Witnesseth, That:
1. DEMISED PREMISES. Landlord, subject to the terms and conditions
hereof, hereby leases to Tenant the premises (hereinafter referred to as the
"Demised Premises") shown outlined in red on the floor plan attached hereto as
Exhibit A and comprising approximately 3,352 square feet of area of office space
and 3,471 square feet of warehouse space for a total of 6,983 square feet in the
building known as Roseville Business Commons located at 2726 Patton Road,
Roseville, Minnesota in Roseville, Minnesota (hereinafter referred to as the
"Building"), to be used by Tenant for general office showroom and/or warehouse
uses and purposes and for no other use or purposes. The Building, the parcel of
land on which it is built, and all improvements thereon are hereinafter referred
to as the "Project."
2. TERM. Tenant takes the Demised Premises from Landlord, upon the
terms and conditions herein contained, to have and to hold the same for the term
("Lease Term") of Five (5) years and (---) months commencing on the 1st day of
February 1992, and ending on the 30th day of March, 1997, unless sooner
terminated as herein provided.
a. If the Landlord, for any reason whatsoever, cannot deliver
possession of the said Premises to the Tenant at the commencement of the Lease
Term hereof, this Lease shall not be void or voidable, not shall Landlord be
liable to Tenant for any loss or damage resulting therefrom, nor shall the
expiration date of the above Lease Term be in any way extended, but in that
event, all rent shall be abated during the period between the commencement of
said Lease Term and the time when Landlord delivers possession.
b. In the event that Landlord shall permit Tenant to occupy the
Demised Premises prior to the commencement date of the Lease Term, such
occupancy shall be subject to all the provisions of this Lease. Said early
possession shall not advance the termination date hereinabove provided.
3. BASE RENT. Tenant shall pay to Landlord during the Lease Term a
monthly base rent of Two Thousand Nine Hundred Eight-five and 06/100 Dollars
($2,985.00), payable on or before the first day of each month in advance at the
office of Landlord at 2660 Cleveland Avenue North, Roseville, Minnesota 55113,
or at such other place as may from time to time be designated by Landlord.
4. OPERATING COSTS. Tenant shall, for the entire Lease Term, pay to
Landlord as additional rent, without any set-off or deduction therefrom, its
proportionate share of all costs which Landlord may incur in owning,
maintaining, and operating the Project. Said costs are referred to herein as
"Operating Costs" and are hereby defined to include, but shall not be limited
to, all real estate taxes and annual installments of special assessments payable
with respect to the Project, maintenance, repair, replacement and care of all
heating, lighting, plumbing and air conditioning fixtures, equipment and systems
serving the common areas, parking and landscape areas, signs, snow removal,
non-structural repair and maintenance of the exterior of the Building (including
the costs of equipment purchased and used for such purposes), insurance
premiums, management fees, wages and fringe benefits of personnel employed for
such work. Operating Costs shall also include the yearly amortization of capital
costs incurred by Landlord for improvements or structural repairs to the Project
required to comply with any change in the law, rules or regulations of any
governmental authority having jurisdiction, or for purposes of reducing
Operating costs, which costs shall be amortized over the useful life of such
improvements or repairs, as reasonably estimated by Landlord. Operating Costs
shall not include depreciation, costs of tenant improvements and payments of
principal and interest on any mortgages covering the Project. Tenant's
proportionate share of operating expenses shall be that fraction, the numerator
of which is the area of Tenant's Demised Premises and the denominator of which
is the total area of the Building.
As soon as reasonably practicable prior to the commencement of each
calendar year during the Lease Term, Landlord shall furnish to Tenant an
estimate of Tenant's share of Operating Costs, if any, for the ensuing calendar
year and Tenant shall pay, as additional rent hereunder together with each
installment of monthly base rent, one-twelfth (1/12th) of its estimated annual
share of such Operating Costs. As soon as reasonably practicable after the end
of each calendar year, Landlord shall furnish to Tenant a certified statement of
the actual Operating Costs for the previous calendar year, including the actual
Operating Costs for the previous calendar year, including Tenant's share of such
amount, and within thirty (30) days thereafter Tenant shall pay to Landlord, or
Landlord to Tenant as the case may be, the different between such actual and
estimated Operating Costs paid by Tenant. Tenant's share of such excess
Operating Costs for the years in which this Lease commences and terminates shall
be prorated based upon the dates of commencement and termination of the Lease
Term.
5. ADDITIONAL TAXES. Tenant shall pay as additional rent to Landlord,
together with, but as a separate payment, each installment of monthly base rent,
the amount of any gross receipts tax, sales tax or similar tax (but, excluding
therefrom any income tax) payable, or which will be payable, by Landlord, by
reason of the receipt of the monthly base rent and adjustments thereto.
6. UTILITIES. Landlord shall provide mains and conduits to supply
water, gas, electricity and sanitary sewage to the Demised Premises. Tenant
shall pay, when due, either directly to the utility company if billed
individually or to Landlord if billed as an operating expense, all charges for
sewer usage or rental, garbage disposal, refuse removal, water, electricity,
gas, telephone and/or other utility services or energy source furnished to the
Demised Premises during the term of this Lease, or any renewal or extension
thereof. Landlord shall not exceed the rate Tenant would be required to pay to a
utility company or service company furnishing any of the foregoing utilities or
services. The charges thereof shall be deemed operating costs in accordance with
Section 4 if the charges are not billed directly to the Tenant by the utility
company.
7. CARE AND REPAIR OF DEMISED PREMISES. Tenant shall, at all times
throughout the terms of this Lease, including renewals and extensions, and at
its sole expense, keep and maintain the Demised Premises in a clean, safe,
sanitary and first class condition and in compliance with all applicable laws,
codes, ordinances, rules and regulations. Tenant's obligations hereunder shall
include but not be limited to the maintenance, repair and replacement, if
necessary, of heating, air conditioning fixtures, equipment and systems, all
lighting and plumbing fixtures and equipment, fixtures, motors and machinery,
all interior walls, partitions, doors and windows, including the regular
painting thereof, all exterior entrances, windows, doors, and docks and the
replacement of all broken glass. When used in this provision, the term "repairs"
shall include replacements or renewals when necessary, and all such repairs made
by the Tenant, shall keep and maintain all portions of the Demised Premises and
the sidewalk and areas adjoining the same in a clean and orderly condition, free
of accumulation of dirt and rubbish.
If Tenant fails, refuses or neglects to maintain or repair the
Demised Premises as required in this Lease after notice shall have been given
Tenant, Landlord may make such repairs without liability to Tenant for any loss
or damage that may accrue to Tenant's merchandise, fixtures or other property or
to Tenant's business by reason thereof, and upon completion thereof, Tenant
shall pay to Landlord all costs plus 15% for overhead incurred by Landlord in
making such repairs upon presentation to Tenant of bill therefor. Landlord shall
keep the foundation, exterior walls (except plate glass or glass or other
breakable materials used in structural portions) and roof in good repair, and if
necessary or required by proper governmental authority, make modifications or
replacements thereof, except that Landlord shall not be required to make any
such repairs, modifications or replacements which become necessary or desirable
by reason of the negligence of Tenant, its agents, servants or employees, or by
reason of anyone illegally entering or upon the premises.
The Landlord shall manage all outside maintenance of the Demised
Premises, including grounds and parking areas. The costs of said maintenance
shall be prorated in accordance with Section 4 of this Lease. All such
maintenance which is provided by Landlord shall be provided as reasonably
necessary for the comfortable use and occupancy of Demised Premises during
business hours, except Saturdays, Sundays, and holidays, upon the condition that
the Landlord shall not be liable for damages for failure to do so due to causes
beyond its control.
8. CONSTRUCTION OF DEMISED PREMISES. Landlord agrees that it shall
construct the Demised Premises in accordance with the specifications in Exhibit
B attached hereto.
9. OBLIGATIONS OF TENANT. Tenant agrees that it shall;
a. Observe such rules and regulations as from time to time may be put
in effect by Landlord for the general safety, comfort and convenience of
Landlord, occupants and tenants of said Building.
b. Give Landlord access to the Demised Premises at all reasonable
times, without charge or diminution of rent, to enable Landlord to examine the
same and to make such repairs, additions and alterations as Landlord may deem
advisable.
c. Keep the Demised Premises in good order and condition and replace
all broken glass with glass of the same quality as that broken, save only glass
broken by fire and extended coverage type risks, the cost of which is reimbursed
by the insurance carrier, and commit no waste on the Demised Premises.
d. Pay for all electric lamps, starters and ballasts as replaced in
the demised Premises.
e. Upon the termination of this Lease in any manner whatsoever,
remove Tenant's goods and effects and those of any other person claiming under
Tenant, and quit and deliver up the demised Premises to Landlord peaceably and
quietly in as good order and condition as the same are now in or hereafter may
be put in by Landlord or Tenant, reasonable use and wear thereof and repairs
which are Landlord's obligation excepted. Goods and effects not removed by
Tenant at the termination of this Lease, however terminate, shall be considered
abandoned and Landlord may dispose of the same as it deems expedient.
f. Not either voluntarily or by operation of law, assign, transfer,
mortgage, pledge, hypothecate or encumber this Lease or any interest therein,
and shall not sublet the Premises or any part thereof, or any right or privilege
appurtenant thereto, or suffer any other person (the employees, agents, servants
and invitees of tenant excepted) to occupy or use the Premises or any portion
thereof, without the prior written consent of Landlord. Notwithstanding the
foregoing, any subtenant or assignee must have at least the financial strength
of the original Tenant. Consent to one assignment, subletting, occupation or use
by any other person shall not be deemed to be a consent to any subsequent
assignment, subletting, occupation or use by another person. Any such assignment
or subletting without such consent shall be void, and shall, at the option of
Landlord, constitute a default under this Lease. Regardless of Landlord's
consent, no subletting or assignment shall release Tenant of Tenant's obligation
to pay the rent and perform all other obligations to be performed by Tenant
hereunder for the term of this Lease. The acceptance of rent by Landlord from
any other person shall not be deemed to be a waiver by Landlord of any provision
hereof or any right hereunder. Any subrent charged to subtenant by Tenant which
is in excess of the rent charged by Landlord to Tenant shall be passed on in
full to the Landlord. Any such subrent, in no event, may be based on net income.
g. Not place signs on or about the Demised Premises without first
obtaining Landlord's written consent thereto. Tenant's signs on exterior of
Building shall conform to sign criteria attached.
h. Not overload, damage or deface the Demised Premises or do any act
which may make void or voidable any insurance on the Demised Premises or the
Building or which may render an increased or extra premium payable for
insurance.
i. Not make any alterations of or additions to the Demised Premises
without the written approval of the Landlord, and alterations or improvements
which may be made by either of the parties hereto upon the Demised Premises,
except movable office furnishings, shall be the property of the Landlord, and
shall remain upon and be surrendered with the Demised Premises, as a part
thereof, at the termination of this Lease or any extension thereof.
j. Keep the demised Premises and the property in which the Demised
Premises are situated free from any liens arising out of any work performed,
materials furnished or obligations incurred by Tenant. Landlord may require, at
Landlord's sole option, that Tenant shall provide to Landlord, at Tenant's sole
cost and expense, a lien and completion bond in an amount equal to one and
one-half (1-1/2) times any and all estimated cost of any improvements,
additions, or alterations in the Demised Premises, to insure Landlord against
any liability for mechanics' and materialmen's lien and to insure completion of
the work.
k. Cause to be performed by a competent service company, preventative
maintenance of all roof top HVAC units and warehouse unit heaters serving the
Demised Premises, as recommended by the equipment manufacturer.
l. Not place any additional locks on any of Tenant's doors without
the written consent of the Landlord. The Landlord shall have the right to keep
pass keys to the Demised Premises. Tenant's obligations under this paragraph
numbered 9 to do or not to do a specified act shall extend to and include
Tenant's obligations to see to it that Tenant's employees, agents and invitees
shall do or shall not do such acts, as the case may be.
10. PARKING AND DRIVES. THE Tenant, its employees, and invitees shall
have the non-exclusive right to use the common driveways and parking lots along
with the other tenants and customers of the Building. The use of such driveways
and parking facilities are subject to such reasonable rules and regulations as
the Landlord may impose. The Tenant further agrees not to use, or permit the use
by it employees, the parking areas for the overnight storage of automobiles or
other vehicles without the written permission of Landlord.
11. CASUALTY LOSS. In case of damage to the Demised Premises or the
Building by fire or other casualty, Tenant shall give immediate notice to
Landlord who shall thereupon cause the damage to be repaired with reasonable
speed at the expense of the Landlord subject to delays which may arise by reason
of adjustment of loss under insurance policies and for delays beyond the
reasonable control or Landlord, and to the extent that the Demised Premises are
rendered untenantable, the rent shall proportionately abate, except in the event
such damage resulted from or was contributed to by the act, fault or neglect of
Tenant, Tenant's employees or agents, in which event there shall be no abatement
of rent. In the event the damage shall be so extensive that the Landlord, in its
sole discretion, shall decide not to repair or rebuild, this Lease shall, at the
option of Landlord, be terminated as of the date of such damage by written
notices from the Landlord to the Tenant, and the rent shall be adjusted to the
date of such damage and Tenant shall thereupon promptly vacate the Demised
Premises.
12. INDEMNITY AND INSURANCE. Tenant agrees to indemnify and save
harmless Landlord from and against all claims of whatever nature arising from
any act, omission or negligence of Tenant, or accident, injury or damage
whatsoever caused to any person or to the property of any person during the term
hereof in or about the Demised Premises or arising from any accident, injury or
damage during the term hereof, outside of the Demised Premises but within the
Project where such accident, injury or damage results or is claimed to have
resulted from an act or omission on the part of Tenant or Tenant's officers,
agents, servants, licensees or contractors. This indemnity and hold harmless
agreement shall include indemnity against all costs, expenses and liabilities
incurred in connection with any such claim or proceeding brought thereon and the
defense thereof.
Tenant agrees to use and occupy the Demised Premises and to use all
other portions of the Project at its own risk, and further agrees that Landlord
shall have no responsibility or liability for any loss of or damage to fixtures,
equipment, merchandise or other personal property of Tenant.
Tenant shall not carry any stock of goods or do anything in or about
said Demised Premises which will in any way tend to increase insurance rates on
said Demised Premises or the Building in which the same are located. If Landlord
shall consent to such use, Tenant agrees to pay as additional rental any
increase in premiums for insurance, against loss by fire or extended coverage
risks resulting from the business carried on in the Demised Premises by Tenant.
If Tenant installs any electrical equipment that overloads the power lines to
the Building, Tenant shall, at its own expense, make whatever changes are
necessary to comply with the requirements of insurance underwriters and
insurance rating bureaus and governmental authorities having jurisdiction.
Tenant agrees to procure and maintain a policy or policies of
insurance, at its own cost and expense, insuring Landlord and Tenant from all
claims, demands, or actions made by or on behalf of any person or persons, firm,
or corporation arising from related to, or connected with the conduct and
operation of Tenant's business in the Demised Premises for injury to or death of
one or more persons and for damage to property in the combined single limit of
not less than $500,000 each occurrence. Tenant shall carry like coverage against
loss or damage by boiler or internal explosion by boilers, if there is a boiler
in the Demised Premises. Said insurance shall not be subject to cancellation
except after at least thirty (30) days' prior written notice to Landlord, and
the policy or policies, or duly executed certificate or certificates for the
same, together with satisfactory evidence of the payment of premium thereon,
shall be deposited with Landlord at the commencement of the term and renewals
thereof no less than thirty (30) days prior to the expiration of the term of
such coverage. If Tenant fails to comply with such requirement, Landlord may
obtain such insurance and keep the same in effect, and Tenant shall pay Landlord
the premium cost thereof upon demand.
Landlord shall procure at its own expense during the term of this
Lease, fire, windstorm, extended coverage, such other insurance as Landlord may
obtain, and rental loss insurance on the Project, provided, however, Tenant
shall reimburse Landlord for its share of the actual net cost and expense to
Landlord of such fire, windstorm, extended coverage, and rental loss insurance.
Tenant shall procure at its own expense from the time Tenant takes
possession until the end of the Lease Term, fire, extended coverage, vandalism,
and sprinkler leakage insurance on the Demised Premises. This property insurance
shall include improvements, signs, fixtures, and floor coverings furnished by
Landlord.
Each of the Landlord and Tenant hereby releases the other from any
and all liability or responsibility, to the other or anyone claiming through or
under them by way of subrogation or otherwise, for any loss or damage to
property caused by fire or any other insured peril, even if such fire or other
casualty shall have been caused by the fault or negligence of the other party or
anyone for whom such party may be responsible. Tenant also agrees to obtain a
waiver of subrogation from its insurer, subject to availability.
13. EMINENT DOMAIN. If the entire Demised Premises are taken by
eminent domain, this Lease shall automatically terminate as of the date of
taking. If a portion of the demised Premises are taken by eminent domain,
Landlord shall have the right to terminate this Lease as of the date of taking
by giving written notice thereof to Tenant within ninety (90) days after such
date of taking. If Landlord does not elect to terminate this Lease, it shall, at
its expense, subject to receipt of condemnation aware proceedings, restore the
Demised Premises, exclusive of any improvements or other changes made therein by
Tenant, to as near the condition which existed immediately prior to the date of
taking as reasonably possible, and to the extent that the demised Premises are
rendered untenantable, the rent shall proportionately abate. All damages awarded
for a taking under the power of eminent domain shall belong to and be the
exclusive property of Landlord, whether such damages be awarded as compensation
for diminution in value of the leasehold estate hereby created or to the fee of
the Demised Premises; provided, however, that Landlord shall not be entitled to
any separate award made to Tenant for the value and cost of removal of its
personal property and fixtures.
14. DEFAULT. Tenant hereby agrees that in case Tenant shall default
in making its payments hereunder or any of them or in performing any of the
other agreements, terms and conditions of this Lease, then, in any such event,
Landlord, in addition to all other rights and remedies available to Landlord, by
law or by other provisions hereof, may, without process, re-enter immediately
into the demised Premises and remove all persons and property therefrom, and, at
Landlord's option, annul and cancel this Lease as to all future rights of
Tenant, and Tenant hereby expressly waives the service of any notice in writing
or intention to re-enter as aforesaid. Landlord, in addition to the foregoing,
may also accelerate rent due and owing for the remainder of the term. Tenant
further agrees that in case of any such termination Tenant will indemnity the
Landlord against all loss of rents and other damage which Landlord may incur by
reason of such termination, including, but not being limited to, costs or
restoring and repairing the demised Premises and putting the same in rentable
condition, costs of renting the Demised Premises to another tenant, loss or
diminution of rents and other damage which Landlord may incur by reason of such
termination, and all reasonable attorney's fees and expenses incurred in
enforcing any of the terms of this Lease. Neither acceptance of rent by
Landlord, with or without knowledge of breach, nor failure of Landlord to take
action on account of any breach hereof or to enforce its rights hereunder shall
be deemed a waiver of any breach, and absent written notice or consent, said
breach shall be a continuing one.
15. NOTICES. All bills, statements, notices or communications which
Landlord may desire or be required to give to Tenant shall be deemed
sufficiently given or rendered if in writing and either delivered to Tenant
personally or sent by registered or certified mail addressed to Tenant at the
Building, and the time of rendition thereof or the giving of such notice or
communication shall be deemed to be the time when the same is delivered to
Tenant or deposited in the mail as herein provided. Any notice by Tenant to
Landlord must be served by registered or certified mail addressed to Landlord at
the address where the last previous rental hereunder was payable, or in case of
subsequent change upon notice given, to the latest address furnished.
16. HOLDING OVER. Should Tenant continue to occupy the demised
Premises after expiration of said Lease Term or any renewal or renewals thereof,
or after a forfeiture is incurred, such tenancy shall be from month to month and
in no event from year to year or for any longer term. The monthly base rent
during such month-to-month tenancy shall be two (2) times the amount of the
monthly base rent set forth in Paragraph 3 on Page 1 of this Lease.
17. SUBORDINATION. The rights of Tenant shall be subordinate to the
lien of any first mortgage now or hereafter in force against the real estate on
or in which the Demised Premises are located, and Tenant shall execute such
further instruments subordinating this Lease to the lien or liens of any such
mortgage or mortgages as shall be requested by the Landlord. Notwithstanding the
foregoing provisions, the Tenant agrees that any First Mortgagee will have the
right at any time to subordinate any rights of such First Mortgagee to the
rights of the Tenant under this Lease on such terms and subject to such
conditions as such Fort Mortgagee deems appropriate.
18. ESTOPPEL CERTIFICATE. Tenant shall at any time and from time to
time upon not less than ten (10) days' prior written notice from Landlord
execute, acknowledge and deliver to Landlord a statement in writing, (a)
certifying that this Lease if unmodified and in full force and effect (or, if
modified, stating the nature of such modification and certifying that this Lease
as so modified, is in full force and effect), and the date to which the rental
and other charges are paid in advance, if any, and (b) acknowledging that there
are not, to Tenant's knowledge, any uncured defaults on the part of the Landlord
hereunder, or specifying such defaults, if any are claimed. Any such statement
may be relied upon by any prospective purchaser or encumbrancer of all or any
portion of the real property of which the Demised Premises are a part. Failure
to sign the statement or failure to specify any default claimed shall be deemed
approval of the statement submitted to Tenant by Landlord.
19. MORTGAGEE PROTECTION. Tenant agrees to send any mortgagees and/or
deed of trust holders, by registered mail, a copy of any Notice of Default
served by Tenant upon the Landlord, provided that prior to such notice Tenant
has been notified, in writing by way of note of assignment of rents or
otherwise, of the addresses of such mortgagees and/or deed of trust holders.
Tenant agrees to send such notices to Teachers Insurance and Annuity
Association, 730 Third Avenue, New York, New York, 10017, Attention: Senior Vice
President, Mortgage Department. Tenant further agrees that if Landlord shall
have failed to cure such default within the time provided for in this Lease, any
such mortgagees and/or deed of trust holders shall have an additional thirty
(30) days within which to cure such default or if such default cannot be cured
within that time, then such additional time as may be reasonably necessary, if
within such thirty (30) days, any mortgagee and/or deed of trust holder has
commenced and is diligently pursuing the remedies necessary to cure such default
(including but not limited to commencement of foreclosure proceedings).
20. SERVICE CHARGE. Tenant agrees to pay a service charge equal to
one percent (1%) per month or any portion thereof of any payment of monthly base
rent or additional charge payable by Tenant hereunder which is not paid within
ten (10) days from the date due, or $5.00 per month or portion thereof,
whichever is greater.
21. SECURITY DEPOSIT. Tenant has deposited with Landlord the sum of
One Thousand One Hundred Seventy-five and 00/100 Dollars ($1,175.00). Said sum
shall be held by Landlord as security for the faithful performance by Tenant of
all the terms, covenants, and conditions of this Lease to be kept and preformed
by Tenant during the term hereof. If Tenant defaults with respect to any
provision of this Lease, including, but not limited to the provisions relating
to the payment of rent, Landlord may (but shall not be required to) use, apply
or retain all or any part of this security deposit for the payment of any rent
or any other sum in default, or for the payment of any amount which Landlord may
spend or become obligated to spend by reason of Tenant's default, or to
compensate Landlord for any other loss or damage which Landlord may suffer by
reason of Tenant's default. If any portion of said security deposit is so used
or applied, Tenant shall within five (5) days after written demand therefor,
deposit cash with Landlord in an amount sufficient to restore the security
deposit to its original amount and Tenant's failure to do so shall be a material
breach of this Lease. Landlord shall not be required to keep this security
deposit separate from its general funds, and Tenant shall not be entitled to
interest on such deposit. If Tenant shall fully and faithfully perform every
provision of this Lease to be performed by it, the security deposit or any
balance thereof shall be returned to Tenant (or, at Landlord's option, to the
last assignee of Tenant's interest hereunder) at the expiration of the Lease
Term. In the event of termination of Landlord's interest in this Lease, Landlord
shall transfer said deposit to Landlord's successor in interest.
22. PROPERTY TAXES. Tenant shall pay, or cause to be paid, before
delinquency, any and all taxes levied or assessed and which become payable
during the term hereof upon all Tenant's leasehold improvements, equipment,
furniture, fixtures, and personal property located in the Premises, except that
which has been paid for by Landlord, and is the standard of the Building. In the
event any or all of the Tenant's leasehold improvements, equipment, furniture,
fixtures and personal property shall be assessed and taxed with the Building,
Tenant shall pay to Landlord its share of such taxes within ten (10) days after
delivery to Tenant by Landlord of a statement in writing setting forth the
amount of such taxes applicable to Tenant's property.
23. NOVATION IN EVENT OF SALE OR TRANSFER. In the event of the sale
of the Building or the transfer of the title thereto, Landlord shall be relieved
of all of the covenants and obligations created by this Lease, except as to
breaches thereof occurring prior to such sale or transfer, and such sale or
transfer shall automatically result in the purchaser or transferee assuming and
agreeing to carry out all of the covenants and obligations of Landlord herein
from and after such sale or transfer.
24. DISPLAYS. Tenant shall not display or suffer to be displayed on
the outside of the Demised Premises, on the outside of the Building or on the
sidewalks, driveways, or parking areas adjoining the Building any goods or
merchandise whatsoever, except with Landlord's written consent.
25. INTERRUPTION OF SERVICES. No liability shall attach to Landlord
for any inconvenience, loss, or damage sustained by Tenant or any other person,
or to the property of Tenant of such other person, due to interruption of
electric power, water, or gas to the Building or to the Demised Premises or by
reason of the failure of any piping, wiring, or apparatus in the Building or for
any inconvenience, loss or damage sustained by Tenant as a result of any of the
causes set forth in the paragraph captioned "Indemnity and Insurance" or caused
by any act or thing done or suffered to be done by any other tenant of the
Building or any servant, employee, agent, invitee, or customer of Tenant.
However, the Landlord shall make all reasonable effort to remedy such
interruption of services.
26. ZONING. The Tenant covenants that it has satisfied itself prior
to execution of this Lease that the Demised Premises are properly zoned to
permit the Tenant's intended use of the Demised Premises. Any changes with
respect to the interior finishing of the premises in order to comply with any
local or municipal by-laws shall be at the sole expense of the Tenant.
27. QUIET ENJOYMENT. Conditional upon the faithful performance of the
terms, covenants and provisions herein contained by the Tenant, Landlord
covenants that Tenant shall quietly have, hold and enjoy the Demised Premises
for the term hereof except or otherwise herein provided.
28. JANITORIAL SERVICES. Tenant shall provide all janitorial and at
the option of Landlord all refuse removal services for the Demised Premises, at
the expense of Tenant.
29. ADDITIONAL PROVISIONS. See Addendum.
30. MEMORANDUM. Upon the request of either Landlord or Tenant, the
parties shall enter into a memorandum, in recordable form, setting forth a
summary of the terms hereof relating only to the description of the Demised
Premises, the term hereof, and the conditions of assignment of subletting.
31. GENERAL. This Lease does not create the relationship of Principal
and agent or of partnership or of joint venture or of any association between
Landlord and Tenant, the sole relationship between Landlord and Tenant being
that of lessor and lessee. No waiver of any default of Tenant hereunder shall be
implied from any omission by Landlord to take any action on account or such
default if such default persists or is repeated, and no express waiver shall
affect any default other than the default specified in the express waiver and
that only for the time and to the extent therein stated. Each term and each
provision of this Lease performable by Tenant shall be construed to be both a
covenant and a condition. The topical headings of the several paragraphs and
clauses are for convenience only and do not define, limit or construe the
contents of such paragraphs or clauses.
All preliminary negotiations are merged into and incorporated in this
Lease. This Lease can only be modified or amended by an Agreement in writing
signed by the Parties hereto. All provisions hereof shall be binding upon the
heirs, successors and assigns of each party hereto.
In Witness Whereof, the parties hereto have executed this Lease the
day and year first above written.
In Presence of: LANDLORD: KK Three Corporation
Minnesota General Partnership
__________________________________ By __________________________________
__________________________________ Its __________________________________
In Presence of: TENANT: Genetic Laboratories Wound Care,
Inc., a Minnesota Corporation
__________________________________ By __________________________________
__________________________________ Its __________________________________
<PAGE>
ADDENDUM
This Addendum to the Lease dated December 16, 1991, by and between Genetic
Laboratories, Wound Care, Inc., a Minnesota Corporation (Tenant) and KK Three
Corporation, a Minnesota Corporation (Landlord).
This Addendum sets forth additional terms, conditions, and covenants applicable
to the lease of the premises described in the above mentioned Lease (The Lease).
All capitalized terms used herein and not otherwise defined shall have the
meaning ascribed to them in the Lease. In the event of a conflict between the
terms of the Lease and this Addendum, the terms of the Addendum shall govern.
The parties further agree as follows:
1. CONCESSIONS: Landlord shall provide Tenant with $15,000.00 payment,
payable upon occupancy and to be used as Tenant ----------- deems
appropriate.
2. OPTION TO RENEW: Provided that Tenant is not in default of any of the
terms of the Lease, Tenant shall have one (1) five (5) year option to
renew this Lease by giving 180 days prior written notice to Landlord.
The Base Rent for each option period shall be the Base Rent paid at
the end of the initial lease term, or previous option period
increased by the consumer price index.
The Base Rent shall be increased by multiplying the Base
Rent paid in the fifth year of the Lease or the last year
of the initial Lease period, whichever is applicable by a
fraction, the numerator of which is the Consumer Price
Index for All Urban Consumers, 1987 = 100 ("Index')
published for the month nearest the date of the
commencement of the Option Term, and the denominator of
which is the Index published for the month immediately
preceding the month in which the initial term commences. If
the Index is changed so that the base year differs from
that used as of the month immediately preceding the month
in which the initial term commences, the Index shall be
converted in accordance with the conversion factor
published by the United States Department of Labor, Bureau
of Labor Statistics. If the Index is discontinued or
revised during the term, such other government index or
computation with which it is replaced shall be used in
order to obtain substantially the same result as would have
been obtained if the Index had not been discontinued or
revised.
In no event shall the Base Rent be less than provided in
this Lease.
3. EXPANSION SPACE:
A. Provided Tenant is not in default under this Lease and
Hueblin does not exercise its option to renew, Tenant shall
have the right of first opportunity to lease the adjoining
approximately 3,547 square feet of space (hereinafter
Expansion Space) at then market rental rates plus Operating
Costs, and shall run concurrently with the initial lease
term and any extension thereof. The effective commencement
date of said Expansion Space shall be no later than 60 days
after Tenant's Notice to Landlord, whichever is earlier.
The parties shall enter into a mutually acceptable Lease
within 30 days of Tenant's Notice. All other terms and
conditions of the Lease shall be acceptable to said
Expansion Space.
B. If Landlord receives a bona fide offer from a prospective tenant to
lease all or a portion of the Expansion Space and Landlord desires to
accept such offer, Landlord shall give notice to Tenant of such
interested prospective tenant, and Tenant shall then have the first
opportunity to lease the Expansion Space on the terms set forth in A
above. To exercise such right, Tenant shall give written notice to
Landlord that Tenant intends to exercise its right hereunder within
ten (10) calendar days ("Tenant's Notice") after receiving Landlord's
notice. In the event that Tenant declines or fails to exercise its
first right to lease by furnishing Tenant's Notice, such right shall
terminate and Landlord shall have no further obligation to offer the
Expansion Space to Tenant.
4. LEASEHOLD IMPROVEMENTS: Landlord agrees to construct Tenant's Demised
Premises in accordance with the forthcoming exhibits at no cost to
Tenant.
Tenant may make changes or alterations to the floor plan prior to
construction provided such changes or alterations do not change the
construction costs of the Demised Premises. Should such changes
increase the construction costs, such costs shall be born exclusively
by Tenant and paid prior to occupancy.
- - ----------------------------------- -------------------------------
Genetic Laboratories, Wound Care, Inc., KK Three Corporation,
A Minnesota Corporation A Minnesota Corporation
<PAGE>
EXHIBIT B
CONTINUED
1. WALLS
A. Office walls per plan.
B. Office/warehouse partition to roof deck above -
sheetrocked, taped, sanded and painted on office side only
and only to 6 feet.
C. Demising walls insulated and sheetrocked to roof deck -
sheetrocked, taped, sanded and painted in office area only
and only to 6 feet.
D. Exterior walls are insulated - only office area exterior
walls are sheetrocked, taped, sanded and painted.
II. CEILING
A. Building standard 2' x 4' acoustical ceiling tile at 8' 0"
in office area only.
B. Exposed bar joist ceiling in warehouse.
III. LIGHTS
A. One (1) building standard recessed fluorescent light
fixture per 100 square feet (2' x 4' fixture) in office
area only.
B. One (1) building standard 6' fluorescent strip light per
250 square feet of space in warehouse area, mounted on
underside of bar joists.
IV. ELECTRICAL
A. Duplex electrical outlets per plan.
B. Light switches per plan.
C. One (1) 100 amp, single phase circuit breaker service
panel.
D. Duplex or fourplex electrical outlet in office/warehouse
per plan.
V. DOORS
A. Building standard 3'0" x 6' 8" solid core doors with passage
hardware per plan. B. Building standard 3'0" x 6' 0" sold core doors
with privacy hardware and closets for bathrooms.
VI. FLOORS
A. Office area will have building standard carpet.
B. Warehouse floors will be exposed concrete.
C. Bathroom floors will be tile.
VII. TELEPHONE
A. Telephone outlets per plan.
VIII. H.V.A.C.
A. Building standard heating and air conditioning distributed
throughout the office area for normal office use.
B. Gas fired, thermostatically controlled suspended unit
heater in the warehouse area.
IX. SPRINKLER SYSTEM.
As per city codes.
X. PLUMBING
A. Bathrooms include wall hung type wash basins and toilets as
required by code. Provided are ceramic tile floors and base
with a ceramic wainscoat on the wet walls.
XI. SUN PROTECTION
Window coverings of building standard.
<PAGE>
EXTERIOR SIGN CRITERIA
It is intended that the signing of the building shall have a sense of
continuity and be developed in an attractive and innovative manner,
and, in keeping therewith, Landlord shall maintain control of all
Tenant's signs, which shall be designed and fabricated by Landlord
(if it so chooses) in a uniform manner and shall be mounted in
specifically designated areas. The cost of sign fabrication and
installation shall be borne exclusively by the Landlord.
The wording of signs shall be limited to the Tenant's business
identification name only and shall not include items sold or services
provided. The use of corporate logos or insignias shall be permitted
provided that the height of such logos or insignias shall not exceed
the allowable height for sign letters.
LEASE AGREEMENT
This Lease, made and entered into this 5th day of January, 1994 by
and between James S. Reid , Frances S. Reid and Joan R. Milburn, hereinafter
collectively referred to as "Lessor" and Sunshine Products, Inc., hereinafter
referred to as "Lessee.
WITNESSETH THAT:
1. In consideration of the rental payments hereinafter agreed to be
paid by Lessee to Lessor and in consideration of the mutual covenants and
agreements hereinafter set forth, Lessor hereby leases to Lessee, subject to the
terms and conditions hereof, the following described property located in the
City of Crestwood, commonly known as 1149 and1175 Reco Drive in Reid Industrial
Court. The premises consist of approximately 23,720 sq. ft. of office and light
manufacturing area, as outlined in red on the attached site plan; provided,
however, that for purposes of rent computation 22,980 square feet shall be
utilized. (Exhibit A)
2. The term of this Lease shall be for a period of three (3) years
commencing on the date of the completion of the Lessor's agreed upon
improvements as set forth in Exhibit B. The exact date of commencement and
termination shall be evidenced by written stipulation of Lessor and Lessee which
shall be attached hereto and marked Exhibit C. Lessee shall have the right to
enter the Leased Premises prior to the commencement date in order to make
necessary repairs and to install its furniture, fixtures and equipment without
incurring any obligation to pay rent prior to the commencement date.
Effective on the commencement date of this Lease, the Lease dated
March 16, 1992, shall be deemed terminated and the Lessor thereby releases
Lessee of any and all liabilities arising out of said Lease dated March 16,
1992; provided, however, that the Addendum to Lease dated July 13, 1993, shall
remain in full force and effect during the term of this Lease.
The Lessee is hereby granted an option to renew this Lease for two
terms of 1 year each upon the same terms, conditions, except for rent, as
provided for the original term of said Lease. Lessee shall notify Lessor in
writing at lease 5 months prior to the expiration of the original term of this
Lease, or any extended term, of its intention to renew this Lease as a condition
of such extension. Lessee acknowledges that Lessor has expended certain sums of
money for improvements to the premises prior to the commencement of this Lease.
In the event Lessee does not exercise its first option to extend the term of
this Lease, then Lessee shall pay to Lessor, upon termination of this Lease, the
sum of Two Thousand Six Hundred Ten Dollars ($2,610.00), which amount represents
the unamortized portion of Lessor's improvements.
3. From the commencement date of this Lease until May 1, 1994, rental
shall be payable in equal monthly installments of Six Thousand Eight Hundred
Ninety-four and 00/100 Dollars ($6,894.00), in advance, on the first day of each
month ($3.60 per sq. ft. x 22,980= $82,728.00 per year or $6,894 per month).
From May 1, 1994 until the end of the second year of this Lease, rent shall be
payable in equal monthly installments of Seven Thousand Eighty-five and 50/100
Dollars ($7,085.50). Rent will increase at the commencement of the third year of
the lease by the percent of increase in the Consumer Price Index during the
previous two calendar years. Rent will increase at the commencement of the
option period by the percent of increase in the C.P.I during the previous
calendar year. The C.P.I. for All Urban Consumers, U.S. City Average, All Items,
will be used. The resulting increase shall be not less than 3% and not more than
5%. Lessor and Lessee shall agree upon the calculations for all increases prior
to their effectiveness.
Example: C.P.I. for all urban consumers in effect
C.P.I. Dec. 31, 1991 413.0
C.P.I. Dec. 31, 1992 425.0
-----
Total C.P.I. increase 1992= 12.0 (i.e. 425 - 413)
Percent of increase in C.P.I. = 12.0/413 = .029 or 2.9% With 3% cap
in effect, increase in rent would be 3% multiplied by previous years
rent.
4. This lease is not assignable nor shall said premises nor any part
thereof be sublet by Lessee unless Lessee shall first procure the written
consent of Lessor, and Lessor agrees that such consent will not be unreasonably
withheld. The Lessor agrees that the Lessee may sublet part or all of the leased
premises to James H. Mahoney, CPA and/or Color Art. If the Lease is assigned or
any part of the premises shall be sublet without the wirtten consent of Lessor,
or if Lessee shall be adjudicated a bankrupt, or if a liquidating receiver shall
be appointed over the property of Lessee and shall not be discharged within 90
days after his appointment, or if Lessee shall make an assignment for the
benefit of creditors, this Lease may by reason of such fact or act be cancelled
by Lessor at Lessor's option. Any assignment of this Lease or subletting of the
Leased Premises or any part thereof, albeit with the written consent of Lessor,
shall not operate to release Lessee from its fulfillment of the covenants and
agreements herein contained to be performed by Lessee unless such written
consent shall specifically release Lessee from such obligations, nor shall any
such consent be construed as authority for any subsequent assignment or
subletting without again obtaining the written consent of Lessor.
5. If Lessee should obtain a company who is willing to lease the
property covered by this Lease and upon terms acceptable to Lessor and upon
mutual agreement between Lessee and Lessor, this Lease may be terminated.
6. All interior and exterior alterations deemed necessary or
desirable by the Lessee shall be made by Lessee, with the exception of the
agreed upon Lessor improvements which are attached hereto as Exhibit B.
7. The Lessor, at Lessor's sole cost and expense, shall keep the
Leased Premises' building and other attached structures thereto, if any, insured
against loss or damage by fire, standard extended coverage perils and vandalism
for the full fair insurable value thereof. The Lessee at Lessee's sole cost and
expense, shall keep the trade fixtures, equipment and inventory on the Leased
Premises insured against loss or damage by fire, standard extended coverage
perils and vandalism for the full fair insurable value thereof. The Lessee shall
carry liability insurance of a minimum of $600,000.00 and name Lessor on the
policy.
Lessor hereby releases Lessee, and any permitted assignee and
sublessee of Lessee, and Lessee hereby agrees to secure its sublessee's release
of Lessor, from and against any and all claims, demands, liabilities or
obligations whatsoever for damage to the property or loss of rents or profits of
either Lessor, Lessee and its sublessee, or other tenants in the building
containing the Leased Premises resulting from or in any way connected with any
fire, accident or other casualty, whether or not such fire, accident or other
casualty shall have been caused by the negligence or contributory negligence of
Lessor, Lessee, any assignee, tenant or sublessee of Lessor or Lessee, or by any
agent, associate or employee of either of them, to the extent that such damage
or loss either is insured under any insurance contract which at the time of such
damage or loss permits waiver of subrogation rights prior to a loss thereunder
or was to be insured against by the provisions of the first paragraph of the
Paragraph 7.
8. Lessee agrees to pay promptly all charges for electricity, water,
sewer, gas and power used in or upon the Leased Premises and to pay for the fuel
used in the heating of the Leased Premises. Lessor shall have all said utilities
seperately metered for the Leased Premises.
9. Lessee agrees to keep the interior of the Leased Premises in good
order and repair, free from nuisance and filth upon or adjacent thereto and not
to use or permit the use of the same or any part thereof for any purpose
forbidden by law or ordinance now in force or hereafter enacted in respect to
the use or occupancy of said premises. Lessor, or Lessor's representatives may,
during reasonable business hours, enter upon the premises for the purpose of
examining the condition thereof and making such repairs as may be necessary.
Lessor shall keep in good order, condition and repair at Lessor's
expense the exterior and all structural parts of the building containing the
Leased Premises, including, but not limited to, the foundations, exterior walls,
floor, ceiling, electrical wiring, downspouts, gutters and roof of the building,
the water pipes, the sewer drains and gas lines outside the exterior walls of
the building, and the parking lot, including the striping thereof. All repairs
and/or replacements agreed upon in this Lease to be made by Lessor, shall be
completed within a reasonable time. Should the Lessor neglect or refuse to make
such repairs and/or replacements after notice, Lessee without liability or
forfeiture of its term herein, may make such repairs and/or replacements and
deduct the full cost thereof from any present and/or future rent payable until
Lessee has been paid in full, anything to the contrary herein notwithstanding.
Lessee agrees to keep and maintain in good order and repair the
interior of the Leased Premises, including ordinary maintenance of the air
conditioning and heating equipment, but shall not be required to make any major
replacements of or to any air conditioning or heating equipment or make any
other major replacements, but all such replacements shall be made promptly by
and at the expense of Lessor. Provided, however, that with respect to the air
conditioning unit used to cool the area known as "Building C" of the leased
premises, Lessor agrees to repair and maintain said unit, excluding replacement
of the compressor, so long as said unit, in the opinion of Jerry Kelly Heating
and Cooling, is repairable.
Any repairs, replacements and alterations necessitated by loss of a
type covered by the fire and extended coverage insurance on the building to be
carried by the Lessor shall be made promptly by the Lessor.
The Lessee agrees to use reasonable diligence in the care and
protection of the Leased Premises during the term of this Lease, to keep the
water pipes, sewer drains and gas connections within the perimeter walls of the
Leased Premises and electric wiring of the trade fixtures and equipment, heating
and air conditioning equipment and other building fixtures and equipment in good
order and repair; and to surrender the Leased Premises at the termination of
this Lease, or any extended term hereof, in as good condition as received,
ordinary wear and tear, damage by fire and the elements and the alterations
permitted by this Lease excepted.
10. The Lessee, from time to time, may make any alterations or
improvements to the Leased Premises and may erect or remove any wall or
partition. Any such work done by the Lessee shall be done in a good and
workmanlike manner without impairing the structural soundness of the building.
All salvage shall belong to the Lessee, but all permanent additions shall become
part of the Leased Premises subject to this Lease. The Lessor shall cooperate
with the Lessee in securing the necessary permits and authority to perform any
work permitted under this Lease.
11. The destruction of said building or the Leased Premises by fire
or other casualty or such material damage thereto as to render such premises
unquestionably untenable for 60 days shall, at the option of Lessor or Lessee,
produce and work a termination of the Lease, such option to be exercised by
delivery of written notice of termination by the party exercising the option to
the other party within 30 days of such destruction or damage, and, in such
event, such termination shall be effective as of the date of such destruction or
damage and any prepaid rent shall be refunded to Lessee. If Lessor and Lessee
cannot agree as to whether said building or premises are unquestionably
untenable for 60 days, that fact shall be then determined by arbitration; the
Lessor and Lessee shall each choose an arbitrator within 5 days after either
party has notified the other party in writing of such destruction or damage and
the two so chosen shall select a third, and the decision of any two of such
arbitrators shall be conclusive and binding upon the parties hereto. If said
building or premises shall be damaged so that they are not unquestionably
untenable for 60 days or if the Lease is not terminated through the exercise by
either party of the option to terminate, as herein provided, even though the
building or premises may be so unquestionably untenable, then Lessor shall
restore the building at Lessor's expense with all reasonable speed and
promptness and, in such case, a just and proportionate part of the rentals shall
be abated from the date of such destruction or damage until said premises shall
have been restored; provided, however, that if such destruction or damage shall
have been due to the negligence, directly or indirectly contributed to by
Lessee, then in such case, there shall be no such abatements of rent. Any
question on untenability shall be referred to arbitration.
12. Failure on the part of Lessee to pay any installment of rent , as
set forth above, as and when the same becomes due and payable, or failure of
Lessee promptly and faithfully to keep and perform each and every covenant,
agreement and stipulation herein on the part of Lessee to be kept and performed
shall, at the option of Lessor, cause the forfeiture of this Lease; provided,
however, that no such forfeiture shall be declared unless Lessor shall first
have delivered to Lessee written notice specifying the default complained of and
unless Lessee shall fail to cure such default within 10 days after delivery to
Lessee of such notice if such default be the failure of Lessee to comply with
its obligations hereunder. In the event that Lessor shall exercise Lessor's
option to cause a forfeiture of the Lease after delivery of the aforesaid notice
and upon failure of Lessee to cure the default within the time specified, in
accordance with the foregoing, Lessee shall deliver to Lessor possession of the
Leased Premises and all improvements thereon (subject to Lessee's right to
remove certain materials installed by Lessee) within 10 days after delivery by
Lessor to Lessee of written notice to the effect that Lessor has exercised said
option and, thereupon, Lessor shall be entitled to and may demand immediate
possession of the Leased Premises, any other notice of demand being hereby
waived.
Lessee will quit and deliver possession of said premises to Lessor
upon termination of this Lease, with all keys and locks, bolts, plumbing
fixtures, and heating apparatus in as good order and condition as the same shall
be in at the time of the commencement hereof or as the same may hereafter by in
by virtue of repairs or alterations which may be made in compliance herewith
ordinary wear and tear from reasonable and careful use, damage caused by fire or
other casualty and repairs herein required to be made by Lessor excepted. It is
hereby understood that forfeiture, annulment or voidance hereof (not including,
however, termination hereof, at the option of either party, as hereinabove in
paragraph 11 provided), shall not relieve Lessee from its obligation to make the
monthly payments of rent as hereinabove reserved at the times and in the manner
aforesaid; and in case of any such default of Lessee, Lessor may relet the
premises, or any portion thereof as agent for and in the name of Lessee at any
rental readily obtainable, applying the proceeds and avails thereof, first to
the payments of such expense as Lessor may be put to in reentering the Leased
Premises and then to the payment of said rent as the same may from time to time
become due and toward the fulfillment of the other covenants and agreements of
Lessee herein contained, and the balance, if any, shall be paid to Lessee, and
Lessee hereby covenants and agrees that if Lessor shall recover or take
possession of said premises, as aforesaid, and be unable to relet and rent the
same so as to realize a sum equal to the rent hereby reserved, Lessee shall and
will pay to Lessor any and all loss or difference of rent for the residue of the
term. Lessee hereby gives to Lessor the right to place and maintain its usual
"For Rent" or "For Sale" signs upon the Leased Premises in the places that the
same are usually displayed on like property for the last 1 year of this Lease.
13. No waiver of any forfeiture, by acceptance of rent or otherwise
shall waive any subsequent cause of forfeiture or breach of any condition of
this Lease nor shall any consent by Lessor to any assignment or subletting of
said premises or any part thereof be held to waive or release any assignee or
sublessee from any of the foregoing conditions or covenants as against him or
them but such assignee and sublessee shall be expressly subject thereto.
14. Lessor also reserves the right to grant easements for utilities
over, across or under the surface of the Leased Premises, provided no such
easement shall interfere with the use of the Leased Premises by Lessee in the
manner herein provided for.
15. Any written notice required or permitted to be delivered
hereunder shall be deemed to be properly delivered if sent by Registered Mail,
deposited in the United States mails, or if delivered to Lessor, addressed to
Lessor, care of James I. Reid, 10461 Whitebridge Lane, St. Louis, Missouri
63141, or such other address as Lessor may hereafter designate by written notice
delivered to Lessee, and, if delivered to Lessee, addressed to Lessee at the
address of the Leased Premises or such other address as Lessee may hereafter
designate by written notice delivered to Lessor, and any such notice shall be
deemed to be delivered at the time of the mailing thereof.
16. Whereever the word "Lessor" is used herein, it shall be construed
to include the heirs, executors, administrators, successors, assigns or legal
representatives of Lessor (and each of the persons above named as Lessor), and
the word "Lessee" shall include the successors, assigns, or legal
representatives of Lessee, and the words "Lessor" and "Lessee" shall include
singular and plural, individual or corporation, subject always to the
restrictions herein contained as to subletting or assignment of this Lease.
17. The Lessor agrees that adequate Parking will be assigned to
Lessee in front of the office and the side of the building.
IN WITNESS WHEREOF, the parties hereto have executed the foregoing
instrument or caused the same to be executed the day and year first above
written.
LESSOR: LESSEE:
SUNSHINE PRODUCTS, INC.
__________________________ BY:_______________________
JAMES S. REID PRESIDENT
__________________________ ATTEST:__________________
FRANCES S. REID SECRETARY
- - --------------------------
JOAN R. MILBURN
MANUFACTURING/SUPPLY AGREEMENT
This Agreement made and entered into this 25th day of August, 1992,
by and between GENETIC LABORATORIES WOUND CARE, INC. (hereinafter "GLWC") and
TAPEMARK COMPANY, (hereinafter "TAPEMARK").
WITNESSETH:
WHEREAS, TAPEMARK has the ability to produce certain products or
their components, (hereinafter "PRODUCT"); and WHEREAS, GLWC and
TAPEMARK wish TAPEMARK to manufacture the PRODUCT for GLWC; NOW,
THEREFORE, in consideration of the mutual covenants herein contained,
GLWC and TAPEMARK agree as follows:
Section 1 - Term and Termination of Agreement
1.1 This Agreement shall be in effect from the date on signing through
and concluding August 25, 1999. It shall thereafter be renewable for
successive terms of three years each.
1.2 The Agreement may be terminated in the event TAPEMARK fails to
provide PRODUCT according to specifications, or does not meet agreed
upon completion dates noted on the Production Orders. In such event,
GLWC shall first give TAPEMARK written notice of any default and
allow a period of thirty (30) days for corrective action. If, after
such notice and elapse of time, TAPEMARK is unwilling or unable to
correct the default, GLWC may terminate this Agreement unilaterally,
without further notice.
1.3 This Agreement may also be terminated by either party upon ninety
(90) days notice without any fault on the part of the other party.
Section 2 - Manufacturing
2.1 TAPEMARK shall supply PRODUCT in accordance with specifications
provided by GLWC.
2.2 Any and all changes to the specifications by TAPEMARK need prior
notification and authorization by GLWC.
Section 3 - Pricing and Payments
3.1 All prices shall be completed and mutually agreed to in advance of
any manufacturing commencement by TAPEMARK. 3.2 Terms of payment will
be net thirty (30) days from date of receipt of shipment F.O.B. West
Saint Paul, Minnesota.
Section 4 - Equipment
4.1 TAPEMARK agrees to maintain and operate all equipment in compliance
with all applicable federal and state safety regulations.
4.2 TAPEMARK will be responsible for providing its own employees training
in the safe and proper operation of any equipment supplied by GLWC.
<PAGE>
Section 5 - Material Usage and Storage
5.1 TAPEMARK shall inspect and approve raw materials on the basis of
criteria provided by GLWC and will not be responsible for
defects in said material.
5.2 TAPEMARK agrees to handle and dispose of all material in accordance
with all applicable federal and state regulations.
Section 6 - Quality
6.1 TAPEMARK agrees to manufacture PRODUCT in accordance with mutually
agreed specifications and CGMP's outlined by the U.S. FDA and DOH.
6.2 GLWC shall have the right to reject PRODUCT that does not meet its
specifications.
6.3 Any rejection of Product shall be in writing and shall specify the
non-compliance.
6.4 TAPEMARK shall allow representatives of GLWC to inspect the
manufacturing site as needed pursuant to GLWC auditing procedures.
GLWC shall provide TAPEMARK with as much advance notification as
possible prior to such inspections. However, it shall have the right
of inspection at any time during normal business hours. In addition,
GLWC shall have the right to inspect the raw material vendors'
manufacturing facilities upon the same conditions. Consummation of
this Agreement shall be subject to a satisfactory preliminary
inspection by GLWC personnel of any manufacturing facility at which
PRODUCT or raw material is to be produced.
6.5 TAPEMARK shall obtain an Establishment Registration Number from FDA,
maintain traceability records on the PRODUCT manufactured, and
cooperate at its expense with GLWC in the event GLWC shall ever
initiate any remedial action for the PRODUCT covered by this
Agreement. TAPEMARK shall notify GLWC promptly in writing in the
event a governmental agency issues an inspection report or other
finding of non-compliance in connection with PRODUCT, its
manufacture, storage of handling and shall provide GLWC with a copy
of any such report or finding, edited for data or information not
related to GLWC or PRODUCT. GLWC shall have the right to participate
with TAPEMARK in the preparation of any response to said finding of
non-compliance. GLWC shall be responsible for creating and printing
all warnings, precautions, and PRODUCT labels required for the
PRODUCT, although TAPEMARK shall assist GLWC in the preparation of
these materials as requested.
6.6 With respect to product liability, each party shall be independently
responsible for its acts and omissions and shall indemnify and hold
the other party harmless for liability caused by its own acts or
omissions.
Section 7 - Confidential Information
7.1 TAPEMARK shall not grant access to any current or potential customers
to the immediate area and equipment where GLWC products are being
manufactured without prior approval of GLWC. The manufacturing
area(s) will be partitioned off to limit access when other customers
or customer representatives are present in the manufacturing
facility.
7.2 All information designated as confidential and exchanged between GLWC
and TAPEMARK while this Agreement is in effect shall be treated as
confidential and neither party shall, for a period of three (3) years
after termination of this Agreement or any renewal thereof (or such
longer period as may be specified in writing) exchange or disclose
such information to any third party without the prior written
approval of GLWC.
Section 8 - Responsibilities of GLWC - It shall be the responsibility of GLWC
hereunder to:
8.1 Issue purchase orders for all PRODUCT to be manufactured at TAPEMARK.
8.2 If GLWC changes the production schedule and interrupts an order in
process, GLWC will advise TAPEMARK either to: A. Transfer the balance
to another order.
B. Hold interrupted order open until further notification.
Section 9 - Notice
9.1 Any notices in correspondence given hereunder shall be in writing
directed to the addresses specified below and effective upon receipt
when delivered by hand or posted as first class Certified Mail,
Return Receipt Requested.
9.1.1 If intended for TAPEMARK;
TAPEMARK Company
150 East Marie Avenue
West St. Paul, MN 55118
Attention: President
9.1.2 If intended for GLWC:
Genetic Laboratories Wound Care, Inc.
2726 Patton Road
St. Paul, MN 55113
Attention: President
Section 10 - Production Planning and Scheduling
10.1 GLWC shall provide TAPEMARK with a rolling six (6) month estimate of
product requirements for production planning and material purchases.
GLWC orders will be issued to TAPEMARK to cover a minimum two (2)
months time frame. Requirements established for month one (1) will be
considered fixed. GLWC shall have the ability to make revisions to
Production Orders issued for month two (2).
10.2 GLWC shall review production requirements with TAPEMARK at regular
monthly intervals.
Section 11 - General
11.1 The relationship between GLWC and TAPEMARK is intended to be that of
buyer and seller. TAPEMARK and its employees, agents, and
representatives shall under no circumstances be considered agents,
partners, joint venturers, or representatives of GLWC. TAPEMARK shall
not act or attempt to act, or represent itself, directly or be
implication, as agent, joint venturer, or representative of GLWC or
in any manner assume or attempt to assume or create any obligation or
liability of any kind, nature, or sort expressed or implied on behalf
of or in the name of GLWC.
11.2 This Agreement and the exhibits attached hereto contain the entire
understanding of the parties, It shall superseded any other oral or
written agreements and shall be binding upon and inure to the benefit
of the respective parties, their successors and permitted assigns.
11.3 This agreement shall not be modified in any way without written
consent of both parties, and neither party shall have the right to
assign this Agreement, in whole or in part, without the prior written
consent of the other, which consent shall not be unreasonably
withheld provided, however, that GLWC may assign this Agreement to a
purchaser or successor of GLWC entire business related to this
subject matter.
11.4 This Agreement shall be construed in accordance with laws of the
State of Minnesota.
11.5 The obligations of either party to perform under this Agreement shall
be excused if such failure to perform or any delay is caused by
matters such as acts of god, strikes, civil commotion, riots, wars,
revolution, acts of government, or any other cause whether similar or
dissimilar to those enumerated which is reasonably beyond the control
of the party obligated to perform. Upon the occurrence of such event,
the duties and obligations of the parties shall be suspended for the
duration of the event preventing proper performance under this
Agreement; provided, however, that if such suspension shall continue
in excess of ninety (90) days, the parties shall attempt to arrive at
a mutually acceptable compromise within the spirit and intent of this
Agreement.
11.6 If any provision of this Agreement is held to be void or illegal, the
rest of the Agreement shall be deemed binding upon the parties
hereto.
IN WITNESS WHEREOF, the parties hereto have by their duly authorized
officers, executed this Agreement as of the day and year first
written above.
GENETIC LABORATORIES WOUND TAPEMARK COMPANY
CARE, INC.
By _____________________________ By _____________________________
H. James Thompson Robert C. Klas, Jr.
Title: President Title: President
Dated: August 25, 1992 Date: August 25, 1992
---------------------------- --------------------
EXHIBIT 21
LISTING OF SUBSIDIARIES OF DERMA SCIENCES, INC.
Name State of Incorporation
Genetic Laboratories Wound Care, Inc. Minnesota
Sunshine Products, Inc. Missouri
<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,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 2,338,552
<SECURITIES> 0
<RECEIVABLES> 1,378,219
<ALLOWANCES> 0
<INVENTORY> 1,645,556
<CURRENT-ASSETS> 5,598,118
<PP&E> 409,938
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,771,571
<CURRENT-LIABILITIES> 2,304,602
<BONDS> 0
0
50,709
<COMMON> 62,357
<OTHER-SE> 5,353,903
<TOTAL-LIABILITY-AND-EQUITY> 7,771,571
<SALES> 9,208,594
<TOTAL-REVENUES> 9,208,594
<CGS> 2,155,835
<TOTAL-COSTS> 2,155,835
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,638
<INCOME-PRETAX> (1,794,811)
<INCOME-TAX> 21,218
<INCOME-CONTINUING> (1,816,029)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,816,029)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
