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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended September 30, 1997
Commission file number 1-11700
HEMAGEN DIAGNOSTICS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 04-2869857
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(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification No.)
34-40 Bear Hill Road, Waltham, Massachusetts 02154
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(Address of principal executive offices) (Zip Code)
(781) 890-3766
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
on which registered Name of each exchange
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Common Stock Boston Stock Exchange
Common Stock Warrants NASDAQ Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 60 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The registrant had revenues of $12,991,102 in its most recent fiscal
year. The aggregate market value of the voting stock held by non-affiliates of
the registrant on December 16, 1997 was $13,675,183. As of December 16, 1997,
7,814,390 shares of Common Stock, $.01 par value per share and 2,695,255 of
Common Stock Warrants, were outstanding.
Certain items of Part III of this Form 10-KSB incorporate by reference
certain portions of the registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission in connection with the registrant's
1998 Annual Meeting of Stockholders.
This report contains certain forward-looking statements that are subject
to risks and uncertainties, including but not limited to those discussed herein
in the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and those discussed in the section
entitled "Risk Factors" in the Prospectus contained in the Company's
Registration Statements on Form S-3, File Nos. 333-6147 and 33-80009 (which
section is hereby incorporated by reference herein). These risks and
uncertainties could cause the Company's actual results in future periods to
differ materially from its historical results, and from any opinions or
statements expressed in forward-looking statements. Such forward-looking
statements speak only as of the date of this report, and the registrant
cautions readers not to place undue reliance on these statements.
Item 1. Business.
General
Hemagen Diagnostics, Inc. (the "Company") develops, manufactures and
markets proprietary medical diagnostic test kits, or "assays," used to aid in
the diagnosis of autoimmune and infectious diseases, in general health
assessment and for research purposes. The Company also develops, manufactures
and markets materials for the manufacture of such diagnostic test kits. The
Company generally focuses on markets which it believes offer significant growth
potential and limited competition.
Until July 1995, the Company's products were based primarily on two
diagnostic technologies, hemagglutination and enzyme-linked immunosorbence
("ELISA" or "EIA"). In July 1995, the Company completed the acquisition of a
line of similar but complementary test kits using a third technology,
immunofluorescence, from Schiapparelli Biosystems, Inc. (The "VIRGO
Acquisition"). These acquired assays are sold under the registered trademark
VIRGO(R).
On March 1, 1996, the Company acquired Reagents Applications, Inc.
("RAI") from Kone Holdings, Inc. RAI manufactures and markets a complete line
of clinical chemistry reagents and diagnostic products for in vitro diagnostic
use in hospitals, clinics and laboratories. These products are sold under the
RAICHEM(R) label directly and through a network of over 30 distributors located
in the United States and international markets. RAI also produces private label
reagents for domestic and international customers. Most RAI reagents can be
used in both automated and manual analyzers. RAI's leading product lines
include blood chemistry assays used to aid the monitoring and measurement of
health profiles, such as cholesterol, blood urea nitrogen (BUN), triglycerides,
glucose and uric acid.
On November 1, 1996, the Company completed the purchase of substantially
all the assets of Cellular Products, Inc., now known as 872 Main Street
Corporation. 872 Main Street Corporation was operating under the provisions of
Chapter 11 of the United States Bankruptcy Code. The Company continues to
operate the facility located in Buffalo, New York through its wholly owned
subsidiary, Cellular Products, Inc. ("CPI"). CPI manufactures biotechnology
materials and assays for research and for the manufacture of clinical
diagnostic test kits.
The Company offers approximately 110 test kits that have been cleared by
the United States Food and Drug Administration ("FDA") for sale in the United
States, including 16 test kits which were cleared during the fiscal year ending
1997. Several additional test kits are sold in foreign markets. The Company
markets and sells its brand name products worldwide, directly and through
national and international distributors and manufacturers' representatives. The
Company markets its products in South America through its majority owned
subsidiary, Hemagen Diagnosticos Comercio, Importacao e Exportacao, Ltd., a
Brazilian limited liability company ("HDC"). In addition, the Company sells
certain of its products on a private-label basis to multinational distributors
of medical diagnostics.
In December 1994 the Company entered into a five-year agreement (the
"Carter-Wallace Agreement") with Carter-Wallace, Inc. ("Carter-Wallace") to
manufacture approximately 14 diagnostic test kits for the Wampole division of
Carter-Wallace. The test kits, which had previously been manufactured by
Carter-Wallace, are used to aid in the diagnosis of diseases such as rheumatoid
arthritis, mononucleosis, strep throat and rubella, as well as to detect
pregnancy. Carter-Wallace has agreed to purchase its requirements for these
test kits from the Company during the term of the Agreement, subject to the
Company maintaining certain quality standards. The test kits are sold by
Carter-Wallace to clinical laboratories and physicians' office laboratories
both domestically and abroad.
From December 1994 through May 1995, the Company remodeled its
manufacturing facility and developed certain technical capabilities in
preparation for producing test kits under the Carter-Wallace Agreement. Initial
shipments of finished goods under the Carter-Wallace Agreement began during the
Company's third quarter of fiscal 1995 and full scale production commenced in
the Company's second quarter of fiscal 1996. The Carter-Wallace Agreement
contains provisions for two-year extensions and may be expanded to include
additional products.
The Company owns a proprietary technique for preserving red blood cells,
a key component of the Company's hemagglutination assays. This technology
enables the Company to manufacture products which have a shelf life of up to 24
months (compared to a typical shelf life of 30 to 60 days for traditional
hemagglutination processes), provides quick and accurate results, require no
special laboratory equipment to perform and are more reliable than previously
available hemagglutination assays. The extended shelf life and improvements in
the consistency of these assays substantially eliminate limitations previously
encountered in the use of hemagglutination assays.
The Company markets and sells certain of its products through third
parties, including Olympus America, Inc. ("Olympus"), an affiliate of Olympus
Optical Co., Ltd. of Japan, Sigma Diagnostics, Inc. ("Sigma"), a subsidiary of
Sigma-Aldrich Corp and Boehringer Mannheim, GmbH ("Boehringer" or "BM"). See
"Business - Distribution and Marketing"
The Company owns a 51% interest in HDC, a Brazilian limited liability
company. HDC distributes most of the Company's products throughout South
America. HDC also completes light assembly of certain of the Company's
products. Unless the context otherwise requires, the term "Company" includes
HDC, RAI, CPI and the Virgo Acquisition.
Recent Developments
Cellular Products, Inc.
On November 1, 1996, the Company, through its wholly owned subsidiary,
CPI, acquired substantially all the assets of 872 Main Street Corporation
(formerly Cellular Products, Inc.) for $400,000 in cash and a $200,000
promissory note which was paid in full on November 1, 1997. CPI is based in
Buffalo, New York and is a manufacturer of biotechnology materials and assays
for research and for the manufacture of clinical diagnostic test kits. CPI's
principal focus is on infectious diseases, particularly retroviruses such as
HIV and HTLV. Its products are used in the growth and testing of these viruses
and as raw materials by manufacturers of clinical diagnostic assays for HIV and
HTLV. The product mix includes enzyme oligonucleotide assays, monoclonal
antibodies, recombinant growth factors, viral lysates and bulk raw materials.
872 Main Street Corporation, originally founded in 1982 as Cellular
Products, Inc., was operating under the provisions of Chapter 11 of the federal
bankruptcy code since November 1994. The acquisition has enabled the Company to
produce several key raw materials for its tests, lowering its raw material
costs and has enhanced the Company's research programs.
Donner Com. IND. LTDA
The Company and Donner Com. IND. LTDA ("Donner"), a Brazilian
distributorship company, entered a distribution agreement under which Donner
will exclusively purchase products from the RAICHEM product line for resale
into Brazil. Donner has agreed to a minimum purchase amount of $2 million over
the term of the three year agreement once the Company's products have been
registered for sale in Brazil. The Company's subsidiary, HDC, will provide
regulatory assistance to Donnor and continue to sell the Company's other
products in South America.
Phoenix Diagnostics, Inc.
The Company, through it's subsidiary, RAI has obtained exclusive
distribution rights for all Phoenix Diagnostics products for a period of 3
years so long as the Company purchases a minimum annual amount of Phoenix
Diagnostics products. The Company has met its purchasing obligation for the
first year of the contract. The Company believes this strategic alliance will
complement RAI's existing product line by expanding the Company's line of
clinical chemistries available in a liquid format. The agreement expires in
March, 2000.
Technology
The presence and concentration of certain antibodies in the blood of an
individual can assist physicians in the diagnosis of certain diseases. The
Company's assays are in vitro (outside of a patient's body) diagnostic tests
that are used to measure specific substances, either antigens or antibodies, in
blood or other body fluids. An antigen is a substance that reacts with a
particular antibody in a manner which, in the proper environment, is detectable
either by the naked eye or with the aid of a laboratory technique which
amplifies the reaction so that it is rendered visible. The Company's
hemagglutination, ELISA and immunofluorescence assays are three examples of
such an amplification. The Company's blood chemistry assays are used to aid the
monitoring and measurement of health profiles, such as cholesterol, blood urea
nitrogen (BUN), triglycerides, glucose and uric acid.
The Company relies upon proprietary technologies in the manufacture of
its kits. These technologies include a lyophilization (freeze drying) technique
which substantially extends the shelf life of the Company's hemagglutination
assays, and proprietary methods to prepare antigens for its ELISA assays.
ELISA
ELISA (or EIA) tests employ small plastic vessels coated with particular
antigens. The test process involves introducing the patient's serum into the
vessel to allow a reaction to occur. If the antibody being tested for is
present, it will bind to the antigens on the inner surface of the vessel. After
the vessel is rinsed, the specifically bound antibody will remain while any
non-specific antibodies will be washed away. To detect the quantity of the
specific antibody, other compounds are added which will cause a color change in
the vessel, the intensity of which is proportionate to the quantity of the
specific antibody bound. If no color is noted, this indicates that the
patient's serum did not contain detectable quantities of the specific antibody.
Immunofluorescence
The Company's immunofluorescence tests utilize a fluorescent microscope.
Mammalian cells grown on microscope slides are treated with disease-producing
organisms (viral or bacterial). Serum from a patient is placed in contact with
the infected cells. If a patient has antibodies to the organism causing the
disease, the antibodies will bind to the organism. A chemical is added to the
slide which binds to the organism and the antibody, if present. When the slide
is illuminated with light at a specific wavelength in the microscope, the
chemically-treated cells will appear fluorescent, indicating a positive test
result. If the patient did not have the appropriate antibody, no fluorescence
will appear and the test result will be deemed negative.
Clinical Chemistries
The Company produces a line of general clinical chemistry reagents
utilizing colorimetric, turbidometric and enzymatic procedures. These chemistry
reagents are those most commonly performed in clinical laboratories as general
health screening tests and in the identifications of diseases. These tests can
be performed using a broad range of automated and semi-automated instruments
typically used by clinical laboratories.
Hemaggglutination
Hemagglutination is the agglutination or "clumping" of red blood cells
("RBCs"). Many substances, including certain antibodies, when placed in contact
with RBCs, will cause agglutination.
Under the appropriate conditions, human RBCs may be modified or
sensitized by binding specific foreign antigens to their surface. These
sensitized RBCs will agglutinate when placed in contact with a specific
antibody to the foreign antigen. The presence of certain antibodies in an
individual's serum (blood from which clotted red blood cells have been removed)
can indicate certain diseases. By sensitizing RBCs with an antigen that
specifically reacts with a particular antibody, the simple visible observation
of the agglutination reaction will indicate the presence of the
disease-produced antibody. The use of RBCs instead of other particles can allow
for simple visual observation of the agglutination reaction in the proper
environment, and reduces the non-specific reactions seen in artificial systems
such as those that utilize latex particles.
To perform the Company's hemagglutination test, a technician combines the
Company's sensitized RBCs with a patient's serum in a small well with a
V-shaped bottom according to a set of directions included with the Company's
test kits. If no agglutination takes place, the RBCs will settle to the bottom
of the well, resulting in a clearly visible red dot which indicates that the
test is negative.
In contrast, if the particular antibody is present in the patient's
blood, the RBCs will agglutinate, which prevents the RBCs from settling to the
bottom of the well. Instead of the small red dot, the substance will appear a
diffuse red, which indicates a positive reaction.
Acute Phase Reactants and Apolipoproteins
The Company has developed a new application for its ELISA technology to
detect cardiovascular risk factors (apolipoproteins) and inflammatory signals
(acute phase reactants), the latter of which are present in a patient's blood
prior to the clinical manifestation of infection or inflammation. If
successful, these technologies could lead to earlier detection and prevention
of cardiovascular disease, the imminent rejection of transplanted organs, or
the onset of infections, than is possible with techniques now commercially
available. Such earlier detection could enable physicians to better plan
appropriate treatment of patients with these conditions. The Company currently
markets two test kits to detect inflammatory signals. Product sales for these
tests were approximately $224,000, and $155,000 in fiscal 1997, and 1996
respectively.
Current Products
ELISA Assays
The Company develops and markets ELISA tests for the detection of disease
markers. As with corresponding hemagglutination tests produced by the Company,
most of the Company's ELISA assays test for elevated levels of antibodies,
which are useful indicators of certain diseases. ELISA tests are widely used by
large laboratories because these tests adapt easily to automated diagnostic
testing equipment. The Company's FDA cleared ELISA test kits aid in the
diagnosis of the following diseases:
SLE (lupus) polymyositis
mixed connective tissue disease dermatomyositis
Sjogren's syndrome connective tissue diseases
cleroderma (systemic sclerosis) Primary Biliary Cirrhosis
cytomegalovirus infections Chagas' disease
Rheumatoid arthritis
Certain of the Company's ELISA tests are also used to monitor the acute
phase response to infection and inflammation in diseases such as lupus and
rheumatoid arthritis. Several of the Company's ELISA tests are now available in
both lyophilized and all liquid formats.
The Company's ELISA and hemagglutination kits (see below) include screen
tests in which up to six different diagnostic indices are monitored at the same
time, which is useful in the rapid initial screening of patients. If the screen
test is positive, individual kits are available to identify which of these six
indices is present.
Immunofluorescence ("IFA") Products
The Company's immunofluorescence products consist primarily of diagnostic
assays for infectious diseases. Immunofluorescence kits are used as primary or
confirmatory tests in many large clinical laboratories in the United States.
There are currently 15 kits sold in the immunofluorescence format.
The Company's immunofluorescence products are used to aid in the
diagnosis of the following:
cytomegalovirus infections herpes simplex
SLE (lupus) german measles
connective tissue diseases chicken pox
primary bilary cirrhosis infections with Epstein-Barr virus
toxoplasmosis chlamydial infections
syphilis measles
primary RSV infections mumps infections
Autoimmune diseases
Hemagglutination Assays
The Company believes that it manufactures and markets the only
commercially available hemagglutination kits which test for antibodies to
antigens present in the nucleus of a cell ("extractable nuclear antigens," or
"ENAs") which are markers of certain autoimmune diseases. Each of the Company's
hemagglutination assays is based on the Company's proprietary technique to
lyophilize, or "freeze dry," the RBCs which form the central component of a
hemagglutination assay. The Company's proprietary lyophilization technique for
the preservation of RBCs permits the production of standardized, easy-to-use
and accurate hemagglutination tests with an extended shelf life, most of which
are attributes previously unavailable using hemagglutination assays. The
shelf-life of the lyophilized RBCs before reconstitution may be up to 24
months. A technician reconstitutes the powdered cells in a water-based solution
prior to introducing the patient's serum.
Each hemagglutination test also requires a specific formula to sensitize
the RBCs prior to lyophilization such that they will react to a specific
antibody. For each of its tests, the Company uses a proprietary formula to
combine antigens and other reagents with RBCs in a manner that allows for
standard, sensitive and specific agglutination reactions. Results from the
Company's test kits are generally available within two hours. The Company's
hemagglutination test kits aid in the diagnosis of the following diseases:
SLE (lupus) dermatomyositis
mixed connective tissue disease polymyositis
Sjogren's syndrome rheumatoid arthritis
scleroderma (systemic sclerosis) Chagas' disease
cytomegalovirus infections
RAI Products
The Company's general chemistry products, sold under the trade name
RAICHEM(R) consist of a broad range of assays used on automated and
semi-automated clinical chemistry analysis systems. Many of the RAICHEM(R)
assays are used in profiling general health conditions and as specific
indications of possible disease states. The most widely recognized general
chemistry tests made by the Company include those for blood levels of glucose,
cholesterol, triglycerides, uric acid, urea nitrogen and total protein. In all,
more than 60 of the Company's clinical chemistry products have been cleared by
the FDA for sale in the United States.
CPI Products
The Company's wholly owned subsidiary, CPI, manufactures and markets
biotechnology materials and assays for research and for the manufacture of
clinical diagnostic test kits. CPI's product line focuses on two target markets
within the bioreagents marketplace. The first is the research product market
which includes T Cell Growth Factors, Retro-Tek Antigen EIA kits, Gene
Detective EOA kits, monoclonal antibodies, Lymphocyte Isolation Adjuncts, and
Recombinant Growth Factors. The second market is the industrial raw materials
market. Major products in this area include purified viral lysates, monoclonal
antibodies, polyclonal antibodies and conjugates. CPI also services a number of
smaller markets with products such as the Retro-Tek IFA kits and is the
exclusive distributor for a product line manufactured by Genelabs Diagnostics
U.S.A. Inc.
New Products
During the fiscal year ending September, 1997, the Company received FDA
clearance on 16 of its immunoassays and obtained the rights to market and sell
additional FDA cleared kits including kits to assist in the diagnosis of:
Cytomegalovirus: An infection which may induce pneumonia, fever and hepatitis
among immunosuppressed patients.
dsDNA: A test which aids in the diagnosis of systemic lupus
erythematosus (lupus).
aCL Screen: Anti-Cardiolipin (aCL) has been associated with lupus, other
connective tissue diseases as well as recurrent thrombosis,
thrombocytopenia and spontaneous abortions.
AMA: The Anti-Mitochondria antibody has been associated with
primary biliary cirrhosis, a disfunction of the liver.
RF SPIA: A quantitative measure of rhematoid factor as an aid in the
diagnosis of rheumatoid arthritis and other inflammatory
diseases.
Prealbumin SPIA: An aid in the evaluation of nutritional deprivation in
newborns, the elderly, and dialysis and postsurgical
patients. Prealbumin may also be used to monitor most forms
of acute and chronic hepatic diseases.
Cholesterol: Cholesterol Rapid Liquid Reagent is a new cholesterol test
available in a liquid format.
Triglycerides: Liquid Triglycerides GPO Reagent is a liquid reagent that is
used with cholesterol to monitor cardiovascular risk in
patients.
Liquid ENAs: The Company has had eight of its ENA ELISA kits cleared for
U.S. sale in an all liquid format.
Phoenix kits: The Company, through its RAI subsidiary has obtained
exclusive distribution rights for all Phoenix Diagnostics
products. This strategic alliance has added calibrators and
controls to the Company's clinical chemistry product line.
CMV antigen: This antigen, which is a raw material for several of the
Company's products, is now manufactured at the Company's
Cellular Products, Inc. subsidiary. The Company estimates
that the internal manufacture of this antigen saved the
Company over $100,000 during the fiscal year ended
September, 1997.
South American Activities
In 1991, the Company began to market its product line in South America
through HDC. In fiscal 1994, HDC completed the renovation of a new
manufacturing and sales office facility in Sao Paulo, Brazil, which allows HDC
to complete light manufacturing of test kits in South America.
The Company markets its full product line to the South American market,
including three proprietary assays for Chagas' disease. Chagas' disease
(American Trypanosomiasis) is an insect and blood transfusion transmitted
parasitic infection which eventually attacks the victim's cardiovascular
system. Due to poor sanitation and other factors, insects have transmitted
Chagas' disease widely throughout Central and South America, with substantial
encroachment into Mexico. In response to the need for efficient and accurate
testing for Chagas' disease, the Company has developed three diagnostic tests:
an instrument-free hemagglutination assay, an ELISA assay, and a
hemagglutination assay prepared specifically for use with certain automated
blood-typing instruments. The ELISA assay has received FDA clearance for sale
in the United States.
The office in Sao Paulo is presently staffed by five full-time
salespeople administrators who receive and process orders, and four people in
production, shipping and technical support. In addition, Dr. de Oliveira, the
Company's Vice President of Research and Development, spends time in Brazil
attending to business of the Company. In fiscal 1997, and 1996 the Company
derived product sales through HDC of approximately $1,255,000, and $956,000
respectively. See "Business - Facilities."
In August, 1997, the Company entered into a distribution agreement with
Donner Systems to distribute the Company's clinical chemistry product line in
Brazil. Donner has agreed to a minimum purchase amount of $2 million over the
term of the three year agreement once the Company's products have been
registered for sale in Brazil. The Company's subsidiary, HDC, will provide
regulatory assistance to Donner and continue to sell the Company's other
products in South America.
Distribution and Marketing
General
In the United States, the Company sells its products directly to clinical
laboratories and blood banks and on a private-label basis through multinational
distributors of medical diagnostics. Internationally, the Company sells its
products primarily through distributors. The Company grants exclusive and
non-exclusive distributorships, which generally cover limited geographic areas
and specific test kits. The Company's exclusive distributorship arrangements
generally condition exclusivity on the distributor maintaining minimum
purchases from the Company. The Company has relationships with approximately 35
exclusive and non-exclusive distributors and its products have been sold in
over 20 countries.
Since 1989 the Company has been the exclusive provider of test kits to
detect CMV antibodies for use with the Olympus' PK Series Pre-Transfusion
instruments, the world's most widely used automated blood-typing instruments in
blood banks and large commercial laboratories. Pursuant to the terms of the
Company's agreement with Olympus, the Company provides CMV test kits for sale
by Olympus worldwide to users of the PK Series Pre-Transfusion instruments. The
agreement provides that Olympus must purchase a minimum number of
hemagglutination CMV test kits annually from the Company through February,
1998, subject to the Company meeting certain requirements. The agreement
specifies that during its term, the Company will not sell its CMV assays to any
customers in North America or Hawaii which use Olympus instruments or use
competing laboratory analysis equipment in blood banks. Sales of CMV assays to
Olympus were approximately $1,057,000, and $395,000 during fiscal 1997, and
1996, respectively. Olympus and the Company do not intend to renew this
exclusive agreement when it terminates in March, 1998.
The Company also manufactures products on a private label basis for
Sigma, Boehringer, Hoffman La Roche, and Carter-Wallace pursuant to supply
agreements. Some of these agreements provide for minimum purchases; however,
the Company cannot predict the level of revenues it will derive from these
agreements.
Carter-Wallace accounted for approximately 14% and 18% of the Company's
revenue for the fiscal years ended September 30, 1997 and 1996 respectively.
Although the Company expects that its relationship with Carter Wallace will
continue, if it were to cease doing business with the Company it would have a
material adverse effect on the Company's business.
In July, 1995 the Company entered into an OEM agreement with Boehringer
which provided for certain minimum purchases. In 1997 these minimums were not
met, however, BM met its obligations to the Company by agreeing to a payment to
the Company in an amount which will satisfy the annual payable amount
obligated. The Company is currently in the process of renegotiating this
contract with regards to product pricing and minimum purchase amounts in future
years.
The Company's South American Distribution and Marketing activities are
described in the section entitled "Business: South American Activities.
Products Under Development
The Company is presently developing new products in areas described
below. The Company spent a total of approximately $1,072,000, and $778,000 on
Company-sponsored research and development for the fiscal years ended September
30, 1997, and 1996, respectively. The Company spent a total of approximately
$6,000, and $36,000 on externally-sponsored research and development for the
years ended September 30, 1997, and 1996, respectively.
Autoimmune Diseases
The Company intends to continue its development of products to aid in the
diagnosis of autoimmune diseases. Hemagglutination and ELISA kits for the
detection of antibodies associated with thyroiditis are currently under
development. In addition, assays to detect antibodies to histone proteins are
being developed. The Company believes that it will have commercially available
assays for these purposes in fiscal 1998, subject to obtaining appropriate
regulatory clearances.
Acute Phase Reactants and Apolipoproteins
The Company continues to develop an application for its ELISA technology
which would detect cardiovascular risk factors (apolipoproteins) and
inflammatory signals (acute phase reactants) that are present in a patient's
blood prior to the manifestation of disease. In addition, these assays could
lead to earlier detection of organ transplant rejection or infection than is
possible with techniques now commercially available. See "Business -
Relationship with Boston University."
The Company has developed a unique modification of its ELISA technology
to test for acute phase reactants. This technology is licensed by the Company
from Boston University, which has a patent for the technology. See "Business -
Relationship with Boston University." The Company is exploring the use of the
new technology to produce a number of new test kits.
The Company's acute phase reactant technology has a number of
potential applications, including:
Transplantation
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The key to successful organ transplantation is to
ensure that the new organ is not rejected by the
recipient's body. This can be aided in part by
administering appropriate drugs prior to the time when
the recipient's body rejects the transplant. It has
been reported that during the early phase of the
rejection process, the body will produce increased
levels of certain acute phase reactants. Using the
Company's serum amyloid A ("SAA") assay, physicians may
be able to detect the point at which a body is
rejecting a transplanted organ earlier than current
techniques allow.
Cardiovascular Diseases
-----------------------
The Company is developing a panel of assays to measure
two blood lipoproteins, which are indicators of risk of
cardiovascular disease. High levels of these two
lipoproteins have been cited in a study supported by
the National Institutes of Health as more reliable
indices of cardiovascular risk than cholesterol levels.
Together with SAA, these technologies could detect high
risk levels in patients with chronic autoimmune
disease, such as rheumatoid arthritis.
Rheumatoid Arthritis
--------------------
In connection with the Company's development program,
the Company has sold test kits utilizing its acute
phase reactant technology to Pfizer for use in the
evaluation of Pfizer's experimental drug Tenidap(R) for
the treatment of rheumatoid arthritis.
Infectious Diseases
The Company continues to develop additional assays to aid in the
diagnosis of infectious diseases. The Company recently completed the
development of products known as a "ToRCH panel" which include assays for
toxoplasmosis, rubella, CMV, and herpes. The Company is also developing test
kits for Lyme disease and for Epstein-Barr virus. As with all of the Company's
products under development, these products will have to undergo FDA review
before they can be marketed and sold in the United States. The CMV IgG has
received clearance from the FDA and data is being collected for the submission
of the other assays.
Clinical Chemistry Reagents
The Company continues to develop additional assays and reagents to fill
in its clinical chemistry reagent product line sold under the RAICHEM label.
Almost all of the powdered clinical chemistry assays are now available in
liquid format, making RAICHEM one of the most completed clinical chemistry
lines offered worldwide. Continuing efforts are directed at increasing the line
of Serum Protein Immunoassays (SPIAs). Plans are in place for development of a
kit to measure blood levels of ferritin, glycated hemoglobin, myoglboin and
troponin I and troponin T.
Relationship with Boston University
Dr. Carl Franzblau, the Chairman of the Board, Chief Executive Officer
and President of the Company, serves as a Professor and Chairman of the
Department of Biochemistry and as Associate Dean for Graduate Affairs at Boston
University School of Medicine. Dr. Alan Cohen, a Director of the Company,
served as a Professor of Medicine and Pharmacology at Boston University School
of Medicine. Lawrence Gilbert, a Director of the Company, was also the Director
of the Patent and Technology Administration at Boston University through
December, 1994. Dr. John I. Sandson, a Director of the Company, is Dean
Emeritus of Boston University School of Medicine. Charles W. Smith, a Director
of the Company, served as Senior Vice President of Boston University from 1984
through 1989 and as its Treasurer from 1983 through June 1992. The Company
believes that the continuing relationship between Boston University and these
individuals, particularly Dr. Franzblau, is beneficial to the Company,
particularly with respect to providing the Company with access to new
developments in scientific areas related to the Company's business.
License Agreements
In March 1992, the Company entered into a license agreement (the "B. U.
License Agreement") with Boston University (the "University") pursuant to which
the Company has obtained the exclusive right to use certain of the University's
patented technology to manufacture and market assays for the detection of acute
phase reactants. See "Business - Products under Development." Pursuant to the
B. U. License Agreement, the Company is obligated to pay an annual royalty of
5% of the first $50,000 of the Company's net sales of these assays, and 10% of
the Company's net sales of these assays in excess of $50,000 until the Company
has paid the University a license fee of $10,000 and reimbursed it for certain
patent expenses. Thereafter, the Company will pay a 5% royalty on its net sales
of these assays. Sales under the B.U. License Agreement have been immaterial to
date.
In July 1994, the Company entered into a second license agreement with
the University under which the Company obtained the exclusive right to use
additional patented and patent-pending technology of the University to
manufacture and market certain products. The royalties due under the terms of
the agreement are the same as the B.U. License Agreement and will be applied to
a license fee of $15,000. No royalties were paid in the years ended September
30, 1997 or 1996 and no amounts were accrued for royalties at September 30,
1997 or 1996. The agreement terminates upon the termination of the patents.
Product Development Agreement
On February 14, 1992 the Company entered into a product development
agreement with the University to develop a urine-based assay to measure levels
of desmosine, which can indicate certain diseases such as cystic fibrosis and
emphysema. This agreement was terminated in 1993.
Manufacturing and Sources of Supply
The Company manufactures its hemagglutination and ELISA test kits
primarily at its facility in Waltham, Massachusetts, and its products based on
immunofluorescence technology at its facility in Columbia, Maryland. The
Company's clinical chemistry products are produced at the Company's facility in
San Diego, California and the raw material and research lines are produced in
Buffalo, New York. The Company purchases RBCs and some of the antigens and
other reagents used in the kits from outside vendors. Most reagents used in the
Company's test kits are manufactured at the Company's facilities. The Company
uses lyophilization equipment to preserve sensitized RBCs for its
hemagglutination test kits.
All components used in the Company's products are available from multiple
sources, except for an antigen called SSA, which the Company uses in two of its
ELISA and two of its hemagglutination test kits. The Company believes that the
supplier of this antigen produces this antigen for many customers. Management
believes that if necessary, the Company could produce sufficient quantities of
this antigen itself. Therefore, if the supply of this antigen were to cease,
the Company believes it would not have a long-term material adverse impact on
the Company's business taken as a whole.
Government Regulation
The Company's manufacturing, distribution, and marketing of diagnostic
test kits are subject to a number of both domestic and international regulatory
controls. In the United States, the Company's production and marketing
activities are subject to regulation by the United States Food and Drug
Administration ("FDA"), under the authority of the Federal Food Drug, and
Cosmetic Act, as amended by the Medical Device Amendments Act of 1976, The Safe
Medical Devices Act of 1990, and The Medical Device Amendments of 1992.
These regulations require that the Company must formally notify the FDA
of its intentions to market in vitro diagnostic devices through a regulatory
submissions process, either the 510(k) review process or the Premarket Approval
process ("PMA"). When a 510(k) review process is used the Company is required
to demonstrate that the product is "substantially equivalent" to another
product in commercial distribution in the United States before May 28, 1976, or
which has subsequently been classified as a Class 1 or Class 2 medical device.
The Company can not proceed with sales of its diagnostic products until it
receives clearance from the FDA. Currently, the majority of products that are
reviewed by the 510(k) process are cleared within 90 days.
In cases where there are no existing FDA approved products "substantially
equivalent" to the new product, an approved PMA, which involves a lengthier and
more burdensome process, could be required before the FDA would allow
commercial distribution.
The Company is also required to register with the FDA as a device
manufacturer and list its devices. As such, the Company is subject to
inspection on a routine basis for compliance with the FDA's Quality System
Regulations (QSR). These regulations require that the Company manufacture its
products and maintain its documents in a prescribed manner with respect to
manufacturing, testing, control, and distribution activities. In addition, the
Company is required to comply with various FDA requirements for labeling,
pursuant to the Medical Device Reporting Act regulations. Finally, the FDA
prohibits an approved device from being marketed for unapproved applications.
The Company believes it is in conformity with all such regulations.
The regulatory controls being imposed upon the Company with respect to
the international distribution, and marketing of in vitro diagnostic devices
are increasing. Specifically, member nations of the European Community are
developing a standardized quality system similar to QSR called EN 29000 that is
anticipated to be effective no sooner than 1998 and will allow companies a
three year period to conform to the directive. The Company will be required to
conform to the EN 29000 regulations for any product sold in the European
Community. The Company expects to be able to conform to these regulations
within the required timeframe.
Competition
The clinical diagnostic industry is highly competitive. There are many
companies, both public and private, engaged in diagnostics-related research and
development, including a number of well-known pharmaceutical and chemical
companies. Competition is based primarily on product reliability, customer
service and price. Some of these companies have substantially greater capital
resources and have marketing and business organizations of substantially
greater size than the Company. Many companies have been working on
immunodiagnostic reagents and products, including some products believed to be
similar to those currently marketed or under development by the Company, for a
longer period of time than has the Company. The Company believes that its
primary competitors in the diagnostics market include Abbott Laboratories,
Sigma Diagnostics, Trace-America, Inc., Gull Laboratories, Inc., INOVA, Sanofi
Diagnostics Pasteur, Inc. and Diamedix Corporation. The Company expects
competition within this industry to intensify.
Product Liability
The testing, marketing and sale of clinical diagnostic products entail an
inherent risk of allegations of product liability, and there can be no
assurance that product liability claims will not be asserted against the
Company. The Company may incur product liability due to product failure or
improper use of products by the user. Inaccurate detection may result in the
failure to administer necessary therapeutic drugs or administration of
unnecessary and potentially toxic drugs. Even with proper use of a product,
there may be specific instances in which the results obtained from the
Company's test kits could lead a physician to incorrectly predict the
appropriate therapy for a particular patient. The Company maintains product
liability insurance in the amount of up to $5,000,000 per incident and in the
aggregate which, based on the Company's experience and industry practice, the
Company believes to be adequate for its present operations. No assurance can be
given that the amount of the Company's insurance is sufficient to fully insure
against claims which may be made against the Company.
Patents and Proprietary Rights
The Company protects its technology primarily as trade secrets rather
than by relying on patents, either because patent protection is not possible
or, in management's opinion, would be less effective than maintaining secrecy.
In addition, the Company relies upon confidentiality agreements with its
employees. To the extent that it relies on confidentiality agreements and trade
secret protection, there can be no assurance that the Company's efforts to
maintain secrecy will be successful or that third parties will not be able to
develop the technology independently. The Company may in the future apply for
patent protection for certain of its technology when management believes such
protection would be beneficial to the Company. The protection afforded by
patents depends upon a variety of factors which may severely limit the value of
the patent protection, particularly in foreign countries, and no assurance can
be given that patents, if granted, will provide meaningful protection for the
Company's technology.
Royalty Obligations
The Company is required to pay royalties to third parties on sales of
some of its products and proposed products. See "Business - Relationship with
Boston University"
Employees
As of September 30, 1997, the Company had 108 full-time employees, of
which four are executive officers, 29 are employed in sales, marketing, general
and administrative activities and 75 are involved in production and research
and development.
None of the Company's employees are represented by a labor organization
and the Company is not a party to any collective bargaining agreement. The
Company has never experienced any strike or work stoppage and considers its
relationship with its employees to be excellent.
Item 2. Description of Property.
The Company maintains its principal executive offices, laboratory and
production operations in Waltham, Massachusetts in two adjacent buildings; one
a 4,000 sq. ft. facility which houses the Company's research and development
laboratories, and the other a 15,000 sq. ft. facility which accommodates the
laboratory and production operations and the executive offices of the Company.
The Company pays rent in the amount of $133,500 per annum for the two
facilities pursuant to the terms of that lease which ends May 30, 2002. The
Company also leases 29,000 square feet in a production facility in Columbia,
Maryland where it manufactures the immunofluorescence products. Under the
Columbia lease, which extends through June 30, 2000, the Company pays $105,045
per annum in rent. The Company also leases 20,100 square feet in San Diego,
California, where it manufactures the RAICHEM products. Under the San Diego
lease, which extends through September 30, 2005, the Company pays approximately
$201,000 per annum. In addition, the Company leases a 1,900 square foot
warehouse facility near its production site for which it pays $13,080 per annum
on an annual lease which may be renewed each April 1. As part of the purchase
of substantially all the assets of 872 Main Street Corporation in November,
1996, the Company acquired the land and building located at 872 Main Street in
Buffalo, New York. CPI operates out of this facility which consists of
approximately 15,000 square feet of space. The Company believes that its
facilities are adequate for its present and foreseeable needs.
The Company's 51%-owned subsidiary leases approximately 4,500 square feet
in Sao Paulo, Brazil pursuant to a lease which expires in September 30, 1998.
This subsidiary pays rent in an amount of approximately $5,500 per month for
this space. The Company believes that its facilities in Sao Paulo are adequate
for its present and foreseeable needs.
Item 3. Legal Proceedings.
The Company is not presently involved in any material pending litigation.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock has been traded on the over-the-counter market
through the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") since February 4, 1993. The Company's Common Stock is also
traded on the Boston Stock Exchange. On December 16, 1997, the closing bid and
ask price of the Common Stock reported by NASDAQ was $1.75 and $1.88 per
share, respectively.
For the periods indicated, the following table sets for the range of high
and low bid prices for the Common Stock as reported by NASDAQ during Fiscal
1996 and 1997. These prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C>
1996
- ----
First Fiscal Quarter. . . . . . . . . . . . . . . $3.50 $1.75
Second Fiscal Quarter . . . . . . . . . . . . . . $4.13 $2.50
Third Fiscal Quarter. . . . . . . . . . . . . . . $4.13 $2.63
Fourth Fiscal Quarter . . . . . . . . . . . . . . $3.13 $2.00
1997
- ----
First Fiscal Quarter. . . . . . . . . . . . . . . $2.94 $2.12
Second Fiscal Quarter . . . . . . . . . . . . . . $2.69 $2.06
Third Fiscal Quarter. . . . . . . . . . . . . . . $2.38 $1.44
Fourth Fiscal Quarter . . . . . . . . . . . . . . $2.19 $1.75
1998
- ----
First Quarter (through December 16, 1997) . . . . $2.47 $1.69
</TABLE>
As of December 16, 1997, there were approximately 199 holders of record
of the Company's Common Stock.
For the periods indicated, the following table sets for the range of high
and low bid prices for the Common Stock Warrants as reported by NASDAQ during
Fiscal 1996 and 1997. These prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C>
1996
- ----
First Fiscal Quarter. . . . . . . . . . . . . . . - -
Second Fiscal Quarter . . . . . . . . . . . . . . - -
Third Fiscal Quarter. . . . . . . . . . . . . . . - -
Fourth Fiscal Quarter . . . . . . . . . . . . . . $0.63 $0.63
1997
- ----
First Fiscal Quarter. . . . . . . . . . . . . . . $1.63 $0.63
Second Fiscal Quarter . . . . . . . . . . . . . . $1.25 $0.63
Third Fiscal Quarter. . . . . . . . . . . . . . . $1.06 $0.31
Fourth Fiscal Quarter . . . . . . . . . . . . . . $0.97 $0.38
1998
- ----
First Quarter (through December 16, 1997) . . . . $0.69 $0.38
</TABLE>
As of December 16, 1997, there were approximately 77 holders of record of
the Company's Common Stock Warrants.
Dividends
The Company has never paid cash dividends. The Company currently intends
to retain all future earnings, if any, for use in its business and does not
anticipate paying any cash dividends in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This section contains certain forward-looking statements that are subject
to risks and uncertainties including but not limited to those discussed in the
section entitled "Risk Factors" in the Prospectus contained in the Company's
Registration Statement on Form S-3, File Nos. 333-6147 and 33- 80009 (which
section is hereby incorporated by reference herein). These risks and
uncertainties could cause the Company's actual results in future periods to
differ materially from its historical results, and from any opinions or
statements expressed in forward-looking statements. Such forward-looking
statements speak only as of the date of this report, and the Company cautions
readers not to place undue reliance on these statements.
Overview
Historically, the Company has concentrated its efforts on developing,
manufacturing and marketing medical diagnostic test kits used to aid in the
diagnosis of certain diseases and the profiling of general health conditions.
Since the fiscal year ending 1995, the Company has also concentrated its
expansion efforts on synergistic acquisitions of companies, product lines and
assets. The Company presently has approximately 120 different test kits
available for general sale, approximately 110 of which have received FDA
clearance for sale in the United States.
Results of Operations
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended
September 30, 1996
Revenues increased to approximately $12,991,000 from approximately
$10,219,000 (27%), primarily as a result of (i) sales from the Company's
November 1, 1996 acquisition of CPI which accounted for approximately
$1,433,000 of the increase, (ii) an approximately $945,000 increase from a full
year of sales from the Company's March 1, 1996 acquisition of RAI, compared
with seven months of sales in fiscal 1996, and (iii) increased sales of CMV
test kits for use on Olympus' PK Series Pre- Transfusion instruments of
approximately $662,000. (See Business: Distribution and Marketing).
Cost of product sales increased to approximately $7,598,000 from
approximately $6,213,000 (22%) due to the increase in sales. Cost of product
sales as a percentage of sales decreased from 61% to 59% due to a change in
product mix and savings on cost of raw materials manufactured by the Company's
subsidiary, CPI.
Research and development expenses increased to approximately $1,078,000
from approximately $814,000 (32%), primarily due to increased personnel costs
in support of the Company's program to develop and complete studies related to
FDA 510(k) submissions, and the addition of RAI and CPI related research and
development expenses. During the fiscal year ended September 30, 1997, the
Company received FDA clearance to market 16 new clinical tests.
Selling, general and administrative expenses increased to approximately
$3,808,000 from approximately $3,237,000 (18%), primarily due to the addition
of RAI and CPI expenses. SG&A expenses decreased as a percentage of revenues
from 32% to 29% due to the Company's utilization of its present infrastructure
to manage additional operations.
Net other expense decreased to approximately $102,000 from approximately
$419,000 due to a decrease in interest expense and a one time expense relating
to the issuance of warrants during the previous year. During the fiscal year
ended September, 1996 the Company converted notes in the aggregate amount of
$1,550,000 into 1,550,000 shares of common stock. The Company also completed an
equity private placement offering which netted $6,410,000 in March, 1996. The
cash provided from this offering was used to reduce the Company's long term
debt, purchase RAI and CPI, and increase working capital for the Company.
Net income was approximately $405,000 compared to a loss of approximately
$464,000 the previous year primarily due to higher RAI, CPI and CMV sales, and
a reduction in non-operating expenses.
Liquidity and Capital Resources
The Company has financed its capital expenditures, operating requirements
and growth primarily from the initial public offering of its common stock, a
bridge loan, lease financing arrangements, borrowings from nonaffiliates and
related parties, cash flow from operations and private placements completed in
September 1995 and March, 1996.
On November 1, 1996 the Company, through its wholly owned subsidiary,
CPI, completed the purchase of substantially all the assets of 872 Main Street
Corporation (formally Cellular Products, Inc.) for $400,000 in cash and a
$200,000 promissory note which was paid in full on November 1, 1997. CPI is
based in Buffalo, New York and is a manufacturer of biotechnology materials and
assays for research and for the manufacture of clinical diagnostic test kits.
Its products are used in the growth and testing of retroviruses and as raw
materials by manufacturers of clinical diagnostic assays. The product mix
includes enzyme oligonucleotide assays, monoclonal antibodies, recombinant
growth factors, viral lysates and bulk raw materials. The Company believes the
acquisition will enable the Company to produce several key raw materials for
its tests, allow for better control of manufacturing costs and enhance the
Company's research programs.
At September 30, 1997, the Company's working capital was approximately
$6,157,000 compared to approximately $5,417,000 at September 30, 1996. This
increase was principally due to the Company's net income of approximately
$405,000 and proceeds of approximately $198,000 from the issuance of common
stock in connection with the exercise of warrants and options.
Inventory balances increased from approximately $3,178,000 on September
30, 1996 to approximately $3,954,000 on September 30, 1997 due to the purchase
of CPI inventory, purchases of inventory in support of Carter Wallace sales,
and purchases of inventory in support of sales of new products. The Company
often purchases large quantities of raw materials due to issues of price,
quality and availability. Accounts payable and accrued expenses decreased from
approximately $1,429,000 to approximately $785,000 primarily due to the
reduction in payables to Carter Wallace for inventory transferred to Hemagen
during the year ended September, 1995, and a decrease in trade payables.
Accounts Receivable balances increased from approximately $1,674,000 to
approximately $2,289,000 primarily due to an increase in fourth quarter sales.
Long term debt decreased from approximately $958,000 on September 30,
1996 to approximately $537,000 on September 30, 1997, due to the payment of the
Company's capital lease obligations.
At September 30, 1997 the Company had capital finance arrangements with
one company totaling approximately $537,000. The Company used this financing to
acquire blood typing machines and other equipment. The Company is required to
pay an average of $34,000 per month in the aggregate under these arrangements
during fiscal 1998. These arrangements run through 1998.
Management believes its cash and cash equivalents and short-term
investments, together with anticipated cash flow from operations, are
sufficient to meet the Company's cash needs for its ongoing business.
Impact of Inflation
Domestic inflation during the last two fiscal years has not had a
significant effect on the Company's business activities. Translation and
transaction gains and losses between the Company and its subsidiary in Brazil
are expensed each period.
New Accounting Pronouncements
Effective October 1, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation." SFAS 123 allows the Company to account for its
stock-based employee compensation plans based upon either a fair value method
or the intrinsic value method currently followed by the Company. The Company
has chosen to retain its current method of accounting for stock-based
compensation plans, and therefore, the adoption of SFAS 123 has had no impact
on the Company's financial position or results of operations. All required
disclosures are included in the Company's financial reports.
Statement of Financial Accounting Standards No. 128 ("SFAS 128")
"Earnings Per Share", issued by the Financial Accounting Standards Board is
effective for financial statements for the fiscal years ending after December
15, 1997. The new standard establishes standards for computing and presenting
earnings per share.
The effect of adopting SFAS 128 is not expected to be material. The
Company is required to adopt the disclosure requirements of SFAS 128 during the
year ending September 30, 1998.
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. Results of operations and financial positions will be
unaffected by the implementation of these new standards.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income, " ("SFAS 130") establishes standards for reporting and
display of comprehensive income, its components, and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income by reported in a financial statement that is displayed with the same
prominence as other financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information, " which supersedes SFAS No. 14, "Financial Reporting for Segments
of a Business Enterprise," establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas, and major customers. SFAS No. 131 defines operating segments
as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Both of these new standards are effective for financial statements for
the periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to the recent issuance of
these standards, management has been unable to fully evaluate the impact, if
any, they may have on future financial statement disclosures.
Item 7. Financial Statements and Supplementary Data.
See Item 13 below and the Index therein for a listing of the financial
statements and supplementary data filed as part of this report.
Item 8. Change in Certifying Accountants
On January 29, 1996 Price Waterhouse LLP declined to stand for reelection
as independent accountants for the Company.
There were no disagreements between the Company and Price Waterhouse LLP
regarding any matters of accounting principles or practices, financial
statement disclosure or auditing scope or procedures in connection with the
audit of each of the Company's fiscal years in the period October 1, 1994
through September 30, 1995, or at any time through January 29, 1996 which, if
not resolved to the satisfaction of Price Waterhouse LLP would have caused
Price Waterhouse LLP to make reference to the subject matter of such
disagreement in connection with its report. There have been no reportable
events (as defined by Regulation S-B Item 304(a)(1)(iv)(B)) during the period
from October 1, 1994 through September 30, 1995, and during the period through
January 29, 1996. In addition, during this period, the Company has not
consulted another accountant regarding the application of accounting principles
to a specific transaction.
The report of Price Waterhouse LLP upon the Company's financial statement
for the fiscal year ending September 30, 1995 contained neither an adverse
opinion nor a disclaimer of opinion nor was such report qualified or modified
as to uncertainty, audit scope or accounting principles.
Price Waterhouse LLP has furnished the Company with a letter addressed to
the SEC stating that it agrees with the above statements. A copy of this
letter, dated February 2, 1996 was filed as an exhibit to the Company's report
on Form 8-K filed with the Commission on February 3, 1996 and is incorporated
herein by reference.
On May 20, 1996 the Board of Directors of the Company approved the
engagement of BDO Seidman, LLP as the independent accountants for the Company.
PART III
Items 9 to 12 are incorporated herein by reference to the Company's
definitive proxy statement to be filed with the Securities and Exchange
Commission.
PART IV
Item 13. Exhibits, List and Reports on Form 8-K.
(a)(1) Financial Statements. The financial statements required to be
filed by Item 7 herewith are as follows:
<TABLE>
<CAPTION>
Page
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<S> <C>
Report of Independent Certified Public Accountants - BDO Seidman, LLP F-2
Consolidated Balance Sheets at September 30, 1997 and 1996 F-3 to F-4
Consolidated Statements of Operations for the years ended September 30,
1997, and 1996 F-5
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1997, and 1996 F-6
Consolidated Statements of Cash Flows for the years ended September 30,
1997, and 1996 F-7
Notes to Consolidated Financial Statements F-8 to F-30
</TABLE>
(a)(2) Exhibits.
(i) The following exhibits, required by Item 601 of Regulation
S-B, are filed herewith:
10ii Distribution agreement between the Company and Donnor Com. IND.
LTDA
10jj Distribution agreement between the Company and Phoenix
Diagnostics, Inc.
(ii) The following exhibits were filed as part of the
Company's Form SB-2 Registration Statement (33-52686-B)
declared effective by the Securities and Exchange
Commission (the "Commission") on February 4, 1993 and
are herein incorporated by reference:
<TABLE>
<CAPTION>
Exhibit No. Title
- ----------- -----
<S> <C>
3a Certificate of Incorporation.
3b Bylaws.
3c Certificate of Agreement of Merger between Hemagen
Diagnostics Inc., a Massachusetts corporation, and the
Company, dated May 1, 1992.
3d Articles of Merger between Hemagen Diagnostics Inc., a
Massachusetts corporation, and the Company, dated May
1, 1992.
<CAPTION>
Exhibit No. Title
- ----------- -----
<S> <C>
4a Rights of security holders (included in Exhibits 3a and 3b).
4b Specimen Stock Certificate.
10a Technology Purchase Agreement between Dr. de Oliveira and Dr.
Lazzari and Seragen, Inc., dated April 15, 1983.
10b Assignment and Assumption Agreement between the Company and
Seragen, Inc., dated September 12, 1985.
10c Product Development Agreement between the Company and Boston
University, dated February 14, 1992.
10d License Agreement between the Company and Boston University,
dated March 1992.
10e Distributorship Agreement between the Company and Eurobio
Laboratories, dated June 11, 1991.
10f Distributorship Agreement between the Company and
International Reagents Corporation, dated February 1, 1990.
10g Financial Assistance Agreement between the Company and
Hemagen Diagnosticos, Comercio, Importacao e Exportacao Ltd.,
dated July 31, 1991.
10h Distribution Agreement between the Company and Hemagen
Diagnosticos, Comercio, Importacao e Exportacao Ltd., dated
July 31, 1991.
*10i Form of Employment Agreement between the Company and Dr.
Franzblau.
*10j Form of Employment Agreement between the Company and Dr. de
Oliveira.
*10k 1992 Stock Option Plan.
10l Distributorship Agreement between the Company and Labor
Diagnostika GmbH, dated July 1, 1990.
10m Product Purchase Agreement between the Company and Olympus
Corporation, dated February 24, 1989.
10n OEM Agreement between the Company and Sigma Diagnostics,
Inc., dated May 11, 1992.
10o Note issued by the Company to Boston University, dated
December 15, 1985.
10p Letter Agreement between the Company and Antonio Lazzari,
M.D., dated April 28, 1985.
10q Lease between the Company and Philip Pagliazzo and Rose
Pagliazzo, dated May 15, 1992.
10r Distribution Agreement between the Company and Olympus
Corporation, dated September 1, 1992.
*10s Form of Employment Agreement between the Company and Mr. von
Stein.
10t Product Development Agreement between the Company and Sigma
Diagnostics, Inc., dated October 16, 1992.
*10u Revised Employment Agreement between the Company and Dr. de
Oliveira.
*10v Revised Employment Agreement between the Company and Dr.
Franzblau.
10w Description of the Company's lease for certain premises
located in Waltham, Massachusetts.
10x Lease for office space of Hemagen Diagnosticos, Comercio,
Importaceo e Exportaceo, Ltd. ("HDC") in Sao Paulo, Brazil.
10x Description of the Lease for office space of HDC in Sao
Paulo, Brazil.
10y Equity Purchase Agreement between the Company and HDC, dated
as of October 1, 1992.
10aa Form of Warrant issued in connection with the Bridge Loan and
Statement of Registration Rights.
10cc Form of Subscription Agreement used in connection with the
Bridge Loan.
21 List of the Company's Subsidiaries.
- -------------------
<F*> These exhibits relate to a management contract or compensatory plan or
arrangement.
</TABLE>
(iii) The following exhibit was filed as part of the Company's
Form 10-QSB for the quarter ended March 30, 1993.
<TABLE>
<CAPTION>
Exhibit No. Title
- ----------- -----
<S> <C>
10a Master Lease Agreement between the Company and Aberlyn
Capital Management Limited Partnership, dated April 1, 1993.
</TABLE>
(iv) The following exhibit was filed as part of the Company's
Form 10-KSB for the Fiscal Year ending September 30, 1994.
<TABLE>
<CAPTION>
Exhibit No. Title
- ----------- -----
<S> <C>
10a Product Development Agreement between the Company and
Boehringher Mannheim GmbH, dated November 25, 1993.
10b Option Agreement between the Company and Boston University,
dated October 15, 1993.
</TABLE>
(v) The following exhibits were filed as part of the Company's
Form 10QSB for the quarter ending December 31, 1994
<TABLE>
<CAPTION>
Exhibit No. Title
- ----------- -----
<S> <C>
10dd Distributorship Agreement between the Company and Labor
Diagnostika GmbH dated October 1, 1994
10ee Agreement between the Company and Carter-Wallace, Inc. dated
December 22, 1994.
10ff License Assignment and License Agreement between the Company
and Aberlyn Capital Management Limited Partnership dated
December 30, 1994.
</TABLE>
(vi) The following exhibits were filed as part of the Company's
Form 10-KSB for the year ending September 30, 1996.
<TABLE>
<CAPTION>
Exhibit No. Title
- ----------- -----
<S> <C>
10gg Distributorship Agreement between the Company and
Schiapparelli Biosystems, B.V.
10hh Distributorship Agreement between the Company and Olympus
America, Inc.
23a Consent of Independent Certified Public Accountants - BDO
Seidman, LLP
23b Consent of Independent Certified Public Accountants - Price
Waterhouse LLP
</TABLE>
(b) Reports on Form 8-K. (i) On July 13, 1995 the Company filed a
form 8-K related to the purchase VIRGO(R) product line.
The Following financial statements were filed with the form 8K.
Report of KPMG Peat Marwick.
Statement of Inventory and Equipment and Leasehold Improvements
of immunofluorescent Assay and IL-2 Product Lines of
Schiapparelli Biosystems, Inc. for the year ended December
31, 1994.
Statement of Operations before Administrative, Interest and
Income Tax Expenses of Immunofluorescent Assay and IL-2
Product Line for the six month ended June 30, 1995
(unaudited).
Pro forma Condensed and Combined Statement of Operations of
the Company and certain assets acquired from Schiapparelli
for the nine months ended June 30, 1995 and the year ended
September 30, 1994 (unaudited).
(ii) On December 27, 1995 the Company filed a form 8-K
announcing the intention of purchasing RAI.
(iii) On February 3, 1996 the Company filed a form 8-K
announcing that Price Waterhouse had declined to stand
for reelection as independent accountants for the
Company.
(iv) On March 4, 1996 the Company filed a form 8-K related
to the purchase of RAI.
The following financial statements were filed with the form 8-K.
Audited Financial Statements for Reagents Applications, Inc.
as of December 31, 1994 and 1993.
Pro Forma Financial Information for the Registrant and RAI
for the year ended September 30, 1995 and for the three
months ended December 31, 1995 and December 31, 1994.
(v) On May 22, 1996 the Company filed a form 8-K related to
the approval of BDO Seidman, LLP as the independent
accountants for the Company.
(vi) On November 14, 1996 the Company filed a form 8-K
related to the purchase of the assets of 872 Main Street
Corporation (formally Cellular Products, Inc.).
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEMAGEN DIAGNOSTICS, INC.
Date: December 23, 1997 By: /s/ Dr. Carl Franzblau
-----------------------------------
Dr. Carl Franzblau, President
In accordance with 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 and on the date indicated.
<TABLE>
<CAPTION>
Name Capacity Date
---- -------- ----
<S> <C> <C>
/s/ Carl Franzblau President and Chairman of the Board of December 23, 1997
- ---------------------------------- Directors (Principal Executive Officer)
Carl Franzblau, Ph.D.
/s/ William Franzblau Chief Financial Officer (Principal December 23, 1997
- ---------------------------------- Financial Officer)
William Franzblau
/s/ Myrna Franzblau Treasurer (Principal Accounting Officer) December 23, 1997
- ----------------------------------
Myrna Franzblau
/s/ Alan S. Cohen Director December 23, 1997
- ----------------------------------
Alan S. Cohen, M.D.
/s/ Lawrence Gilbert Director December 23, 1997
- ----------------------------------
Lawrence Gilbert
Director December __, 1997
- ----------------------------------
Ricardo M. de Oliveira, M.D.
/s/ John I. Sandson, M.D. Director December 23, 1997
- ----------------------------------
John I. Sandson, M.D.
/s/ Charles W. Smith Director December 23, 1997
- ----------------------------------
Charles W. Smith
</TABLE>
HEMAGEN DIAGNOSTICS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Title
- ----------- -----
<S> <C>
10ii Distribution Agreement between the Company and Donnor Com. IND. LTDA
10jj Distribution Agreement between the Company and Phoenix Diagnostics, Inc.
23a Consent of Independent Certified Public Accountants - BDO Seidman, LLP
</TABLE>
Hemagen Diagnostics, Inc.
and Subsidiaries
Index to Consolidated Financial Statements
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated financial statements:
Balance sheets F-3 to F-4
Statements of operations F-5
Statements of stockholders' equity F-6
Statements of cash flows F-7
Notes to consolidated financial statements F-8 to F-30
</TABLE>
<PAGE> F-1
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
Hemagen Diagnostics, Inc.
We have audited the accompanying consolidated balance sheets of Hemagen
Diagnostics, Inc. and subsidiaries as of September 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hemagen
Diagnostics, Inc. and subsidiaries at September 30, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
BDO Seidman, LLP
Boston, Massachusetts
November 14, 1997
<PAGE> F-2
Hemagen Diagnostics, Inc.
and Subsidiaries
Consolidated Balance Sheets
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 294 086 $ 756 919
Short-term investments 730 827 1 360 249
Accounts receivable, less allowance for doubtful accounts of $55,500
and $53,800 at September 30, 1997 and 1996, respectively 2 288 793 1 673 791
Inventories 3 953 601 3 178 180
Prepaid expenses and other current assets 221 646 271 800
---------------------------
Total current assets 7 488 953 7 240 939
Property and equipment, net of accumulated depreciation 2 545 470 2 931 879
Other assets 1 512 227 1 636 412
---------------------------
$11 546 650 $11 809 230
===========================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> F-3
Hemagen Diagnostics, Inc.
and Subsidiaries
Consolidated Balance Sheets
(Continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 785 135 $ 1 428 790
Notes payable 198 983 -
Current maturities of long-term debt 347 388 395 034
--------------------------
Total current liabilities 1 331 506 1 823 824
Long-term debt, less current maturities 189 281 562 672
--------------------------
Total liabilities 1 520 787 2 386 496
--------------------------
Minority interest in consolidated subsidiary - -
Commitments and contingencies (Note 15)
Stockholders' equity:
Preferred stock, $.01 par value - 1,000,000 shares authorized; none issued - -
Common stock, $.01 par value - 30,000,000 shares authorized; 7,776,890 and
7,620,890 shares issued and outstanding at September 30, 1997 and 1996,
respectively 77 769 76 209
Additional paid-in capital 13 329 197 13 132 757
Accumulated deficit (3 375 103) (3 780 232)
--------------------------
10 031 863 9 428 734
--------------------------
Less - receivable from stockholders (6 000) (6 000)
--------------------------
Total stockholders' equity 10 025 863 9 422 734
--------------------------
$11 546 650 $11 809 230
==========================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> F-4
Hemagen Diagnostics, Inc.
and Subsidiaries
Consolidated Statements of Operations
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended September 30, 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Product sales $12 971 102 $10 161 335
Research and development contracts 20 000 58 000
---------------------------
12 991 102 10 219 335
---------------------------
Cost and expenses:
Cost of product sales 7 597 981 6 213 398
Cost of research and development revenue 5 928 36 040
Research and development 1 072 188 777 718
Selling, general and administrative 3 808 000 3 237 045
---------------------------
12 484 097 10 264 201
---------------------------
Operating income (loss) 507 005 (44 866)
---------------------------
Other income (expenses):
Interest income 63 727 106 566
Interest expense (131 806) (517 052)
Foreign exchange loss (18 306) (21 179)
Other income (expense) (15 491) 12 545
---------------------------
(101 876) (419 120)
---------------------------
Net income (loss) $ 405 129 $ (463 986)
===========================
Net income (loss) per share $ .05 $ (.08)
===========================
Weighted average shares outstanding 7 676 561 5 666 357
===========================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> F-5
Hemagen Diagnostics, Inc.
And Subsidiaries
Consolidated Statements of Stockholders' Equity
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional Receivable
-------------------- Paid-in Accumulated from Stockholders'
Shares Par Value Capital Deficit Stockholders Equity
--------- --------- ---------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 3 162 000 $31 620 $5 154 912 $(3 316 246) $(6 000) $ 1 864 286
Issuance of common stock upon conversion
of subordinated debt 1 550 000 15 500 1 502 565 - - 1 518 065
Issuance of common stock, net of expenses,
in connection with private placement
offering 2 695 255 26 953 6 383 216 - - 6 410 169
Exercise of common stock purchase warrants 90 517 905 (905) - - -
Exercise of common stock purchase warrants 45 259 453 (453) - - -
Exercise of common stock purchase warrants 45 259 452 (452) - - -
Issuance of common stock to employees under
stock option plan 5 100 51 8 899 - - 8 950
Issuance of common stock to Board of
Directors under stock option plan 7 500 75 11 175 - - 11 250
Issuance of common stock purchase warrants - - 50 000 - - 50 000
Issuance of common stock to Board of
Directors in lieu of compensation 20 000 200 23 800 - - 24 000
Net loss - - - (463 986) - (463 986)
-------------------------------------------------------------------------------
Balance at September 30, 1996 7 620 890 76 209 13 132 757 (3 780 232) (6 000) 9 422 734
Issuance of common stock to employees under
stock option plan 56 000 560 97 440 - - 98 000
Exercise of common stock purchase warrants 100 000 1 000 99 000 - - 100 000
Net income - - - 405 129 - 405 129
-------------------------------------------------------------------------------
Balance at September 30, 1997 7 776 890 $77 769 $13 329 197 $(3 375 103) $(6 000) $10 025 683
===============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> F-6
Hemagen Diagnostics, Inc.
and Subsidiaries
Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended September 30, 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 405 129 $ (463 986)
Adjustments to reconcile net income (loss) to cash provided (used)
by operating activities:
Depreciation and amortization 847 296 763 041
Compensation relating to the issuance of warrants and common stock - 74 000
Amortization of deferred financing costs and debt discount 11 190 -
Foreign exchange loss 18 306 21 179
Changes in operating assets and liabilities, net of effects of
purchase of CPI in 1997 and RAI in 1996:
Accounts receivable (405 345) 135 435
Inventories (319 019) (306 967)
Prepaid expenses and other current assets 53 854 (471)
Accounts payable and accrued expenses (771 101) 329 871
Deferred revenue - (20 000)
-------------------------
Net cash provided (used) by operating activities (159 690) 532 102
-------------------------
Cash flow from investing activities:
Payment for acquisitions, net of cash acquired (395 479) (4 920 548)
Purchases of short-term investments - (1 360 249)
Proceeds from maturity of short-term investments 629 422 803 000
Purchases of property and equipment (325 082) (234 343)
Other assets (8 095) 345 973
-------------------------
Net cash used by investing activities (99 234) (5 366 167)
-------------------------
Cash flows from financing activities:
Repayments of notes payable to related party - (350 000)
Proceeds from issuance of long-term debt - 108 392
Repayments of long-term debt (405 876) (1 930 844)
Proceeds from issuance of common stock, net - 6 410 169
Exercise of stock options and warrants 198 000 20 200
-------------------------
Net cash provided (used) by financing activities (207 876) 4 257 917
-------------------------
Effect of exchange rates on cash and cash equipments 3 967 -
-------------------------
Net decrease in cash and cash equivalents (462 833) (576 148)
Cash and cash equivalents, beginning of year 756 919 1 333 067
-------------------------
Cash and cash equivalents, end of year $ 294 086 $ 756 919
=========================
Cash payments of interest $ 147 840 $ 507 849
=========================
</TABLE>
Supplemental disclosure of non-cash financing and investing activities, see
Note 2.
See accompanying notes to consolidated financial statements.
<PAGE> F-7
Hemagen Diagnostics, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
1. Nature of Business and Organization
Hemagen Diagnostics, Inc. ("Hemagen" or the "Company") is a biotechnology
company which develops, manufactures, and markets laboratory medical
diagnostic kits used to aid in the diagnosis of certain autoimmune and
infectious diseases. In the United States, the Company sells its products
directly to clinical laboratories and blood banks and on a private-label
basis through multinational distributors of medical supplies.
Internationally, the Company sells its products primarily through
distributors. The Company was incorporated in the Commonwealth of
Massachusetts in 1985 and reincorporated in the state of Delaware in
1992.
2. Significant Accounting Policies
Estimates and Assumptions
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and Hemagen Diagnostics Commercio,
Importaco & Exporataco, Ltd. ("HDC") for the two years ended
September 30, 1997, the accounts of Reagents Applications, Inc.
("RAI") from March 1, 1996, and the accounts of Cellular Products,
Inc. ("CPI") from November 1, 1996, the effective dates of the RAI
and CPI acquisitions as described in Note 3. All significant
intercompany balances and transactions have been eliminated in
consolidation.
The Company has a 51% interest in HDC. All losses of HDC in excess
of the minority shareholders' investment have been allocated to the
Company.
Foreign Currency Translation
The functional currency of HDC is the U.S. dollar. Certain assets
(primarily inventories and property and equipment) and liabilities
and related income and expenses of HDC are remeasured into U.S.
dollars at exchange rates in effect when the assets were acquired
or the liabilities were incurred. All other assets and liabilities
are translated at the exchange rates in effect as of the balance
sheet date, and income and expense items are translated at average
exchange rates for the period. Remeasurement gains and losses are
included in operations as they occur.
Cash Equivalents and Short-Term Investments
The Company considers all investments with an original maturity of
three months or less to be cash equivalents. The Company invests
its excess cash in certificates of deposit.
Short-term investments are accounted for in accordance with
Statement of Financial Accounting Standards No. 115 ("SFAS No.
115"), "Accounting for Certain Investments in Debt and Equity
Securities," which requires that debt and marketable equity
securities be classified as trading, available-for-sale, or
held-to-maturity. Available-for-sale securities are reported in the
balance sheet at fair value with unrealized gains or losses
included in a separate component of stockholders' equity. At
September 30, 1997 and 1996, the Company held certificates of
deposit of $730,827 and $1,360,249, respectively. All certificates
held at September 30, 1997 mature within one year. These
certificates of deposit are classified as available-for-sale and
are recorded at cost at September 30, 1997 and 1996, which
approximates fair value.
Inventories
Inventories are stated at the lower of cost, determined on a
first-in, first-out basis, or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided
on a straight-line basis over the estimated useful lives of the
related assets. Expenditures for repairs and maintenance are
expensed as incurred.
Goodwill
Goodwill resulting from the excess of cost over fair value of net
assets acquired is being amortized on a straight-line basis over 15
years. The Company evaluates the recoverability and remaining life
of its goodwill and determines whether the goodwill should be
completely or partially written-off or the amortization period
accelerated. The Company will recognize an impairment of goodwill
if undiscounted estimated future operating cash flows of the
acquired business are determined to be less than the carrying
amount of the goodwill. If the Company determines that the goodwill
has been impaired, the measurement of the impairment will be equal
to the excess of the carrying amount of the goodwill over the
amount of the undiscounted estimated future operating cash flows.
If an impairment of goodwill were to occur, the Company would
reflect the impairment through a reduction in the carrying value of
goodwill.
Income Taxes
The Company utilizes the liability method of accounting for income
taxes, as set forth in Statement of Financial Accounting Standards
No. 109, "Accounting For Income Taxes." Under this method, deferred
tax liabilities and assets are recognized for the expected future
tax consequences of temporary differences between the carrying
amount and the tax basis of assets and liabilities.
Revenue Recognition
Revenue from the sale of products is recognized when the product is
shipped. Revenue from contracts to conduct research and development
is recognized using the percentage-of-completion method. Losses are
provided for at the time that management determines that contract
costs will exceed related revenues. The portion of contract
billings related to research and development not complete at the
balance sheet date is included in deferred revenue.
Advertising
The Company expenses advertising costs as incurred. Advertising
expense was approximately $94,000 and $48,000 in fiscal 1997 and
1996, respectively.
Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted average number
of shares of common stock and common stock equivalents outstanding
during each period, and shares obtainable through conversion of
convertible debt. Common stock equivalents, consisting of
outstanding stock options and warrants, are included in the
computation when their effect is dilutive.
Statement of Cash Flows - Disclosure of Non-Cash Financing and Investing
Activities
During 1996, the Company forced the conversion of $1,550,000 of
notes payable into 1,550,000 shares of common stock. Also in
connection with the conversion, common stock purchase warrants with
a total estimated value of $50,000 were issued.
Common stock with a value of $24,000 was issued to non-employee
members of the Board of Directors in lieu of compensation during
1996.
During 1996, 181,035 warrants were exercised in a non-monetary
transaction whereby the Company forgo its rights to the cash
consideration upon exercise of these warrants in return for the
warrant holder's forfeiture of their right to exercise the
remaining 68,965 warrants.
Instruments with a net book value of $114,523 and $157,319 were
transferred from fixed assets to inventory during 1997 and 1996,
respectively.
New Accounting Pronouncements
Effective October 1, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standard No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation." The Company has elected
to continue to account for stock options at their intrinsic value
with disclosure of the effects of fair value accounting on net
earnings (loss) and earnings (loss) per share on a pro forma basis.
Statement of Financial Accounting Standards No. 128, "Earnings per
Share," ("SFAS No. 128") issued by the Financial Accounting
Standards Board is effective for financial statements for fiscal
years ending after December 15, 1997. The new standard establishes
standards for computing and presenting earnings per shares.
The effect of adopting Statement of Financial Accounting Standards
No. 128, "Earnings per Share," is not expected to be material. The
Company is required to adopt the disclosure requirements of SFAS
No. 128 during the year ended September 30, 1998.
In June 1997, the Financial Accounting Standards Board issued two
new disclosure standards. Results of operations and financial
position will be unaffected by implementation of these new
standards.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," ("SFAS No. 130") establishes standards for
reporting and display of comprehensive income, its components, and
accumulated balances. Comprehensive income is defined to include
all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise," establishes
standards for the way that public enterprises report information
about operating segments in annual financial statements and
requires reporting of selected information about operating segments
in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and
services, geographic areas, and major customers. SFAS No. 131
defines operating segments as components of an enterprise about
which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
Both of these new standards are effective for financial statements
for periods beginning after December 15, 1997 and require
comparative information for earlier years to be restated. Due to
the recent issuance of these standards, management has been unable
to fully evaluate the impact, if any, they may have on future
financial statement disclosures.
3. Acquisitions
Effective March 1, 1996, the Company acquired 100% of the outstanding
common stock of Reagents Applications, Inc., a manufacturer of diagnostic
test kits for a cash purchase price of $4,979,195.
The acquisition was recorded using the purchase method of accounting,
whereby the net assets acquired were recorded at their estimated fair
values and the excess of cost over the fair value of the net assets
acquired of approximately $1,635,487 was allocated to goodwill and is
being amortized over 15 years.
The Company acquired certain assets, primarily inventory and fixed
assets, and assumed certain liabilities of 872 Main Street Corp.
(formerly Cellular Products, Inc.) on November 1, 1996 for total
consideration and related costs of $738,600 and formed a new subsidiary,
Cellular Products, Inc. ("CPI"). The purchase price consisted of $400,000
in cash and an unsecured promissory note to 872 Main Street Corp. in the
amount of $200,000 due November, 1997. The present value of the note
payable at September 30, 1997 is $198,983. The acquisition was recorded
using the purchase method of accounting.
The excess of the fair value of net assets acquired over the purchase
price was recorded as a reduction of the fixed assets acquired, in
accordance with the provisions of Accounting Principles Board Opinion No.
16, "Business Combinations." CPI manufactures biotechnology materials and
assays for research and for the manufacture of clinical diagnostic test
kits.
The consolidated statements of operations and cash flows for the year-
ended September 30, 1997 include the results of operations and cash flows
for CPI from November 1, 1996 through September 30, 1997 and RAI for the
entire year.
The consolidated statements of operations and cash flows for the year
ended September 30, 1996 include the results of operations and cash flows
for RAI from March 1, 1996 through September 30, 1996.
The unaudited pro forma combined results of operations of the Company and
the businesses acquired in fiscal 1997 and 1996 for the years ended
September 30, 1997 and 1996, assuming that the acquisitions had occurred
at October 1, 1995 and after giving effect to certain pro forma
adjustments are as follows:
Years ended September 30, 1997 1996
-----------------------------------------------------------------------
Revenue $13 121 000 $14 039 000
Net income (loss) $ 432 000 $ (761 000)
Net income (loss) per share $ .06 $ (.12)
4. Related Party Transactions
Related Parties
The Company's Chairman of the Board, Chief Executive Officer,
President and principal stockholder is the Chairman of Boston
University's (the "University") Biochemistry Department and a
Professor and Associate Dean for Graduate Affairs of the
University's School of Medicine. Certain other directors and
stockholders of the Company are also employed by the University.
The Company has entered into certain product development and
license agreements with the University as further described below.
Product Development Agreement
In February 1992, the Company entered into a product development
agreement with the University to develop, on a best efforts basis,
a product which can indicate certain diseases. Under this
agreement, the Company is obligated to provide facilities,
personnel, supplies, and services totaling $100,000, which are
recorded as research and development contract support costs as
incurred. No such costs were incurred in the years ended September
30, 1997 and 1996. The Company retains a 50% interest in all
intellectual property developed.
The University is obligated to provide $100,000 in cash to the
Company over the term of the agreement to pay for the services of
two employees of the Company and certain equipment and other costs
which are recorded as costs of research and development revenues as
incurred. No such costs were incurred in the years ended September
30, 1997 or 1996. Revenue of $20,000 was recognized under the
product development agreement in fiscal 1996. No amounts were due
to the Company at September 30, 1997 or 1996 under this agreement.
If the technology developed is licensed to a third party, royalties
will be distributed in proportion to the number of patents and
patent applications licensed to the Company and the University,
respectively. License fees will be distributed equally up to a
maximum of $215,000; thereafter, the fees will be allocated in the
same manner as royalties.
The agreement terminated in September 1993. The agreement provided
that following its termination (i) if the Company and the
University both desire to further develop and market the
technology, that they enter into a joint venture for that purpose,
(ii) if only the Company desires to further develop the technology,
it may purchase the rights to the technology and reimburse the
University for its initial $100,000 investment, (iii) if only the
University desires to pursue the technology, then the University
will repay the Company for its initial investment, (iv) if neither
party desires to pursue the technology, neither party will have any
obligation to the other. The rights to the technology will be
assigned in accordance with patent law and the University shall own
any equipment purchased with University funds. If neither party
desires to pursue the technology, the Company has agreed to assign
its rights to the technology to the University. The Company intends
to further develop the technology and is discussing the
alternatives with the University.
License Agreements
In March 1992, the Company entered into a license agreement with
the University under which the Company obtained the exclusive right
to use the University's patented and patent pending technology to
manufacture and market certain products. Under the agreement, the
Company is obligated to pay an annual royalty of 5% of the first
$50,000 of the Company's net sales of these products and 10% of net
sales of these products in excess of $50,000 until the Company has
paid the University a license fee of $10,000 in total and
reimbursed it for certain patent expenses. All royalties to be paid
thereafter will equal 5% of the Company's net sales of these
products. Sales of products using technology obtained under the
agreement, but not specifically covered under the patent
application, and sales which occur if no patents are granted, are
subject to a 3% royalty for a period of ten years. The Company also
agreed to pay the University 27.5% of royalties the Company
receives if it sublicenses the technology and 25% of the license
fees resulting from any sublicense agreement. There were no
royalties paid in the years ended September 30, 1997 and 1996. The
agreement terminates upon the termination of the patents.
In July 1994, the Company entered into a license agreement with the
University under which the Company obtained the exclusive right to
use additional patented and patent-pending technology of the
University to manufacture and market certain products. The
royalties due under the terms of the agreement are the same as the
initial license agreement and will be applied to the license fee of
$15,000. No royalties were paid in the years ended September 30,
1997 and 1996 and no amounts were accrued for royalties at
September 30, 1997 or 1996. The agreement terminates upon the
termination of the patents.
5. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, 1997 1996
----------------------------------------------------------
<S> <C> <C>
Raw materials $1 558 916 $1 278 021
Work-in-process 250 612 274 181
Finished goods 2 144 073 1 625 978
--------------------------
$3 953 601 $3 178 180
==========================
</TABLE>
6. Property and Equipment
Property and equipment include the following:
<TABLE>
<CAPTION>
September 30, 1997 1996
------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 16 000 $ -
Building 172 000 -
Furniture and equipment 3 987 991 3 950 300
Leasehold improvements 552 352 523 113
------------------------
4 728 343 4 473 413
Less accumulated depreciation and amortization 2 182 873 1 541 534
------------------------
$2 545 470 $2 931 879
========================
</TABLE>
Depreciation and amortization expense relating to property and equipment
was $701,816 and $708,525 for the years ended September 30, 1997 and
1996, respectively.
Included in the above amounts is property and equipment acquired under
capital leases of $119,135 and $534,114 at September 30, 1997 and 1996,
respectively. Accumulated depreciation and amortization on property and
equipment under capital leases totaled $83,395 and $321,671 at September
30, 1997 and 1996, respectively.
In fiscal 1996, the Company retired lease obligations amounting to
$1,337,044 and acquired the ownership of the assets under these leases.
7. Other Assets
Other assets consist of the following:
<TABLE>
<CAPTION>
September 30, 1997 1996
------------------------------------------------------------------------------------
<S> <C> <C>
Goodwill, net of accumulated amortization of $163,549
and $54,516 for 1997 and 1996, respectively $1 471 938 $1 580 971
Other 40 289 55 441
------------------------
$1 512 227 $1 636 412
========================
</TABLE>
8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following:
<TABLE>
<CAPTION>
September 30, 1997 1996
--------------------------------------------------------------
<S> <C> <C>
Accounts payable - trade $375 046 $ 645 068
Accrued professional fees 78 424 144 149
Accrued vacation 129 327 155 163
Accrued other 202 338 484 410
-----------------------
$785 135 $1 428 790
=======================
</TABLE>
9. Development and License Agreements
In October 1992, the Company entered into a product development agreement
with a customer, under which the customer and the Company would each
contribute $93,500, subject to the Company meeting specified goals in
connection with the development of a product line by December 31, 1993.
The Company completed the development in the year ended September 30,
1993, and all amounts due under the terms of the agreement were paid in
full. Under this agreement, the customer received a perpetual,
non-exclusive license to manufacture the product. The customer and the
Company agreed to pay royalties to each other, ranging from 2% to 6%, on
net sales of the product sold by the other during the first ten years
after development. In addition, the selling party shall pay a royalty
equal to 6% of net sales of the product to the other party until a total
amount of $93,500 has been paid to the other party. After the Company has
been reimbursed its $93,500 contribution, the balance of the customer's
contribution not already repaid by the Company shall be repaid in eight
quarters by offsetting any royalty payments due to the customer. If the
customer elects not to manufacture the product itself, then Hemagen shall
have the right of first refusal to manufacture the product for sale by
the customer. Hemagen retains ownership rights in all technology
developed under this agreement.
There were no sales of this product in the years ended September 30, 1997
or 1996. During 1997, the Company and the customer mutually agreed to
discontinue research and development of the product line.
In November 1993, the Company entered into a product development
agreement with a customer under which the Company would develop a product
which would work in conjunction with the customer's blood analyzer. Under
the terms of the agreement, the Company would provide facilities and
personnel and the customer would provide the use of its blood analyzer
and materials. The Company completed the development in the year ended
September 30, 1994. Under this agreement, the Company maintains exclusive
rights to manufacture and sell the product. Subsequently, the Company
entered into an OEM agreement with the customer which provided for
certain minimum purchases by the customer. During 1997, the customer did
not meet its minimum purchase requirement but agreed to satisfy the
annual amount obligated. Sales to this customer amounted to $203,000 in
1997 and $13,000 in 1996. The Company is currently renegotiating the
terms of the agreement to eliminate the minimum purchase requirement.
10. Financing Arrangements
Long-Term
Debt Borrowings classified as long-term debt consist of the
following:
<TABLE>
<CAPTION>
September 30, 1997 1996
-----------------------------------------------------------------------
<S> <C> <C>
Term loan at an effective interest rate of
approximately 13%, monthly principal and
interest payments of $31,309 from January
1996 through December 1998 $495 056 $789 340
Obligations under capital leases (Note 15) 41 613 168 366
----------------------
536 669 957 706
Less current portion 347 388 395 034
----------------------
$189 281 $562 672
======================
</TABLE>
Term Loan
In December 1994, the Company borrowed $1,000,000 from a leasing
company, using certain patents as collateral, to fund working
capital requirements. The Company's first year of interest was
netted from the proceeds of the loan and recorded as prepaid
interest. Principal and interest payments are due in monthly
installments of $31,309 beginning in January 1996 through December
1998, with a balloon payment of $100,000 due at the end of the
term. At the Company's option, the amount due at the end of the
term may be paid in four additional monthly installments of
$25,437. Principal repayments for the fiscal years ending September
30, 1998 and 1999 will be $305,775 and $189,281, respectively.
11. Stockholders' Equity
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of
preferred stock, $.01 par value per share. The preferred stock may
be issued in one or more series, the terms of which may be
determined at the time of issuance by the Board of Directors and
may include voting rights, preferences as to dividends and
liquidation, conversion and redemption rights, and sinking fund
provisions.
Common Stock
During 1996, the Company forced the conversion of the unpaid
principal balance of Subordinated Convertible Notes issued during
1995 into 1,550,000 shares of common stock at a rate of $1.00 per
share. All of these shares were registered with the SEC under the
Securities Act of 1933 with the filing of a Form SB-2, registration
statement, which, as amended, was declared effective on November
11, 1996.
Also during 1996, the Company filed a Form SB-2, registration
statement, under the Securities Act of 1933 with the SEC in order
to register 2,695,255 shares of common stock which were issued in a
private placement offering (the "Private Placement Offering"). This
registration statement, as amended, was declared effective on
November 14, 1996. The Company received net proceeds after expenses
of approximately $6,410,000 in connection with the Private
Placement Offering.
In connection with the exercise of certain common stock purchase
warrants and options, the Company issued 156,000 and 193,635 shares
of common stock during 1997 and 1996, respectively.
Board of Directors Common Stock
During 1996, the Company issued 20,000 shares of common stock to
non-employee members of the Board of Directors in lieu of cash
compensation. The related compensation expense is amortized over
the one year service period.
Common Stock Purchase Warrants
In connection with certain bridge financing which was repaid in
1993, the Company issued warrants to purchase 360,000 shares of
common stock at $3.00 per share and a warrant to purchase 36,000
shares of common stock at $3.60 per share exercisable through
December 31, 1997. During 1995, the Company repriced 90,000
warrants to individuals who participated in both the 1992 bridge
financing and the 1995 private placement. The warrants were
repriced from $3.00 per share to $1.50 per share. During 1996,
7,500 of these warrants were exercised. The incremental value of
the repriced warrants over the original warrants at the time of
repricing was estimated by management and determined not to be
material to the Company's results of operations or financial
position. Upon the effective date of the registration statement
filed in connection with the initial public offering, the warrant
to purchase 36,000 shares was cancelled. This was replaced with
warrants to purchase 100,000 shares of common stock at $8.00 per
share exercisable through February 3, 1998. During 1995, 70,000 of
these warrants were forfeited.
In conjunction with certain sale and leaseback transactions
occurring in 1993 and 1994, the Company issued warrants to purchase
50,000 and 20,000 shares of common stock at $3.25 per share
exercisable through April 1, 1998 and April 29, 1999, respectively.
The value of the warrants at the time of issuance was estimated by
management and determined not to be material to the Company's
results of operations or financial position.
In conjunction with a $1,000,000 term loan and a sale and leaseback
transaction with a leasing company in fiscal 1995, the Company
issued warrants to purchase 52,000 and 35,000 shares of common
stock at $2.50 and $2.00 per share, respectively, exercisable
through December 30, 1999 and June 30, 2000, respectively. The
value of the warrants at the time of issuance was estimated by
management to be $35,000 and $20,000, respectively.
In 1995, the Company issued 250,000 warrants to purchase common
stock at $1.00 per share exercisable through August 10, 2000 to
three consultants for services provided to the Company during the
period July 1, 1995 through June 30, 1996. The value of the
warrants at the time of issuance was estimated by management to be
$116,000. The value was amortized over the period the services were
provided. During fiscal 1996, 181,035 warrants were exercised in a
non-monetary transaction whereby the Company relinquished its
rights to the cash consideration upon exercise of these warrants in
return for the warrant holder's forfeiture of their right to
exercise the remaining warrants.
In October 1995, the Company issued 10,000 warrants to purchase
common stock at $2.37 per share exercisable through October 16,
1997 to an investor. The value of the warrants at the time of
issuance was estimated by management and determined not to be
material to the Company's results of operations and financial
position.
In connection with the Private Placement Offering, the Company
issued 2,695,255 common stock purchase warrants exercisable at
$2.75 per share and expiring on February 28, 2001.
Also in connection with the Private Placement Offering, the Company
issued Placement Agent Warrants allowing for the purchase of
269,526 units at a price of $2.75 per unit. Each unit consists of
one share of the Company's common stock and one common stock
Purchase Warrant which entitles the holder to purchase one share of
the Company's common stock for $2.75 per share, expiring February
28, 2001. The Placement Agent Warrants expire February 28, 1999.
In January 1996, the Company issued 100,000 warrants to purchase
common stock at $1.00 per share exercisable through January 8,
1999. The value of the warrants at the time of issuance was
estimated by management to be $50,000. During fiscal 1997 the
warrants were exercised.
Reserved Shares
At September 30, 1997, the Company has reserved 5,081,896 shares of
common stock for issuance upon the exercise of outstanding common
stock options and warrants. During March 1996, the Company's Board
of Directors voted to increase the number of authorized shares of
common stock from 10,000,000 to 30,000,000.
1992 Stock Option Plan
The 1992 Stock Option Plan (the "Plan") provides for the grant of
incentive and nonqualified stock options for the purchase of shares
of the Company's common stock by employees, directors, and
consultants of the Company. In 1996, the stock option plan was
amended to provide for the purchase of up to an aggregate of
1,000,000 shares of the Company's common stock. The Board of
Directors is responsible for the administration of the Plan. The
Board determines the term of each option, the number of shares for
which each option is granted and the rate at which each option is
exercisable. The Company may not grant an employee incentive stock
options with a fair market value in excess of $100,000 that is
exercisable during any one calendar year. The term of incentive
stock options granted cannot exceed ten years (five years for
options granted to holders of more than 10% of the voting stock of
the Company). The exercise price for incentive stock options
granted may not be less than 100% of the fair market value per
share of the underlying common stock (110% for options granted to
holders of more than 10% of the voting stock of the Company). The
Board, at the request of any optionee, may convert incentive stock
options that have not been exercised at the date of conversion into
nonqualified stock options.
Changes in options outstanding under the 1992 Stock Option Plan are
summarized as follows:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
-------- ----------------
<S> <C> <C>
Balance, September 30, 1995 227 350 $2.56
Granted 11 000 2.00
Exercised (5 100) 1.75
Cancelled or expired (5 025) 1.75
Balance, September 30, 1996 228 225 2.54
Granted 187 625 2.19
Exercised (56 000) 1.75
Cancelled or expired (50 900) 4.78
Balance, September 30, 1997 308 950 $2.08
</TABLE>
The following table summarizes information about stock options
outstanding at September 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
-------------------------------------------------
Weighted-
Average Weighted-
Range of Number Remaining Average
Exercise Outstanding at Contractual Exercise
Prices September 30, 1997 Life (years) Price
------------ ------------------ ------------ ----------
<S> <C> <C> <C>
$ 5.00 6 000 .7 $5.00
2.19 176 800 4.2 2.19
2.00 14 400 3.4 2.00
1.75 111 750 2.7 1.75
----------------------------------------------------------------
$1.75 - 5.00 308 950 3.5 $2.08
================================================================
</TABLE>
The Company accounts for its stock-based compensation plan using
the intrinsic value method. Accordingly, no compensation cost has
been recognized for its stock option plan. Had compensation cost
for the Company's stock option plan been determined based on the
fair value at the grant dates for awards under the plan consistent
with the method of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," the Company's net
income (loss) and earnings (loss) per share would have been
adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years ended September 30, 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) As reported $405 129 $(463 986)
Pro forma 181 179 (476 286)
Earnings (loss) As reported $ .05 $ (.08)
per share Pro forma .02 (.08)
</TABLE>
In determining the pro forma amounts above, the Company estimated
the fair value of each option granted using the Black-Scholes
option pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996: dividend yield of 0%
for both years and expected volatility of 27.6% for both years,
risk free rates ranging from 5.95% to 6.13% for 1997 and 6.44% to
6.65% for 1996, and expected lives of 5 years for 1997 and 1996.
The weighted average fair value of options granted in fiscal 1997
and 1996 was $223,950 and $12,300, respectively.
12. Income Taxes
Domestic and foreign income (loss) before income taxes and minority
interest in net income (loss) of consolidated subsidiary are as
follows:
<TABLE>
<CAPTION>
Years ended September 30, 1997 1996
--------------------------------------------------------
<S> <C> <C>
Domestic $316 314 $(342 997)
Foreign 88 815 (120 989)
-----------------------
$405 129 $(463 986)
=======================
</TABLE>
The difference between income taxes provided at the Company's
effective tax rate and the Federal statutory rate is as follows:
<TABLE>
<CAPTION>
Years ended September 30, 1997 1996
---------------------------------------------------------------------------------------
<S> <C> <C>
Federal tax (benefit) at statutory rate $ 137 744 $(157 755)
Operating income offset by current tax loss generating
no current or deferred tax effect (137 744) -
Losses without tax benefit - 157 755
-----------------------
$ - $ -
=======================
</TABLE>
Deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
September 30, 1997 1996
------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1 317 000 $ 950 000
Amortization of intangible assets 324 000 579 000
Research and development and investment tax
credit carryforwards 100 000 65 000
Other 134 000 80 000
--------------------------
Gross deferred tax assets 1 875 000 1 674 000
Deferred tax asset valuation allowance (1 824 000) (1 285 000)
--------------------------
Net deferred tax assets $ 51 000 $ 389 000
==========================
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997 1996
------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liability:
Basis difference of property and equipment $51 000 $389 000
====================
</TABLE>
The change in the valuation allowance for deferred tax assets was
an increase of $539,000 primarily related to carryforwards for net
operating losses and research and development tax credits, since
the realization of these future benefits is not sufficiently
assured as of September 30, 1997. If the Company achieves continued
profitability, these deferred tax assets may be available to offset
future income tax liabilities.
At September 30, 1997, the Company has approximately $3,292,000,
$2,342,000 and $100,000 of federal, state, and foreign net
operating losses, respectively, available to offset future taxable
income, which expire on various dates through 2012. At September
30, 1997, the Company has $100,000 of federal research and
development tax credit carryforwards and $55,000 of state research
and development and investment tax credit carryforwards available
to offset future income taxes payable, which expire on various
dates through 2011. Ownership changes as defined in the Internal
Revenue Code may limit the amount of net operating loss and tax
credit carryforwards that may be utilized annually.
13. Significant Sales and Concentration of Credit Risk
In 1997 and 1996, the Company derived revenues from a single customer
totalling $1,880,000 and $1,832,000, respectively. The Company derived
revenues from another customer amounting to $1,190,000 and $646,000 for
the years ended 1997 and 1996, respectively. Revenues derived from export
sales amounted to $4,777,000 in 1997 and $3,484,000 in 1996. Export sales
to Europe were approximately $2,591,000 in 1997 and $2,383,000 in 1996.
Export sales to South America were approximately $1,446,000 in 1997 and
$1,100,000 in 1996 .
14. International Operations
The following is a summary of certain selected financial information as
of September 30, 1997 and 1996 and for the years then ended of the
Company's 51% owned subsidiary, excluding the applicable intercompany
balances.
<TABLE>
<CAPTION>
September 30, 1997 1996
------------------------------------------------------------------------------
<S> <C> <C>
Assets $ 852 578 $933 718
Liabilities $ 82 952 71 802
Revenues $1 255 318 $955 944
</TABLE>
15. Commitments
Leases The Company leases certain office and manufacturing facilities
under noncancelable operating leases. In addition, the Company leases an
office and manufacturing facility under a cancelable operating lease
which has no future minimum rental commitments. Future minimum lease
commitments under the noncancelable operating leases and capital leases
(see Note 6) are as follows:
<TABLE>
<CAPTION>
Operating Capital
Year ending September 30, Leases Leases
------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 467 000 $45 000
1999 451 000 -
2000 425 000 -
2001 336 000 -
2002 301 000 -
----------------------
Total minimum lease payments $1 980 000 45 000
==========
Less amount representing interest (3 387)
-------
Present value of net minimum capital lease payments $41 613
=======
</TABLE>
Rent expense approximated $524,000 and $344,000 in 1997 and 1996,
respectively.
Minimum Purchase Obligation
During 1997, the Company entered in an exclusive distribution
agreement whereby it is required to purchase a minimum amount of
products from the supplier. Future minimum purchase obligations
amount to $200,000 in 1998 and $500,000 in 1999.
EXHIBIT 10ii
- ------------
AGREEMENT
BY AND BETWEEN
REAGENTS APPLICATIONS, INC.
AND
DONNER COM. IND. LTDA
DATED: July 23, 1997
INDEX
<TABLE>
<S> <C>
ARTICLE 1: DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 2: TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 3: EXCLUSIVE SALE AND DISTRIBUTION RIGHTS. . . . . . . . . . . . . 2
ARTICLE 4: TERMS AND CONDITIONS OF SALE. . . . . . . . . . . . . . . . . . 3
ARTICLE 5: NON-COMPETITION . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE 6: COOPERATION/BEST EFFORTS. . . . . . . . . . . . . . . . . . . . 4
ARTICLE 7: PERFORMANCE STANDARDS . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE 8: DUTIES OF DONNER. . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE 9: DUTIES OF RAICHEM . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE 10: TRADEMARKS, PATENTS, INTELLECTUAL PROPERTY, AND
INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 11: LIMITED WARRANTY. . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE 12: CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE 13: TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE 14: PRODUCT RECALL AND REGULATORY COMPLIANCE. . . . . . . . . . . . 13
ARTICLE 15: ARBITRATION . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE 16: GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
DISTRIBUTION AGREEMENT
----------------------
This Agreement is entered into this 23rd. day of July, 1997, by and between
Reagents Applications, Inc., a corporation organized and existing under the
laws of the State of Delaware, U.S.A. and having its principal place of
business at 8225 Mercury Court, San Diego, California U.S.A. (hereinafter
referred to as "RAICHEM"), and Donner Com. Ind. Ltda, a corporation organized
and existing under the laws of Brazil and having its principal place of
business at rua Dr. Luis Arrobas Martins, 98, Sao Paulo, Brazil (hereinafter
referred to as "DONNER").
RECITALS
--------
WHEREAS, DONNER desires to purchase certain in vitro diagnostic products
produced by RAICHEM; and
WHEREAS, RAICHEM desires to manufacture such products for DONNER to
distribute or sell said products in the territory defined below; and
WHEREAS, RAICHEM has developed or acquired and perfected the necessary
technology to manufacture certain diagnostic products; and
WHEREAS, RAICHEM has represented to DONNER that it has the necessary
facilities, personnel, and technology to commercially realize the manufacture
of certain diagnostic products; and
WHEREAS, DONNER has represented to RAICHEM that it has the necessary
facilities and personnel to commercially market and sell certain diagnostic
products manufactured by RAICHEM in the territory defined below.
NOW, THEREFORE, in consideration of the above recitals, and in
consideration of the mutual covenants and agreements hereinafter set forth,
RAICHEM and DONNER do hereby agree as follows:
AGREEMENT
---------
Article 1. Definitions
-----------
1.1. "PRODUCT(s)" means and include(s) certain of RAICHEM's in vitro
diagnostic test kits and reagents, as set forth in Appendix 1.1 and as
amended from time to time by mutual written agreement of the parties.
1.2. "AFFILIATE" means any entity directly or indirectly controlling,
controlled by, or under common control with, a party hereto. "Control",
as used in this definition, means the ownership of fifty percent or
more of the party in question.
1.3. "TERRITORY" means Brazil.
Article 2. Term
----
2.1. The initial term of this Agreement shall be for a period of five (5)
years from the date RAICHEM obtains regulatory approval from the
Brazilian Health Ministry to sell the PRODUCTs in Brazil unless
terminated as provided in this Agreement. This Agreement shall
automatically continue to be in effect after the initial term for
successive twelve-month periods unless it is terminated by either party
as provided in this Agreement, or written notice of non-renewal is
given by either party to the other at least six (6) months prior to the
expiration of the initial term or at least six (6) months prior to the
expiration of any successive twelve-month term.
Article 3. Exclusive Sale and Distribution Rights
--------------------------------------
3.1. Distribution Rights. Subject to the terms and conditions set forth in
this Agreement, DONNER shall have the exclusive right to market, sell
and distribute the PRODUCTs under RAICHEM's labels in the TERRITORY.
3.2. Exclusivity. During the term of this Agreement and any extensions
thereto, RAICHEM will not sell, offer to sell, license, distribute,
offer the distribution rights, market or offer marketing rights to
PRODUCTs under RAICHEM's labels within the TERRITORY.
3.3. Minimum Purchases. DONNER must purchase the minimum quarterly
quantities of PRODUCT set forth in Appendix 3.3. DONNER hereby
acknowledges that the quantities stated in Appendix 3.3 are reasonable
for the TERRITORY and are those which DONNER warranted to RAICHEM.
3.4. Rolling Forecast. Every three months beginning with the date this
Agreement is signed, DONNER shall furnish RAICHEM with a written
rolling forecast indicating the quantities of PRODUCTs that DONNER
estimates it will require during the following twelve (12) successive
calendar months, allocated per month. By way of example, on July 1,
DONNER shall deliver a rolling forecast to RAICHEM of the quantities of
PRODUCTs DONNER estimates it will require during the months of August
through and including the following October. On October 1, DONNER shall
deliver a rolling forecast of the quantities of PRODUCTS DONNER
estimates it will require during the months of December through and
including the following November. This rolling forecast process will
continue in this manner every third month during the term of this
Agreement.
Article 4. Terms and Conditions of Sale
----------------------------
4.1. RAICHEM's terms and conditions of sale will apply to all purchases by
DONNER, notwithstanding any variation as may appear on any purchase
order submitted by DONNER. DONNER shall submit purchase orders to
RAICHEM at least thirty (30) days prior to the requested delivery date.
All purchase orders must be in writing, and should contain the date of
requested shipment, the date of requested delivery and preferred
shipping instructions, if any. Payment terms are in U.S. dollars due
upon delivery of the PRODUCTs to the F.O.B. point. Any cost or charges
for currency conversion shall be borne by DONNER.
4.2. Shipping date. RAICHEM shall use its best efforts to have PRODUCTs
available for shipment at its manufacturing facility(ies) on the day
requested by DONNER in its written purchase order. RAICHEM shall use
its best efforts to ship all such orders no later than the requested
shipping date. RAICHEM shall promptly notify DONNER of any anticipated
delays in shipping.
4.3. Deliveries. All deliveries shall be made F.O.B. RAICHEM's plant in San
Diego, California. For purposes of this Agreement, F.O.B. shall also
mean E.X.W. when ocean shipping is not utilized. Title and risk of loss
will transfer from RAICHEM to DONNER upon delivery of the PRODUCT to
the F.O.B. point. Freight and insurance charges shall be borne by
DONNER.
4.4. Purchase Price. A current price list is attached to this Agreement in
Appendix 1.1. This price list shall remain in effect without change for
twelve (12) months after the date of this Agreement. Thereafter, prices
may be adjusted for increases in costs of labor and raw materials used
to manufacture PRODUCTS. RAICHEM will furnish DONNER with changes to
its price list at least sixty (60) days prior to the effective date of
any price changes. All prices quoted by RAICHEM are subject to the
addition of all sales taxes and duties which are now or may be levied
or assessed and shall be paid by DONNER. Any taxes which RAICHEM is
obligated to collect from its customers shall be paid by DONNER upon
payment of the purchase price for the PRODUCT, or in lieu of this,
DONNER shall provide to RAICHEM a duty or tax exemption certificate
acceptable to the appropriate taxing authorities.
Article 5. Non-Competition
---------------
5.1. Competing Products. DONNER agrees that during the term of this
Agreement and any extensions thereto, neither it nor any AFFILIATE will
market or sell any goods or diagnostic tests which directly competes
with a PRODUCT. The parties acknowledge that DONNER currently markets
and sells diagnostic test kits which are competitive to the PRODUCTs.
During the six month period beginning on the date this Agreement is
signed, DONNER shall transition its customers and sub- distributors to
the PRODUCTs and stop marketing and selling such competitive diagnostic
test kits. At the end of such six month period, DONNER shall fully
comply with the first sentence of this Section 5.1.
Article 6. Cooperation/Best Efforts
------------------------
6.1. Best Efforts. DONNER will use its best efforts to sell the PRODUCTs and
will not perform any acts that might jeopardize the reputation of the
PRODUCTs or of RAICHEM. RAICHEM will not perform any acts that might
jeopardize the reputation of the PRODUCTs or of DONNER.
6.2. Cooperation. The spirit of this Agreement is that the two parties shall
cooperate to the fullest extent possible.
Article 7. Performance Standards
---------------------
7.1. PRODUCT Acceptance. DONNER shall have the right (at its own cost) to
take random samples of PRODUCTs delivered by RAICHEM for analyzing
purposes. Should the result of an analysis of any such sample deviate
from the specifications or quality control standards, RAICHEM shall be
notified and provided with samples of the PRODUCTs tested. If,
following a review of the test results and after conducting its own
tests of the sample (or if the sample is not available, RAICHEM will
use retain samples to conduct its own tests), RAICHEM agrees that such
sample does not conform to said specifications or quality control
standards, RAICHEM shall provide DONNER, free of any additional charge,
with new deliveries of the same quantity of the PRODUCTs as the one
from which the random samples were taken. DONNER shall return, at
RAICHEM's expense, the particular lot or shipment of the PRODUCT which
does not comply with the aforesaid specifications or quality control
standards. If, after investigation, RAICHEM disagrees with DONNER, then
the parties shall agree upon a mutually acceptable method to determine
whether or not the Products should be accepted by DONNER. If the
parties fail to agree upon a method within ten business days, then the
parties shall promptly agree upon an independent quality control
laboratory (the "Laboratory") to conduct an inspection of the PRODUCTs
for purposes of determining if the PRODUCTs should be accepted by
DONNER or replaced, at no charge, by RAICHEM. The determination of the
Laboratory shall be final and binding upon the parties and the party
that was proven incorrect in its inspection analysis shall bear the
entire cost of the Laboratory inspection.
7.2. PRODUCT Modification. Throughout the term of this Agreement, in order
to maintain and improve the PRODUCTs, RAICHEM may desire to make
certain changes in the performance or appearance of the PRODUCTs.
RAICHEM shall notify DONNER of all such changes in performance or
appearance. In any event, best efforts shall be made to deliver such
notification at least ninety (90) days prior to the desired or expected
implementation date.
Article 8. Duties of DONNER
----------------
8.1. Trade and Advertising Practices. DONNER agrees that it shall not engage
in any unfair trade practices or make any false or misleading
statements or representations in its advertising, printed material, or
otherwise with respect to RAICHEM and/or the PRODUCTs and/or any
trademark and/or any other proprietary property of RAICHEM. DONNER, at
DONNER's cost, agrees to correct and/or change any such statements
which RAICHEM considers materially objectionable. If DONNER advertises
the PRODUCTs, such advertising shall be in compliance with all
applicable state, federal and international laws and regulations.
8.2. Advertising, Marketing and Sales of PRODUCTs. DONNER shall:
(A) use its best efforts to promote the sale and use of the PRODUCTS
in the TERRITORY.
(B) purchase the quarterly minimum quantities of PRODUCTS from
RAICHEM as stated in Article 3, above.
(C) have an adequate sales force to properly service the TERRITORY on
a continuous basis.
(D) have delivery personnel and motor vehicles, and/or make
arrangements with Common Carriers, in order to deliver the
PRODUCTS without any undue delay.
(E) regularly call on every customer within the TERRITORY as is
customarily done in the industry and as necessary to aggressively
and efficiently develop the market and sales of the PRODUCTS.
(F) undertake local advertising to develop demand and promote sales
of the PRODUCTs, and obtain the approval of RAICHEM on that part
of any advertising material which is of legitimate concern to
RAICHEM in order to preserve and maintain RAICHEM's commercial
image before conducting any advertising campaign in connection
with the PRODUCTs.
(G) keep RAICHEM informed on competitive conditions in the TERRITORY.
(H) maintain a one-and-one-half (1 1/2) month inventory of PRODUCTs
being purchased by customers. This will minimize the possibility
of backorders and ensure that each customer will have ready
access to inventory.
(I) include the PRODUCTs in any regular bulletin provided by DONNER
to its sales personnel and/or customers.
(J) Permit RAICHEM representatives to address meetings of DONNER
sales personnel on behalf of the PRODUCTs at times which are
mutually agreeable.
8.3. Storage of PRODUCTs. DONNER shall provide proper storage facilities for
the PRODUCTS giving due consideration to their character and to any
special suggestions or directions which DONNER shall give in respect to
a particular PRODUCT or group of PRODUCTs.
8.4. Export Issues. DONNER shall be responsible for any United States export
issues relating to PRODUCTs.
8.5. Licenses and Permits. DONNER shall assist RAICHEM in obtaining all
licenses and permits required by any governmental authority, regulatory
or otherwise, in order to import the PRODUCTs into the TERRITORY or
sell the PRODUCTs in the TERRITORY. DONNER agrees, at its own expense,
to comply with all applicable laws, regulations and orders governing
the sale, disposition, shipment and import of the PRODUCTs as may be
necessary to perform its obligations hereunder. Unless such information
is proprietary, RAICHEM will supply DONNER with any required
information (such as FDA 510(k) data) which DONNER shall reasonably
request for the sole purpose of complying with all applicable laws,
regulations and orders governing the sale, disposition, shipment and
import of the PRODUCTs.
8.6. Compliance with Laws. DONNER agrees to comply at all times with all
applicable laws of the United States, including but not limited to the
controls of re-exports of U.S.-Origin commodities and technical data
and the provisions of the Foreign Corrupt Practices Act, and similar
laws of the U.S.
8.7. PRODUCT Record Keeping. DONNER agrees to maintain and when required by
any governmental agency or authority, provide to RAICHEM information
that lists DONNER's lot numbers of each PRODUCT with corresponding
RAICHEM lot numbers (if different), where each lot was shipped, who
purchased it and the address of the customer.
8.8. Conditions For Resale. DONNER shall be free to determine all terms and
conditions of resale of the PRODUCTs purchased from RAICHEM. Any
additional warranty offered by DONNER or any modification of RAICHEM's
limited warranty without express approval or concurrence by RAICHEM
shall be the sole responsibility of DONNER, and DONNER shall indemnify
RAICHEM for any costs, losses or damage incurred by its as a result of
any such additional warranty or modification.
8.9. Promotional Materials. DONNER shall be responsible for the creation and
distribution of all promotional and marketing materials and for the
development and implementation of all marketing and sales strategies.
RAICHEM shall assist DONNER in its efforts whenever possible.
8.10. Inspections. DONNER shall allow RAICHEM personnel to inspect its
facilities where the PRODUCTs are stored at any time with reasonable
advance notice given by DONNER to RAICHEM.
Article 9. Duties of RAICHEM
-----------------
9.1. Technical Assistance and Training. RAICHEM shall provide training and
technical assistance to DONNER necessary for the marketing of the
PRODUCTs. Technical assistance and training shall be provided by
RAICHEM at no charge to DONNER except that if the training is performed
at DONNER's premises, RAICHEM's personnel shall be reimbursed by DONNER
for their reasonable expense of travel, meals, and lodging. All
technical assistance and training shall be performed at times
convenient to both parties.
9.2. Technical Assistance. RAICHEM shall respond in a timely manner to
DONNER's inquiries and provide technical support to DONNER regarding
the sale, use or operation of PRODUCTs.
9.3. Good Manufacturing Practices. RAICHEM shall, at all times, manufacture
PRODUCTs in accordance with good manufacturing practices which are
generally accepted in the medical diagnostic industry.
9.4 PRODUCT Improvements. RAICHEM shall continue to utilize its research
and development capabilities to improve PRODUCTs and to keep them in
line with available scientific knowledge and know-how. All PRODUCT
improvements shall be tested and all studies shall be completed by
RAICHEM and thereafter such improvements shall be supplied to DONNER at
no additional cost or expense.
9.5. Sales Leads. RAICHEM shall forward to DONNER any and all inquiries
received from PRODUCT customers or potential PRODUCT customers within
the TERRITORY.
9.6. Promotional Materials. RAICHEM shall share with DONNER, in RAICHEM's
sole discretion, RAICHEM's catalogues, promotional literature,
technical bulletins, application sheets and other sales aids to assist
DONNER in marketing and selling the PRODUCTs.
9.7. Regulatory Approval. To the extent required by applicable laws, RAICHEM
agrees to submit the PRODUCTs for approval of the Brazilian government.
Article 10. Trademarks, Patents, Intellectual Property, and Indemnification
---------------------------------------------------------------
10.1. Right of Use. DONNER may use any of DONNER's trademarks, trade names,
service marks, copyrights or logos of DONNER's choice relating to the
marketing or sale of the PRODUCTs. All such use will be for the benefit
of DONNER, and RAICHEM will acquire no ownership in such marks, or
trade names, copyrights, logos or labels by virtue of such use.
10.2. Patents and Trademarks. DONNER acknowledges and agrees that nothing
herein shall give DONNER any right, title or interest in or license to
use any RAICHEM patent, trademark, service mark, trade name or
copyright (collectively the "Proprietary Rights"), except as expressly
set forth herein. DONNER shall use RAICHEM's trademarks or service
marks only in connection with the sale of PRODUCTs and may use
RAICHEM's Proprietary Rights only in connection with all advertising
and promotion of the PRODUCT. DONNER shall be entitled to use RAICHEM's
Proprietary Rights only for so long as this Agreement is in effect.
10.3. Infringement. RAICHEM shall undertake at RAICHEM's own expense the
defense of any suit or action for infringement of RAICHEM's United
States patents brought against DONNER in the United States, which suit
or action results from the sale of any PRODUCTs, provided that DONNER
shall have promptly advised RAICHEM in writing of each notice or claim
of infringement received by DONNER and of the commencement of the suit
or action. RAICHEM shall hold DONNER harmless from damages or other
sums which may be assessed or may become payable under any final decree
or judgment in any such suit or action or under any settlement thereof.
RAICHEM shall have sole charge and direction of the defense of any such
suit or action and of all negotiations for such settlement, but shall
use commercial reasonableness and shall consult with DONNER with regard
to the defense or settlement of any such suit or action. DONNER shall
be obligated to render all reasonable assistance which may be required
by RAICHEM at RAICHEM's expense. DONNER may retain counsel of its own
selection and at its own expense to advise and consult with RAICHEM's
counsel. RAICHEM may not settle any suit or action without the consent
of DONNER, if by such settlement DONNER is obligated to make any
monetary payment, to part with any property or interest therein, to
assume any obligation or to be subject to any injunction. The parties
agree that if the PRODUCTs supplied by RAICHEM are found to be
infringing on a third-party patent, RAICHEM will negotiate in good
faith with the third party to obtain a license to use the third party's
technology and, if RAICHEM fails to obtain such a license, or if
RAICHEM is subject to a permanent injunction, then DONNER shall have
the right to either terminate this Agreement by giving written notice
of termination to RAICHEM, and return for full credit all inventory on
hand, or negotiate with the infringed party for such a license.
RAICHEM's indemnification resulting from any infringement on third
party patent shall exclude DONNER's costs involved in negotiation with
any infringed party for such a license.
10.4. Indemnification. DONNER agrees to defend, indemnify and hold RAICHEM
harmless from and against all loss, liability and expense (including
attorney's fees, settlements, litigation costs, and costs of appeal)
resulting from the acts or omissions of DONNER or its agents with
respect to its handling, storage or marketing of the PRODUCTs
including, but not limited to, DONNER's sale of the PRODUCTs for use in
humans or clinical diagnosis or analysis, DONNER's fraud or
misrepresentation in the use, distribution, or sale of the PRODUCTs, or
DONNER's mishandling of the PRODUCTs or DONNER's failure to comply with
the PRODUCTs' registration requirements in any jurisdiction in which
DONNER sells the PRODUCTs. Likewise, RAICHEM agrees to defend,
indemnify and hold DONNER harmless from all and against all loss,
liability and expense (including attorney's fees, settlements,
litigation costs, and costs of appeal) resulting from the acts or
omissions of RAICHEM or its agents with respect to its handling,
storage or manufacturing of the PRODUCTs including but not limited to
RAICHEM's fraud or misrepresentation in the manufacture or sale of the
PRODUCTs, or RAICHEM's mishandling of the PRODUCTs.
10.5. Indemnification Notice. Each party shall give prompt notice of any
claim, loss or liability for which such party seeks defense and
indemnification. If either party wishes to enter the defense of a suit
brought pursuant to the indemnification sections of this Agreement
being defended by the other party, such party may do so at its own
cost. The control of such case shall remain with the indemnifying party
unless otherwise agreed to in writing.
10.6. Settlement Notice. If either party wishes to settle a case for which
the other party is liable for indemnification, the party wishing to
settle shall first obtain the written approval of the indemnifying
party.
10.7. NEITHER PARTY WILL HAVE ANY RIGHT TO ANY INDEMNIFICATION OR OTHER
COMPENSATION FROM THE OTHER IN RESPECT OF EXPIRATION OR TERMINATION OF
THIS AGREEMENT AND/OR TERMINATION OF THEIR BUSINESS RELATIONSHIP
HEREUNDER, AND TO THE MAXIMUM LAWFUL EXTENT, EACH PARTY HEREBY WAIVES
AND RELINQUISHES ANY RIGHTS TO ANY SUCH INDEMNIFICATION OR OTHER
COMPENSATION (INCLUDING WITHOUT LIMITATION IN RESPECT OF CLAIMS FOR
LOST GOODWILL, LOST PROFITS, OR OTHER DAMAGES), WHETHER ARISING UNDER
STATUTE OR OTHERWISE.
10.8. Insurance. Each party will keep in force during the term of this
Agreement all customary forms of insurance, including but not limited
to product liability insurance, in such amounts as are prudently
required.
Article 11. Limited Warranty
----------------
11.1. Shelf Life Warranty. The PRODUCT shall have a minimum shelf life, at
the time of shipment by RAICHEM, as specified in Appendix 1.1. RAICHEM
shall not be liable for any variance from specifications or any failure
to satisfy the shelf life requirement to the extent such variance is
caused by conditions or events occurring after shipment from RAICHEM's
manufacturing facility.
11.2. PRODUCT Specification, Defective PRODUCT Notice and PRODUCT Complaints.
RAICHEM warrants that, at the time of delivery to DONNER, all PRODUCTs
supplied by RAICHEM meet PRODUCT specifications. Either party shall
immediately notify the other party in writing should it become aware of
any defect or condition that may render the PRODUCTs supplied by
RAICHEM in violation of the U.S. Food, Drug and Cosmetic Act, or of a
similar law of any jurisdiction where the PRODUCTs are sold by DONNER.
The parties shall share with each other all data on the PRODUCT
complaints including, but not limited to, complaints or information
regarding performance and/or allegations or reports of any negative
effect from the use or misuse of the PRODUCTs as soon as such data is
available. Each party will assist the other in resolving DONNER's
customers' complaints. However, DONNER shall have sole responsibility
and authority to interact directly with DONNER's customers in the
resolution of such complaints, and RAICHEM shall be responsible only
for interacting with DONNER in such matters.
11.3. Warranties. THE WRITTEN WARRANTIES OF RAICHEM IN THIS ARTICLE ARE THE
SOLE EXCLUSIVE WARRANTIES PROVIDED TO DONNER AND TO CONSUMERS AND ARE
IN LIEU OF ALL OTHER WARRANTIES, WHETHER WRITTEN OR ORAL, IMPLIED OR
STATUTORY. RAICHEM WARRANTS THE PRODUCT AGAINST DEFECTS IN MATERIAL AND
WORKMANSHIP UNDER THE NORMAL USE AND SERVICE FOR WHICH IT WAS DESIGNED,
FOR THE SHELF LIFE PERIOD DEFINED IN APPENDIX 1.1, RAICHEM'S OBLIGATION
UNDER THIS WARRANTY BEING LIMITED TO THE REPLACEMENT OF THE PRODUCT
DETERMINED BY IT TO BE DEFECTIVE, PLUS TRANSPORTATION COSTS FOR RETURN
OF THE PRODUCT AND RESHIPMENT OF PRODUCTS TO CUSTOMERS. UNLESS RAICHEM
HAS PRIOR WRITTEN KNOWLEDGE OF DIFFERENT TERMS, ALL REPLACEMENTS WILL
BE SHIPPED F.O.B. DONNER'S RECEIVING FACILITY.
Article 12. Confidentiality
---------------
12.1 Confidentiality. For the purposes of this Agreement, the term
"Confidential Information" shall be any information embodying concepts,
ideas, techniques, know-how, formulations, market data, customer lists,
PRODUCT specifications and accounting data which:
(a) is disclosed by one party hereto to the other;
(b) is claimed by the disclosing party to be secret, confidential and
proprietary to the disclosing party; and
(c) if disclosed in writing, is marked by the disclosing party to
indicate its confidential nature or if disclosed orally, is
claimed in writing by the disclosing party to be confidential
within ten (10) days following disclosure.
During the period that this Agreement remains in effect and for a
period of five (5) years following termination hereof, each party
(except as is explicitly otherwise required hereby) shall keep
confidential, shall not use for itself or for the benefit of others and
shall not copy or allow to be copied in whole or in part any
Confidential Information disclosed to such party by the other.
The obligations of confidentiality imposed upon the parties by the
foregoing paragraph shall not apply with respect to any alleged
Confidential Information which:
(a) is known to the recipient thereof, as evidenced by said
recipient's written records, prior to receipt thereof from the
other party hereto;
(b) is disclosed to said recipient after the day hereof by a third
party who has the right to make such disclosure;
(c) is or becomes a part of the public domain through no fault of the
said recipient; or
(d) is required to be disclosed by operation of law.
Article 13. Termination
-----------
13.1. Termination For Cause. Either party will have the right to terminate
this Agreement if the other party (a) assigns this Agreement or any of
its rights hereunder in violation of the provisions of this Agreement,
or (b) becomes bankrupt or insolvent, or (c) makes an assignment for
the benefit of creditors, or a receiver, trustee in bankruptcy or
similar officer appointed to take charge of all or part of its
property, and such event has not been cured within thirty (30) days of
written notice thereof by the non-breaching party. If either party
materially breaches this Agreement, including, but not limited to, (a)
DONNER's failure to adhere to the non- competition requirements of this
Agreement, and (b) either party's failure to adhere to the
confidentiality provisions and restrictions on use of information set
forth in this Agreement, then notwithstanding any other provision of
this Agreement, no cure period shall be allowed and the non-breaching
party shall be entitled to terminate this Agreement immediately.
13.2. Termination For Failure to Meet Quarterly Minimum Purchases. The
parties acknowledge that the minimum quarterly purchases are very
important under this Agreement. If, at any time during the term of this
Agreement, DONNER fails to meet its minimum quarterly purchases as
stated in Article 3, then RAICHEM shall have the right to terminate
this Agreement upon thirty (30) days written notice to DONNER.
13.3. If RAICHEM is unable to register the PRODUCTs with the Brazilian Health
Ministry for sale in Brazil within twelve (12) months from the date
this Agreement is signed, then either party shall have the right to
terminate this Agreement without cause upon ninety (90) days written
notice.
13.4. Rights and Obligations on Termination. Upon termination of this
Agreement, DONNER shall immediately discontinue any previously
authorized use of any of RAICHEM's Proprietary Rights and shall
immediately cease all conduct that might cause anyone to believe that
DONNER is authorized to market or sell PRODUCTs or otherwise connected
with RAICHEM. Upon termination or expiration of this Agreement, DONNER
will immediately turn over to RAICHEM all promotional and other
materials given to DONNER by RAICHEM relating to RAICHEM's PRODUCTs.
13.5. Termination or Expiration Damages. Neither RAICHEM nor DONNER shall be
liable to the other, or to any other business entity solely by reason
of the expiration or termination of this Agreement so long as the
terminating party acted in good faith. Notwithstanding anything herein
to the contrary, neither party shall be liable to the other for any
indirect, special, consequential or incidental damages sustained by
reason of such termination, including but not limited to, any claim for
loss of compensation or profits or for loss of prospective compensation
or prospective profits in respect of sales of any of the PRODUCTs or on
account of any expenditures, investments, leases, capital improvements
or any other commitments made by either party in connection with their
respective business made in reliance upon or by virtue of this
Agreement or otherwise. Each party hereto agrees that if this Agreement
is terminated rightfully and in good faith by the other pursuant to the
terms of this Agreement, the terminating party shall not be liable to
the other party for any termination compensation whatsoever, whether
based upon goodwill established, clientele obtained, expenditures
incurred, investments made, activities undertaken or otherwise.
Termination of this Agreement for any reason whatsoever shall not
relieve either of the parties hereto from making payment of monies due
to the other from fulfilling obligations incurred up to the effective
date of termination or as otherwise expressly provided in this
Agreement.
13.6. Transfer of Importation License. Upon termination of this Agreement, if
it is legally possible, DONNER shall transfer any government or
regulatory license(s) or permit(s), if any, which authorizes or
approves the importation and sale of PRODUCTs into the TERRITORY to
RAICHEM or its nominee. RAICHEM shall reimburse DONNER for its
reasonable expenses incurred in obtaining such licenses and permits.
Nothing in this paragraph shall require RAICHEM to purchase such
licenses and/or permits from DONNER and RAICHEM shall be free to obtain
the licenses and/or permits directly from the government or regulatory
authority.
Article 14. PRODUCT Recall and Regulatory Compliance
----------------------------------------
14.1. Data Base. RAICHEM and DONNER shall maintain a data base to support all
claims made or to be made regarding PRODUCTs' performance.
14.2. Inquiries. Each party shall keep the other informed of any formal or
informal inquiry relating to PRODUCTs sold hereunder by any regulatory
agency of any state or national government.
14.3 PRODUCT Recall. Should PRODUCT performance or any governmental action
require the recall or withholding from market of PRODUCT sold by
RAICHEM to DONNER, DONNER shall bear the costs and expenses of recall
if such recall is the result of any fault or omission attributable to
DONNER and RAICHEM shall bear the costs and expenses of recall if such
recall is the result of any fault or omission attributable to RAICHEM.
Should such recall result from the equal fault of both parties, or
should it prove impossible to assign fault to the satisfaction of both
parties, the parties shall share the said costs and expenses equally.
Article 15. Arbitration
-----------
15.1. Any controversy or claim arising under or in relation to this
Agreement, except as otherwise expressly provided below, shall be
settled exclusively by arbitration in accordance with the International
Arbitration Rules of the American Arbitration Association (AAA). There
shall be three arbitrators: one selected by RAICHEM, one selected by
DONNER, and one selected by the parties jointly or, failing their
agreement, selected pursuant to the rules of the AAA. The arbitration
shall be conducted in English and shall be held in Massachusetts. The
prevailing party shall be entitled to recover its costs and attorneys'
fees. The decision of the arbitrators shall be final and binding on the
parties, and judgment upon the award rendered by the arbitrators may be
entered by any court having jurisdiction thereof. The provisions of
this arbitration clause shall not be applied to the determination of
questions affecting the validity or scope of any trademarks or other
intellectual property rights.
Article 16. General Provisions
------------------
16.1. Antiboycott Compliance. DONNER will not require or request RAICHEM to
take any action or to provide any information in the fulfillment of
this Agreement which would cause RAICHEM to violate the antiboycott
laws of the United States.
16.2. Entire Agreement. This Agreement, including the Appendices, constitutes
the entire agreement between the parties with respect to the subject
matter hereof, and may not be modified (unless expressly provided
otherwise herein) except by a writing duly signed by both parties.
16.3. Assignment, Waiver, Severability. Neither party may assign this
Agreement without the prior written consent of the other party. Failure
by either party to enforce any term hereof shall not be deemed a waiver
of future enforcement of that or any other term. If any provision of
this Agreement is declared void or unenforceable by any judicial,
administrative or arbitration authority, such action will not nullify
the remaining provisions of this Agreement.
16.4. Governing Law. This Agreement shall be governed and construed under and
according to the laws of the Commonwealth of Massachusetts, U.S.A.,
excluding its choice of laws rules. The Vienna Convention on the
International Sale of Goods is expressly excluded from application.
16.5. Relationship Created. The relationship of the parties is that of
independent contractors. Nothing in this Agreement shall be construed
as establishing an agency, joint venture or partnership between the
parties. Each party is an independent entity, and shall have sole
responsibility for its employees, even while such employees are on the
premises of the other party's facility(ies). Neither DONNER nor RAICHEM
shall have the right to enter into any contracts or commitments or to
make any representations or warranties, whether express or implied, in
the name of or on behalf of any other party, or to bind any other party
in any respect whatsoever, unless agreed to in writing or expressly
permitted in this Agreement.
16.6. Authority. Each party hereby represents and warrants that it has full
power and authority to enter into and perform this Agreement, without
any governmental approvals, and that its entering into and performance
of this Agreement will not conflict with any other agreement to which
it is a party or by which it is bound.
16.7. Notice. Any written notice, or statement, necessary or appropriate
under this Agreement shall be deemed to be properly given if delivered
personally in writing or sent by registered or certified mail to the
party to be notified at the address set forth above or at such other
address as either party may hereafter designate in writing. Notices or
statements may be delivered via facsimile and this shall be deemed to
be properly given if such notice or statement is thereafter sent to the
recipient via first class mail or any similar type of delivery.
16.8. Captions. The captions or paragraph headings of this Agreement do not
constitute any substantive part of this Agreement and shall not be
considered in the construction or interpretation of this Agreement.
16.9. Force Majeure. Each party hereto shall be excused from the performance
of its obligations hereunder in the event such performance is prevented
by force majeure, and such excuse shall continue for so long as the
condition constituting such force majeure and any consequences
resulting from such condition continues. In addition, in the event the
condition constituting the force majeure causes a substantial inability
by either party hereto to meet its obligations hereunder, the term of
this Agreement may, upon written agreement of both parties, be
suspended for the period of such inability, but not to exceed six (6)
months. For the purposes of this Agreement, force majeure shall mean
causes beyond either party's control including, without limitation,
acts of God; regulations or laws of any government; war, riot or civil
commotion; damage to or destruction of production facilities or
materials by fire, earthquake, storm or other disaster; manufacturing
or transportation delay, strikes or other labor disturbances, epidemic;
and failure or default of public utilities or common carriers.
IN CONSIDERATION OF the foregoing terms and conditions, DONNER and RAICHEM have
executed this Agreement on the day and year first written above.
REAGENTS APPLICATIONS, INC. DONNER COM. IND. LTDA
/s/ Carl Franzblau /s/ Roberto Donner
- ----------------------------------- --------------------------------
Carl Franzblau, President Roberto Donner
REAGENTS APPLICATIONS, INC. DONNER COM. IND. LTDA
Appendix 1.1 -- PRODUCTs
===============================================================================
MINIMUM SHELF-LIFE FROM DATE
PRODUCTS (IN U.S. OF SHIPMENT DOLLARS) PRICE
- ---------------------- ----------------------------- ----------------------
CONFIDENTIAL TREATMENT CONFIDENTIAL TREATMENT CONFIDENTIAL TREATMENT
REQUESTED REQUESTED REQUESTED
===============================================================================
PRODUCT Specifications: See attached PRODUCT literature
CONFIDENTIAL TREATMENT REQUESTED
APPENDIX 3.3 MINIMUM PURCHASES
------------------------------
Prior to the PRODUCTs being registered with the Brazilian Health
Ministry, during each month this Agreement is in effect, DONNER shall purchase
_________________ minimum quantities of PRODUCTs from RAICHEM.
After the PRODUCTs are registered with the Brazilian Health Ministry,
during each quarter (three month period) this Agreement is in effect, DONNER
shall purchase the following quarterly minimum quantities of PRODUCTs from
RAICHEM (ALL QUANTITIES ARE STATED IN UNITED STATES DOLLARS):
YEAR 1:
CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
YEAR 2:
CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
YEAR 3:
CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
YEAR 4:
CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
YEAR 5:
CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
ADDENDUM TO APPENDIX 3.3
------------------------
Minimum Purchases
- -----------------
Year 1. Minimum purchases begin on the date on which 80% of the
RAICHEM products (listed on Pricing Schedule) become
registered with the Brazilian Ministry of Health.
Therefore Year 2 begins 12 months after the approval of
RAICHEM products.
/s/ Carl Franzblau /s/ Roberto Donner
- ----------------------------------- --------------------------------
Carl Franzblau, President Roberto Donner
REAGENTS APPLICATION, INC. DONNER COM. IND. LTDA
EXHIBIT 10jj
AGREEMENT
BY AND BETWEEN
REAGENTS APPLICATIONS, INC.
d/b/a RAICHEM, DIVISION OF HEMAGEN
DIAGNOSTICS, INC.
AND
pHoenix Diagnostics, Inc.
DATED: March 19, 1997
INDEX
<TABLE>
<S> <C>
ARTICLE 1: DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 2: TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 3: EXCLUSIVE SALE AND DISTRIBUTION RIGHTS . . . . . . . . . . . . 2
ARTICLE 4: TERMS AND CONDITIONS OF SALE . . . . . . . . . . . . . . . . . 2
ARTICLE 5: LABELING, PACKAGE INSERTS AND PACKAGING. . . . . . . . . . . . 4
ARTICLE 6: PERFORMANCE STANDARDS . . . . . . . . . . . . . . . . . . . . 4
ARTICLE 7: DUTIES OF RAICHEM. . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE 8: DUTIES OF pHoenix. . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE 9: TRADEMARKS, PATENTS, INTELLECTUAL PROPERTY . . . . . . . . . . 6
ARTICLE 10: INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE 11: LIMITED WARRANTY . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 12: CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 13: TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE 14: PRODUCT RECALL AND REGULATORY COMPLIANCE . . . . . . . . . . . 11
ARTICLE 15: ARBITRATION . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE 16: GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
AGREEMENT
---------
This Agreement is entered into this ________ day of ____________, 1997, by and
between Reagents Applications, Inc. d/b/a RAICHEM, Division of Hemagen
Diagnostics, Inc., a corporation organized and existing under the laws of the
State of Delaware, U.S.A. and having its principal place of business at 8225
Mercury Court, San Diego, California, U.S.A. (hereinafter referred to as
"RAICHEM"), and pHoenix Diagnostics, Inc., a corporation organized and existing
under the laws of ____________ and having its principal place of business at 8
Tech Circle, Natick, Massachusetts 01760 (hereinafter referred to as
"PHoenix").
RECITALS
--------
WHEREAS, RAICHEM desires to distribute certain products produced by
pHoenix; and
WHEREAS, pHoenix desires to engage RAICHEM to market and sell said
products in the territory defined below; and
WHEREAS, RAICHEM and pHoenix desire to enter into a business relationship
in which RAICHEM will be the exclusive distributor of certain products
manufactured by pHoenix pursuant to the terms of this Agreement; and
WHEREAS, pHoenix has acquired and perfected the necessary technology to
manufacture certain products; and
WHEREAS, pHoenix has represented to RAICHEM that it has the necessary
facilities, personnel, and technology to commercially realize the manufacture
of certain products.
NOW, THEREFORE, in consideration of the above recitals, and in
consideration of the mutual covenants and agreements hereinafter set forth,
PHoenix and RAICHEM do hereby agree as follows:
AGREEMENT
---------
Article 1. Definitions
-----------
1.1 "PRODUCT(s)" means and include(s) pHoenix's CONFIDENTIAL TREATMENT
REQUESTED as set forth in Appendix A and as amended from time to time
by mutual written agreement of the parties.
1.2 "AFFILIATE" means any entity directly or indirectly controlling,
controlled by, or under common control with, a party hereto. "Control",
as used in this definition, means the ownership of fifty percent or
more of the party in question.
1.3 "TERRITORY" means the world.
Article 2. Term
----
2.1 The initial term of this Agreement shall be for a period of three (3)
years unless terminated as provided in this Agreement. RAICHEM shall
have the right to terminate this Agreement within thirty (30) days from
the date it is executed if RAICHEM is not satisfied with the results of
RAICHEM's due diligence review of the pHoenix PRODUCTs. This Agreement
shall automatically continue to be in effect after the initial term for
successive twelve-month periods unless it is terminated by either party
as provided in this Agreement, or written notice of non-renewal is
given by either party to the other at least three (3) months prior to
the expiration of the initial term or at least three (3) months prior
to the expiration of any successive twelve-month term.
Article 3. Exclusive Sale and Distribution Rights
--------------------------------------
3.1 Distribution Rights. Subject to the terms and conditions set forth in
this Agreement, RAICHEM shall have the exclusive right to market, sell
and distribute the PRODUCTs under RAICHEM's own label or under the
pHoenix label in the TERRITORY. RAICHEM shall not have the right to
enter into any agreements or contracts which are binding upon pHoenix
unless prior written approval is given by pHoenix. pHoenix shall retain
the right to sell PRODUCTs directly to its customers which presently
purchase the PRODUCTs from pHoenix. pHoenix shall provide a present
customer list to RAICHEM on the date this Agreement is signed by both
parties.
3.2 Exclusivity. During the term of this Agreement and any extensions
thereto, pHoenix will not sell, offer to sell, license, distribute,
offer the distribution rights, market or offer marketing rights to
PRODUCTs to any third party within the TERRITORY.
3.3 Minimum Purchases. In order to retain its exclusive distribution rights
as stated in this Article 3, RAICHEM must purchase the minimum
quantities of PRODUCTs set forth in Appendix B. If RAICHEM shall fail
to purchase the minimum quantity of PRODUCTs, then RAICHEM shall loose
its exclusive distribution rights and pHoenix may market, sell and
distribute the PRODUCTs directly to end users or through third party
distributors.
Article 4. Terms and Conditions of Sale
4.1 pHoenix's terms and conditions of sale (defined in Article 4 and in
other provisions of this Agreement) will apply to all purchases by
RAICHEM, notwithstanding any variation as may appear on any purchase
order submitted by RAICHEM. All purchase orders and amendments thereto
must be in writing, and should contain (i) quantity of PRODUCT, (ii)
date of requested shipment, (iii) date of requested delivery, and (iv)
preferred shipping instructions, if any. Payment terms are in U.S.
dollars net ten (10) days from RAICHEM's receipt of pHoenix's invoice.
4.2 Shipping date. pHoenix shall use its best efforts to ship all such
orders no later than the requested shipping date. pHoenix shall
promptly notify RAICHEM of any anticipated delays in shipping.
4.3 Deliveries. All deliveries shall be made F.O.B. pHoenix's plant in
Natick, Massachusetts. For purposes of this Agreement, F.O.B. shall
also mean E.X.W. when ocean shipping is not utilized. Freight and
insurance charges shall be borne by RAICHEM.
4.4 Purchase Price. A current price list is attached to this Agreement as
Appendix C. The prices are CONFIDENTIAL TREATMENT REQUESTED. Overhead
shall be calculated at 200% of labor unless otherwise determined by
actual cost of such overhead. pHoenix will furnish RAICHEM with changes
to its price list at least ninety (90) days prior to the effective date
of any price changes. RAICHEM shall have the right to audit pHoenix's
books and records to determine compliance with the terms of this
Section. All prices quoted by pHoenix are subject to the addition of
all sales taxes and duties which are now or may be levied or assessed
and shall be paid by RAICHEM. Any taxes which pHoenix is obligated to
collect from its customers shall be paid by RAICHEM upon payment of the
purchase price for the PRODUCT, or in lieu of this, RAICHEM shall
provide to pHoenix a duty or tax exemption certificate acceptable to
the appropriate taxing authorities.
4.5 Gross Profit Transfer. (a) On or before the fifteenth (15th) business
day of each month, CONFIDENTIAL TREATMENT REQUESTED pHoenix shall have
the right to audit RAICHEM's books and records to determine compliance
with the terms of this Section.
(b) In the event that PRODUCTs are sold in the form of
combination products (PRODUCT sold in combination with a second
discrete product sold by RAICHEM), then profits for such combination
products will be calculated by multiplying actual cash payments for
such combination products by the fraction A/(A+B) where A is the
average invoice price (to third parties) during the previous month for
the PRODUCTs when sold separately, and B is the average invoice price
of any other active component or components manufactured or sold by
RIACHEM in the combination when sold separately. If the active
component(s) in the combination that are not PRODUCTs are not sold
separately by RAICHEM, then profits shall be calculated by multiplying
actual cash payments for such combination products by the fraction A/C
where A is the average invoice price (to third parties) of the PRODUCTs
when sold separately and C is the average invoice price (to third
parties) of the combination product.
Article 5. Labeling, Package Inserts and Packaging
---------------------------------------
5.1 Labeling & Packaging. pHoenix shall deliver the PRODUCTs to RAICHEM in
bulk and unlabeled (to the extent allowed by the United States Food and
Drug Administration) and if requested by RAICHEM, then pHoenix shall
deliver the PRODUCTs to RAICHEM labeled and packaged under the pHeonix
name at no additional expense to RAICHEM. RAICHEM shall be free to
design all packages, package inserts and labels for the PRODUCTs
provided, however that such packages, package inserts and labels shall
conform to all United States Food and Drug Administration rules and
regulations as well as all rules and regulations of any governmental
agency in the TERRITORY in which the PRODUCTs are being marketed and
sold. RAICHEM shall not make any claims regarding the PRODUCTs which
are not endorsed in writing by pHoenix. All packages, package inserts
and labels for the PRODUCTs shall be produced and purchased by RAICHEM
at RAICHEM's own expense.
5.2 Assistance by RAICHEM. In order to assist DISTRIBUTOR in designing and
producing PRODUCT packages, package inserts and labels, pHoenix shall
provide RAICHEM with samples of pHoenix's current packages, package
inserts and labels. pHoenix shall notify RAICHEM when any changes to
such packages, package inserts and labels must be made to such
packages, package inserts and labels.
Article 6. Performance Standards
---------------------
6.1 PRODUCT Acceptance. RAICHEM shall have the right (at its own cost) to
take random samples of PRODUCTs delivered by pHoenix for analyzing
purposes. Should the result of an analysis of any such sample deviate
from the specifications or quality control standards, pHoenix shall be
notified and provided with samples of the PRODUCTs tested. If,
following a review of the test results and after conducting its own
tests of the sample, pHoenix agrees that such sample does not conform
to said specifications or quality control standards, pHoenix shall
provide RAICHEM, free of any additional charge, with new deliveries of
the same quantity of the PRODUCTs as the one from which the random
sample were taken. RAICHEM shall return, at pHoenix's expense, the
particular lot or shipment of the PRODUCT which does not comply with
the aforesaid specifications or quality control standards. If, after
investigation, pHoenix disagrees with RAICHEM, then the parties shall
agree upon a mutually acceptable method to determine whether or not the
Products should be accepted by RAICHEM. If the parties fail to agree
upon a method within ten business days, then the parties shall promptly
agree upon an independent quality control laboratory (the "Laboratory")
to conduct an inspection of the PRODUCTs for purposes of determining if
the PRODUCTs should be accepted by RAICHEM or replaced, at no charge,
by pHoenix. The determination of the Laboratory shall be final and
binding upon the parties and the party that was proven incorrect in its
inspection analysis shall bear the entire cost of the Laboratory
inspection.
6.2 PRODUCT Modification. Throughout the term of this Agreement, pHoenix
may desire to make certain changes in the performance or appearance of
the PRODUCTs. pHoenix shall notify RAICHEM of all such changes in
performance or appearance. In any event, best efforts shall be made to
deliver such notification at least ninety (90) days prior to the
desired or expected implementation date.
Article 7. Duties of RAICHEM
-----------------
7.1 Licenses and Permits. RAICHEM, at its own expense shall be responsible
for obtaining all licenses and permits required by any governmental
authority, regulatory or otherwise, other than the US Food and Drug
Administration, in order to import/export the PRODUCTs into the
TERRITORY or sell the PRODUCTs in the TERRITORY. RAICHEM agrees, at its
own expense, to comply with all applicable laws, regulations and orders
governing the sale, disposition, shipment and import/export of the
PRODUCTs and to purchase and maintain in effect all licenses, permits
and authorizations from all government agencies as may be necessary to
perform its obligations hereunder. Unless such information is
proprietary, pHoenix will supply RAICHEM with any required information
(such as FDA 510(k) data) which RAICHEM shall reasonably request for
the sole purpose of obtaining licenses and permits.
7.2 Conditions For Resale. RAICHEM shall be free to determine all terms and
conditions of resale of the PRODUCTs purchased from pHoenix. Any
additional warranty offered by RAICHEM or any modification of pHoenix's
limited warranty without express approval or concurrence by pHoenix
shall be the sole responsibility of RAICHEM.
7.3 Promotional Materials. RAICHEM shall be responsible for the creation
and distribution of all promotional and marketing materials and for the
developmnent and implementation of all marketing strategies.
Article 8. Duties of pHoenix
-----------------
8.1 Technical Assistance and Training. pHoenix shall provide training and
technical assistance to RAICHEM necessary for the marketing of the
PRODUCTs. Technical assistance and training shall be provided by
pHoenix at no charge to RAICHEM except that if the training is
performed at RAICHEM's premises, pHoenix's personnel shall be
reimbursed by RAICHEM for their reasonable expense of travel, meals,
and lodging. All technical assistance and training shall be performed
at times convenient to both parties.
8.2 Instructions. pHoenix shall, at pHoenix's expense, provide RAICHEM with
written instructions (in English) relating to the PRODUCT(s) use, and
with such amendments thereto as subsequently become available. However,
RAICHEM shall be responsible, at RAICHEM's cost, for having such
instructions translated into any language necessary to complete its
obligations hereunder.
8.3 Regulatory Approval. To the extent required by applicable laws and
regulations, pHoenix shall be responsible for obtaining US Food and
Drug Administration pre-market clearance to market and sell the
PRODUCTs in the United States.
8.4 RAICHEM Assistance. pHoenix shall promptly and correctly respond to
RAICHEM's inquiries and provide technical support to RAICHEM regarding
the sale, use or operation of PRODUCTs.
8.5 Promotional Materials. pHoenix shall furnish RAICHEM, free of charge,
with promotional materials, samples of PRODUCTs and technical data, the
selection and quantity of which shall be determined at pHoenix's sole
discretion.
8.6 Good Manufacturing Practices. pHoenix shall, at all times, manufacture
PRODUCTs in accordance with good manufacturing practices and good
laboratory practices which are generally accepted in the medical
diagnostic industry. pHoenix shall maintain a quality control system
and data retention as well as real-time stabilities for the PRODUCTs.
RAICHEM shall have the right to audit and inspect pHoenix in order to
insure compliance with this Section.
Article 9. Trademarks, Patents, Intellectual Property
------------------------------------------
9.1 Right of Use. RAICHEM may use any of RAICHEM's trademarks, trade names,
service marks, copyrights or logos of RAICHEM's choice relating to the
marketing or sale of the PRODUCTs. All such use will be for the benefit
of RAICHEM, and pHoenix will acquire no ownership in such marks, or
trade names, copyrights, logos or labels by virtue of such use.
9.2 Patents and Trademarks. RAICHEM acknowledges and agrees that nothing
herein shall give RAICHEM any right, title or interest in or license to
use any pHoenix patent, trademark, service mark, trade name or
copyright (collectively the "Proprietary Rights"), except as expressly
set forth herein. RAICHEM may use pHoenix's trademarks or service marks
only in connection with the sale of PRODUCTs and may use pHoenix's
Proprietary Rights only in connection with all advertising and
promotion of the PRODUCTs. RAICHEM shall be entitled to use pHoenix's
Proprietary Rights only for so long as this Agreement is in effect.
9.3 Infringement. pHoenix shall undertake at pHoenix's own expense the
defense of any suit or action for infringement of pHoenix's patents or
technology brought against RAICHEM, which suit or action results from
the sale of any PRODUCTs, provided that RAICHEM shall have promptly
advised pHoenix in writing of each notice or claim of infringement
received by RAICHEM and of the commencement of the suit or action.
pHoenix shall hold RAICHEM harmless from damages or other sums which
may be assessed or may become payable under any final decree or
judgment in any such suit or action or under any settlement thereof.
pHoenix shall have sole charge and direction of the defense of any such
suit or action and of all negotiations for such settlement, but shall
use commercial reasonableness and shall consult with RAICHEM with
regard to the defense or settlement of any such suit or action. RAICHEM
shall be obligated to render all reasonable assistance which may be
required by pHoenix at pHoenix's expense. RAICHEM may retain counsel of
its own selection and at its own expense to advise and consult with
pHoenix's counsel. pHoenix may not settle any suit or action without
the consent of RAICHEM, if by such settlement RAICHEM is obligated to
make any monetary payment, to part with any property or interest
therein, to assume any obligation or to be subject to any injunction.
The parties agree that if the PRODUCTs supplied by pHoenix are found to
be infringing on a third-party patent, pHoenix will negotiate in good
faith with the third party to obtain a license to use the third party's
technology and, if pHoenix fails to obtain such a license, or if
pHoenix is subject to a permanent injunction, then RAICHEM shall have
the right to either terminate this Agreement by giving written notice
of termination to pHoenix, and return for full credit all inventory on
hand, or negotiate with the infringed party for such a license.
pHoenix's indemnification resulting from any infringement on third
party patent shall exclude RAICHEM's costs involved in negotiation with
any infringed party for such a license.
Article 10. Indemnification
---------------
10.1 Indemnification. RAICHEM agrees to defend, indemnify and hold pHoenix
harmless from and against all loss, liability and expense (including
attorney's fees, settlements, litigation costs, and costs of appeal)
resulting from the acts or omissions of RAICHEM or its agents with
respect to its handling or marketing of the PRODUCTs including, but not
limited to, RAICHEM's fraud or misrepresentation in the use,
distribution, or sale of the PRODUCTs, or RAICHEM's mishandling of the
PRODUCTs or RAICHEM's failure to comply with the PRODUCTs' registration
requirements in any jurisdiction in which RAICHEM sells the PRODUCTs.
Likewise, pHoenix agrees to defend, indemnify and hold RAICHEM harmless
from all and against all loss, liability and expense (including
attorney's fees, settlements, litigation costs, and costs of appeal)
resulting from the acts or omissions of pHoenix or its agents with
respect to its handling or manufacturing of the PRODUCTs including but
not limited to pHoenix's fraud or misrepresentation in the manufacture
or sale of the PRODUCTs, or pHoenix's mishandling of the PRODUCTs.
10.2 Indemnification Notice. Each party shall give prompt notice of any
claim, loss or liability for which such party seeks defense and
indemnification. If either party wishes to enter the defense of a suit
brought pursuant to the indemnification sections of this Agreement
being defended by the other party, such party may do so at its own
cost. The control of such case shall remain with the indemnifying party
unless otherwise agreed to in writing.
10.3 Settlement Notice. If either party wishes to settle a case for which
the other party is liable for indemnification, the party wishing to
settle shall first obtain the written approval of the indemnifying
party.
10.4 Insurance. Each party will keep in force during the term of this
Agreement all customary forms of insurance, including but not limited
to product liability insurance, in such amounts as are prudently
required.
Article 11. Limited Warranty
----------------
11.1 Shelf Life Warranty. The PRODUCT shall have a shelf life, at the time
of shipment by pHoenix, as specified in Appendix A. pHoenix shall not
be liable for any variance from specifications or any failure to
satisfy the shelf life requirement to the extent such variance is
caused by conditions or events occurring after shipment from pHoenix's
plant.
11.2 PRODUCT Specification, Defective PRODUCT Notice and PRODUCT Complaints.
pHoenix warrants that, at the time of delivery to RAICHEM, all PRODUCTs
supplied by pHoenix meet PRODUCT specifications. Either party shall
immediately notify the other party in writing should it become aware of
any defect or condition that may render the PRODUCT(s) supplied by
pHoenix in violation of the U.S. Food, Drug and Cosmetic Act, or of a
similar law of any jurisdiction where the PRODUCT is sold by RAICHEM.
The parties shall share with each other all data on the PRODUCT
complaints including, but not limited to, complaints or information
regarding performance and/or allegations or reports of any negative
effect from the use or misuse of the PRODUCTs as soon as such data is
available. Each party will assist the other in resolving RAICHEM's
customers' complaints. However, RAICHEM shall have sole responsibility
and authority to interact directly with RAICHEM's customers in the
resolution of such complaints, and pHoenix shall be responsible only
for interacting with RAICHEM in such matters.
11.3 Warranties. THE WRITTEN WARRANTIES OF pHoenix IN THIS ARTICLE 11 ARE
THE SOLE EXCLUSIVE WARRANTIES PROVIDED TO RAICHEM AND TO CONSUMERS AND
ARE IN LIEU OF ALL OTHER WARRANTIES, WHETHER WRITTEN OR ORAL, IMPLIED
OR STATUTORY. pHoenix WARRANTS THE PRODUCT AGAINST DEFECTS IN MATERIAL
AND WORKMANSHIP UNDER THE NORMAL USE AND SERVICE FOR WHICH IT WAS
DESIGNED, FOR THE SHELF LIFE PERIOD DEFINED IN APPENDIX A, pHoenix'S
OBLIGATION UNDER THIS WARRANTY BEING LIMITED TO THE REPLACEMENT OF THE
PRODUCT DETERMINED BY IT TO BE DEFECTIVE, PLUS TRANSPORTATION COSTS FOR
RETURN OF THE PRODUCT. ALL REPLACEMENTS WILL BE SHIPPED F.O.B.
RAICHEM'S RECEIVING FACILITY.
Article 12. Confidentiality
---------------
12.1 Confidentiality. For purposes of this Agreement, the term "Confidential
Information" shall mean all documents, clearly marked as "PROPRIETARY"
or "CONFIDENTIAL" , relating to the respective products and businesses
of the parties which (i) is disclosed, upon request, by one party
hereto to the other and (ii) is claimed by the disclosing party to be
secret, confidential and proprietary to the disclosing party.
During the Agreement Term and for a period of one year thereafter, each
party (except as is explicitly otherwise required hereby) shall keep
confidential, shall not use itself or for the benefit of others and
shall not copy or allow to be copied, in whole or in part , any
Confidential Information disclosed to such party by the other.
The obligations of confidentiality imposed upon the parties by the
foregoing paragraph shall not apply with respect to any alleged
Confidential Information which:
(a) is known to the recipient thereof prior to receipt thereof from
the other party hereto (as evidenced by said recipient's written
or other recorded records);
(b) is disclosed to said recipient by a third party who has the right
to make such disclosure;
(c) is or becomes a part of the public domain or public knowledge
through no fault of the said recipient;
(d) is independently developed by the recipient (as evidenced by said
recipient's written or other recorded records); and
(e) is required to be disclosed under operation of law.
Article 13. Termination
-----------
13.1 Termination For Cause. Either party will have the right to terminate
this Agreement if the other party (a) assigns this Agreement or any of
its rights hereunder in violation of the provisions of this Agreement,
or (b) becomes bankrupt or insolvent, or (c) makes an assignment for
the benefit of creditors, or a receiver, trustee in bankruptcy or
similar officer appointed to take charge of all or part of its
property, and such event has not been cured within thirty (30) days of
written notice thereof by the non-breaching party. If either party
materially breaches this Agreement, including, but not limited to
either party's failure to adhere to the confidentiality provisions and
restrictions on use of information set forth in this Agreement, then
notwithstanding any other provision of this Agreement, no cure period
shall be allowed and the non-breaching party shall be entitled to
terminate this Agreement immediately.
13.2 Termination For Failure to meet Minimum Purchases. pHoenix shall have
the right to terminate this Agreement upon three (3) months written
notice at any time if RAICHEM fails to meet its minumin purchases as
stated in this Agreement.
13.3 Rights and Obligations on Termination. Upon termination of this
Agreement, RAICHEM shall immediately discontinue any previously
authorized use of any of pHoenix's Proprietary Rights and shall
immediately cease all conduct that might cause anyone to believe that
RAICHEM is authorized to market or sell PRODUCTs or otherwise connected
with pHoenix, and pHoenix may itself or through others, commence sale,
distribution and service of PRODUCTs in the TERRITORY. Termination of
this Agreement for any reason whatsoever shall not relieve either of
the parties hereto from making payment of monies due to the other from
fulfilling obligations incurred up to the effective date of termination
or as otherwise expressly provided in this Agreement.
13.4 Termination or Expiration Damages. Neither pHoenix nor RAICHEM shall be
liable to the other, or to any other business entity solely by reason
of the expiration or termination of this Agreement regardless of the
rationale for or propriety of any termination or expiration. The
exculpation from liability shall be for any losses or damages of any
kind whatsoever, including, but not limited to, direct, indirect,
special, consequential or incidental damages sustained by reason of
such termination, including but not limited to, any claim for loss of
compensation or profits or for loss of prospective compensation or
prospective profits in respect of sales of any of the PRODUCTs or on
account of any expenditures, investments, leases, capital improvements
or any other commitments made by either party in connection with their
respective business made in reliance upon or by virtue of this
Agreement or otherwise.
Article 14. PRODUCT Recall and Regulatory Compliance
----------------------------------------
14.1 Data Base. pHoenix and RAICHEM shall maintain a data base to support
all claims made or to be made regarding PRODUCTs' performance.
14.2 Inquiries. Each party shall keep the other informed of any formal or
informal inquiry relating to PRODUCTs sold hereunder by any regulatory
agency of any state or national government.
14.3 PRODUCT Recall. Should PRODUCT performance or any governmental action
require the recall or withholding from market of PRODUCT sold by
pHoenix to RAICHEM, RAICHEM shall bear the costs and expenses of recall
if such recall is the result of any fault or omission attributable to
RAICHEM and pHoenix shall bear the costs and expenses of recall if such
recall is the result of any fault or omission attributable to pHoenix.
Should such recall result from the equal fault of both parties, or
should it prove impossible to assign fault to the satisfaction of both
parties, the parties shall share the said costs and expenses equally.
Article 15. Arbitration
-----------
15.1 Any controversy or claim arising under or in relation to this
Agreement, except as otherwise expressly provided below, shall be
settled exclusively by arbitration in accordance with the International
Arbitration Rules of the American Arbitration Association (AAA). There
shall be three arbitrators: one selected by PHoenix, one selected by
RAICHEM, and one selected by the parties jointly or, failing their
agreement, selected pursuant to the rules of the AAA. The arbitration
shall be conducted in English and shall be held in Massachusetts. The
prevailing party shall be entitled to recover its costs and attorneys'
fees. The decision of the arbitrators shall be final and binding on the
parties, and judgment upon the award rendered by the arbitrators may be
entered by any court having jurisdiction thereof. The provisions of
this arbitration clause shall not be applied to the determination of
questions affecting the validity or scope of any trademarks or other
intellectual property rights.
Article 16. General Provisions
------------------
16.1 Entire Agreement. This Agreement, including the Appendices, constitutes
the entire agreement between the parties with respect to the subject
matter hereof, and may not be modified (unless expressly provided
otherwise herein) except by a writing duly signed by both parties.
16.2 Assignment, Waiver, Severability. Neither party may assign this
Agreement without the prior written consent of the other party. Failure
by either party to enforce any term hereof shall not be deemed a waiver
of future enforcement of that or any other term. If any provision of
this Agreement is declared void or unenforceable by any judicial,
administrative or arbitration authority, such action will not nullify
the remaining provisions of this Agreement.
16.3 Governing Law. This Agreement shall be governed and construed under and
according to the laws of the Commonwealth of Massacusetts, U.S.A.,
excluding its choice of laws rules.
16.4 Relationship Created. The relationship of the parties is that of
independent contractors. Nothing in this Agreement shall be construed
as establishing an agency, joint venture or partnership between the
parties. Each party is an independent entity, and shall have sole
responsibility for its employees, even while such employees are on the
premises of the other party's facility(ies). Neither RAICHEM nor
pHoenix shall have the right to enter into any contracts or commitments
or to make any representations or warranties, whether express or
implied, in the name of or on behalf of any other party, or to bind any
other party in any respect whatsoever, unless agreed to in writing or
expressly permitted in this Agreement.
16.5 Authority. Each party hereby represents and warrants that it has full
power and authority to enter into and perform this Agreement, without
any governmental approvals, and that its entering into and performance
of this Agreement will not conflict with any other agreement to which
it is a party or by which it is bound.
16.6 Notice. Any written notice, or statement, necessary or appropriate
under this Agreement shall be deemed to be properly given if delivered
personally in writing or sent by registered or certified mail to the
party to be notified at the address set forth above or at such other
address as either party may hereafter designate in writing.
16.7 Captions. The captions or paragraph headings of this Agreement do not
constitute any substantive part of this Agreement and shall not be
considered in the construction or interpretation of this Agreement.
16.8 Force Majeure. Each party hereto shall be excused from the performance
of its obligations hereunder in the event such performance is prevented
by force majeure, and such excuse shall continue for so long as the
condition constituting such force majeure and any consequences
resulting from such condition continues. In addition, in the event the
condition constituting the force majeure causes a substantial inability
by either party hereto to meet its obligations hereunder, the term of
this Agreement may, upon written agreement of both parties, be
suspended for the period of such inability, but not to exceed six (6)
months. For the purposes of this Agreement, force majeure shall mean
causes beyond either party's control including, without limitation,
acts of God; regulations or laws of any government; war, riot or civil
commotion; damage to or destruction of production facilities or
materials by fire, earthquake, storm or other disaster; manufacturing
or transportation delay, strikes or other labor disturbances, epidemic;
and failure or default of public utilities or common carriers.
IN CONSIDERATION OF the foregoing terms and conditions, RAICHEM and pHoenix
have executed this Agreement on the day and year first written above.
REAGENTS APPLICATIONS, INC. pHoenix Diagnostics, Inc.
d/b/a RAICHEM, DIVISION OF
HEMAGEN DIAGNOSTICS, INC.
/s/ Carl Franzblau /s/ Ram Nunna
- ---------------------------------- -----------------------------------
Carl Franzblau, President Ram Nunna, President
REAGENTS APPLICATIONS, INC. pHoenix Diagnostics, Inc.
Appendix A -- PRODUCTs
----------------------
=====================================================================
MINIMUM SHELF-LIFE FROM
PRODUCTS DATE OF SHIPMENT
----------------------------- -----------------------------------
=====================================================================
PRODUCT Specifications: See attached PRODUCT literature
Appendix B -- Terms
-------------------
1) pHoenix grants to RAICHEM exclusive marketing rights to sell PRODUCTs in
the TERRITORY.
2) Minimum orders for the initial term are listed below:
Minimum Purchases
YEAR (in US dollars)
------------ -----------------
CONFIDENTIAL TREATMENT REQUESTED
Appendix C -- Prices
--------------------
CONFIDENTIAL TREATMENT REQUESTED
Consent of Independent Certified Public Accountants
Hemagen Diagnostics, Inc.
Waltham, Massachusetts
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of the Registration Statements on Form S-3 (Nos. 33-80009
and 333-06147) and in the Registration Statement on Form S-8 (No. 33-3333718)
of our report dated November 14, 1997, relating to the consolidated financial
statements of Hemagen Diagnostics, Inc. appearing in the Company's Annual
Report on Form 10-KSB for the year ended September 30, 1997.
BDO Seidman, LLP
Boston Massachusetts
December 24, 1997
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 294,086
<SECURITIES> 730,827
<RECEIVABLES> 2,344,293
<ALLOWANCES> 55,500
<INVENTORY> 3,953,601
<CURRENT-ASSETS> 7,488,953
<PP&E> 4,728,343
<DEPRECIATION> 2,182,874
<TOTAL-ASSETS> 11,546,650
<CURRENT-LIABILITIES> 1,331,506
<BONDS> 0
0
0
<COMMON> 77,769
<OTHER-SE> 9,948,094
<TOTAL-LIABILITY-AND-EQUITY> 11,546,650
<SALES> 12,971,102
<TOTAL-REVENUES> 12,991,102
<CGS> 7,597,981
<TOTAL-COSTS> 7,603,909
<OTHER-EXPENSES> 4,880,188
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131,806
<INCOME-PRETAX> 405,129
<INCOME-TAX> 0
<INCOME-CONTINUING> 405,129
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
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