-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, l1P3V9f0D44AcT3cG0odcA8xkV2i3AQbsmb1vGYZsd4sUt0wWRNnyL0FAXz4cb16 2T5T6krruABP9CmLnJRX/Q== 0000950109-95-000352.txt : 19950602 0000950109-95-000352.hdr.sgml : 19950602 ACCESSION NUMBER: 0000950109-95-000352 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950214 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDCHEM PRODUCTS INC /MA/ CENTRAL INDEX KEY: 0000711074 STANDARD INDUSTRIAL CLASSIFICATION: 2834 IRS NUMBER: 042471310 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09899 FILM NUMBER: 95509888 BUSINESS ADDRESS: STREET 1: 232 W CUMMINGS PARK CITY: WOBURN STATE: MA ZIP: 01801 BUSINESS PHONE: 6179325900 MAIL ADDRESS: STREET 1: 232 W CUMMINGS PARK STREET 2: 232 W CUMMINGS PARK CITY: WOBURN STATE: MA ZIP: 01801 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ____________ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarterly period ended _________________________________________ or X Transition report pursuant to Section 13 or 15(d) - - - - - - ------------ of the Securities Exchange Act of 1934 For the transition period from September 1, 1994 to December --------------------- -------- 31, 1994 - - - - - - --------------- Commission File Number 1-9899 -------------------------- MedChem Products, Inc. - - - - - - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-2471310 - - - - - - -------------------------------------------------------------------------------- (state or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 232 West Cummings Park, Woburn, MA. 01801 - - - - - - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 932-5900 ---------------- Former fiscal year ended August 31, 1994 - - - - - - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 90 days. Yes X No _____ ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On February 1, 1995, 10,237,589 shares of common stock, par value $0.01 per share, were outstanding. MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets as of, December 31, 1994 August 31, 1994 - - - - - - -------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $157,591 $788,663 Accounts receivable 4,032,487 4,191,352 Inventories 10,739,786 9,394,463 Prepaid expenses and other current assets 1,494,811 1,110,433 - - - - - - -------------------------------------------------------------------------------------------------------------------- Total current assets 16,424,675 15,484,911 - - - - - - -------------------------------------------------------------------------------------------------------------------- Property, plant and equipment 12,466,151 11,799,300 Less accumulated depreciation and amortization 3,021,975 2,798,042 - - - - - - -------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 9,444,176 9,001,258 - - - - - - -------------------------------------------------------------------------------------------------------------------- Note receivable -Anika Research, Inc. 1,000,000 1,000,000 Cost in excess of net assets of businesses acquired 35,887,747 36,375,478 Intangible and other assets 16,274,010 16,633,667 - - - - - - -------------------------------------------------------------------------------------------------------------------- Total Assets $79,030,608 $78,495,314 ==================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $2,679,607 $1,529,960 Accrued expenses 3,370,893 4,317,910 Note payable - Life Medical Sciences, Inc. 1,000,000 2,000,000 Current installments of long term debt 2,000,000 2,000,000 - - - - - - -------------------------------------------------------------------------------------------------------------------- Total current liabilities 9,050,500 9,847,870 - - - - - - -------------------------------------------------------------------------------------------------------------------- Deferred income taxes 626,809 626,809 Long-term debt, excluding current installments 11,000,000 9,500,000 Convertible subordinated debt 4,103,204 4,103,204 - - - - - - -------------------------------------------------------------------------------------------------------------------- Total liabilities 24,780,513 24,077,883 - - - - - - -------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock, $.01 par value: authorized 1,000,000 shares; no shares issued and outstanding - - Common stock, $.01 par value: authorized 20,000,000 shares; issued 11,213,536 and 11,150,236 shares, respectively 112,135 111,502 Additional paid-in capital 37,493,085 37,307,139 Retained earnings 25,220,017 25,573,932 - - - - - - -------------------------------------------------------------------------------------------------------------------- 62,825,237 62,992,573 Treasury stock, 1,024,702 shares, at cost (8,575,142) (8,575,142) - - - - - - -------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 54,250,095 54,417,431 - - - - - - -------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $79,030,608 $78,495,314 ====================================================================================================================
See accompanying notes to consolidated financial statements. 2 MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES Consolidated Statements of Operations
Four months ended ---------------------------------- Dec. 31, 1994 Dec. 31, 1993 - - - - - - ---------------------------------------------------------------------------------------------------------------------------- Net sales: Domestic $7,919,874 $7,529,134 International 1,585,968 949,068 - - - - - - ---------------------------------------------------------------------------------------------------------------------------- Total net sales 9,505,842 8,478,202 Cost of sales 3,037,859 2,596,034 - - - - - - ---------------------------------------------------------------------------------------------------------------------------- Gross profit 6,467,983 5,882,168 Operating expenses: Research and development 656,244 265,373 Selling, general and administrative 5,070,761 3,477,053 Depreciation and amortization 861,399 813,841 - - - - - - ---------------------------------------------------------------------------------------------------------------------------- Total operating expenses 6,588,404 4,556,267 Income (loss) from operations before interest and income taxes (120,421) 1,325,901 Interest expense, net 412,431 315,248 - - - - - - ---------------------------------------------------------------------------------------------------------------------------- Income (loss) from operations before income taxes (532,852) 1,010,653 Income tax expense (benefit) (178,937) 252,663 - - - - - - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) ($353,915) $757,990 Income (loss) per share, primary and fully diluted: ($0.03) $0.07 Weighted average number of shares outstanding: Primary and fully diluted 10,189,000 10,349,000 - - - - - - ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 3 MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows
Four months ended ----------------------------------- Dec. 31, 1994 Dec. 31, 1993 - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income (loss) ($353,915) $757,990 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 1,103,839 1,123,217 Changes in operating assets and liabilities: Accounts receivable 158,865 1,250,290 Inventories (1,345,323) (1,049,119) Prepaid expenses and other current assets (384,378) (468,307) Other assets (32,518) 16,467 Accounts payable and accrued expenses 202,630 (905,025) - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used for) operating activities (650,800) 725,513 - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Additions to property, plant and equipment (666,851) (1,076,987) - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used for investing activities (666,851) (1,076,987) - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net borrowing under revolving line of credit 2,000,000 -- Principal payments on bank debt (500,000) -- Principal payment on note payable - Life Medical Sciences, Inc. (1,000,000) -- Proceeds from exercise of stock options 186,579 -- - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 686,579 -- - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents (631,072) (351,474) Cash and cash equivalents at beginning of period 788,663 346,099 - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $157,591 ($5,375) ==================================================================================================================================== Supplemental disclosure of cash flow information: Cash paid for: Interest $317,898 $427,740 Income taxes 399,184 368,254 - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 4 PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS (CONTINUED) MEDCHEM PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (1) Nature of Business ------------------ MedChem Products, Inc. and subsidiaries ("the Company"), develop, manufacture and market specialty medical products for use in surgical and non-surgical procedures. The Company's two business groups are the Surgical Specialties Group and the Drug Delivery Group. The Surgical Specialties Group is comprised of the Company's Avitene(R) family of topical hemostasis products used to control bleeding in surgical procedures and the Sure- Closure product line, acquired in July 1994, used to close skin-deficit wounds. The Drug Delivery Group is comprised of intravenous ("I.V")catheter products and disposable medical devices sold to the neonatal, pediatric and adult markets by the Company's wholly owned subsidiary, Gesco International, Inc. ("Gesco"). (2) Basis of Presentation --------------------- The accompanying consolidated financial statements for the four month transition period ended December 31, 1994 and the comparable period for 1993 have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, these consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position of the Company as of December 31, 1994, and the consolidated results of the Company's operations and their cash flows for the four month transition period ended December 31, 1994 and 1993. The accompanying consolidated financial statements and related notes should be read in conjunction with the Company's annual financial statements filed with the Annual Report on Form 10-K. The four months ended December 31, 1994 comprise the four month ("transition period") resulting from a recent change in the Company's year end from August 31, to December 31. On January 1, 1995 the Company started a new calendar year and will begin reporting on a calendar quarter and year basis. Certain reclassifications were made to the 1993 period consolidated financial statements to conform to the 5 transition period 1994 presentation. (3) Inventories ----------- Inventories consist of the following:
December 31, August 31, 1994 1994 ------------ ---------- Raw materials $1,737,472 $2,325,484 Work in process 2,768,512 2,898,490 Finished goods 6,233,802 4,170,489 ----------- ---------- Total inventories $10,739,786 $9,394,463 =========== ========== (4) Long-Term Debt -------------- Long term debt consists of the following: December 31, August 31, 1994 1994 ----------- ---------- $7,000,000 bank revolving line of credit at the bank's prime rate or cost of funds rate plus two percent (8.50% at December 31, 1994), secured by tangible and intangible property, payable by June, 1996. $4,000,000 $2,000,000 Term loan payable to a bank, interest at the bank's prime rate plus one-half of one percent or LIBOR plus two percent (8.50% at December 31, 1994), payable in quarterly installments of $500,000, with a final installment of $4,500,000 on May 1, 1997, secured by tangible and intangible property. 9,000,000 9,500,000 ----------- ---------- Total long-term debt 13,000,000 11,500,000 Less: current installments 2,000,000 2,000,000 ----------- ----------- Long-term debt less current installments $11,000,000 $ 9,500,000 =========== ===========
6 The Company has obtained a waiver, through November 30, 1995, of a covenant pertaining to the ratio of indebtedness to net cash flow and a waiver, through December 31, 1994, of a covenant pertaining to profitability. (5) Contingencies ------------- The Company's 1992 tax return is currently under review by the Internal Revenue Service and the Commonwealth of Massachusetts is also scheduled to audit the Company's state tax returns for that year. The Company is currently involved in three pending product liability claims related to its Drug Delivery Business. At this time the Company cannot estimate the exposure on its financial statements, if any, if the Company were unsuccessful in its defense of these claims. However, the Company feels that its product liability insurance is adequate to cover any liability that may arise from these claims. 7 PART I: FINANCIAL INFORMATION ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Overview ------------------ The Company's net loss for the four month period ended December 31, 1994 was $353,915, or $0.03 per share, versus net income of $757,990, or $0.07 per share, for the comparable period last year. Operating cash flow, before interest and income taxes for the transition period decreased to $983,418 from $2,449,118 for the comparable period last year. As previously reported, Avitene sales have been depressed for several quarters due in large part to overstocked inventories at some of the Company's wholesale distributors. During the transition period, the estimated overstocked position at distributors decreased by approximately $1,800,000. The Company believes that this overstock was substantially eliminated by December 31, 1994, and that Avitene sales in 1995 will begin to approach a level approximately commensurate with hospital demand. The four months ended December 31, 1994 comprise the four month ("transition period") resulting from a recent change in the Company's year end from August 31, to December 31. Results of Operations --------------------- Total net sales for the transition period ended December 31, 1994 increased 12% to $9,505,842 from $8,478,202 in the comparable period last year. Domestic sales from the Company's Surgical Specialties Group, consisting of Avitene and Sure-Closure products, declined $350,038, or 9%. This decline was primarily attributable to the decline in Avitene sales of $1,264,238 due to the overstocked position at the Company's Avitene distributors as discussed above, which was mostly offset by sales of the recently acquired Sure-Closure product line. Domestic sales of Drug Delivery products from the Company's Gesco subsidiary increased 22% to $4,177,727 in the transition period from $3,436,949 in the prior year. International sales of Avitene to the Company's Japanese distributor amounted to $562,593, of the total $636,900 increase in international sales compared to the same period last year. 8 Gross profit, as a percentage of net sales, for the four months ended December 31, 1994, decreased to 68% from 69% in the comparable period last fiscal year. The decrease was primarily attributable to the increase in Gesco and international Avitene(R) sales as a proportion of total sales for the current period as these sales have lower gross margins than domestic Avitene(R) sales. Research and development expense (includes regulatory and clinical trial expenses) increased $390,871 to $656,244 for the transition period ended December 31, 1994 from $265,373 in the prior year due mainly to the research and development being conducted in connection with the Sure- Closure product line. The Company expects an increase in research and development expenses due to the addition of the Sure-Closure product line and increased product development related to its Drug Delivery product line in calendar 1995 in comparison to the twelve month period ended August 31, 1994. Selling, general and administrative expenses increased $1,593,708 to $5,070,761 for the four month period ended December 31, 1994 from $3,477,053 in the prior year. The increase is attributable to the expansion and training of the national Surgical Specialty sales force and marketing expenses resulting from the addition of the Sure-Closure product line. The Company expects no significant increases in selling, general and administrative expenses as a percent of sales for the full 1995 calendar year in comparison to the twelve month period ended August 31, 1994. Depreciation and amortization expense for the transition period totaled $861,399 compared to $813,841 in the comparable period in the prior year. The Company's effective tax rate for the transition period was 34% versus 25% in the comparable period last fiscal year. The increase in the effective tax rate was due to a decrease in operating income from the Avitene(R) product line which receives a favorable tax benefit as a result of the section 936 election available on Avitene(R) sales as compared to the same period last year. Liquidity and Capital Resources ------------------------------- The Company generated operating cash flow before interest and income taxes, of $983,418 in the transition period versus $2,449,118 in the comparable period last year. The Company currently has a revolving line of credit agreement whereby the bank will lend the Company up to 9 $7,000,000 at the bank's prime rate or cost of funds rate plus two percent and a $10,000,000 term loan. At December 31, 1994 there was $4,000,000 outstanding under this line and $9,000,000 outstanding under the term loan. The line of credit expires in June 1996 and the $10,000,000 term loan is payable to the bank in quarterly installments of $500,000 through 1997, with a final payment of $4,500,000 due on May 1, 1997. The $4,103,204 of convertible subordinated debt issued to Gesco's principal sellers is convertible at the option of the holders into common stock at $11.73 per share. The note can be prepaid in whole, but not in part, at par at the Company's option, and is payable in full on August 4, 1997. In connection with the purchase of the Sure-Closure product line, the Company issued a note payable to Life Medical Sciences, Inc, in the principal amount of $2,000,000. The first installment of $1,000,000 on the non-interest bearing note was paid on October 27, 1994, with the remaining installment paid on January 27, 1995. During the transition period ended December 31, 1994, the Company continued to build the level of Avitene(R) finished goods, for approximately $1,300,000 in anticipation of the termination of the finished goods manufacturing contract with Alcon Laboratories, which terminated on December 31, 1994. The Company has funded approximately $4,050,000 of this planned inventory build-up from operating cash flow since the first quarter of fiscal 1994. The Company believes it has sufficient Avitene(R) finished goods inventory levels based on the anticipated demand until the fourth quarter of calendar 1995, by which time the Company's new Avitene(R) finished goods manufacturing facility is expected to be in full operation. The Company believes that cash flow generated from its operating activities, as well as funds available under its bank line of credit, will be sufficient to enable the Company to conduct its operations and repay its indebtedness. Management continues to evaluate potential acquisitions and other opportunities to expand and diversify the Company's product lines, although there are no present agreements to enter into any such transactions. In the event that the Company enters into any such transactions in the future, additional financing may be required. 10 PART II: OTHER INFORMATION ----------------- ITEM 1: THROUGH ITEM 4: NOT APPLICABLE ITEM 5: OTHER INFORMATION On December 1, 1994, the Company and the MedTech Group, Inc. ("MedTech"), entered into a Strategic Alliance Agreement engaging MedTech as its exclusive, worldwide manufacturer of the disposable skin stretching devices and other molded plastic medical devices relating to its Sure-Closure product line. This agreement supersedes all prior oral or written agreements, commitments or understanding with respect to the matters provided herein. Refer to Item 6: Exhibit No. 12. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit No. Description ----------- ----------- 11 Computation of earnings per share 12 Strategic Alliance Agreement between the Company and The MedTech Group, Inc. (b) Reports on Form 8-K ------------------- The Company filed a Current Report on Form 8-K with the Commission on October 20, 1994 that reported the change in fiscal year from the year ending August 31 to the year ending December 31. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEDCHEM PRODUCTS, INC. DATE: February 14, 1995 BY:/s/Edward J. Quilty ----------------------------- Edward J. Quilty President Chief Executive Officer DATE: February 14, 1995 BY:/s/John J. McDonough ----------------------------- John J. McDonough Vice President Chief Financial Officer 12 EX-11 2 EXHIBIT 11 EXHIBIT 11 MedChem Products, Inc. and Subsidiaries Computation of Primary and Fully Diluted Earnings Per Share
Four months ended December 31, 1994 1993 ------------ ------------ Net income (loss) ($353,915) $757,990 PRIMARY : - - - - - - ------- Weighted average number of common shares outstanding 10,188,834 10,089,384 Dilutive effect of outstanding stock options 0 259,229 ------------ ------------ Weighted average number of common shares as adjusted 10,188,834 10,348,613 Primary earnings (loss) per share ($0.03) $0.07 ============ ============ FULLY DILUTED: - - - - - - ------------- Weighted average number of common shares outstanding 10,188,834 10,089,384 Dilutive effect of outstanding stock options 0 259,229 ------------ ------------ Weighted average number of common shares as adjusted 10,188,834 10,348,613 Fully diluted earnings (loss) per share ($0.03) $0.07 ============ ============
EX-12 3 EXHIBIT 12 EXHIBIT 12 STRATEGIC ALLIANCE AGREEMENT This Strategic Alliance Agreement is entered into as of DECEMBER 1st, 1994 between The MedTech Group, Inc. a New Jersey corporation whose principal offices are at 6 Century Road, South Plainfield, NJ 07080-1396 ("MedTech") and MedChem Products, Inc., a Massachusetts corporation whose principal offices are at 232 West Cummings Park, Woburn, MA 01801 ("MedChem"). BACKGROUND On July 29, 1994, MedChem acquired substantially all of the assets of Life Medical Sciences, Inc. ("LMS") relating to LMS' Sure-Closure mechanical skin- stretching system. From July 1, 1993 until July 29, 1994, LMS had an oral arrangement with MedTech whereby MedTech using its technical manufacturing expertise in the manufacture of complete disposable medical devices manufactured PRODUCTS (as defined below). NOW, THEREFORE, in consideration of the mutual covenants contained herein and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: I. Products PRODUCTS refers to the disposable skin stretching devices and other molded plastic medical devices which are listed on Exhibit A. Exhibit A may be --------- --------- amended from time to time to add additional PRODUCTS upon the mutual written agreement of both parties. It is MedChem's intention to work with MedTech to develop products in the range of Appropriate Technology (as defined in Section III) and to add additional products to Exhibit A as and --------- when appropriate terms with respect to the manufacture of such products are agreed upon by both parties. II. Engagement of MedTech MedChem hereby engages MedTech as its exclusive, worldwide manufacturer of PRODUCTS in accordance with the terms and conditions of this Agreement, subject to Section V below. In furtherance of this engagement, MedChem hereby grants to MedTech during the term of this Agreement, a limited, exclusive license to manufacture PRODUCTS in accordance with the specifications and procedures set forth in Exhibits A, B, C, and D. ---------- - - - MedTech shall have no other intellectual property rights in or to the PRODUCTS, their design, method of operation, or proprietary process of manufacture as described in Section XVIII below, except for the manufacturing license granted herein. Such manufacturing license shall terminate upon the termination or expiration of this Agreement for any reason. The license granted herein is for manufacture only and does not include a license or right to sell or resell these PRODUCTS except as directed by MedChem in writing. III. Appropriate Technology The scope of this Agreement is limited to products for which MedTech has demonstrated appropriate technology, skills and resources. MedTech's technology, skills and resources at this time are in the area of molding, assembly and packaging of complete, disposable, plastic medical devices. IV. Mutual Cooperation As part of the strategic alliance, both companies will be flexible in satisfying each other's requirements and will cooperate to meet the needs of the final customer. MedTech and MedChem shall establish a team consisting of appropriate members of both companies who will be responsible for establishing milestones, reporting delays, and smoothing the transition to the development and manufacture of PRODUCTS. V. Ancillary Agreements The parties acknowledge that MedChem is obligated, under certain circumstances, to have PRODUCTS manufactured in Israel in accordance with the terms of the Agreement dated June 20, 1992 between The Technion Research and Development Foundation, Ltd. ("Technion") and LMS modified by the letter agreement dated March 2, 1994 between Technion, Dimotech, Ltd. ("Dimotech") and LMS, the letter agreement dated March 13, 1994 between the Ministry of Industry Trade/Office of the Chief Scientist and Technion and the letter agreement dated April 21, 1984 between Technion, Dimotech and LMS (collectively, the "Israel Agreement"), which Israel Agreement was assigned by LMS to MedChem. In such event, MedChem may terminate the exclusivity of its engagement of MedTech immediately in the event that MedTech fails to comply with MedChem's request to manufacture (or arrange for the manufacture of) PRODUCTS in Israel. MedChem will make every reasonable effort to provide the longest possible advance notice of such requirements to MedTech, and will provide every reasonable assistance to MedTech in complying therewith. In the event that MedTech is unable to comply, -2- MedChem shall be free to engage any other party to manufacture PRODUCTS in Israel in compliance with the Israel Agreement. VI. Competitive Standards It is the intent of this Agreement to seek mutual profitability of both parties. This Agreement, therefore, is predicated on the ability of MedTech to remain competitive with industry standards in its manufacturing procedures and pricing structure. If MedChem demonstrates through reference to competitive technology or price quotes from other manufacturers that MedTech has become non-competitive, then MedChem and MedTech will work in good faith to resolve such non-competitiveness, including without limitation amending any terms of this Agreement, while recognizing that MedTech may have invested in product development and may therefore have a reasonable expectation of recovering such investment within a reasonable time. If the non-competitiveness of MedTech cannot be resolved to the satisfaction of MedChem, then the non-competitiveness of MedTech shall be deemed non-performance by MedTech with respect to Section XX and accordingly MedChem shall have the right to terminate this Agreement as provided therein. VII. Product Specifications and Manufacturing Procedures MedChem and MedTech will cooperate in the development and/or modification of the detailed Product Specifications and Manufacturing Procedures for PRODUCTS set forth on Exhibits A and B attached hereto. The Product ---------- - Specifications and Manufacturing Procedures may be amended from time to time by either party with the prior written approval of the other (which approval shall not be unreasonably withheld or delayed); provided that in the event the parties cannot agree to any amendments to such Product Specifications and Manufacturing Procedures, this Agreement may be terminated in accordance with the provisions of Section XX. Any mutually approved amendments or additions to the Product Specifications and Manufacturing Procedures shall be attached as exhibits hereto and considered incorporated herein. A. Product Specifications. MedTech shall manufacture each PRODUCT in accordance with the applicable specifications ("Specifications") for such PRODUCT as set forth in the appropriate part of Exhibit A --------- attached hereto. -3- B. Manufacturing Procedures. MedTech shall comply with the engineering, manufacturing, testing, warehousing and shipping procedures set forth in Exhibit B attached hereto. The procedures set forth in Exhibit B ------- - --------- shall apply to the manufacture, testing, storage and shipping of all PRODUCTS unless specifically otherwise stated in Exhibit A. --------- C. Quality Assurance. MedTech shall be responsible for ensuring that the quality of the PRODUCTS is at all times consistent with the applicable Specifications. MedTech shall develop and implement quality assurance procedures and shall incorporate in such procedures any elements reasonably requested by MedChem. D. Customer Complaints and Returned PRODUCTS. MedTech and MedChem shall comply with the procedures set forth in Exhibit C with respect to --------- responding to customer complaints and handling returned PRODUCTS. VIII. Forecasts and Orders A. Upon execution of this agreement, MedChem shall provide to MedTech a non-binding forecast of its requirements for PRODUCTS for the following twelve (12) months and a purchase order with quantities and delivery dates for the initial three months of such 12-month period. Thereafter, MedChem will provide by the first day of each month, a non-binding rolling three (3) month forecast of PRODUCT requirements and a binding purchase order for the third month. MedChem and MedTech may mutually agree to adjust purchase orders if required. B. MedChem shall submit purchase orders in writing to MedTech at the address set forth above. Purchase orders may be submitted by telecopy. MedChem shall use best efforts to submit purchase orders as far in advance in practicable. C. In recognition of the forecast variability associated with new PRODUCTS, MedTech shall maintain a 20% surge capacity at all times and shall maintain adequate safety stocks of critical components to ensure uninterrupted supply of PRODUCTS in the event that MedChem's requirements exceed its forecast by up to 50%. Critical components will be specifically identified by MedChem, and MedChem will bear the cost of safety stock for these components. -4- D. MedTech shall have two months after receiving a written purchase order to deliver PRODUCTS in accordance with such purchase order and Section X. Within 14 days after such delivery, MedTech shall deliver an invoice to MedChem stating in reasonable detail the manufacturing lot identification, quantity, model and price (per Exhibit D) of --------- PRODUCTS delivered along with a Finished Device History Checklist and a Certificate of Compliance with respect to such delivery in accordance with the terms of Exhibit C attached hereto (the --------- "Delivery Invoice"). E. Whenever MedTech's performance is delayed or prevented, MedTech shall promptly notify MedChem and provide an updated schedule of delivery. Any delay in PRODUCT delivery, except for a delay covered by paragraph E of Section XXI, shall entitle MedChem to delay payment for such PRODUCT by a period of time equal to the delivery delay. Repeated delays in PRODUCT delivery shall be grounds for the termination of this Agreement in accordance with Section XX below. In the event that MedChem's requirements exceed the current delivery schedule at any time, MedChem may request delivery of such PRODUCTS in less than two months, and MedTech shall make all reasonable efforts to meet MedChem's requirements. IX. Pricing and Payment A. Pricing. In consideration of the full range of services described herein, and recognizing that MedTech may have invested in product development, MedChem shall pay to MedTech the per unit purchase price for each PRODUCT determined in accordance with the price list set forth on Exhibit D attached hereto. The price list set forth on --------- Exhibit D shall remain in effect for one year following its effective --------- date. For each year thereafter during the term of this Agreement, the parties shall negotiate in good faith and agree on a new price list and Exhibit D shall be modified accordingly. Failure to agree on a --------- new price list shall constitute grounds for termination of the Agreement pursuant to Section XX below. In the event that either party demonstrates extraordinary and precipitous changes in the business environment of either MedTech or MedChem, either party may request that the price list be renegotiated at any time. In such circumstances, failure to agree on a new price list within 60 days shall constitute grounds for termination of the Agreement pursuant to Section XX below. -5- B. Payment. MedChem shall make payments of the purchase price for PRODUCTS within 30 days following the delivery by MedTech to MedChem of the Delivery Invoice. X. Delivery A. All PRODUCTS shall be packaged, marked and otherwise prepared for shipment by MedTech in suitable containers in accordance with sound commercial practices. MedTech shall mark on containers all necessary handling, loading and shipping instructions. An itemized packing list and bills of lading shall be included with each shipment. B. All sales of PRODUCTS are F.O.B. MedTech's premises in South Plainfield, New Jersey. Title to and risk of loss for PRODUCTS purchased shall pass to MedChem upon the earlier of delivery to MedChem or delivery to a carrier for shipment to MedChem. C. All PRODUCTS shall be received subject to MedChem's inspection, testing, approval and acceptance at its premises, notwithstanding any inspection or testing at MedTech's premises or any prior payment for such PRODUCTS. PRODUCTS rejected as not conforming may be returned to MedTech at MedTech's risk and expense and shall be replaced by MedTech upon such terms as are agreed to by MedTech and MedChem. XI. Returned Goods A. MedChem shall establish and maintain a returned goods policy and protocol for PRODUCTS sold to MedChem's customers as set forth in Exhibit C attached hereto. MedTech assumes no responsibility or --------- authority to respond to customer requests or inquiries regarding PRODUCTS and will forward all such inquiries to MedChem. B. MedTech will evaluate returned goods at the request of MedChem and will determine whether such returned goods can be safely returned to inventory. C. MedChem shall promptly notify MedTech of any return of defective PRODUCTS so that any appropriate remedial actions can be initiated. Likewise, MedTech shall promptly notify MedChem of any return of any defective PRODUCTS. -6- XII. Quality Assurance and Customer Complaints A. MedTech has agreed that the PRODUCTS shall meet the Specifications as set forth in Exhibits A, B and C. ---------- - - B. MedChem shall be responsible for responding to and maintaining documentation of field complaints of PRODUCTS in accordance with the policies set forth on Exhibit C. MedChem shall promptly notify --------- MedTech of any field complaints so that any appropriate actions can be initiated. C. MedTech shall forward to MedChem copies of any complaints, expressions of dissatisfaction, or other similar information about which MedTech becomes aware with respect to PRODUCTS in accordance with the policies set forth on Exhibit C. MedTech, at its expense, --------- shall assist MedChem in investigating such complaints and related matters, and shall provide necessary information with respect to such matters to MedChem. D. Although MedChem is responsible for responding to and maintaining documentation of field complaints for PRODUCTS, a file containing all complaints and other information required by the Food and Drug Administration's ("FDA's") Good Manufacturing Practices ("GMPs") with respect to complaints must be kept at MedTech per section 820.198 of the GMP regulation. E. MedChem shall implement and maintain an appropriate Medical Device Reporting system in accordance with the policies set forth on Exhibit ------- C. Preparation, submission, and documentation of Medical Device - Reports ("MDRs") shall be the sole responsibility of MedChem. MedTech shall assist MedChem as necessary in the conduct of any investigations, evaluations or corrective actions associated with MDRs. XIII. Regulatory Compliance A. MedTech shall fully comply with the FDA's Good Manufacturing Practices regulation, 21 CFR 820, as presently in effect, as well as with any future changes thereto. B. MedTech will implement a quality control system no later than November 1995 that will be consistent with ISO9002 requirements and with the European Medical Devices Directive [93-42 EEC], particularly the Product Vigilance provisions thereof. In addition, MedTech will -7- fully support MedChem in the preparation of all foreign and domestic regulatory applications. The quality control system will be subject to inspection and certification by a European Notified Body to be selected by MedChem. C. In order to assure that MedTech is satisfying its regulatory responsibilities, MedChem shall have the right to audit, with at least one week's advance notice provided to MedTech, those manufacturing and other operations related to PRODUCTS. Additionally, MedTech shall provide notice to MedChem of any inspection by the FDA that involves MedTech operations with respect to these PRODUCTS. MedTech shall provide to MedChem a copy of any FDA communications that relate to PRODUCTS or the manufacture of PRODUCTS. MedTech agrees that it will meet any reasonable foreign manufacturing obligations that apply to PRODUCTS made by MedTech for MedChem that are intended to be sold outside the United States. XIV. Tooling A. Capital equipment purchased by MedTech to manufacture PRODUCTS is the property of MedTech. MedChem may elect to purchase through MedTech certain capital equipment necessary for the manufacture of PRODUCTS. B. All tools, dies, molds, patterns, jigs, masks and other equipment and materials furnished by MedChem to MedTech or paid for by MedChem, directly or indirectly, and any replacements, shall remain MedChem's property. MedTech shall plainly identify such property as MedChem's property and shall not use such property except in performing this Agreement. C. Any capital equipment purchased through MedTech must be authorized in writing by MedChem. MedChem shall reimburse MedTech for such purchases as follows: 50% downpayment, 25% upon first piece inspection, and 25% upon final approval by MedChem of molded parts or assemblies. D. Before accepting plastic injection molds owned by MedChem, MedTech will perform validation procedures to ensure acceptability. MedChem shall pay for necessary modifications to the mold to ensure that acceptable -8- parts are produced. No such modifications will be performed without a written purchase order authorization from MedChem. XV. Sharing Information It is in the interest of both parties to reduce the manufacturing cost of PRODUCTS manufactured by MedTech for MedChem and to share in the benefits of such cost reductions. To that end, MedChem agrees to continue to invest in design effort and tooling expenses to reduce cost, and MedTech agrees to make available to MedChem information related to PRODUCTS which MedChem needs to analyze or evaluate manufacturing costs or return on investment. XVI. Product Warranty and Indemnity A. Product Warranty MedTech warrants that PRODUCTS shall be ---------------- manufactured in conformance with the Specifications and Procedures attached hereto as Exhibits A, B and C and shall be free of liens ---------- - - and encumbrances. These warranties shall survive any delivery, inspection, acceptance, payment or resale of PRODUCTS and shall extend to MedChem and its customers. In the event of the breach of this warranty, MedTech shall replace non-conforming PRODUCTS, at its expense, or refund the purchase and freight price for same. The product warranty set forth herein is in lieu of all other warranties and representations, whether express or implied, including without limitation, implied warranties of merchantability and fitness for a particular purpose. B. Indemnification. MedTech shall indemnify and hold harmless MedChem --------------- from and against all actual and direct damages, costs, and expenses (including reasonable attorney's fees and disbursements) incurred by MedChem resulting from any negligence, willful misconduct, or material breach of this Agreement by MedTech, subject to an overall limit of $1,000,000. C. Limitation of MedTech Liability. MedTech shall not under any ------------------------------- circumstances be liable to MedChem for any special, indirect, punitive, or consequential damages of any nature whatsoever, including, without limitation, any lost revenues or profits of MedChem or any other party resulting or arising out of the sale or use of PRODUCTS. -9- D. Notice of Complaints. Each of MedTech and MedChem shall promptly -------------------- notify the other of any PRODUCT deficiencies or field complaints, of which it has knowledge, regarding any MedTech related work. XVII. Insurance A. Each party agrees to maintain at least $1,000,000 of product liability insurance and to provide the other of evidence with coverage upon request. B. MedTech will insure all MedChem property located on MedTech's premises against loss or damage for an amount equal to its replacement cost and with MedChem named as loss payee, including but not limited to molds, fixtures, tooling, critical component safety stock and inventory. C. MedTech agrees that all MedChem property located on MedTech's premises shall be held at MedTech's risk and, to the extent furnished by MedChem to MedTech or paid for by MedChem, directly or indirectly, or a replacement thereof, shall be returned to MedChem or its designee upon the earlier of MedChem's request or the termination or completion of this Agreement. XVIII. Confidentiality and Intellectual Property A. MedTech and MedChem shall at all times maintain each other's CONFIDENTIAL INFORMATION in strict confidence. MedTech shall also maintain any CONFIDENTIAL INFORMATION provided to it by LMS on or after November 1992 and prior to July 29, 1994 in strict confidence in accordance with the terms of this Agreement. Neither party shall use or disclose CONFIDENTIAL INFORMATION to any person or entity outside of its organization without prior written consent of the other party. The Providing Party shall disclose CONFIDENTIAL INFORMATION received by it under this Agreement only to persons within its organization who have a need to know such CONFIDENTIAL INFORMATION in the course of the performance of their duties and who are bound to protect the confidentiality of such CONFIDENTIAL INFORMATION. It shall be a condition of granting the consent that any third party to whom CONFIDENTIAL INFORMATION is to be disclosed must agree in advance in writing to maintain such CONFIDENTIAL INFORMATION in strict confidence and not to release or disclose such CONFIDENTIAL INFORMATION to any other party without the prior written consent of the Providing Party (as defined below). -10- B. "CONFIDENTIAL INFORMATION" means information or data provided by either MedTech, MedChem (or in the case of LMS, prior to July 29, 1994) (the "Providing Party") to the other (the "Receiving Party") that concerns the discoveries, designs, inventions, improvements, know-how, and ideas of the Providing Party, except to the extent that ------ any such CONFIDENTIAL INFORMATION (a) is known or becomes known to the general public other than as a result of unauthorized disclosure by the Receiving Party or by persons to whom the Receiving Party has made such information available; or (b) is received by the Receiving Party on a non-confidential basis from a third party who to the best knowledge of the Receiving Party, lawfully possessed and disclosed such information. C. MedTech acknowledges and agrees that, as between the parties hereto, MedChem is the owner of all right and title to (a) the design of PRODUCTS, including patent rights, trade secrets and similar rights and interests, and (b) the PRODUCT trademarks as specified in Exhibit ------- A and (c) the PRODUCT SPECIFICATIONS (collectively, the "MedChem - Proprietary Rights"). MedTech agrees (a) not to contest or challenge in any way the MedChem Proprietary Rights, (b) to reproduce on the PRODUCTS (or their packaging) any proprietary notice designated by MedChem with respect to the MedChem Proprietary Rights, and (c) to cooperate in good faith with MedChem in safeguarding and protecting the MedChem Proprietary Rights. MedTech further agrees that MedChem shall be the sole owner of any improvements to or new models of PRODUCTS and MedTech shall execute and deliver to MedChem any documents and instruments requested by MedChem to convey to MedChem any rights that MedTech may have in any such improvements or new models. D. MedChem represents and warrants to MedTech that it has sufficient right, title and interest in and to the PRODUCTS to grant to MedTech the licenses and rights contained in this Agreement, and that, to the best of MedChem's knowledge, the manufacture and sale to MedChem by MedTech of PRODUCTS pursuant to this agreement shall not infringe any patent, trademark, copyright, trade secret or other proprietary rights of any third party. MedChem shall indemnify and hold MedTech harmless from and against any and all claims, damages, judgements, expenses and losses (including reasonable attorney's fees) arising from claims by any third party alleging that MedTech's manufacture or sale to MedChem of PRODUCTS in accordance with this agreement infringes such third party's proprietary rights. -11- E. The parties acknowledge that proprietary manufacturing processes used in connection with PRODUCTS will in some cases be jointly developed by both parties and in other cases be developed individually. All manufacturing processes that are (i) jointly developed or (ii) individually developed by MedTech and funded in any substantial manner by MedChem will be jointly owned by both parties and both parties shall have full rights to the use thereof except that MedTech ------ shall not use such processes in the manufacture of any competing products. XIX. Term This Agreement shall be effective as of the date set forth above and shall remain in effect through November 1, 1999. Thereafter, the term of this Agreement shall automatically renew for successive one year terms (or such longer renewal terms as the parties might agree in writing) each commencing July 1 unless (i) this Agreement is earlier terminated pursuant to Section XX below or (ii) either party shall have notified the other in writing, no later than 180 days prior to the expiration of the initial term or the then current renewal term, as the case may be, if it's intent not to renew. XX. Termination A. Either party may terminate this agreement for cause in the event of a material breach of this Agreement or non-performance by the other party where such breach or non-performance is not cured within 30 days after written notice of such breach is delivered by the terminating party to the breaching party or in the event that the parties cannot agree as to any amendments or modifications to any of the Exhibits attached hereto. In the event that MedChem is the terminating party, or this Agreement is being terminated pursuant to Section IX.A above, MedChem may elect to defer the effective date ------------ of termination for up to 180 days by so notifying MedTech in writing, and during such extension period this Agreement shall remain in effect and the price list set forth in Exhibit D may be increased by --------- MedTech as it deems reasonably necessary but not more than 15% above the last mutually approved price list. B. In the event of termination resulting from the event of non- performance on the part of MedChem, MedTech shall be reimbursed for its reasonable and accountable costs of raw material, work-in- progress, and finished goods upon termination and these shall become the property of -12- EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 4-MOS DEC-31-1994 SEP-01-1994 DEC-31-1994 158 0 4,032 0 10,739 16,425 12,466 3,022 79,031 9,051 0 112 0 0 54,138 79,031 9,506 9,506 3,038 3,038 6,588 0 412 (533) (179) (354) 0 0 0 (354) (0.03) (0.03)
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