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, 1999
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from _____ to ______
Commission file number: 1-31070
DERMA SCIENCES, INC.
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2328753
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
214 Carnegie Center, Suite 100, Princeton, New Jersey 08540
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(Address of principal executive offices) (Zip code)
Registrant's telephone number: (800) 825-4325
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value Boston Stock Exchange
Common Stock, $.01 par value Pacific Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
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
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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.[ ]
Issuer's revenues for its most recent fiscal year were $10,055,675.
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 24, 1999, was approximately $2,471,034.
The number of shares outstanding of each of the issuer's classes of
common equity, as of March 24, 2000, was 1,409,272.
Documents Incorporated by Reference: None
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Part I
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ITEM 1. DESCRIPTION OF BUSINESS
Overview
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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 December, 1999, pursuant to an Agreement and Plan of Merger dated
December 27, 1999, Genetic Labs was merged into Derma Sciences by means of a
tax-free reorganization whereby the separate corporate existence of Genetic Labs
ceased.
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 subsidiary 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
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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
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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.
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
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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 Sterile 4" x 8", 12 ply
(Saline) 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.
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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 CLOSURE
LC Strip 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.
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.
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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 Detergent and disinfectant. Used to clean
Disinfectant and disinfect any whirlpool or hardsurface.
Effective against a broad range of
microorganisms.
Distribution and Sales
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DOMESTIC
The Company employs a direct sales force and utilizes drug wholesalers,
specialty dealers and medical - surgical distributors to sell and distribute its
products in the hospital, home health, nursing home, and physician office
markets. The Company's direct sales force consists of a Vice President for
Sales, a Vice President for National Accounts, a Vice President for Distributor
Programs, three regional managers, twelve sales representatives and forty-two
manufacturer's representatives.
Direct sales representatives receive a base salary together with
commissions. Manufacturer's representatives receive commissions based upon sales
in their territory and/or market segment. Compensation to wholesalers, dealers
and distributors is derived from markups on the Company's products.
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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.
eCOMMERCE
The Company launched an eCommerce initiative in early 2000 with a view
to generating sales via the Internet. This initiative currently consists of two
web-sites one of which is devoted to the Company's institutional markets and one
of which is devoted to individuals caring for themselves at home. Sales
generated via the Internet are not material.
Competition
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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 Bristol Myers-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 Coloplast/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
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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."
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Patents, Proprietary and Non-Proprietary Technology
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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 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
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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
over-the-counter 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 over-the-counter
drugs and devices. All states have individual laws that 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.
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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 Class 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.
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 over-the-counter drugs pursuant to
the FDC Act are: Dermagran Spray, Dermagran Ointment, Mysotrol, Antibacterial
Soap and NutraShield Perineal Protectant.
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.
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Dermagran Spray, Dermagran Ointment and NutraShield Perineal Protectant
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
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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
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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 and 1999, Medicaid rebates represented approximately 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.
The Prospective Payment Systems (PPS) enacted by Congress as part of
the Balanced Budget Act of 1997 places "per capita" (per patient) limits on the
amount of Medicare payments for goods and services provided by skilled nursing
facilities. PPS has generally had a negative impact on the long-term care
industry as well as suppliers to this industry, including the Company.
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.
Employees
- - ---------
The Company maintained 62 full-time and 3 part-time employees at
December 31, 1999. The Company considers its employee relations to be
satisfactory.
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 $1,981
per month. The Company has a lease for offices located in Wilkes Barre,
Pennsylvania, at a rate of $3,088 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 lease
for 24,000 square feet of office and warehouse space in St. Louis, Missouri, at
a rate $7,298 per month which expires in August, 2002 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.
9
<PAGE>
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, 1999.
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 and, where applicable, as
adjusted for a 1:5 stock split implemented on August 2, 1999:
Quarter Ended High Low
------------- ---- ---
March 31, 1998 $10.63 $5.00
June 30, 1998 $11.25 $7.50
September 30, 1998 $8.13 $3.12
December 31, 1998 $5.63 $3.13
March 31, 1999 $3.75 $3.13
June 30, 1999 $3.91 $2.03
September 30, 1999 $1.38 $0.88
December 31, 1999 $2.63 $1.94
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 24, 2000, there were 1,243 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
10
<PAGE>
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 1999 and 1998, the Company experienced a 9% increase and a 40%
increase, respectively, in annual revenue. The Company incurred a net loss of
$2,406,306 and $1,816,029 in 1999 and 1998, respectively. The Company's net loss
for 1999 was primarily attributable to: (1) litigation costs associated with the
Company's defense of its Patent related to Dermagran (R) Ointment totaling
$500,000 (discussed below); (2) pricing disruption and loss of customers on
certain products associated with the Patent litigation issue, and (3)
restructuring costs associated with the consolidation and/or elimination of
certain facilities and functions totaling $350,000.
Results of Operations
- - ---------------------
The following table presents selected financial information for the
periods indicated expressed as a percentage of net sales:
1999 1998
------------- -------------
Net sales .......................... 100.0% 100.0%
Cost of sales ...................... 41.0 23.4
------------- -------------
------------- -------------
Gross profit ....................... 59.0 76.6
Selling, general and administrative 82.8 97.2
Other income and expenses, net 0.1 (1.1)
------------- -------------
Loss before income taxes............ (23.9) (19.5)
Income taxes ...................... 0.0 0.2
------------- -------------
Net loss............................ (23.9%) (19.7%)
============= =============
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.
The following table presents sales by product line, expressed in
dollars and as a percentage of total increase in net sales:
11
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
% of Total
Product Line 1999 1998 Variance Variance
------------ ---- ---- -------- --------
<S> <C> <C> <C> <C>
Chronic wound care $ 3,416,970 $5,534,254 $(2,117,284) (249%)
Wound closure strips
and fasteners 3,159,877 3,172,006 (12,129) (1%)
Skin care 3,478,828 502,334 2,964,365 350%
----------- ---------- ---------- ----
Total $10,055,675 $9,208,594 $ 847,081 100%
========== ========= ============= ====
</TABLE>
1999 Compared to 1998
- - ---------------------
NET SALES AND GROSS PROFIT
Net sales increased in 1999 by $847,081, or 9%, to $10,055,675 from
$9,208,594 in 1998. The decrease in net sales for the chronic wound care product
line of 249% is composed of a $1,512,671 net decrease in product sales and a
decrease of Medicaid rebates of $475,866. The wound closure strips and fastener
net sales remained constant. The increase of $2,964,365, or 350%, of total net
sales, in the skin care product line is due to the Sunshine Products acquisition
on October 31, 1998. The net sales of $502,334 reported for 1998 reflected sales
for the final two months.
Cost of sales expressed as a percentage of net sales increased from 23%
in 1998 to 41% in 1999. This increase is attributable primarily to the sales
mix. The skin care product line had the only increase in sales and also had the
highest cost of sales as a percentage of net sales. Cost of sales for the skin
care line was 57% and 47% for 1999 and 1998, respectively. This increase 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 were 40% and 37% for 1999 and 1998, respectively. Aggregate
cost of sales increased $1,970,945 to $4,126,780 in 1999 from $2,155,835 in
1998. The increase in aggregate cost of sales is attributable to the increase in
net sales and the current year's sales mix discussed above.
Gross profit expressed as a percentage of net sales decreased from 77%
in 1998 to 59% in 1999. Aggregate gross profit decreased $1,123,864, or 16%, to
$5,928,895 in 1999 from $7,052,759 in 1998. Both the decreases in the gross
profit percentage and the aggregate gross profit are attributable to the
previously discussed increase in net sales and the current year's sales mix.
OPERATING EXPENSES
Operating expenses, including other income and expense, decreased
$512,369, or 6%, from $8,847,570 in 1998 to $8,335,201 in 1999. Merger and
restructuring costs decreased $498,024 to $250,000 from $748,024 in 1998.
Additionally the ABS Litigation settlement of $819,353, (discussed below), was
reflected in the 1998 expenses while no settlements occurred during 1999. A
partial offset to these reductions in operating expenses occurred due to the
addition of Sunshine Products and its manufacturing operations, plus the
increase to the direct sales force which increased wages and travel costs.
Selling, general and administrative expense for 1999 increased
$750,656, or 10%, to $8,072,991 from $7,322,335 in 1998 and remained constant as
a percentage of sales at 80%. The increase is primarily due to the addition of
Sunshine Products and its manufacturing operations plus additions to the direct
sales force which increased wages and travel costs.
12
<PAGE>
LITIGATION SETTLEMENT
In June 1998 the Company commenced an action in the United States
District Court for the Middle District of Florida against Hyperion Medical, Inc.
for infringement of the Company's patent on its Dermagran Ointment. Derma
further alleged that Hyperion had engaged in unfair competition by
misappropriating the formula for Dermagran Ointment. Later in 1998 the Company
initiated actions against Medical Resources, Inc. and Corwood Laboratories, Inc.
for the same patent infringement and misappropriation causes of action brought
against Hyperion.
During 1999 the foregoing actions were settled pursuant to a
stipulation and judgement wherein Hyperion, Medical Resources and Corwood admit
the validity and enforceability of the Company's Dermagran Ointment patent and
consent to an injunction permanently enjoining them infringing the Company's
patent.
On June 8, 1998 the Company and ABS LifeSciences, Inc. ("ABS"), a
subsidiary of Integra Life Sciences, Inc. agreed to 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 pays 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 net losses in 1999 and 1998 of $2,406,306 and
$1,816,029, or $1.84 and $1.45 per share, respectively.
Liquidity and Capital Resources
- - -------------------------------
At December 31, 1999 and 1998 the Company had working capital of
$1,064,633 and $3,293,516, respectively.
On August 16, 1999, the Company completed a private placement of its
Series C Convertible Bonds ("Series C Bonds") in which an aggregate of $875,000
was raised. The Series C Bonds originally matured on August 15, 2000. However,
in March of 2000 the bondholders extended the maturity of the Series C Bonds
until January 7, 2001. The Series C Bonds pay interest only, at New York prime,
until maturity. Series C Bonds may be converted, at the option of the
bondholder, into units ("Series C Units") each consisting of one share of Series
C Convertible Preferred Stock ("Series C Preferred Stock") convertible into one
share of Common Stock and one warrant to purchase one share of Common Stock at a
price of $1.10. In March 2000, bondholders owning $475,000 in aggregate
principal amount of the Series C Bonds converted the principal and accrued
interest of their Series C Bonds into Series C Units.
On December 29, 1999, the Company completed a private placement of its
Series D Convertible Bonds ("Series D Bonds") in which an aggregate of $600,000
was raised. The Series D Bonds originally matured on December 31, 2000. However,
in March of 2000 the bondholders extended the maturity of the Series D Bonds
until January 7, 2001. The Series D Bonds pay interest only, at New York prime,
until maturity. Series D Bonds may be converted, at the option of the
bondholder, into units ("Series D Units") each consisting of one share of Series
D Convertible Preferred Stock ("Series D Preferred Stock") convertible into one
share of Common Stock and one warrant to purchase one share of Common Stock at a
price of $1.0125. In March 2000, bondholders owning $150,000 in aggregate
principal amount of the Series D Bonds converted the principal and accrued
interest of their Series D Bonds into Series D Units.
The Company has a short-term line of credit facility for $1,000,000 of
which $650,000 was outstanding at December 31, 1999 at a fluctuating rate per
annum equal to the prime rate minus 1%, (7.5% at December 31, 1999). The
maturity date of the line is October 31, 2000. Cash on deposit with the bank
secures this line of credit. The Company utilizes its line of credit primarily
for working capital.
13
<PAGE>
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 December 3, 1999 by the NASDAQ Stock Market
("NASDAQ") that it no longer met the minimum $2,000,000 net tangible assets
requirement for continued listing on the NASDAQ SmallCap Market. On December 17,
1999 the Company submitted its definitive plan for achieving compliance with
this requirement. The NASDAQ staff granted an extension until March 31, 2000 for
the Company to provide evidence of such compliance.
The Company has requested and been granted an additional extension of
the March 31, 2000 deadline. The Company believes that it will be able to
provide NASDAQ with evidence of its timely compliance with the minimum net
tangible assets requirement so as to avoid delisting from the NASDQ SmallCap
Market.
Ultimately, the Company's failure to maintain the minimum net tangible
assets requirement would result in the Company's common stock being delisted
from the NASDAQ 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 NASDAQ
SmallCap Market could make it difficult for the Company's shareholders to sell
their shares and could also make it more difficult for the Company to secure
additional financing.
YEAR 2000 COMPATIBILITY
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission-critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its internal systems, or the products and services of third
parties. The Company will continue to monitor its mission-critical computer
applications and those of its suppliers and vendors throughout the year 2000 to
ensure that any latent year 2000 matters that may arise are addressed promptly.
14
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Index
-----
Description Page
- - -----------
Report of Independent Auditors........................................... 16
Balance Sheets........................................................... 17
Statements of Operations................................................. 18
Statements of Shareholders' Equity....................................... 19
Statements of Cash Flows................................................. 20
Notes to Financial Statements............................................ 21
15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Derma Sciences, Inc.
We have audited the accompanying balance sheets of Derma Sciences,
Inc., as of December 31, 1999 and 1998 and the related statements of operations,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the results of its operations and its
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 27, 2000
16
<PAGE>
DERMA SCIENCES, INC.
Consolidated Balance Sheets
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
December 31,
ASSETS 1999 1998
- - --------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 1,221,691 $ 2,338,552
Accounts receivable, net of allowances of
$151,400 in 1999 and $140,000 in 1998 2,041,099 1,378,219
Inventories 1,289,138 1,645,556
Current portion of officers' notes receivable 19,330 19,330
Prepaid expenses and other current assets 223,120 216,461
- - --------------------------------------------------------------------------------
Total current assets 4,794,378 5,598,118
Property and equipment, net 382,542 409,938
Other Assets
Officers' notes receivable 76,034 76,034
Goodwill and other intangibles, net 1,548,246 1,674,426
Other 838 13,055
- - --------------------------------------------------------------------------------
Total Assets $ 6,802,038 $ 7,771,571
- - --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- - --------------------------------------------------------------------------------
Current Liabilities
Bank line of credit $ 650,000 $ 300,000
Accounts payable 1,261,620 1,034,415
Accrued expenses and other
current liabilities 493,964 970,187
- - --------------------------------------------------------------------------------
Total current liabilities 2,405,584 2,304,602
- - --------------------------------------------------------------------------------
Long-Term Liabilities
Convertible bonds 1,325,000 -
- - --------------------------------------------------------------------------------
Total liabilities 3,730,584 2,304,602
- - --------------------------------------------------------------------------------
Shareholders' Equity
Common stock $.01 par value,
30,000,000 shares authorized;
issued and outstanding: 1,325,938
shares in 1999; 1,247,158 in 1998 13,259 12,471
Convertible preferred stock $.01 par
value; 11,750,000 shares authorized;
issued and outstanding: 939,188
shares in 1999; 1,014,180 in 1998 9,392 10,142
Additional paid-in capital 10,798,197 10,787,444
Accumulated deficit (7,749,394) (5,343,088)
- - --------------------------------------------------------------------------------
Total Shareholders' Equity 3,071,454 5,466,969
- - --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 6,802,038 $ 7,771,571
- - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
17
<PAGE>
DERMA SCIENCES, INC.
Consolidated Statements of Operations
- - --------------------------------------------------------------------------------
Year Ended December 31,
1999 1998
- - --------------------------------------------------------------------------------
Net sales $10,055,675 $ 9,208,594
Cost of sales 4,126,780 2,155,835
- - --------------------------------------------------------------------------------
Gross profit 5,928,895 7,052,759
- - --------------------------------------------------------------------------------
Operating expenses 8,322,991 8,946,515
Other (income) and expense, net 12,210 (98,945)
- - --------------------------------------------------------------------------------
8,335,201 8,847,570
- - --------------------------------------------------------------------------------
Loss before provision for income taxes (2,406,306) (1,794,811)
Provision for income taxes - 21,218
- - --------------------------------------------------------------------------------
Net Loss $(2,406,306) $(1,816,029)
- - -------------------------------------------------------------------------------
Loss per common share basic and diluted $ (1.84) $ (1.45)
- - --------------------------------------------------------------------------------
Shares used in computing loss per common share 1,305,928 1,250,636
- - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
18
<PAGE>
DERMA SCIENCES, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1999 1998
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net loss $(2,406,306) $(1,816,029)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 237,966 300,634
Medicaid rebate adjustments - (475,866)
Provision for bad debts 111,400 21,233
Changes in operating assets and
liabilities, net of effects
of purchased business
Accounts receivable (774,280) (260,477)
Inventories 356,418 (200,434)
Prepaid expenses and other current assets (6,659) 63,152
Other assets 12,217 50,002
Accounts payable 227,205 (235,683)
Accrued expenses and other current liabilities (476,223) 359,950
- - -------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,718,262) (2,193,518)
- - -------------------------------------------------------------------------------------------------------------------
Investing Activities
Purchases of property and equipment, net (84,390) (124,505)
Increase in patents and trademarks - (3,826)
Acquisition of business, net of cash acquired - (1,525,000)
- - -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (84,390) (1,653,331)
- - -------------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in bank line of credit 350,000 (249,633)
Proceeds from issuance of convertible
securities, net of issuance costs 1,325,000 3,955,000
Retirement of treasury stock (1,018) (39,633)
Proceeds from issuance of common stock - 9,514
Collection of officers' notes receivable - (4,407)
Proceeds from exercise of stock options 11,809 -
- - -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,685,791 3,670,841
- - -------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,116,861) (176,008)
Cash and cash equivalents
Beginning of year 2,338,552 2,514,560
- - -------------------------------------------------------------------------------------------------------------------
End of year $ 1,221,691 $ 2,338,552
- - -------------------------------------------------------------------------------------------------------------------
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, 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 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
Conversion of convertible shares (3,750) 3,750 - - -
One-for-Five reverse split (37,567) (53,037) 90,604 - -
Exercise stock options - 189 11,620 - 11,809
Retirement of Treasury
stock, at cost - - (1,018) - (1,018)
Net loss - - - (2,406,306) (2,406,306)
- - -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 9,392 $ 13,259 $ 10,798,197 $(7,749,394) $ 3,071,454
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Derma Sciences, Inc., and its 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. In December, 1999, pursuant to an Agreement and Plan of Merger
dated December 27, 1999, Genetic Labs was merged into Derma Sciences by means of
a tax-free reorganization whereby the separate corporate existence of Genetic
Labs ceased.
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 - In 1998, 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.
In 1999, Genetic Labs was merged into Derma Sciences whereby the corporate
existence of Genetic Labs ceased. All significant intercompany accounts and
transactions have been eliminated upon consolidation.
Use of Estimates - In conformity with accounting principles generally
accepted in the United States, 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.
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.
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)
Reverse Stock Split - In August, 1999, the Company effected a
one-for-five reverse split of its Common and Preferred Shares (Note 11). All
share and per share amounts for all periods presented have been adjusted for the
split.
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. Goodwill
on the Sunshine Products acquisition is being amortized over 12 years. Contract
rights are amortized over 15 years.
Cash Flow Information - Interest paid during 1999 and 1998 amounted to
$61,099 and $54,638, respectively. Income taxes paid during 1999 and 1998
amounted to $37,534 and $20,000, respectively.
Non-cash transactions in 1998 included receipts of 1,935 shares of
common stock in repayment of officer's 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.
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.
Reclassifications - Certain reclassifications have been made to the
1998 financial statements to conform to the 1999 presentation.
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 338,158
shares of the Company's common stock for all the outstanding stock of Genetic
Labs. In December, 1999, pursuant to an Agreement and Plan of Merger dated
December 27, 1999, Genetic Labs was merged into Derma Sciences by means of a
tax-free reorganization whereby the separate corporate existence of Genetic Labs
ceased. The accompanying financial statements for the year ended December 31,
1998 are based on the assumption that the companies were combined for 1998.
22
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
2. ACQUISITIONS (CONTINUED)
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:
<TABLE>
<CAPTION>
Company Genetic Labs Total
--------- ------------ ---------
<S> <C> <C> <C>
Net sales $ 3,585,853 $ 2,048,992 $ 5,634,845
--------- --------- ---------
Net income (loss) $ (831,845) $ 61,762 $ (770,083)
---------- ----------- -----------
</TABLE>
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, 1998.
1998
----
Net Sales $ 11,564,647
Net Income $ (1,712,942)
Earnings Per Share:
Basic and Diluted $ (1.35)
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 were classified as
goodwill and are being amortized using the straight-line method over twelve
years.
23
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
3. INVENTORIES
Inventories comprise the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
----------- -------
<S> <C> <C>
Finished goods $1,108,244 $1,446,816
Raw materials 50,693 31,972
Supplies 159,931 166,768
---------- ----------
$1,289,138 $1,645,556
========= =========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment comprise the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
----------- -------
<S> <C> <C>
Furniture and equipment $952,135 $867,745
Leasehold improvements 14,543 14,543
-------- --------
966,678 882,288
Less: Accumulated depreciation 584,136 472,350
------- -------
$382,542 $409,938
======= =======
</TABLE>
5. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles comprise the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
----------- -------
<S> <C> <C>
Goodwill $1,497,364 $1,497,365
Patents and trademarks 451,417 454,469
Contract rights 350,000 350,000
--------- ---------
2,298,782 2,301,834
Less: Accumulated amortization 750,535 627,408
--------- ---------
$1,548,246 $1,674,426
========= =========
</TABLE>
24
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
6. CONCENTRATION OF CREDIT RISK
The Company sells almost all of its products to medical supply
companies, pharmacies and healthcare providers. At December 31, 1999 and 1998,
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.
7. Accrued Expenses
Accrued expenses comprise the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
----------- -------
<S> <C> <C>
Salary, wages and severance $ 85,925 $ 46,889
Professional fees 31,848 205,045
Restructuring charges 121,631 463,183
Other 186,595 125,554
Rebates payable 49,873 125,068
-------- -------
$475,872 $965,739
======= =======
</TABLE>
8. BANK LINE OF CREDIT
The Company has a $1,000,000 bank line of credit facility, with
$650,000 and $300,000 outstanding at December 31, 1999 and 1998, respectively,
which amounts approximate fair value. The maturity date of the line is October
31, 2000. The line of credit agreement requires monthly interest payments at
prime minus 1%, or 7.5% at December 31, 1999. Cash deposited with the bank of
$1,000,000 secures the line of credit.
25
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
9. 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 $355,247 and $231,660 in 1999 and 1998, respectively. Minimum future
rental payments under non-cancelable operating leases as of December 31, 1999
are:
Year Ending
December 31,
2000 $354,072
2001 324,951
2002 141,063
2003 9,526
---------
Total minimum future rental payments $ 829,612
=======
10. INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
---- ----
<S> <C> <C>
Deferred tax liabilities:
Prepaid insurance $ (4,177) $ (10,842)
Contributions (812) -
Patent amortization (69,176) (76,856)
----------- ----------
Total deferred tax liabilities (74,165) (87,698)
----------- ----------
Deferred tax assets:
Net operating loss carryforwards 2,353,095 1,863,403
Depreciation 84,350 31,219
Amortization of intangibles 150,142 108,656
Foreign tax, research and
development credits 24,559 24,559
Accrued Expenses 189,357 -
Allowance for bad debts 61,458 32,881
Other 2,263 65,333
------------ -----------
2,865,584 2,126,051
Valuation allowance (2,791,419) (2,038,353)
--------- ---------
Total deferred tax assets 74,165 87,698
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
</TABLE>
26
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
10. INCOME TAXES (CONTINUED)
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:
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Current:
Federal $ - $19,000
State - 2,218
------- -------
Total current $ - $21,218
======= ======
Deferred:
Federal $ - $ -
State - -
------- -----
Total deferred $ - $ -
======= =====
Total provision for income taxes $ - $21,218
======= ======
</TABLE>
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense (benefit)
is:
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Tax benefit at U.S. statutory rates $(818,144) $(610,236)
State income taxes, net of
federal benefit (16,539) (63,327)
Increase in valuation allowance 809,615 599,717
Nondeductible expenses 25,068 14,950
Tax on unconsolidated subsidiary
(pre acquisition) - 21,218
-------
Other - (58,896)
------- --------
$ 0 $ 21,218
======= ========
</TABLE>
At December 31, 1999, the Company has net operating loss carryforwards
of approximately $6,200,000 for federal tax purposes that begin to expire in
years 2012 through 2019. For state tax purposes, the Company has net operating
loss carryforwards of $4,100,000 that expire in years 2004 through 2009. 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.
27
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
11. SHAREHOLDERS' EQUITY
Increase in Authorized Common Stock
On May 26, 1999 the Company, upon recommendation of its Board of
Directors and approval of its shareholders, amended its articles of
incorporation to increase authorized Common Stock from 15,000,000 to 30,000,000
shares. The par value of the Common Stock remains at $.01 per share.
Reverse Stock Split
On August 2, 1999 the Company, upon recommendation of its Board of
Directors and approval of its shareholders, amended its articles of
incorporation to implement a one-for-five reverse split of its Common Stock,
Series A Preferred Stock and Series B Preferred Stock pursuant to which: (1)
each five issued and outstanding shares of Common Stock were combined into one
share of Common Stock; (2) each five issued and outstanding shares of Series A
Preferred Stock were combined into one share of Series A Preferred Stock; and
(3) each five issued and outstanding shares of Series B Preferred Stock were
combined into one share of Series B Preferred Stock. Fractional shares resulting
from the reverse split were rounded to the next higher number of whole shares.
The number of authorized shares and the par value of the Common Stock, Series A
Preferred Stock and the Series B Preferred Stock were not affected by the
reverse split.
Series A Convertible Bonds
On November 19, 1997, the Company completed a private placement of its
Series A Convertible Bonds ("Series A Bonds") in which an aggregate of $1.8
million was raised. Terms of the Series A Bonds required that upon approval by
the Company's shareholders of at least a new class of preferred stock (which
approval was obtained in January, 1998) the Series A Bonds automatically convert
into units ("Series A Units") at the rate of $4.00 per Series A Unit. Each
Series A Unit consists of one share of Series A Preferred Stock convertible into
one share of Common Stock and one warrant to purchase one share of Common Stock
at a price of $4.50.
Series B Convertible Bonds
On July 14, 1998, the Company completed a private placement of its
Series B Convertible Bonds ("Series B Bonds") in which an aggregate of $4.0
million was raised. Terms of the Series B Bonds required that upon approval by
the Company's shareholders of at least 666,680 additional shares of preferred
stock (which approval was obtained in September, 1998) the Series B Bonds
automatically convert into units ("Series B Units") at the rate of $6.00 per
Series B Unit. Each Series B Unit consists of one share of Series B Preferred
Stock convertible into one share of Common Stock and one warrant to purchase one
share of Common Stock at a price of $6.75.
Series C Convertible Bonds
On August 16, 1999, the Company completed a private placement of its Series
C Convertible Bonds ("Series C Bonds") in which an aggregate of $875,000 was
raised. The Series C Bonds originally matured on August 15, 2000. However, in
March of 2000 the bondholders extended the maturity of the Series C Bonds until
January 7, 2001. The Series C Bonds pay interest only, at New York prime, until
maturity. Series C Bonds may be converted, at the option of the bondholder, into
795,455 units ("Series C Units") each consisting of one share of Series C
Convertible Preferred Stock ("Series C Preferred Stock") convertible into one
share of Common Stock and one warrant to purchase one share of Common Stock at a
price of $1.10. In March 2000, bondholders owning $475,000 in aggregate
principal amount of the Series C Bonds converted the principal and accrued
interest of their Series C Bonds into Series C Units.
28
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
11. SHAREHOLDERS' EQUITY (CONTINUED)
Series D Convertible Bonds
On December 29, 1999, the Company completed a private placement of its
Series D Convertible Bonds ("Series D Bonds") in which an aggregate of $450,000
was raised. The Series D Bonds originally matured on December 31, 2000. However,
in March of 2000 the bondholders extended the maturity of the Series D Bonds
until January 7, 2001. The Series D Bonds pay interest only, at New York prime,
until maturity. Series D Bonds may be converted, at the option of the
bondholder, into 444,444 units ("Series D Units") each consisting of one share
of Series D Convertible Preferred Stock ("Series D Preferred Stock") convertible
into one share of Common Stock and one warrant to purchase one share of Common
Stock at a price of $1.0125. In March 2000, bondholders owning $150,000 in
aggregate principal amount of the Series D Bonds converted the principal and
accrued interest of their Series D Bonds into Series D Units.
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 350,000 shares of preferred stock as
Series A Convertible Preferred Stock ("Series A Preferred") with the above and
below described rights and preferences. Upon authorization of the Series A
Preferred, the $1,400,000 of outstanding Series A Convertible Bonds were
automatically converted into 350,000 Series A Units (described above under
Series A Convertible Bonds) effective as of December 31, 1997. The Series A
Preferred bears no dividend and there are no conversion price reset or
anti-dilution provisions.
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 666,680 shares of the
10,000,000 shares of newly authorized preferred stock as Series B Convertible
Preferred Stock ("Series B Preferred") with the above and below designated
rights and preferences. Upon authorization of the Series B Preferred, the
$4,000,000 of the outstanding Series B Convertible Bonds were automatically
converted into 666,880 Series B Units (described above under Series B
Convertible Bonds). The Series B Preferred bears no dividend and there are no
conversion price reset or anti-dilution provisions.
During 1998, 2,500 shares of Series A Preferred were converted into
2,500 shares of Common Stock.
During 1999, 75,000 shares of Series A Preferred were converted into
75,000 shares of Common Stock.
Stock Purchase Warrants
At December 31, 1999, the Company had 2,532,728 warrants outstanding to
purchase the Company's common stock, all of which are currently exercisable at
prices ranging from $4.50 to $6.75 and expiring 1999 through 2009.
29
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
12. STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its stock options. 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 300,000 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 36,000 and 76,055 shares of common stock were granted to officers
and directors in 1999 and 1998 respectively, with exercise prices ranging from
$4.00 to $6.00 per share. Options to purchase 3,780 shares of common stock were
exercised during 1999.
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 1999 and 1998: risk-free interest rate of 6.25% and 6.0%,
respectively; dividend yield of 0%; a volatility factor of the expected market
price of the Company's common stock of 0.830 and 0.885 respectively; and a
weighted average life of the option of 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. The Company's stock options have characteristics significantly
different from those of traded options.
Further, changes in the subjective input assumptions related to the
options can materially affect the fair value estimate. Therefore, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of the Company's stock options.
For purposes of pro forma disclosures, the estimated fair value of
traded options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
1999 1998
-------- ------
Pro forma net loss $(2,603,372) $(2,369,376)
Pro forma loss per common share $ (1.99) $ (1.90)
30
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
12. STOCK OPTIONS (CONTINUED)
A summary of the Company's stock option activity and related
information for the years ended December 31, follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
<S> <C> <C> <C> <C>
Outstanding - beginning of year 419,766 $ 6.60 267,611 $7.20
Granted 43,000 5.41 152,155 5.60
Exercised (3,780) 3.12 - -
Forfeited (73,100) 4.07 - -
-------- --------
Outstanding - end of year 385,886 $7.00 419,766 $6.60
======= ========
Exercisable at end of year 360,866 357,666
======= =======
</TABLE>
Exercise prices for options outstanding under the stock option plan,
non-statutory option agreements and employment agreements at December 31, 1999
ranged from $1.80 to $12.50. The weighted average fair value of options issued
was $3.47 in 1999.
13. 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 zero and $3,600 for the years ended December 1999 and 1998,
respectively.
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 1999 and 1998, such compensation was $64,291and $99,000
respectively.
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
$175,500 and $18,035 in 1999 and 1998, respectively.
14. 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.
Repayments of other officers' notes receivable during 1999 and 1998
totaled $0 and $20,000, respectively inclusive of principal and interest.
31
<PAGE>
DERMA SCIENCES, INC.
Notes to Consolidated Financial Statements
15. MEDICAID REBATES
During 1999 and 1998 the Company negotiated and received $0 and
$475,000, respectively, related to Medicaid rebate adjustments. This amount is
reflected in the accompanying statement of operations. At December 31, 1999, the
company has estimated that it will receive Medicaid Rebate adjustments of
$170,000, which have been recorded as accounts receivable at December 31, 1999.
16. YEAR 2000 (UNAUDITED)
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission-critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its internal systems, or the products and services of third
parties. The Company will continue to monitor its mission-critical computer
applications and those of its suppliers and vendors throughout the year 2000 to
ensure that any latent year 2000 matters that may arise are addressed promptly.
32
<PAGE>
Part III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Executive Officers
- - --------------------------------
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name Age Position held with the Company
---- --- ------------------------------
Edward J. Quilty (2)(3)......................... 49 Chairman of the Board and Chief Executive Officer
Richard S. Mink ................................ 47 Vice President and Chief Operating Officer
Stephen T. Wills, CPA .......................... 43 Vice President and Chief Financial Officer
Srini Conjeevaram (1)(2)........................ 41 Director
Timothy J. Patrick (1)(2)(3).................... 41 Director
Mary G. Clark, RN ............................. 67 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.
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
33
<PAGE>
University, West Chester, Pennsylvania in 1979 and a Master of Science in
Taxation from Temple University, Philadelphia, Pennsylvania in 1994.
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.
MARY G. CLARK, RN has served as director of the Company since May,
1999. She founded the Company and has served as a Special Consultant for
Scientific Affairs to the Company since March, 1994. She served as Chairman of
the Board of the Company from February, 1991 through March, 1994 and Vice
Chairman from April, 1994 to May, 1998. Mrs. Clark served as the Company's
President from 1984 to 1990 and as director of the Company from November, 1984
to March, 1994. She is the inventor and original patent holder of the Company's
flagship products, Dermagran Spray and Dermagran Ointment. She is also the
founder, owner and operator of the Primary Medical and Nutritional Clinic, Old
Forge, Pennsylvania, a clinic specializing in medical and nutritional
preventative therapies. She has extensive clinical medical experience with
emphasis in the nutritional biochemistry and ortho-molecular medicine fields.
Mrs. Clark earned a Registered Nurse degree from Scranton State General Hospital
in 1954 and a Clinical Nurse Therapist degree in Intensive Cardiovascular Care
from Mechanicsburg Rehabilitation Center in 1972. She was appointed by former
Pennsylvania Governor Robert P. Casey to membership on the Entrepreneurial
Advisory Board for the Commonwealth of Pennsylvania.
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 with the exception of reports of Redwood Asset
Management, Oslo, Norway.
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 1997, 1998 and 1999:
34
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation
------------------- All Other
Name and Principal Position Year Salary Bonus Options(#)* Compensation
- - --------------------------- ---- ------ ----- ----------- ------------
<S> <C> <C> <C> <C> <C>
Edward J. Quilty 1999 $150,000 $25,000 -- --
Chairman and Chief Executive Officer 1998 $150,000 $25,000 76,055(1) --
1997 $149,986 -- 60,000(2) --
Richard S. Mink 1999 $160,500 -- -- --
Vice President and 1998 $157,875 $ 6,000 -- --
Chief Operating Officer 1997 $100,961 $25,000(3) 40,000 --
Stephen T. Wills, CPA, MST 1999 $109,500(4) -- 40,000 --
Vice President and 1998 $100,000(4) -- -- --
Chief Financial Officer 1997 $ 85,000(5) -- 15,000 --
John T. Borthwick (6) 1999 $180,000 -- -- $ 9,962(7)
Vice President for Sales 1998 $180,000 -- -- $ 9,962(7)
1997 $180,000 -- 10,000 $ 9,962(7)
Charles F. Caudell, III (8) 1999 $160,500 -- -- --
Former Executive Vice President for 1998 $157,875 $ 6,000 -- --
Field Operations 1997 $100,961 -- 40,000 --
</TABLE>
- - ---------------------------
* All options have been adjusted to effect the Company's 5-for-1 stock
split effective August 2, 1999.
(1) Options issued pursuant to the anti-dilution provisions of Mr. Quilty's
employment agreement.
(2) Includes 30,000 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 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) Mr. Borthwick resigned as Chief Executive Officer and President in May,
1997 and November, 1997, respectively.
(7) The Company enrolled Mr. Borthwick in a split-dollar life insurance
program on July 1, 1993. The monthly premiums are $830.18 for $500,000
coverage.
(8) Mr. Caudell resigned in August, 1999. Of the compensation shown for
1999, $60,188 represents severance payments.
OPTION GRANTS TABLE
The following table sets forth information regarding grants of stock
options to the following named executive officer made during the year ended
December 31, 1999:
<TABLE>
<CAPTION>
Percent of Total Exercise
Options Options Granted to Price
Name Granted (#) Employees in 1999 ($/Share) Expiration Date
---- ----------- ------------------ --------- ---------------
<S> <C> <C> <C> <C>
Stephen T. Wills 12,000 (1) 50.0% $6.00 March 16, 2009
20,000 (2) 50.0% $6.00 December 14, 2008
</TABLE>
- - -------------------
(1) Options are 100% vested.
(2) Options vest at the rate of 25% per year commencing February 1, 1999.
See Employment Arrangements below.
35
<PAGE>
AGGREGATE YEAR END OPTION VALUE TABLE
The following table sets forth information regarding the aggregate
number and value of options to purchase Common Stock held by the named executive
officers as of December 31, 1999. No options have been exercised:
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised
Underlying Unexercised In-The-Money Options
Options at December 31, 1999 (#) At December 31, 1999 ($)(1)
-------------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Edward J. Quilty ................... 132,055 4,000 0 0
Richard S. Mink .................... 36,000 4,000 0 0
Charles F. Caudell, III ............ 36,000 4,000 0 0
Stephen T. Wills, CPA............... 37,000 10,000 0 0
John T. Borthwick .................. 26,000 4,000 0 0
</TABLE>
- - -------------------
(1) Determined based on the fair market value for the Company's Common Stock at
December 31, 1999 of $2.0625 per share.
EMPLOYMENT ARRANGEMENTS
EDWARD J. QUILTY
The Company employs Edward J. Quilty, its Chairman and Chief Executive
Officer, under an oral agreement (the "Agreement") providing for compensation at
the rate of $175,000 per year. The Agreement is subject to termination by the
Company or Mr. Quilty at any time and for any reason.
RICHARD S. MINK
The Company entered into an employment agreement on May 7, 1999 (the
"Agreement") with Richard S. Mink, its Vice President and Chief Operating
Officer. The Agreement continues for an indefinite term and can be cancelled by
either party upon thirty days notice. The Agreement provides that Mr. Mink
receive the following: (1) base compensation of $160,500 per year, and (2)
incentive compensation as determined by the Company's Board of Directors upon
recommendation of the Chairman and Chief Executive Officer.
The Agreement further provides that if the Agreement is terminated by
the Company other than "for cause," Mr. Mink will receive severance pay equal to
one year's base salary and the period for Mr. Mink to exercise previously
granted stock options will be extended to the earlier of three years from the
termination date or the original expiration date of said options.
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 continues for an indefinite term and can be
cancelled 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) 20,000 non-qualified
stock options, exercisable at $6.00, which options become exercisable in 5,000
increments on February 1, 1999, December 15, 1999, December 15, 2000 and
December 15, 2001. 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
36
<PAGE>
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 20,000 non-qualified stock options, exercisable at a price of $11.25
per share, of which all were vested as of 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 $11.55 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 base compensation earned 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 base compensation earned 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 July 14, 1998. The
number of shares of common stock reserved for issuance pursuant to the Plan is
300,000 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.
37
<PAGE>
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, 1999, options to purchase 76,200 shares of the
Company's common stock at prices ranging from $4.00 to $5.625 per share had been
granted under the Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 24, 2000 certain information
regarding the current beneficial ownership of shares of the Company's Common
Stock by: (i) each person known by the Company to own beneficially more than 5%
of the outstanding shares of Common Stock, (ii) each director of the Company,
(iii) each officer of the Company, and (iv) all directors and officers of the
Company as a group:
<TABLE>
<CAPTION>
Number of Shares Percent
Name and Address of Beneficial Owner (1) Beneficially Owned(12) Beneficially Owned(12)
- - ---------------------------------------- ---------------------- ----------------------
<S> <C> <C>
Srini Conjeevaram (2).................................. 2,651,496 65.30%
Hambrecht & Quist California (3)....................... 993,788 41.36%
Redwood Asset Management (4)........................... 573,562 30.57%
Edward J. Quilty (5)................................... 371,117 21.35%
Mary G. Clark, RN (6) ................................. 155,095 11.01%
Stephen T. Wills, CPA (7).............................. 135,920 8.84%
Richard S. Mink (8) ................................... 86,107 5.78%
John T. Borthwick (9).................................. 79,883 5.56%
Timothy J. Patrick (10)................................ 2,000 (*)
All directors and officers as a group (6 persons) (11) 3,481,617 74.40%
</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: 125,000 shares of Class A Convertible
Preferred Stock ("Class A Preferred"); 75,000 warrants to purchase Common
Stock exercisable at $4.50 per share ("Class A Warrants"); 416,667 shares
of Class B Convertible Preferred Stock ("Class B Preferred"); 416,667
warrants to purchase Common Stock exercisable at $6.75 per share ("Class B
Warrants"); bonds convertible into 363,636 shares of Class C Convertible
Preferred Stock ("Class C Preferred") and 363,636 warrants to purchase
Common Stock exercisable at $1.10 per share ("Class C Warrants"); bonds
convertible into 444,445 shares of Class D Convertible Preferred Stock
("Class D Preferred") and 444,445 warrants to purchase Common Stock
exercisable at $1.01 per share ("Class D Warrants"); and exercisable
options to purchase 2,000 shares of Common Stock. No additional options to
purchase Common Stock will become exercisable within 60 days of March 24,
2000.
(3) Hambrecht & Quist California can be reached at: One Bush Street, San
Francisco, California 94104. Ownership consists of: 122,500 shares of
Class A Preferred; 122,500 Class A Warrants; 101,667 shares of Class B
Preferred; 101,667 Class B Warrants; bonds convertible into 272,727 shares
of Class C Preferred and 272,727 Class C Warrants.
(4) Redwood Asset Management can be reached at: Ovre Ullorn Terrasse 32, 0358
Oslo, Norway. Ownership consists of: 106,334 shares of Common Stock;
50,000 Class A Warrants; 83,334 Class B Warrants; 68,182 shares of Class C
Preferred; 68,182 Class C Warrants; 98,765 shares of Class D Preferred;
and 98,765 Class D Warrants.
(5) Ownership consists of: 42,100 shares of Common Stock; 38,000 Class A
Warrants; 8,334 shares of Class B Preferred; 8,334 Class B Warrants;
45,455 shares of Class C Preferred; 45,455 Class C Warrants; 24,692 shares
of Class D Preferred; 24,692 Class D Warrants; and exercisable options to
purchase 134,055 shares of
38
<PAGE>
Common Stock. No additional options to purchase Common Stock will become
exercisable within 60 days of March 24, 2000.
(6) Ownership consists of: 155,095 shares of Common Stock.
(7) Ownership consists of 7,750 shares of Common Stock; 7,750 Class A
Warrants; 4,167 shares of Class B Preferred; 4,167 Class B Warrants;
22,728 shares of Class C Preferred; 22,728 Class C Warrants; 14,815 shares
of Class D Preferred; 14,815 Class D Warrants; and exercisable options to
purchase 37,000 shares of Common Stock. No additional options to purchase
Common Stock will become exercisable within 60 days of March 24, 2000.
(8) Ownership consists of: 6,250 shares of Common Stock; 6,250 Class A
Warrants; 4,167 shares of Class B Preferred; 4,167 Class B Warrants;
13,637 shares of Class C Preferred; 13,637 Class C Warrants; and options
to purchase 38,000 shares of Common Stock. No additional options to
purchase Common Stock will become exercisable within 60 days of March 24,
2000.
(9) Ownership consists of: 51,883 shares of Common Stock; and exercisable
options to purchase 28,000 shares of Common Stock. No additional options
to purchase Common Stock will become exercisable within 60 days of March
24, 2000.
(10) Ownership consists of exercisable options to purchase 2,000 shares of
Common Stock. No additional options to purchase Common Stock will become
exercisable within 60 days of March 24, 2000.
(11) Ownership consists of: an aggregate of 3,240,562 shares of Common Stock,
Class A Preferred, Class B Preferred, Class C Preferred and Class D
Preferred; and options currently exercisable and exercisable within 60
days of March 24, 2000 to purchase 241,055 shares of Common Stock.
(12) 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
24, 2000), the conversion of all convertible bonds into units consisting
of warrants to purchase Common Stock and Convertible Preferred Stock and
the exercise of all warrants and the conversion into Common Stock of all
Convertible Preferred Stock owned by such entity or individual. The
percent beneficially owned is a fraction the numerator of which is the
number of shares of Common Stock beneficially owned by each entity or
individual and the denominator of which is the number of outstanding
shares of Common Stock plus the number of shares of Common Stock which
would be issued upon exercise by the subject entity or individual of
its/his/her own options and warrants, the conversion into units of
its/his/her own convertible bonds and the conversion into Common Stock of
its/his/her own Convertible Preferred Stock. This method of computing the
percent beneficially owned results in the aggregate ownership percentages
exceeding 100%.
(*) 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, Chief Financial Officer and nominee for director of the Company,
is a principal of Golomb, Wills & Company, PC. Payments to Golomb, Wills &
Company, PC during 1998 and 1999 totaled $175,500 and $18,035, respectively.
The Company has an oral consulting agreement with its founder, director
and former President, Mary G. Clark, RN. In 1999 compensation under this
agreement was $64,292.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- - ------- ----------- ----
<S> <C> <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).
39
<PAGE>
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 Amendment to the Articles of Incorporation effective May 26, 1999 (previously filed as --
Exhibit A to the Company's Proxy Statement filed on April 13, 1999 and incorporated
herein by reference).
3.5 Amendment to the Articles of Incorporation effective August 2, 1999 (previously filed --
as Exhibit 3 to the Company's Form 8-K filed on August 6, 1999 and incorporated
herein by reference).
3.6 Certificate of Designations, Voting Powers, Preferences and Rights of the Series of --
Preferred Stock of Derma Sciences, Inc. to be Designated Series C Convertible
Preferred Stock (previously filed as Exhibit 10.05 to the Company's Form 8-K filed
on August 20, 1999 and incorporated herein by reference).
3.7 Certificate of Designations, Voting Powers, Preferences and Rights of the Series of --
Preferred Stock of Derma Sciences, Inc. to be Designated Series D Convertible
Preferred Stock (previously filed as Exhibit 10.05 to the Company's Form 8-K filed
on January 10, 2000 and incorporated herein by reference).
3.8 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 December 27, 1999 by and among Derma Sciences, Inc. --
and Genetic Laboratories Wound Care, Inc. (previously filed as Exhibit 10.01 to the
Company's Form 8-K filed on January 10, 2000 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
herein by reference).
10.03* 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).
10.04* 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).
10.05* Employment Agreement, dated May 7, 1999, between the Company and Richard S. Mink --
10.06* Employment Agreement, dated February 1, 1999, between the Company and Stephen T. Wills,
CPA, MST
10.07* 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 and incorporated herein by reference).
10.08* 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 filed on
March 29, 1996 and incorporated herein by reference).
10.09* 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 Form 10-KSB filed on
March 31, 1997 and incorporated herein by reference).
10.10* 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).
10.11* 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).
40
<PAGE>
10.12* 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 filed on March 30,
1995 and incorporated herein by reference).
10.13 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).
10.14 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).
10.15 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).
10.16 Lease Agreement, dated January 5, 1994, between James S. Reid, Frances S. Reid and Joan --
R. Milburn and Sunshine Products, Inc. (previously filed as Exhibit 10.38 to the
Company's Form 10-KSB filed on March 31, 1999 and incorporated herein by reference).
10.17 Lease Agreement, dated July 1, 1997, between the Company and Cross Creek Pointe --
(previously filed as Exhibit 10.44 to the Company's Form 10-KSB filed on March 31,
1998 and incorporated by reference).
10.18 Lease Agreement, dated September 1, 1993, between the Company and Mariotti Building --
Products (previously filed as Exhibit 10.51 to the Company's Registration Statement
filed on Form SB-2, No. 33-52246-NY, declared effective on May 13, 1994 and
incorporated herein by reference).
10.19 Sales Agreement, dated June 4, 1999, between the Company and Beverly Enterprises, Inc. --
(previously filed as Exhibit 10.01 to the Company's Form 8-K filed on June 11, 1999
and incorporated herein by reference.)
10.20 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).
10.21 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).
10.22 Manufacturers Agreement, dated August 25, 1992, between the Company and TapeMark --
Company (previously filed as Exhibit 10.50 to the Company's Form 10-KSB filed on
March 31, 1999 and incorporated herein by reference).
10.23 Stock Option Plan, dated July 18, 1991 (previously filed as Exhibit 10.01 to the --
Company's Registration Statement and incorporated herein by reference).
10.24* 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).
10.25* Stock Option Plan Amendment, dated November 21, 1995 (previously filed as Exhibit 10.03 --
to the Company's Form 10-KSB filed on March 31, 1996 and incorporated herein by
reference).
10.26* 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).
10.27* The Company's 401(k) Plan, dated June 30, 1995 (previously filed as Exhibit 10.56 to --
the Company's Form 10-KSB filed on March 31, 1996 and incorporated herein by
reference).
21 Information relative to subsidiaries --
23 Consent of Ernst & Young LLP --
27 Financial Data Schedule
</TABLE>
- - --------------------------
* Management contract or compensatory plan.
41
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter, 1999.
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, 2000 By: /s/ Edward J. Quilty
-----------------------
Edward J. Quilty
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 30, 2000.
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/ Mary G. Clark
- - --------------------------- Director
Mary G. Clark
/s/ Timothy J. Patrick
- - ---------------------------- Director
Timothy J. Patrick
42
Exhibit 10.05
AGREEMENT
THIS AGREEMENT ("Agreement") made this 7th day of May, 1999 by and between
Derma Sciences, Inc., a business corporation organized under the laws of the
Commonwealth of Pennsylvania ("Derma") and Richard S. Mink ("Mink").
1. Employment. Derma hereby employs Mink, and Mink agrees to be employed by
Derma, as Derma's Vice President and Chief Operating Officer upon the terms and
conditions hereinbelow set forth.
2. Previous Employment Agreement. This Agreement amends in toto and
replaces that certain Employment Agreement ("Employment Agreement") dated April
14, 1997 between the parties hereto which Employment Agreement, save as
hereafter provided, is void and of no further force or effect. Provided,
however, the stock options granted to Mink pursuant to the Employment Agreement
shall continue to be governed by the terms of paragraph 4 thereof as modified by
paragraph 5 hereof.
3. Time and Efforts. Mink shall devote all of his business time and efforts
to his responsibilities hereunder.
4. Compensation. During the term hereof Derma shall pay compensation to
Mink as follows:
(a) Salary at the rate of One Hundred Sixty Thousand Five Hundred
Dollars ($160,500) per year;
(b) Incentive compensation as determined by Derma's board of directors
upon recommendation of the Chairman. Mink shall be accorded a performance
review by Derma's Chairman in April of each year during the Term hereof.
The Chairman may, but shall be under no obligation to,
<PAGE>
forward the results of this performance review to the compensation committee of
the board of directors for such action as this committee deems appropriate.
5. Term. This Agreement shall be effective upon execution hereof and shall
continue indefinitely until terminated as provided herein. Either party hereto
may terminate this Agreement upon thirty (30) days written notice of such
termination to the other party. Upon termination of this Agreement by Derma
other than "For Cause," the period to exercise the options granted under the
previous Employment Agreement shall be extended to the earlier of three years
from the date of termination or the original expiration date of said options.
Anything contained in the Employment Agreement to the contrary notwithstanding,
vesting of said options shall accelerate to 100% upon either a change in
ownership of in excess of 75% of Derma or the sale by Derma of substantially all
of its assets. For purposes of the preceding, termination "For Cause" shall mean
termination by Derma as a result of:
(a) Willful misconduct which has resulted in or is likely to result in
material economic damage to Derma;
(b) Conviction of a felony;
(c) Perpetration of fraud which had resulted, or is likely to result,
in material economic damage to Derma; or
(d) Willful refusal to comply with the instructions of superiors or of
Derma's board of directors; but only if such instructions are rendered for
the purpose of advancing the business interests of Derma, can reasonably be
in the best interest of Derma and are not illegal.
6. Severance. Upon termination of this Agreement by Derma other than "For
Cause," Derma shall pay to Mink a severance payment of one year's salary as
specified in paragraph 4(a) hereof, as amended.
<PAGE>
7. Employee Benefits. During the term hereof, Mink shall be entitled to the
following employee benefits:
(a) Participation in Derma's medical insurance plans;
(b) Participation in Derma's deferred compensation plans;
(c) Reimbursement of vehicle expenses at the rate of $0.31 per
business mile;
(d) Reimbursement of "ordinary and necessary" business expenses; and
(e) Paid vacation of three (3) weeks per year.
(f) In the event of termination other than "For Cause," outplacement
assistance in an amount not to exceed $12,000.
8. Disclosure of Information. Mink recognizes and acknowledges that he will
have access to certain confidential information of Derma and that such
information constitutes valuable, special and unique property of Derma. Mink
will not, during or after the Term hereof, disclose any of such confidential
information to any person, firm, corporation, association, or other entity for
any reason or purpose whatsoever unless ordered to do so by a court or other
tribunal or government agency with jurisdiction over the subject matter and
Mink. In the event of a breach or threatened breach by Mink of the provisions of
this paragraph, Derma shall be entitled to an injunction restraining Mink from
disclosing, in whole or in part, confidential information of Derma, or from
rendering any services to any person, firm, corporation, association, or other
entity to whom such confidential information, in whole or in part, has been
disclosed or is threatened to be disclosed. Nothing herein shall be construed as
prohibiting Derma from pursuing any other remedies available to Derma for such
breach or threatened breach, including the recovery of damages from Mink.
<PAGE>
9. Restrictive Covenant. For a period of One (1) year after the termination
of this Agreement by Derma "For Cause" or by Mink for any reason, Mink will not,
within the greater of the currently existing marketing area of Derma or any
future marketing area of Derma established during Mink's employment under the
terms of this Agreement, directly or indirectly, own, manage, operate, control,
be employed by, participate in, or be connected in any manner with the
ownership, management, operation, or control of any business related to wound
care therapeutics or otherwise similar to the type of business conducted by
Derma at the time of the termination of this Agreement. In the event of Mink's
actual or threatened breach of the provisions of this paragraph, Derma shall be
entitled to an injunction restraining Mink therefrom. Nothing herein shall be
construed as prohibiting Derma from pursuing any other available remedies for
such breach or threatened breach, including the recovery of damages from Mink.
10. Place of Employment. Derma shall maintain Mink's regular place of
employment at its corporate headquarters as from time to time constituted.
IN WITNESS WHEREOF, the parties hereto have hereunder set their hands and
seals as of the date first hereinabove written. DERMA SCIENCES, INC.
By: /s/ Edward J. Quilty
----------------------
Edward J. Quilty
Chairman
/s/ Richard S. Mink
----------------------
Richard S. Mink
Exhibit 10.06
AGREEMENT
THIS AGREEMENT, made this 1st day of February, 1999 by and between Derma
Sciences, Inc., a business corporation organized under the laws of the
Commonwealth of Pennsylvania ("Derma") and Stephen T. Wills, CPA, MST ("Wills").
1. Employment. Derma hereby employs Wills, and Wills agrees to be employed
by Derma, as Derma's Vice President and Chief Financial Officer upon the terms
and conditions hereinbelow set forth.
2. Time and Efforts. Wills shall devote such of his business time and
efforts as may reasonably be required to discharge his responsibilities
hereunder. Provided, however, Derma acknowledges that Wills currently serves,
and during the Term hereof will continue to serve, as Vice President and Chief
Financial Officer of Palatin Technologies, Inc. and Managing Principal of
Golomb, Wills and Company, PC. Derma further acknowledges that Wills' duties to
the foregoing organizations require that he devote a substantial portion of his
business time and efforts to the affairs thereof. Nothing contained herein shall
be deemed to restrict Wills' right to continue in the foregoing capacities.
3. Compensation. During the Term hereof Derma shall pay compensation to
Wills as follows:
(a) Salary at the rate of One Hundred Two Thousand Dollars ($102,000)
per year;
(b) Bonus as determined by Derma's board of directors upon
recommendation of the Chairman.
4. Options Grant. Wills shall receive "non-qualified" options to purchase
all, or any portion of, One Hundred Thousand (100,000) shares of Derma common
stock at a
<PAGE>
price per share of $1.20. The subject options shall be exercisable during the
Term hereof until 12:00 midnight December 14, 2008 and shall vest as follows:
Number of Options Vesting Date
25,000 Upon execution hereof
25,000 December 15, 1999
25,000 December 15, 2000
25,000 December 15, 2001
Vesting of the foregoing options shall accelerate to 100% upon: (a) A change in
ownership of in excess of 75% of Derma; or (b) The sale by Derma of
substantially all of its assets.
5. Term and Severance. This Agreement shall be effective upon execution
hereof and shall continue indefinitely until terminated as provided herein.
Either party hereto may terminate this Agreement upon thirty (30) days written
notice of such termination to the other party. Upon termination of this
Agreement by Derma without cause:
(a) Derma shall pay to Wills a severance payment of one year's salary;
and
(b) The period to exercise the options granted hereunder shall be
extended to the earlier of five years from the date of termination or 12:00
midnight December 14, 2008.
6. Employee Benefits. During the term hereof, Wills shall be entitled to
the following employee benefits:
(a) Participation in Derma's medical insurance plans;
(b) Reimbursement of vehicle expenses at the rate of $0.31 per
business mile;
(c) Participation in Derma's deferred compensation plans in accordance
with the terms thereof;
(d) Reimbursement of "ordinary and necessary" business expenses; and
(e) Paid vacation of two (2) weeks per year.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunder set their hands and
seals as of the date first hereinabove written. DERMA SCIENCES, INC.
By: /s/ Edward J. Quilty
--------------------------
Edward J. Quilty, Chairman
/s/ Stephen T. Wills
--------------------------
Stephen T. Wills, CPA, MST
Exhibit 21
Listing of Subsidiaries of Derma Sciences, Inc.
Name State of Incorporation
- - ---- ----------------------
Sunshine Products, Inc. Missouri
Exhibit 23
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3 No. 333-45983) and related Prospectus of Derma
Sciences, Inc. for the registration of 750,000 shares of its common stock
(giving effect to the 1:5 reverse split of the common and convertible preferred
stock of Derma Sciences, Inc. effected August 2, 1999) and to the incorporation
by reference therein of our report dated February 25, 2000, with respect to the
financial statements of Derma Sciences, Inc. included in its Annual Report (Form
10-KSB) for the year ended December 31, 1999, filed with the Securities and
Exchange Commission.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 30, 2000
<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,
1999 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-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,221,691
<SECURITIES> 0
<RECEIVABLES> 2,041,099
<ALLOWANCES> 0
<INVENTORY> 1,289,138
<CURRENT-ASSETS> 4,794,378
<PP&E> 382,542
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,802,038
<CURRENT-LIABILITIES> 2,405,584
<BONDS> 0
0
9,392
<COMMON> 13,259
<OTHER-SE> 3,048,803
<TOTAL-LIABILITY-AND-EQUITY> 6,802,038
<SALES> 10,055,675
<TOTAL-REVENUES> 10,055,675
<CGS> 4,126,780
<TOTAL-COSTS> 4,126,780
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61,099
<INCOME-PRETAX> (2,406,306)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,406,306)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,406,306)
<EPS-BASIC> (1.84)
<EPS-DILUTED> (1.84)
</TABLE>
