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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended June 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ___________ to ____________
Commission file number 0-9570
LUTHER MEDICAL PRODUCTS, INC.
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(Name of small business issuer in its charter)
California 33-0468235
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14332 Chambers Road, Tustin, California 92680
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (714) 544-3002
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, No Par Value Per Share
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information state ments incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [_]
State issuer's revenues for its most recent fiscal year.$5,476,569
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The aggregate market value of registrant's common stock held by non-
affiliates of the registrant is $9,702,614 based upon the average bid and asked
price of the common stock on October 8, 1997.
Number of shares of Common Stock outstanding as of October 8, 1997:
3,212,786 shares.
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Part I
Item 1. Description of Business.
Luther Medical Products, Inc., a California corporation (the "Company"),
since its organization in 1980 has been primarily engaged in the design,
development, manufacture, sale, and licensing of intra-vascular catheters and
split, peel-away needles. The Company's L-Cath(TM) peel-away needle catheter
placement system and the OneCath(R) protected needle catheter placement
systems are used when soft, flexible catheters must be inserted for short- and
long-term intravenous therapy. The L-Cath(TM) for Ports is used to insert a
soft, flexible catheter into an implanted port as an alternative to a steel
Huber needle.
Products
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Peripherally Inserted Central Catheters ("PICCs").
PICCs provide venous access and typically reach into the superior vena cava
to serve as a "central line." The Company's patented peel-away needle has been
central to the Company's PICC products. A PICC is indicated for the following
clinical reasons: (i) lack of peripheral venous access, (ii) infusion of
vesicant/irritant drugs, (iii) long-term intravenous therapy in the home,
hospital, or clinic setting, (iv) administration of blood/blood products, or
(v) infusion of intermittent drug therapy.
The Company believes that PICCs provide certain non-economic advantages
over conventional intravenous catheters, e.g., reliable vascular access
throughout the course of therapy and decrease in patient pain and discomfort
associated with frequent venipuncture. In addition, the Company believes that
certain economic advantages also exist. For example, PICCs may be left in place
for two to six weeks or more as compared to traditional over-the-needle
catheters that must be changed every 48 hours. One PICC may substitute for up
to 20 short-term catheters, saving up to 19 short-term procedures.
Peripherally Inserted Midline Catheters ("Midlines")
Midlines provide venous access with the tip of the catheter located in the
upper arm. A Midline is indicated for the following clinical reasons: (i)
certain types of peripheral IV solutions, (ii) two to six week short-term IV
therapy, or (iii) providing venous access when a PICC is contra-indicated.
Midlines provide similar economic advantages as PICCs.
Peripherally Inserted Long-Term Peripheral Catheters ("Long-Term Peripherals")
Long-Term Peripherals are similar to Midlines, except that they are more
likely to be used for shorter time frames. Long-Term Peripherals are an
alternative to traditional, short, hard IV catheters that must be replaced every
48 to 72 hours. Long-Term Peripherals, which can remain in place for more than
30 days, if required, bridge the time gap between such traditional IV catheters
and Midlines.
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L-Cath(TM) PICC, Midline, and Long-Term Peripheral Catheter Placement Systems.
The Company's patented peel-away needle catheter placement system consists
of a stainless steel needle (the "cannula") through and by which a flexible
catheter is inserted. The cannula is sharpened to a fine point on one end and
has an extremely narrow slit along its entire length. Once a cannula has been
inserted into a blood vessel, the catheter is inserted into the cannula and
advanced into the vessel. After the catheter has been advanced to the desired
level of insertion, the needle is withdrawn. Rather than attempting to thread
the needle back over the length of the catheter outside the body and off the end
(an end that may have a large connecting adapter rendering removal impossible),
the needle is peeled or split lengthwise in two and is removed from the
catheter.
The L-Cath catheter placement systems may be used in a variety of
biomedical applications. In the medical market, for example, catheters are
advanced into a vein, thereby allowing the clinician to administer plasma,
blood, chemotherapy, intravenous drugs, or feeding solutions.
The L-Cath catheter placement system are currently manufactured and sold in
a variety of sizes and configurations for applications ranging from neonatal
(infants) to adult to veterinary. The L-Cath catheter system is available in
either polyurethane or silicone materials.
OneCath/(R)/ Catheter.
The OneCath catheter placement system has been designed as a new generation
of PICCs or Midlines. The OneCath catheter placement system incorporates the
advantages of many of the Company's earlier developments and certain protection
against accidental needle sticks. The OneCath allows for the insertion of
central venous catheters or Midlines made from soft biocompatible material using
conventional "over-the-needle" techniques with a protected needle that is
designed to give protection from AIDS and other infectious diseases.
L-Cath Catheter for Port Access.
The L-Cath for Ports is a soft catheter utilized in the infusion of fluids
into the blood stream through a small implanted chamber (a port) inserted under
the skin of a patient's chest. In August of 1994, the FDA granted the Company
clearance to market the L-Cath for Ports, a market currently served only by
steel needle manufacturers. Management believes that the L-Cath for Ports
offers certain advantages in comparison with traditional steel needles,
including increased comfort for the patient and reduced inventory levels for the
healthcare provider. The L-Cath for Ports catheter will bend in response to
external forces applied to it, or to its connections, e.g., a patient rolling
over in bed; whereas, a steel needle would not bend, but would cause the patient
noticeable pain. Because the distance under the skin at which ports have been
implanted will vary depending on the patient and the surgeon's preference,
healthcare providers typically maintain many lengths of steel needles in
inventory. The L-Cath for Ports can satisfy virtually any length requirement
simply by bending the soft catheter outside of the skin.
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Stickless Technology.
Currently, the Company's OneCath catheter placement system incorporates
stickless technology. See Item 1. Description of Business -- Research and
Development. When placing a catheter into a patient, the health care worker is
at significant risk of receiving an accidental needle stick. The needle may be
contaminated by any one of a variety of potentially infectious diseases. The
degree to which the health care worker is at risk of becoming infected is
directly dependent upon the degree to which the disease is transmittable.
AIDS and other infectious diseases have been shown to be transmittable from
patient to health care worker via contaminated needles. Management believes
that (a) health care workers and hospital administrators are highly motivated to
reduce the possibility of transmission of such diseases and (b) the insurance
industry is also highly motivated to reduce the risks (and associated costs) of
such infectious diseases. Furthermore, management believes that nurses' unions
and government agencies, e.g., Occupational Safety and Health Administration,
may require that needle guards be used when treating potentially infectious
patients. The present directive of the Centers for Disease Control and
Prevention in Atlanta, Georgia, is that hospital workers treat all patients as
potentially infectious; hence, care-givers must take certain necessary
precautions. Those precautions do not currently include the mandated use of
needle guards and there can be no assurance that any union or government agency
will require the use of needle guards. However, the design of the OneCath
catheter placement system incorporates technology that provides increased
protection against accidental needle sticks to health care workers.
Pertrach Technology.
The Pertrach tracheostomy device (the "Pertrach Tracheostomy Product")
provides a means of rapidly and safely inserting a breathing tube into a
patent's trachea (through their crico-thyroid membrane or trachea) in certain
clinical situations. It provides an adequate airway through which the patient
can receive airflow. The method of inserting the device is dilating a needle
puncture. Because of the small size of the puncture, a patient typically
suffers minimal bleeding and the chance of infection is reduced. Deploying the
Pertrach Tracheostomy Product has been demonstrated to take 30 seconds or less
to perform.
ACTIV(TM) Catheter and Material.
In April of 1987 the Company executed a License and Sales Agreement
(the "L & S Agreement") with Tyndale Plains-Hunter, Ltd. ("TPH"), in respect of
a polymer that the Company used in early versions of its OneCath catheters. As
a result of experience gained in the marketplace through the Company's specialty
distribution network, the Company and TPH modified the L & S Agreement, in April
of 1996. As modified, the L & S Agreement permits the Company to make, use,
sell, and sublicense products that utilize the Company's OneCath technology
covered by certain patents owned by TPH in the field of intravenous catheters,
exclusive of use in the fields of cardio-vascular diagnosis and treatment, blood
sensing, and enteral feeding tubes, for the original term of 25 years. The
amendment eliminates the Company's $60,000 minimum annual royalty requirement.
The Company remains obligated to pay royalties to TPH of a minimum of 2% to a
maximum of 3.5% of net sales of products incorpo-
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rating the patented rights, and a royalty of 40% of all income that the Company
receives from sublicenses, if any.
Marketing and Customers
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The Company's marketing strategy is to distribute its catheter products
through a specialty distribution network. The Company may develop and
manufacture products, some of which may incorporate the Company's patented
technology for distribution on an OEM basis. The Company may also license
portions of its technology.
For several years, the Company had indirectly participated in the PICC and
Midline markets by selling its patented peel-away needle to two firms offering
complete patient PICC kits. In late 1990, the Company decided that it would
discontinue the supply of patented peel-away needles to one such firm and would
market complete patient PICC and Midline catheter kits under its own label. In
1994, the Company determined to discontinue the supply of peel-away needles to
the other firm and to sell the peel-away needles for PICC and Midline use
exclusively through its own distribution network.
In March of 1992, the Company entered into an exclusive distribution
agreement with Pharmacia Deltec Inc. ("Pharmacia") for the Company's PICC and
Midline products. In 1994 the Company and Pharmacia agreed to terminate the
exclusive nature of the agreement. In March 1994, Pharmacia became a non-
exclusive distributor for a broad range of the Company's products and the
Company commenced the establishment of a distribution network through specialty
distributors. Effective March of 1995, Pharmacia was permitted only to
distribute the Company's neonatal products.
Management believes that the current size of the markets for PICCs and
Midlines in the United States is approximately $40 million annually and that it
is expanding at an annual rate of 15%. The Company believes that the market
will continue its growth due to the continued efforts of the medical insurance
industry to reduce health care costs and the collateral movement of health care
delivery from the hospital to the outpatient setting. The Company believes that
its products are lower cost alternatives to established therapy.
Management believes that the current size of the market for implanted port
catheters in the United States is approximately $150 million annually. The
Company believes that its distribution network is properly positioned to address
this market and to gain certain market share for the Company, as the market is
currently served only by Huber steel needle manufacturers. Many of the
Company's distributors also sell Huber needles.
National Accounts Marketing.
Certain observers of the healthcare industry believe that as much as 70% of
materials purchased by hospitals are purchased under group contracts. Group
purchasing organizations represent large groups of hospitals or healthcare
agencies and negotiate with manufacturers for scheduled deliveries of products
at predetermined, competitive prices. In May of 1995, the Company entered into
a two-year consulting agreement with National Contracts, Inc. ("NCI"), pursuant
to which NCI will provide national account services for the Company. NCI
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represents approximately ten companies in respect of national accounts into
which it has historically gained access and from which it has historically
received purchase contracts for its clients. The Company paid approximately
$200,000 annually to NCI in consideration of its consulting services.
In furtherance of the Company's desire to sell its products through group
purchasing organizations, the Company entered into agreements with various
national group purchasing organizations, e.g., Apria Healthcare, Inc. ("Apria"),
Teamcare, the institutional pharmacy subsidiary of Atlanta-based GranCare, Inc.
("TeamCare"), and Mid Atlantic Group Network of Shared Services, Inc.
("Magnet"). The Company is the principal nationwide supplier of intermediate
and long-term intravenous catheters to Apria and to TeamCare. The Company sup-
plies its catheter products through Magnet, which is comprised of 11 regional
shared services/group purchasing organizations representing more than 1,100
acute care hospitals, 1,350 long-term care facilities, and a range of extended
care and related healthcare facilities. Sales through such national accounts
commenced during the 1996 fiscal year. In December of 1995, the Company was
awarded the rights to use the Alliance of Children's Hospitals "Seal of
Acceptance" for the Company's pediatric and neonatal products, which products
the Company supplies to members of the Alliance.
Distribution Network.
In March of 1994, the Company commenced the establishment of a network of
specialty distributors to encompass the United States and Canadian markets. In
addition, the Company has appointed a number of international distributors. As
of the date of this Annual Report, the Company has full coverage of the United
States and Canadian marketplace through approximately 21 distributors, resulting
in more than 150 sales personnel engaged in sales efforts for the Company's
products.
In August of 1994, the Company entered into a five-year distribution
agreement for the states of California, Arizona, Nevada, and New Mexico with
Kentec Medical, Inc. ("Kentec"). The Company granted Kentec certain pricing
accommodations during a transition period. The agreement provides certain
termination criteria for the Company and for Kentec. The Company may terminate
the agreement if Kentec fails to purchase sufficient quantities of the Company's
products. Kentec may terminate the agreement if, during the term of the
agreement and under certain circumstances, the Company (i) commences direct
sales into Kentec's territory without its written consent or (ii) is a party to
a business combination transaction, the resulting enterprise of which chooses
not to assume the agreement. Kentec shall be entitled to a fee if it terminates
the agreement upon the occurrence of either such event. For each year remaining
of the then-unexpired term of the agreement, such fee (to be paid annually)
shall be a sum equivalent to 30% of the aggregate transfer price for products
sold by the Company to Kentec during the immediately preceding 12 months. In
the case of such a termination, Kentec is to receive the initial annual payment
of such fee within 30 days.
In August of 1997, the Company entered into a five-year distribution
agreement with Alaris Medical Systems, Inc. ("Alaris"), for the EEC and certain
other foreign countries. The agreement contains certain termination provisions
that may come into effect in the event that the Company and Alaris are unable to
reach agreement regarding Alaris's performance goals
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for the second through fifth years of the agreement. In addition, the agreement
may be terminated, and payment of a termination fee will be required, in the
event that the Company is a party to a business combination transaction, the
resulting enterprise of which chooses to terminate the agreement. If the
agreement is terminated either because of the parties' inability to agree on
performance goals or because of the actions of the Company's successor, Alaris
shall retain rights to continue to distribute such products for a period of up
to two years.
Licensed Technology.
In October of 1993, the Company signed an exclusive "life of the patents"
agreement with The Kendall Company ("Kendall") for North and South America,
pursuant to which the Company licensed Kendall to use certain of the Company's
patent rights and technology relating to the Company's peel-away needles.
Kendall may utilize such patent rights and technology in research and
development, manufacturing, marketing, and selling peel-away needles used in
connection with epidural and/or spinal anesthesia (the "Kendall Licensed
Products"). Kendall tendered to the Company an initial licensing fee of
$10,000. Kendall is obligated to tender to the Company a royalty on the sale of
Kendall Licensed Products, which royalty shall be the greater of three percent
of net sales of the Kendall Licensed Products or 75c for each sale of Kendall
Licensed Products. If the Company manufactures for, or supplies to, Kendall
peel-away needles during the first 12 months following the date on which the FDA
issues a 510(k) clearance to market, Kendall shall pay to the Company its
proportional direct labor, direct material, and direct overhead costs, plus one
dollar for each such needle. In order to maintain exclusivity under the license
agreement, Kendall shall be required to sell a minimum of 6,000 needles during
the first year of production and, during each of the four subsequent years, the
greater of 15,000 needles or an amount equivalent to 80% of the needles sold
during the previous year. If Kendall desires to maintain exclusivity under the
license agreement, but has not attained such minimum sales levels, it shall
make a payment to the Company at the end of each year in an amount equivalent
to the royalty that would have been due on the relevant minimum sales levels.
If Kendall does not maintain exclusivity under the license agreement, the
royalty rate shall be reduced by 50%.
In March of 1992, the Company and Pharmacia entered into a five-year
distribution and development arrangement, pursuant to which Pharmacia became the
virtually exclusive distributor (world-wide, except for Japan) of certain of the
Company's catheter products (both currently available and under development) and
undertook to provide certain funding related to the development of the OneCath
products. In March of 1994, the Company and Pharmacia modified their
relationship as follows: (i) the March of 1992 agreements were terminated,
other than certain confidentiality provisions, and Pharmacia was released from
all minimum purchase obligations; (ii) the Company executed a replacement 8%
promissory note (with an initial principal balance of $625,000) due in June of
1997; (iii) the Company granted to Pharmacia a world-wide (except for Japan)
non-exclusive license to distribute the Company's PICC and Midline products that
use a peel-away needle for adults for a 12-month period and, for a five-year
period, certain neonatal catheter products; and (iv) the Company granted to
Pharmacia a non-exclusive license to use certain of the Company's patents, as
partial consideration for which Pharmacia paid $100,000 to the Company in May
of 1994. The Company utilized such payment as its initial $100,000 principal
payment on the March 1994 promissory
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note and, thereafter, commenced quarterly principal and interest payments. In
November of 1995, the Company paid to Sims Deltec, Inc. ("Sims"), the corporate
successor to Pharmacia, $400,000, as payment in full of such promissory note.
In November of 1987, the Company signed a world-wide "life of the patents"
agreement with Critikon, Inc., a Johnson & Johnson company ("Critikon"), that
licensed Critikon to manufacture, market, and distribute the Company's patented
guarded intravenous catheter under the trademarked name of PROTECTIV. In March
of 1995, the Company assigned the licensed patents to Johnson & Johnson Medical,
Inc. ("JJMI"), the corporate successor to Critikon, for $4.7 million.
Interventional Radiology.
In September of 1995, the Company entered into a product development and
supply agreement with Boston Scientific Corporation ("BSC"), pursuant to which
the Company undertook to manufacture (to BSC's specifications) and BSC
undertook to sell (on an exclusive basis) a jointly developed range of PICCs to
be used exclusively in the interventional radiology market for patients who
require percutaneous access to the vascular system.
Order Backlog
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The amount of backlog orders believed by the Company to be firm, as of
June 30, 1997, for catheter production was $558,000. The Company expects that
all of such backlog will be filled within the current fiscal year. As of
June 30, 1996, such backlog orders were approximately $402,000 for catheter
production.
Production and Supplies
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Many of the components of the catheter product lines can have more than one
source of supply, although the Company has not traditionally multi-sourced its
components. The Company believes that it would be able to switch its sources of
supply without causing significant disruption to its manufacturing or marketing
operations. The Company owns the designs and molds for the components that are
proprietary to the Company and can relocate the molds at its discretion to
numerous alternative molders in its local area.
Government Regulation
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The FDA classified the Company's catheter placement systems as Class II
medical devices under the Federal Food, Drug and Cosmetic Act (the "FFD&C
Act"). This classification requires the Company to obtain clearance from the
FDA prior to marketing its catheter products. The Company has had and will
continue to have its products clinically tested in hospitals and other
institutions to ensure the fitness for, and ease of, use of the catheter
placement systems. Under the FFD&C Act and applicable FDA regulations, the FDA
may periodically inspect the manufacturing facilities of the Company, and the
Company must comply with certain methods, facilities, controls, labeling,
recordkeeping, and reporting requirements in manufacturing and marketing its
catheter placement systems. During the 1997 fiscal year, the Company expended
$317 thousand to modify its internal quality assurance and regulatory
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affairs system. Of such sum, $49 thousand was included in the Company's cost of
revenues, $262 was included in the Company's general and administrative
expenditures, and six thousand dollars was included in the Company's research
and development expenditures. See "Item 6. Management's Discussion and Analysis
or Plan of Operation -- Results of Operations."
The manufacture and sale of medical devices are also regulated by some
states, including California, and most foreign countries. The Company has
obtained its manufacturing license from California and is not aware of any other
state approvals necessary at this time. The Company will require each foreign
distributor to obtain all necessary regulatory approvals to market the Company's
catheter placement system in the countries in which the distributor intends to
market the product. Management believes that the Company's distributors have
obtained all necessary international approvals for products currently being
sold.
Patents
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Peel-Away Cannula Patent.
In July of 1980, Mr. Luther and one other then-current executive officer
and director of the Company assigned the cannula patent to the Company in
exchange for a royalty of 6% of net sales of products utilizing that patent.
Through December of 1987, royalties of $83,000 had been paid and an additional
$70,000 had been accrued. In March of 1988, the parties agreed to terminate the
royalty agreement; in consideration thereof and of the accrued but unpaid
royalties, 24,858 shares of the Company's Common Stock were issued to such
individuals.
OneCath Patents.
The Company has filed applications for six patents for the OneCath catheter
and its manufacturing process. To date, four letters patent have issued.
Pertrach Patents.
The Company is the assignee of three patents utilized in the Pertrach
Tracheostomy Product. See "Item 1. Description of Business -- Products --
Pertrach Technology."
Other Patents.
During the fiscal years ended June 30, 1997, 1996, and 1995, six patent
applications, in addition to those referenced above, were filed, five of which
are in the issuance process and one of which is pending as of the date of this
Annual Report.
General Patent Protection.
To date, no court has ruled on the enforceability of any of the Company's
patents. There is no assurance that the Company's patents or any future patents
will afford protection broad enough to prevent competitors from manufacturing
systems similar to the Company's. In defense of its intellectual property
rights, the Company was successful in compelling Gesco
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International, Inc. ("Gesco") to cease its infringement of one of the Company's
split-needle patents. The Company has purchased a policy of patent insurance to
supplement its financial resources in the prosecution of infringement of its
major patents.
Competition
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Many larger medical companies, e.g., Baxter Healthcare Corp., Becton-
Dickinson and Co., Abbott Laboratories, and Sims, dominate the general catheter
and port access segments of the medical device industry and compete with the
Company on the basis of product performance. Management believes that PICCs
and Midlines typically offer a lower cost alternative to the surgically placed
central catheter lines that are offered by such larger companies. See Products
- -- Peripherally Inserted Central Catheters.
Management believes that such larger companies neither offer a range of
products that better suit the needs served by PICCs and Midlines nor utilize
appropriate channels of distribution to service the PICC and Midline markets.
Although the Company does not have the financial or distribution resources to
supplant the market position of such larger companies with respect to the
specific catheter products manufactured and marketed by them, management
believes that the Company can be successful in manufacturing and supplying PICCs
and Midlines to the markets that can utilize such products. Accordingly, the
Company has adopted a strategy of marketing its products through its network of
specialty distributors, as well as through selective licensing arrangements.
Management believes that the major manufacturers of PICCs and Midlines are:
. Gesco, which was acquired by Bard Access Systems, offers only silicone
PICCs as an extension to Bard's established product line, the range of
which the Company's management believes to be more limited and more
expensive than the Company's.
. HDC Corporation, which currently only offers silicone PICCs and Midlines.
Research and Development
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In May of 1987, the Company introduced a new catheter product designed to
minimize the transmission of infectious diseases such as AIDS and hepatitis
through accidental needle sticks. Management believes that the Company was the
first to develop and market a product of this type. That product became the
PROTECTIV catheter, licensed by the Company to Critikon, Inc., a Johnson &
Johnson company ("Critikon"). Since the introduction of stickless technology
with PROTECTIV, the Company's catheter research and development efforts
continued to concentrate on stickless product designs, as well as the OneCath
catheter, L-Cath for Ports, high flow-rate catheters, dual lumen products, and
closed-end, slit-valve intravenous catheters.
Since completion of the PROTECTIV design, the Company has concentrated on
the development of additional products for its distribution network. Current
areas on which the Company is concentrating its efforts include needle stick
protection for healthcare workers, reduced exposure to blood, increased dwell
time (the time that a catheter may remain in a vein before it must be removed),
ease of use with a related reduction in training time, and
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improved patient comfort. As a result of such development efforts, the L-Cath
for Ports design has been upgraded to offer reduced blood exposure and greater
ease of use. Other products offering such upgrades are currently in development.
There can be no assurance that any commercially feasible products will result
from such research and development activities. During the fiscal years ended
June 30, 1997, and 1996, the Company expended an aggregate of approximately
$521,000 and $395,000, respectively, on catheter research and development
efforts.
Employees
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The Company employs 62 individuals. The Company's employees are not
covered by any collective bargaining agreement, and management believes its
relationship with its employees is good.
Item 2. Description of Property.
The Company's executive offices and manufacturing facilities are located in
leased premises at 14332 Chambers Road, Tustin, California. The property
comprises approximately 20,000 square feet of light industrial space. The
leasehold improvements include approximately 4,350 square feet of a controlled
manufacturing environment suitable for medical device manufacturing, as well as
air, vacuum, and electrical systems. The Company believes that its facilities,
as improved, are suitable and adequate for its business, as currently conducted
and for the foreseeable future. The Company believes that the facilities
provide it with productive capacity sufficient to enable it to meet its current
production goals and requirements, and those for the foreseeable future.
Management believes that the facilities, as currently situated, could support a
tripled level of production of current catheter products. The lease terminates
April 30, 1998.
Item 3. Legal Proceedings.
The Company is not a party to any legal proceedings and management is not
aware of any threatened legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted during the fourth quarter of the year ended
June 30, 1997, to a vote of security holders through the solicitation of proxies
or otherwise.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock is publicly traded in the over-the-counter
market and is quoted on the Nasdaq Stock Market (SmallCap) under the trading
symbol "LUTH". The following table sets forth the high and low quotations for
the Common Stock of the Company during the calendar periods indicated, as
reported by the Nasdaq Stock Market.
<TABLE>
<CAPTION>
Calendar Year Quarter High Low
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<S> <C> <C> <C>
1995 First Quarter 3.00 2.50
Second Quarter 2.68 2.50
Third Quarter 3.19 2.25
Fourth Quarter 5.38 2.75
1996 First Quarter 5.13 3.25
Second Quarter 7.25 4.31
Third Quarter 5.87 3.93
Fourth Quarter 5.25 3.00
1997 First Quarter 4.87 3.00
Second Quarter 4.12 2.87
</TABLE>
The closing price of the Company's Common Stock as of October 8, 1997, was
$3.03. At October 8, 1997, the Company had approximately 3,100 record holders
of its Common Stock.
The Company did not declare or pay any dividends during either of its
fiscal years ended June 30, 1997, and 1996. Payment of dividends, if any, on
the Common Stock, is dependent upon the amounts of future after-tax earnings, if
any, of the Company and is subject to the discretion of its Board of Directors.
The Board of Directors is not legally obligated to declare dividends, even if
the Company is profitable. To date, the Company has not declared or paid any
dividends. The Company intends to employ all available funds to finance the
growth of its business and, accordingly, does not intend to declare or pay any
dividends in the foreseeable future.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Results of Operations
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The Company commenced business operations in 1980 (as the successor to a
partnership organized in 1979) to develop, manufacture, and market a
proprietary catheter placement system and related products. The Company has
financed its development activities and operations since inception primarily
with the net proceeds of an initial public offering in 1980 and with proceeds
from subsequent sales of securities (both public and private issuances), funds
received under a research and development agreement funded by a limited
partnership
-12-
<PAGE>
to develop certain small catheter systems, and the proceeds of a sale by the
Company of five of its patents to JJMI.
Development continues on new models of catheter systems for various
applications. Since its inception, the Company has developed and introduced
numerous versions of its catheter placement products and systems, and additional
catheter products are in development. There can be no assurance that any
commercially feasible products will result from such development activities.
Historically, the Company focused on research and development, rather than
marketing. In November of 1987, a significant private label agreement was
entered with Critikon, under which the Company manufactured its PROTECTIV
catheter product for distribution by Critikon; in March of 1990, Critikon
commenced to manufacture the product and paid the Company a sales-based royalty;
and in March of 1995, the Company assigned to JJMI the PROTECTIV patents for
$4.4 million, net of expenses. In 1990, the Company commenced the marketing of
a PICC product line utilizing its L-Cath catheter placement system. In March of
1992, the Company entered into an exclusive distribution agreement with
Pharmacia for the Company's PICC and Midline products that use a peel-away
needle, including catheters for adults and certain neonate catheters, which
agreements became non-exclusive in March of 1994. Effective March of 1995,
Pharmacia was permitted only to distribute the Company's neonatal products for
an additional four years. See Item 1. Description of Business.
In March of 1994, the Company commenced the establishment of a network of
specialty distributors to encompass the United States and Canadian markets. In
addition, the Company has appointed a number of international distributors. As
of the date of this Annual Report, the Company has approximately 21
distributors, resulting in more than 150 sales personnel engaged in sales
efforts for the Company's products. As of the date of this Annual Report,
substantially all of the distributors have received training in the use of the
products.
Fiscal Year Ended June 30, 1997, Compared To Fiscal Year Ended June 30, 1996.
Total revenues for 1997 increased 36% to $5.5 million from $4.0 million in
1996. Domestic product sales revenues for 1997 increased 86% to $3.9 million
from $2.1 million in 1996, primarily as a result of adding new distributors and
additional products during the year. International product sales revenues for
1997 increased 30% to $1 million from $774 thousand, primarily as a result of
adding new distributors during the year. OEM sales revenues for 1997 decreased
54% to $457 thousand from $993 thousand in 1996, primarily as a result of
decreased sales to a major OEM customer as a result of a product design
modification. The modifications were completed during the third quarter and
nominal shipments to the customer resumed in March. Additionally, the Company's
changed relationship with Pertrach Inc. ("Pertrach"), a former OEM customer of
the Company, affected the classification of certain revenues derived from sales
of Pertrach Tracheostomy Product. For many years, the Company had manufactured
tracheostomy products for Pertrach on an OEM basis. In March of 1996, the
Company purchased Pertrach's intellectual property rights and certain other
assets. Pursuant to the purchase agreement, the Company now markets those
products and pays Pertrach a sales-based royalty. Currently, the Company is
utilizing a distributor for such marketing efforts. Revenues from the Pertrach
Tracheostomy Product for 1997 were $177 thousand
-13-
<PAGE>
(which were included in the Company's domestic product sales) compared to $75
thousand for 1996 (which were included in OEM sales). Interest and royalty
income decreased 46% to $76 thousand from $139 thousand in 1996, primarily as a
result of a decrease in interest earned on available cash which was invested in
U.S. treasury bills. There were no production costs associated with any royalty
income.
Cost of revenues for 1997 increased to $3.3 million from $2.4 million in
1996. Cost of revenues as a percentage of product sales decreased to 61% from
62%, attributable to increased sales and slightly lower per-unit manufacturing
costs.
Selling expenses for 1997 increased 29% to $1.2 million from $902 thousand
in 1996, as a result of increased marketing efforts, such as an expansion of the
Company's extensive training programs, distribution of a greater number of
promotional units, and attendance at a greater number of conventions in support
of the Company's growing distributor network. General and administrative
expenses for 1997 increased to $1.0 million from $869 thousand in 1996, as a
result of a non-recurring expenditure of $262 thousand for modification of the
Company's internal quality assurance and regulatory affairs system more than
offsetting a $32 thousand reduction in shareholders' relations expense and a
reduction in indirect patent expenses charged to general and administrative.
Patent expenses for 1997 totalled $75 thousand. Research and development
expenses for 1997 increased 32% to $521 thousand from $395 thousand in 1996, as
a result of increased direct patent expenses of $75 thousand, increased project
expenditures for new products under development, and a reduction in billable
hours to a major OEM customer due to a product design modification.
Depreciation and amortization expenses increased in 1997 to $234 thousand from
$181 thousand in 1996. Depreciation accounted for $25 thousand and amortization
accounted for $28 thousand of such increase. The Company recorded no interest
expense in 1997 compared with $13 thousand in 1996. The Company recorded a
provision for minimum income taxes of $800 for 1997 and 1996. At June 30, 1997,
the Company had net operating loss carryforwards of approximately $4.2 million
and $571 thousand available to offset future taxable federal and state income,
respectively. The carryforwards amounts expire in varying amounts between 2001
and 2012.
Liquidity and Capital Resources
- -------------------------------
At June 30, 1997, the Company had working capital of $3.05 million and its
principal sources of liquidity consisted of $812 thousand in cash and cash
equivalents. The Company used cash for operations of $750 thousand during 1997,
mainly as the result of the net loss for the year and an increase in inventories
resulting from higher sales levels. With respect to investing activities, the
Company made purchases of property and equipment totaling $134 thousand.
Financing activities provided $98 thousand, resulting from the collection of a
note receivable from a shareholder and proceeds from sales of common stock from
the exercise of stock options.
The Company has no long-term capital commitments other than an annual lease
obligation of $130,000 for its facilities through 1998.
-14-
<PAGE>
The Company believes that available cash and cash equivalents, as well as
funds expected to be generated from operations, will be sufficient to meet the
Company's operating expenses and cash requirements for the next fiscal year. As
of the date of this Annual Report, the Company does not have any credit
facilities in place.
Item 7. Financial Statements.
See Index to Financial Statements at page 31.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
There have been no events or conditions requiring reporting under the
requirements of this item.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
Director
Name of Individual Age Position Since
- ---------------------------- --- -------------------------------- -----
<S> <C> <C> <C>
David Rollo 56 President, Chief Executive 1993
Officer, Chief Financial
Officer, and a Director
Ronald B. Luther 65 Vice President, Director of
Research and Development -
George C. Brdlik 43 Vice President of Quality
Assurance and Regulatory Affairs -
Petra Darling 53 Secretary -
Mark S. Isaacs 33 Director 1991
Jack W. Payne 67 Director 1992
D. Ross Hamilton 59 Director 1993
William R. Dahlman 55 Director 1995
Barry W. Hall 49 Director 1995
</TABLE>
Each of the Company's directors has been elected to serve until the next
meeting of shareholders. Except as described below, there are no arrangements
or understandings between any director and any other person pursuant to which
any person was elected or nominated as a director. The Company's executive
officers serve at the discretion of the Board of Directors.
Mr. Rollo has served as President, Chief Executive Officer, and as a
director of the Company since December of 1993, as its Chief Financial Officer
since January of 1994, and as
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<PAGE>
its Chairman of the Board since June of 1995. From 1976 to 1993, he was
employed by Telectronics Inc. (or by certain of its affiliates), a Denver,
Colorado, based heart pacemaker manufacturer, in various positions, including
President and Chief Executive Officer.
Mr. Luther is the founder of the Company and, since September of 1995 has
served as its Vice President, Director of Research and Development. From the
Company's organization in 1980, until December of 1995, he served as a director;
until June of 1995, as the Company's Chairman of the Board; until December of
1993, as its Chief Executive Officer; and, between 1980 and 1990 and during 1992
and 1993, as its President. From 1978 to 1980, Mr. Luther was the President and
sole shareholder of Luther Medical Systems, Inc., a research and consulting
company. From 1975 to 1978, he was the President of William Harvey Research
Corporation, a manufacturer of blood oxygenators for open heart surgery.
Mr. Brdlik has served as Vice President of Quality Assurance and Regulatory
Affairs of the Company since January of 1997. From 1994 to 1996, he was
employed as the Regulatory Affairs Manager of the Perfusion Services of Baxter
Healthcare Corporation. From 1985 to 1994, Mr. Brdlik held several positions at
IVAC Corporation, ranging from Senior Quality Engineer to Regulatory/Clinical
Affairs Manager. From 1980 to 1985, he held several positions, including
Biomedical Engineer, at the FDA.
Ms. Darling has served as Secretary of the Company since November of 1992.
Since 1981, she has been employed by the Company in various administrative, non-
policy making capacities, including the Company's assistant secretary (between
1988 and 1992) and its controller (from 1981 to the present), reporting to the
Company's principal accounting officer.
Mr. Isaacs has served as a director of the Company since September of 1991.
From April of 1995 until December of 1995, he also served as a consultant to the
Company. Since May of 1996, Mr. Isaacs has served as the Chairman of the Board
of VenzCoal, Inc., a private Nevada corporation formed to be engaged in the
production and marketing of coal in Guarico State Venezuela. From March of 1991
to October of 1994, Mr. Isaacs was engaged in the acquisition of silver mining
properties under the name SilTex Resources. In August of 1992, SilTex Resources
was incorporated in Nevada as "SilTex Resources, Inc." Mr. Isaacs served as its
Chairman of the Board and Chief Executive Officer until October of 1994, as a
director until December of 1994, and as a consultant through April of 1995.
From February of 1993 until October of 1994, Mr. Isaacs served as President,
Chief Executive Officer, and Chairman of the Board of Belcor Inc. ("Belcor"),
whose business consists of natural resource related activities.
Mr. Payne has served as a director of the Company since March of 1992.
From January of 1993 to the present, he has served as the Executive Vice
President and a director of Sequin Hospital Bed Corporation, a Denver, Colorado,
durable medical equipment company of which he is a co-founder. From June of
1992 to the present, Mr. Payne has also served as President and Chief Executive
Officer of FerroMagnetic Therapeutics Corp., a Denver, Colorado, biotechnology
company. Mr. Payne was with Baxter International from 1958 until 1977 where he
was employed in various sale and executive positions. Thereafter, he continued
his career in that industry with executive positions at R.P. Scherer Corporation
and Terumo Medical Products, Inc.
-16-
<PAGE>
Mr. Hamilton has served as a director of the Company since March of 1993.
For not less than the previous five years through the present, he has served as
President of Hamilton Research, Inc., a Maryland-based financial consulting
firm. Mr. Hamilton is a director of Altris Software, Inc., an electronic
document management software company; from January through July of 1997, he
served as its Chairman of the Board. Since December of 1989 through June of
1997, Mr. Hamilton served as a director of Incstar Corporation, a medical
diagnostics company (52% of which was owned by Fiat S.p.A. until the sale of
the company to American Standard in June of 1997), and between January of 1993
and June of 1996, he served as a director of Belcor. Between 1968 and 1980, Mr.
Hamilton served as a Vice President of Dean Witter Reynolds and, for the six
previous years, an officer of Chemical Bank.
Mr. Dahlman has served as a director of the Company since December of 1995.
From November of 1996 to the present, he has served as the president and chief
executive officer of the Employers Group, a non-profit association providing
human resources support to 5,000 California companies. From January of 1991 to
November of 1996, he served as a principal of WRD & Associates, a Los Angeles,
California, contract management and consulting group. From 1987 until forming
WRD & Associates, Mr. Dahlman was the President and Chief Executive Officer of
Suntory Water Group in Atlanta, Georgia.
Mr. Hall has served as a director of the Company since December of 1995.
From January of 1996 to September of 1997, he served as Vice President, Finance
and Administration and Chief Financial Officer of EarthLink Network, Inc., a
Pasadena, California, internet service provider. Currently, Mr. Hall is an
independent management consultant to the internet and online industry. From
April of 1994 to December of 1995, Mr. Hall was an independent management
consultant. For the five years commencing March of 1989, he served as Chief
Executive Officer and Chairman of the Board of California Amplifier, Inc., a
publicly traded manufacturer of microwave amplifiers headquartered in Camarillo,
California.
Committees; Meetings.
The Company has a standing audit committee, the members of which are
Messrs. Isaacs, Hamilton, and Hall; a standing compensation committee, the
members of which are Messrs. Payne and Hamilton; and a standing nominating
committee, the members of which are Rollo, Isaacs, and Dahlman.
The Company's Board of Directors met a total of six times during the fiscal
year ended June 30, 1997.
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<PAGE>
Item 10. Executive Compensation.
Employment Agreements
- ---------------------
David Rollo.
The Company employs Mr. Rollo as its Chief Executive Officer and President
pursuant to a series of employment agreements, the most current of which is
effective as of December of 1995. Mr. Rollo's annual base compensation
thereunder currently is $150,000, subject to cost of living increases and
periodic review and increase upon the recommendation of the Company's
compensation committee. Mr. Rollo is also entitled to receive bonus payments in
their discretion.
Upon execution of the initial employment agreement in December of 1993, the
Company granted to Mr. Rollo warrants to purchase 150,000 shares of the
Company's common stock, of which 50,000 warrants vested in December of 1994,
50,000 vested in December of 1995, and 50,000 vested in December of 1996. The
exercise price of the warrants (the average of the closing bid and asked prices
as quoted on the Nasdaq Stock Market (SmallCap) on December 6, 1993) is $2.94.
If Mr. Rollo's employment by the Company should terminate for any reason,
all of such warrants shall immediately vest and become exercisable. Vesting of
all of Mr. Rollo's unvested warrants shall be accelerated to the date on which
a sale of all or substantially all of the Company's assets closes or a change of
control of the Company occurs.
Under certain circumstances, a termination of Mr. Rollo's employment
agreement will cause the Company to pay to Mr. Rollo (i) his full base
compensation through the date of termination at the rate in effect at the time
of such termination and (ii) a lump sum equal to 100% of his annual base
compensation at the highest rate in effect during the 12 months immediately
preceding the date of termination.
A "change in control of the Company" means a change in control of a nature
that would be required to be reported in response to Item 5(f) of Schedule 14A
of Regulation 14A promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"); provided, however, that such "person" (as such
term is used in Section 13(d) and 14(d) of the Exchange Act), other than the
Company or any "person" who on the date hereof is a director or officer of the
Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
80% or more of the combined voting power of the Company's then outstanding
securities.
George C. Brdlik.
The Company has employed Mr. Brdlik as its Vice President of Quality
Assurance and Regulatory Affairs of the Company since January of 1997, pursuant
to an employment agreement that provides for the "at will" employment of Mr.
Brdlik, subject to the occurrence of two specified events. Mr. Brdlik reports
directly to Mr. Rollo, as the Company's president, and his duties emphasize
daily review and analysis of the Company's operations in respect of
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<PAGE>
quality assurance and regulatory affairs compliance in connection with the good
manufacturing practices requirements of the FDA and analogous international
regulatory agencies.
Mr. Brdlik's annual base compensation currently is $100,000.
Notwithstanding the at will status of Mr. Brdlik's employment, if the Company
sells all or substantially all of its assets or a change of control of the
Company occurs, the Company may become obligated to pay to him (i) his full base
compensation through the date of termination at the rate in effect at the time
of such termination and (ii) a lump sum equal to 100% of his annual base
compensation at the highest rate in effect during the 12 months immediately
preceding the date of termination. The definition of "change in control of the
Company" is the same for Messrs. Brdlik and Rollo.
Ronald B. Luther.
Effective in September of 1995, the Company and Mr. Luther entered into an
agreement (the "September 1995 Agreement"), pursuant to which the Company
employs Mr. Luther as its Vice President, Director of Research and Development.
Mr. Luther's annual base compensation thereunder is $115,000, subject to
periodic review. Mr. Luther may receive bonus payments in the discretion of the
Company's compensation committee. The September 1995 Agreement supersedes an
earlier employment agreement entered in November of 1993 (the "November 1993
Agreement").
Upon execution of the November 1993 Agreement, the Company granted to Mr.
Luther warrants to purchase 100,000 shares of the Company's common stock, of
which warrants, 60,000 of which are currently vested and the remainder vest
annually in November of 1997 and 1998, in two equal allotments of 20,000 each.
The exercise price of the warrants, as determined by the Company's board of
directors (with Mr. Luther abstaining), is $2.63.
During each of the five years following the earlier of (i) termination of
the agreement for any reason (other than if Mr. Luther has been convicted of
committing a felony) or (ii) November 19, 1998, the Company shall pay to Mr.
Luther compensation ("Royalties") equivalent to two percent of the "net sales
price" of all products manufactured by, or on behalf of, the Company for which
the Company received a 510(k) notification from the United States Food and Drug
Administration that bears a date on or after November 19, 1993. No Royalties
shall accrue in favor of Mr. Luther during the period that the Company is
responsible to pay to him base compensation. Royalties shall be paid in cash,
quarterly, in arrears. Any successor to the Company may limit Royalties (i) to
the amount paid by the Company prior to such event of succession, if, as of the
date of such event, Mr. Luther had received Royalties in an aggregate amount of
not less than $2,000,000 or (ii) to a maximum aggregate amount of $2,000,000,
if, as of such event of succession, Mr. Luther had not received Royalties in
such amount. In lieu of the second limitation, a successor to the Company may
pay to Mr. Luther the then net present value of Royalties remaining to be paid,
to a maximum aggregate payment of $2,000,000.
"Net sales price" means all revenues from sales of relevant royalty
products received by the Company in arms-length transactions for commercial
purposes, whether a sale, lease, or other transaction, less sales, excise, and
use taxes; export or import duties; freight; credits for
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<PAGE>
claims; and allowances for returns from, and samples to, purchasers. If the
Company grants licenses or otherwise transfers to unaffiliated third parties
certain patent rights to sell relevant royalty products, sales or leases
thereof by such third parties shall be deemed to be sales or leases by the
Company, although the calculation of such "third-party generated" Royalties
would be reduced from two percent to one percent of the royalty revenues
received by the Company.
During the period that Royalties are to be paid by the Company, Mr. Luther
shall not, without the Company's prior written consent, engage in business
activities that are the same or substantially similar to the businesses,
products, services, or markets of the Company. The Company's termination of Mr.
Luther's employment pursuant to the at will employment provisions of the
September 1995 Agreement shall be deemed to be such written consent.
Additionally, Mr. Luther may elect to compete by voluntarily terminating the
Company's Royalties obligation.
If Mr. Luther's employment agreement is terminated due to his death or
disability, the Company will be required to pay to Mr. Luther, his designee, or
his estate, as appropriate, (i) his full base compensation to the date of
termination, (ii) a sum equivalent to one month's salary for each year
commencing November 12, 1980, payable monthly for the relevant number of
months, and (iii) the Royalties. If Mr. Luther's employment agreement is
terminated pursuant to the at will employment provisions of the September 1995
Agreement, the Company will be required to pay to Mr. Luther (i) his full base
compensation to the date of termination, (ii) a sum equivalent to 16 months'
salary in 16 equal monthly installments, and (iii) the Royalties.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------------------------------------
Annual Compensation Awards Payouts
----------------------------------------------------------------------------------------------
Other
Name Annual Restricted All Other
and Compen- Stock LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($) ($) SARs(#) ($) ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David Rollo 1997 $150,000 -- -- -- - 0 - -- --
(President, 1996 $150,000 -- -- -- - 0 - -- --
CEO, and CFO) 1995 $141,437 -- -- -- - 0 - -- --
Ronald Luther 1997 $114,049 -- -- -- - 0 - -- --
(Vice President, 1996 $115,300 -- -- -- 100,000 -- --
Director - R&D) 1995 $107,690 -- -- -- - 0 - -- --
All executive
officers as a group
(4 persons) 1997 $380,208 -- -- -- - 0 - -- --
(3 persons) 1996 $326,870 -- -- -- 100,000 -- --
(3 persons) 1995 $308,383 -- -- -- 9,286 -- --
</TABLE>
-20-
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
- ------------------------------------------------------------------------------------------------------------------------------------
Percent of Total
Options/SARs
Options/ Granted to Market Price
SARs Employees in Exercise or Base on Date Expiration
Name Granted(#) Fiscal Year Price($/Sh) of Grant($/Sh) Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
David Rollo - 0 - N/A N/A N/A N/A
Ronald Luther - 0 - N/A N/A N/A N/A
</TABLE>
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<PAGE>
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise(#) Value Realized($) Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David Rollo -0- -- 150,000 / 0 27,000 / 0
Ronald Luther 70,000 17,500 166,429 / 39,200 /
40,000 20,400
</TABLE>
Effective in December of 1995, Directors who are not officers of the
Company receive a fee of $900 per meeting attended in person, or $500 per
meeting attended by telephone, as compensation for their services, an increase
from $600 and $400, respectively.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of Common Stock at October 8, 1997, (except as otherwise indicated by
footnote) by (i) each person (including any "group" as that term is used in
Section 13(d)(3) of the Securities Exchange Act of 1934) known by management to
own beneficially more than 5% of the Company's outstanding Common Stock, (ii)
each of the Company's directors, and (iii) all executive officers and directors
of the Company as a group:
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially Owned (2)
Name of Individual Amount (1) %
- ------------------ ---------- ------
<S> <C> <C>
David Rollo 153,175(3) 4.02
Mark S. Isaacs 101,211(4) 2.65
Jack W. Payne 65,000(5) 1.70
D. Ross Hamilton 151,500(6) 3.97
William R. Dahlman 12,000(7) *
Barry W. Hall 12,000(8) *
Ronald B. Luther 356,132(9) 9.35
All executive officers
and directors as a
group (9 persons) 873,661(10) 22.94
</TABLE>
- -------------------
* Represents less than one percent.
-22-
<PAGE>
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Company Common Stock shown to be beneficially
owned by them, subject to community property laws where applicable and the
information contained in the footnotes to this table.
(2) Assumes the exercise of options and warrants to purchase 491,644 shares
held by executive officers and directors of the Company, which options and
warrants are, or become, exercisable within the 60 days of the date of this
Annual Report.
(3) Includes 3,175 shares beneficially owned by Mr. Rollo, plus warrants to
purchase 150,000 shares at an exercise price of $2.94 per share, expiring
at various dates from December 5, 1999, to December 5, 2001, of which
150,000 warrants are exercisable as of, or within 60 days of, the date of
this Annual Report. Mr. Rollo's address is 14332 Chambers Road, Tustin,
California 92680.
(4) Includes 19,711 shares beneficially owned by Mr. Isaacs, plus warrants to
purchase 5,000 shares at an exercise price of $3.50 per share, expiring on
January 15, 1998; warrants to purchase 25,000 shares at an exercise price
of $2.75 per share, expiring on July 23, 1998; warrants to purchase 5,000
shares at an exercise price of $2.50 per share, expiring on January 21,
1999; warrants to purchase 13,500 shares at an exercise price of $2.55 per
share, expiring on January 27, 2000; warrants to purchase 12,000 shares at
an exercise price of $2.56 per share, expiring at various times during the
period of April 30 through September 30, 2000; warrants to purchase 9,000
shares at an exercise price of $3.85 per share, expiring on December 8,
2000; warrants to purchase 6,000 shares at an exercise price of $4.81 per
share, expiring on December 8, 2001; and warrants to purchase 6,000 shares
at an exercise price of $4.81 per share, expiring on December 8, 2002. Mr.
Isaacs' address is 14332 Chambers Road, Tustin, California 92680.
(5) Includes warrants to purchase 5,000 shares at an exercise price of $3.50
per share, expiring on January 15, 1998; warrants to purchase 25,000 shares
at an exercise price of $2.75 per share, expiring on July 23, 1998;
warrants to purchase 5,000 shares at an exercise price of $2.50 per share,
expiring on January 21, 1999; warrants to purchase 9,000 shares at an
exercise price of $2.55 per share, expiring on January 27, 2000; warrants
to purchase 9,000 shares at an exercise price of $3.85 per share, expiring
on December 8, 2000; warrants to purchase 6,000 shares at an exercise price
of $4.81 per share, expiring on December 8, 2001; and warrants to purchase
6,000 shares at an exercise price of $4.81 per share, expiring on December
8, 2002. Mr. Payne's address is 4515 S. Meadow Drive, Boulder, Colorado
80301.
(6) Includes 7,500 shares beneficially owned by Mr. Hamilton and 74,000 shares
owned by a partnership, of which Mr. Hamilton and two unaffiliated third
parties each own 33.3%; warrants to purchase 35,000 shares at an exercise
price of $2.75 per share, expiring on July 23, 1998; warrants to purchase
5,000 shares at an exercise price of $2.50 per share, expiring on January
21, 1999; warrants to purchase 9,000 shares at an exercise price of $2.55
per share, expiring on January 27, 2000; warrants to purchase 9,000 shares
at an exercise price of $3.85 per share, expiring on December 8,
-23-
<PAGE>
2000; warrants to purchase 6,000 shares at an exercise price of $4.81 per
share, expiring on December 8, 2001; and warrants to purchase 6,000 shares
at an exercise price of $4.81 per share, expiring on December 8, 2002. Mr.
Hamilton's address is 9440 Gregory Road, Easton, Maryland 21601.
(7) Includes warrants to purchase 6,000 shares at an exercise price of $4.81
per share, expiring on December 8, 2001; and warrants to purchase 6,000
shares at an exercise price of $4.81 per share, expiring on December 8,
2002. Mr. Dahlman's address is 215 N. Marengo Avenue, Pasadena, California
91101.
(8) Includes warrants to purchase 6,000 shares at an exercise price of $4.81
per share, expiring on December 8, 2001; and warrants to purchase 6,000
shares at an exercise price of $4.81 per share, expiring on December 8,
2002. Mr. Hall's address is 355 S. Madison Avenue, #327, Pasadena,
California 91101.
(9) Includes 166,438 shares beneficially owned by Mr. Luther, 5,622 shares
owned by Mr. Luther's spouse, as to which shares Mr. Luther disclaims
beneficial ownership, warrants to purchase 15,000 shares at an exercise
price of $3.50 per share, expiring April 23, 1998; warrants to purchase
7,143 shares at an exercise price of $3.50 per share, expiring on June 24,
1998; warrants to purchase 4,286 shares at an exercise price of $3.25 per
share, expiring on April 22, 1999; warrants to purchase 100,000 shares at
an exercise price of $2.63 per share, expiring at various dates from
November 19, 1998, to November 19, 2002, of which 80,000 warrants are
exercisable as of, or within 60 days of, the date of this Annual Report;
and warrants to purchase 100,000 shares at an exercise price of $3.63 per
share, expiring September 18, 2000, of which 60,000 warrants are
exercisable as of, or within 60 days of, the record date. Also includes
options, issued to Mr. Luther's spouse, to purchase 1,000 shares at an
exercise price of $4.25 per share, expiring on November 13, 1997; options
to purchase 8,500 shares at an exercise price of $3.07 per share, expiring
on April 23, 1998; options to purchase 2,143 shares at an exercise price of
$3.25 per share, expiring on April 22, 1999; and options to purchase 6,000
shares at an exercise price of $2.82 Per share, expiring on July 22, 1999,
as to all of which options and the underlying shares Mr. Luther disclaims
beneficial ownership. Mr. Luther's address is 14332 Chambers Road, Tustin,
California 92680.
(10) Includes all shares, options, and warrants described in notes (3) through
(6), inclusive, and (9), above; 2,214 shares beneficially owned by an
executive officer who is not a director, plus options to purchase 1,000
shares at an exercise price of $4.25 per share, expiring on November 13,
1997; options to purchase 6,000 shares at an exercise price of $3.07 per
share, expiring on April 23, 1998; options to purchase 2,143 shares at an
exercise price of $3.25 per share, expiring on April 22, 1999; options to
purchase 2,000 shares at an exercise price of $2.82 per share, expiring on
July 22, 1999; and options to purchase 9,286 shares at an exercise price of
$3.19 per share, expiring on January 27, 2000.
Item 12. Certain Relationships and Related Transactions.
-24-
<PAGE>
As of June 30, 1997, two officers or directors were indebted to the Company
in the aggregate amount of $235,409. Each such indebtedness was incurred in
connection with the exercise of warrants previously granted to such individuals.
During the 1997 fiscal year, Mr. Luther's maximum obligation to the Company was
$262,500, of which $52,091 was repaid to the Company during such year and an
additional $187,500 was offset against such obligation (at a price equivalent to
the warrant exercise price) through the return by Mr. Luther of 50,000 of the
shares that had served as security for such obligation. As of the date of this
Annual Report, Mr. Luther's obligation to the Company is $22,909. Mr. Isaacs'
maximum obligation to the Company, during such year, was $25,000, none of which
has been repaid.
Item 13. Exhibits and Reports on Form 8-K.
The following documents are filed as a part of this report:
(a) Exhibits
* Exhibits filed herewith. Other exhibits are incorporated by reference to
previous filings.
2.1 Asset Purchase Agreement, dated July 1, 1994, among Luther Medical
Products, Inc., a California corporation, Neuro Diagnostics, Inc., a
California corporation, and Bio-Logic Systems Corp., a Delaware
corporation, relating to the acquisition of certain assets and the
assumption of certain liabilities of Neuro Diagnostics, Inc., by a
wholly-owned subsidiary of Bio-Logic Systems Corp., filed as Exhibit
2.1 to the Registrant's Annual Report on Form 10-KSB for the Fiscal
Year Ended June 30, 1994, (the "1994 10-KSB") and is incorporated
herein by reference.
3.1 Articles of Incorporation of the Registrant as filed with the
Secretary of State of California on February 22, 1991, filed as
Exhibit B to the Registrant's Proxy Statement for the Annual Meeting
of Stockholders, May 24, 1991, and is incorporated herein by
reference.
3.1a Certificate of Determination of Preferences of Preferred Shares, filed
as Exhibit 3.1a to the Registrant's Annual Report on Form 10-KSB for
the Fiscal Year Ended June 30, 1993, and is incorporated herein by
reference.
3.2 By-Laws of the Registrant as currently in effect, filed as Exhibit 3.2
to the Registrant's Annual Report on Form 10-K for the Fiscal Year
Ended June 30, 1991, (the "1991 10-K") and is incorporated herein by
reference.
10.1 Assignment dated July 21, 1980, and Amendment to Assignment dated
September 2, 1980, pursuant to which Ronald B. Luther and Marshall F.
Sparks assigned to the Registrant a patent relating to the catheter
placement system, filed as Exhibit 10.1 to the Registrant's
Registration Statement on Form S-2, as amended (the "Registration
Statement") (File No. 33-12557) and are incorporated herein by
reference.
-25-
<PAGE>
10.2 Supplemental Assignment dated July 1, 1981, pursuant to which Ronald
B. Luther and Marshall F. Sparks expanded the applicability of the
Assignment dated July 21, 1980, to include all subsequent technology
related to the catheter placement system on the same terms and
conditions, filed as Exhibit 10.2 to the Registration Statement and
is incorporated herein by reference.
10.4 License and Sales Agreement, dated April 1, 1987, and Amendment to
License and Sales Agreement, dated December 4, 1987, between the
Registrant and Tyndale Plains-Hunter, Ltd., relating to an exclusive
license to make, use, and sell certain patented hydrophilic polymers,
filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K
for the Fiscal Year Ended June 30, 1988, (the "1988 10-K") and are
incorporated herein by reference.
10.4a Amendment, dated April 11, 1996, to License and Sales Agreement,
dated April 1, 1987, between the Registrant and Tyndale Plains-
Hunter, Ltd., relating to modifications of the field of the Agreement
and the Registrant's royalty obligations, filed as Exhibit 10.4a to
the to the Registrant's Annual Report on Form 10-KSB for the Fiscal
Year Ended June 30, 1996, (the "1996 10-KSB") and is incorporated
herein by reference.
10.5 License Agreement, dated June 17, 1985, between the Registrant and
Medtronic, Inc., granting Medtronic a license to utilize the
Registrant's patents on split needle technology for certain product
applications, filed as Exhibit 10.6 to the Registration Statement and
is incorporated herein by reference.
10.6 Agreement, dated November 11, 1987, and Amendment to Agreement, dated
February, 1988, between the Registrant and Critikon, Inc., relating
to the Registrant's stickless needle technology, filed as Exhibit
10.10 to the 1988 10-K and are incorporated herein by reference.
10.6a Agreement dated as of March 28, 1995, between the Registrant and
Johnson & Johnson Medical, Inc., relating to the assignment by the
Company of five certain catheter patents to JJMI, filed as Exhibit
2.1 to the Registrant's Current Report on Form 8-K dated March 28,
1995.
10.7 Lease dated December 9, 1992, between the Registrant and the Beecher
Family Trust, as lessor, as to facilities located at 14332 Chambers
Road, Tustin, California, filed as Exhibit 6(a) to the Quarterly
Report on Form 10-QSB for the Quarter Ended December 31, 1992, and
is incorporated herein by reference.
10.8 Adoption Agreement for Prototype Defined Contribution Plan #02
Sponsored By IDS Financial Services, filed as Exhibit 10.12 to the
Registrant's Annual Report on Form 10-K for the Fiscal Year Ended
June 30, 1990, (the "1990 10-K") and is incorporated herein by
reference.
-26-
<PAGE>
10.9 Loan and Security Agreement dated September 17, 1990, between the
Regis trant and Johnson & Johnson Finance Corporation, filed as
Exhibit 10.13 to the 1990 10-K and is incorporated herein by
reference.
10.10 Loan and Security Agreement dated May 12, 1994, (and Addendum
thereto) between the Registrant and Johnson & Johnson Finance
Corporation, filed as Exhibit 10.10 to the 1994 10-KSB and is
incorporated herein by reference.
10.11 Loan and Security Agreement dated August 15, 1994, between the
Registrant and Johnson & Johnson Finance Corporation, filed as
Exhibit 10.11 to the 1994 10-KSB and is incorporated herein by
reference.
10.12 Research and Development Agreement, dated March 24, 1992, between
the Registrant and Pharmacia Deltec Inc., filed as Exhibit 10.1 of
the Registrant's Current Report on Form 8-K filed on April 1, 1992,
and is incorporated herein by reference.
10.13 Distribution Agreement, dated March 24, 1992, between the Registrant
and Pharmacia Deltec Inc., filed as Exhibit 10.2 of the Registrant's
Current Report on Form 8-K filed on April 1, 1992, and is
incorporated herein by reference.
10.13a Distribution and License Agreement, dated as of March 9, 1994,
between the Registrant and Pharmacia Deltec Inc., filed as Exhibit
10.13a to the 1994 10-KSB and is incorporated herein by reference.
10.14 Loan and Security Agreement, dated March 24, 1992, between the
Registrant and Pharmacia Deltec Inc., filed as Exhibit 10.3 of the
Registrant's Current Report on Form 8-K filed on April 1, 1992, and
is incorporated herein by reference.
10.14a Amendment to Loan and Security Agreement, dated as of March 9, 1994,
between the Registrant and Pharmacia Deltec Inc., filed as Exhibit
10.14a to the 1994 10-KSB and is incorporated herein by reference.
10.15 8% Convertible Note, dated March 24, 1992, of the Registrant in
favor of Pharmacia Deltec Inc., filed as Exhibit 10.4 of the
Registrant's Current Report on Form 8-K filed on April 1, 1992, and
is incorporated herein by reference.
10.15a Replacement Note, dated as of January 1, 1994, of the Registrant in
favor of Pharmacia Deltec Inc., filed as Exhibit 10.15a to the 1994
10-KSB and is incorporated herein by reference.
10.15b Payment Agreement, dated as of November 3, 1995, between the
Registrant and Pharmacia Deltec Inc., in respect of Replacement
Note, dated as of January 1, 1994, of the Registrant in favor of
Pharmacia Deltec Inc, filed as Exhibit 10.15B to the to the 1996 10-
KSB and is incorporated herein by reference.
-27-
<PAGE>
10.16 Registration Rights Agreement, dated March 24, 1992, between the
Registrant and Pharmacia Deltec Inc., filed as Exhibit 10.5 of the
Registrant's Current Report on Form 8-K filed on April 1, 1992, and
is incorporated herein by reference.
10.17 Release and Termination Agreement, dated as of March 9, 1994,
between the Registrant and Pharmacia Deltec Inc., filed as Exhibit
10.17 to the 1994 10-KSB and is incorporated herein by reference.
10.18 Non-U. S. Distributor Agreement, dated May 18, 1983, between the
Registrant and Medical Japan, Ltd., filed as Exhibit 10.19 of the
Registrant's Annual Report on Form 10-KSB for the Fiscal Year Ended
June 30, 1992, and is incorporated herein by reference.
10.19 Registrant's Incentive Employee Stock Option Plan - 1984, filed as
Exhibit 10.14 to the Registration Statement and is incorporated
herein by reference.
10.20 Amendments to Registrant's Incentive Employee Stock Option Plan -
1984, filed as Exhibit 10.14A to the Registration Statement and is
incorporated herein by reference.
10.21 Registrant's Employee Stock Option Plan - 1986, filed as Exhibit
10.15 to the Registration Statement and is incorporated herein by
reference.
10.22 Amendments to Registrant's Employee Incentive Stock Option Plan -
1986, filed as Exhibit 10.15A to the Registration Statement and is
incorporated herein by reference.
10.23 Registrant's Employee Stock Option Plan - 1987, filed as Exhibit 4.1
to the Registrant's Registration Statement on Form S-8 (File No. 33-
48850) (the "1987 S-8") and is incorporated herein by reference.
10.24 Registrant's Incentive Stock Compensation Plan - 1987, filed as
Exhibit 4.2 to the 1987 S-8 and is incorporated herein by reference.
10.25 Intentionally omitted.
10.26 Intentionally omitted.
10.27 Patent and Technology License and Supply Agreement, dated as of
October 31, 1993, between the Registrant and The Kendall Company,
filed as Exhibit 10.27 to the 1994 10-KSB and is incorporated herein
by reference.
10.28 Agreement for Transfer of License, dated as of March 1, 1994,
between the Registrant and Medikit Co., Ltd., filed as Exhibit 10.28
to the 1994 10-KSB and is incorporated herein by reference.
-28-
<PAGE>
10.29 Distribution Agreement, dated as of August 4, 1994, between the
Registrant and Kentec Medical, Inc., filed as Exhibit 10.29 to the
1994 10-KSB and is incorporated herein by reference.
10.30 Employment Agreement, dated November 19, 1993, between the
Registrant and Ronald B. Luther, filed as Exhibit 10.30 to the 1994
10-KSB and is incorporated herein by reference.
10.30a Employment Agreement, dated September 25, 1995, between the
Registrant and Ronald B. Luther, filed as Exhibit 10.30a to the
1996 10-KSB and is incorporated herein by reference.
10.31 Employment Agreement, dated December 6, 1993, between the Registrant
and David Rollo, filed as Exhibit 10.31 to the 1994 10-KSB and is
incorporated herein by reference.
10.31a Employment Agreement, dated May 31, 1995, between the Registrant
and David Rollo, filed as Exhibit 10.31a to the Registrant's Annual
Report on Form 10-KSB for the Fiscal Year Ended June 30, 1995, (the
"1995 10-KSB") and is incorporated herein by reference.
10.32 Consulting Agreement, dated April 1, 1995, between the Registrant
and Mark S. Isaacs, filed as Exhibit 10.32 to the 1995 10-KSB and is
incorporated herein by reference.
10.33 National Account Consulting Agreement, dated May 19, 1995, between
the Registrant and National Contracts, Inc., filed as Exhibit 10.33
to the 1995 10-KSB and is incorporated herein by reference.
10.34 Purchase Agreement, dated September 12, 1995, between the Registrant
and Apria Healthcare, Inc., filed as Exhibit 10.34a to the 1996 10-
KSB and is incorporated herein by reference.
10.35 Intentionally omitted.
10.36 Standard Proposal, dated November 9, 1995, between the Registrant
and Mid Atlantic Group Network of Shared Services, Inc., filed as
Exhibit 10.36 to the 1996 10-KSB and is incorporated herein by
reference.
10.37 National Contract, dated July 1, 1996, between the Registrant and
Teamcare, the institutional pharmacy subsidiary of GranCare, Inc.,
filed as Exhibit 10.37 to the 1996 10-KSB and is incorporated herein
by reference.
10.38 License Agreement for Use of Alliance of Children's Hospitals' Seal
of Acceptance by the Manufacturer, dated December 1, 1995, between
the Registrant and Alliance of Children's Hospitals., filed as
Exhibit 10.38 to the 1996 10-KSB and is incorporated herein by
reference.
-29-
<PAGE>
10.39 Distributorship Agreement, dated September 21, 1995, between the
Registrant and Boston Scientific Corporation, filed as Exhibit
10.39 to the 1996 10-KSB and is incorporated herein by reference.
10.40* Employment Agreement, dated December 2, 1996, between the
Registrant and George Brdlik.
10.40a* Amendment No. 1, dated July 16, 1997, to Employment Agreement,
dated December 2, 1996, between the Registrant and George Brdlik.
10.41* Distribution Agreement, dated August 11, 1997, between the
Registrant and ALARIS Medical Systems, Inc.
23.1* Consent of Thelen, Marrin, Johnson & Bridges.
23.2* Consent of Arter & Hadden.
23.3* Consent of Robert L. Pike, Esq.
23.4* Consent of Ernst & Young LLP.
23.5* Consent of Corbin & Wertz.
27.1* Financial Data Schedule.
(b) Reports on Form 8-K
During the last quarter of the period covered by this Annual Report, the
Company did not file any Current Reports on Form 8-K.
-30-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Reference
<S> <C>
- Report of Independent Auditors - Ernst & Young LLP F-1
- Report of Independent Auditors - Corbin & Wertz F-2
- Balance sheet as of June 30, 1997 F-3
- Statements of operations for each of the years
in the two-year period ended June 30, 1997 F-4
- Statements of stockholders' equity for each of
the years in the two-year period ended June 30, 1997 F-5
- Statements of cash flows for each of the years
in the two-year period ended June 30, 1997 F-6
- Notes to financial statements for each of the
years in the two-year period ended June 30, 1997 F-7 -- F-19
</TABLE>
<PAGE>
Report of Independent Auditors
To the Board of Directors of
Luther Medical Products, Inc.
We have audited the accompanying balance sheet of Luther Medical Products, Inc.
as of June 30, 1997, and the related statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Luther Medical Products, Inc.
as of June 30, 1997 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Irvine, California
August 29, 1997
F-1
<PAGE>
Independent Auditors' Report
----------------------------
To the Board of Directors of
Luther Medical Products, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Luther Medical Products, Inc. and
subsidiary (the "Company") for the year ended June 30, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Luther Medical Products, Inc. and subsidiary for the year ended June 30, 1996 in
conformity with generally accepted accounting principles.
/s/ CORBIN & WERTZ
----------------------------
CORBIN & WERTZ
Irvine, California
August 8, 1996
F-2
<PAGE>
Luther Medical Products, Inc.
Balance Sheet
June 30, 1997
<TABLE>
<CAPTION>
ASSETS
Current assets:
<S> <C>
Cash and cash equivalents $ 811,974
Accounts receivable, less allowance for doubtful accounts of $13,666 825,364
Inventories 1,843,425
Prepaid expenses and other assets 59,577
-----------
Total current assets 3,540,340
Property and equipment:
Production equipment 940,211
Office equipment 194,275
Leasehold improvements 120,833
Automobiles 4,706
-----------
1,260,025
Less accumulated depreciation and amortization (921,022)
-----------
Property and equipment, net 339,003
Intangible assets, net 89,730
Deposits 10,199
-----------
$ 3,979,272
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 291,560
Accrued payroll and related expenses 115,538
Other accrued liabilities 83,284
-----------
Total current liabilities 490,382
Commitments and contingencies
Stockholders' equity:
Preferred stock - no stated par value; 10,000,000 shares authorized;
none issued
Common stock - no stated par value; 25,000,000 shares authorized;
3,262,786 shares issued and outstanding 10,487,478
Common stock purchase warrants 50,000
Note receivable from shareholders (235,409)
Accumulated deficit (6,813,179)
-----------
Net stockholders' equity 3,488,890
-----------
$ 3,979,272
===========
</TABLE>
See accompanying notes to Financial Statements.
F-3
<PAGE>
Luther Medical Products, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1997 1996
----------------------------
<S> <C> <C>
Revenues:
Product sales $5,400,907 $3,882,950
Royalties 16,488 13,445
Interest income and other 59,174 125,706
----------------------------
Total revenues 5,476,569 4,022,101
Costs and expenses:
Costs of revenues 3,273,322 2,393,065
Research and development 520,834 395,073
General and administrative 1,017,995 868,862
Selling 1,159,886 901,593
Depreciation and amortization 233,758 181,084
Interest expense - 13,237
----------------------------
Total costs and expenses 6,205,795 4,752,914
Loss before taxes and extraordinary gain (729,226) (730,813)
Income tax expense 800 800
----------------------------
Loss before extraordinary items (730,026) (731,613)
Extraordinary gain on debt forgiveness, net of income
taxes of $0 - 122,958
----------------------------
Net loss $ (730,026) $ (608,655)
============================
Per share amounts:
Loss before extraordinary item $ (.23) $ (.24)
Extraordinary gain - .04
----------------------------
Net loss $ (.23) $ (.20)
============================
Weighted average shares outstanding 3,206,615 3,070,974
============================
</TABLE>
See accompanying notes to Financial Statements.
F-4
<PAGE>
Luther Medical Products, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
COMMON
COMMON STOCK STOCK NOTES
-------------------------- PURCHASE RECEIVABLE- ACCUMULATED
SHARES AMOUNT WARRANTS STOCKHOLDERS DEFICIT TOTAL
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 2,985,636 $ 9,580,713 $50,000 $(183,444) $(5,474,498) $3,972,771
Common stock issued -
exercise of stock
options and warrants 187,464 573,289 - - - 573,289
Collection of notes
receivable from
stockholder - - - 183,444 - 183,444
Net loss - - - (608,655) (608,655)
----------------------------------------------------------------------------------------------
Balance at June 30, 1996 3,173,100 10,154,002 50,000 - (6,083,153) 4,120,849
Common stock issued for
cash 12,543 45,976 - - - 45,976
Common stock issued for
notes receivable 77,143 287,500 - (287,500) - -
Collection of notes
receivable from
stockholder - - - 52,091 - 52,091
Net loss (730,026) (730,026)
----------------------------------------------------------------------------------------------
Balance at June 30, 1997 3,262,786 $10,487,478 $50,000 $(235,409) $(6,813,179) $3,488,890
==============================================================================================
</TABLE>
See accompanying notes to Financial Statements.
F-5
<PAGE>
Luther Medical Products, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1997 1996
------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (730,026) $ (608,655)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 202,098 177,474
Amortization 31,660 3,610
Gain on forgiveness of debt (122,958)
Changes in operating assets and liabilities:
Accounts receivable (1,079) (496,896)
Inventories (256,103) (398,930)
Prepaid expenses and other assets 12,642 16,202
Accounts payable (38,987) 189,354
Other accrued liabilities 29,459 (225,316)
------------------------------
Net cash used in operations (750,336) (1,466,115)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities - (1,974,826)
Proceeds from sale of available-for-sale securities - 4,729,259
Purchases of property and equipment (133,898) (104,636)
Purchases of intangible assets - (125,000)
------------------------------
Net cash (used in ) provided by investing activities (133,898) 2,524,797
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 45,976 573,289
Collections of notes receivable from stockholder 52,091 183,444
Principal payments on debt - (400,000)
------------------------------
Net cash provided by financing activities 98,067 356,733
------------------------------
Net (decrease) increase in cash and cash equivalents (786,167) 1,415,415
Cash and cash equivalents, beginning of year 1,598,141 182,726
------------------------------
Cash and cash equivalents, end of year $ 811,974 $ 1,598,141
==============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the year for:
Interest $ - $ -
==============================
Income taxes $ 800 $ 800
==============================
</TABLE>
See accompanying notes to Financial Statements.
F-6
<PAGE>
Luther Medical Products, Inc.
Notes to Financial Statements
June 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Luther Medical Products, Inc. (the Company) was organized in 1980 for the
purpose of engaging in the design, development, manufacture and sale of catheter
placement systems. The Company holds numerous patents for a wide variety of
catheter placement systems. The Company sells its products world-wide primarily
through independent distributors. Approximately 81% and 80% of product sales
during 1997 and 1996, respectively, were domestic. The Company considers its
business to be in the medical devices industry.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the 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.
REVENUE RECOGNITION
Revenues on product sales are recognized at the time of shipment. Royalty fees
are recognized as earned.
CERTAIN CONCENTRATIONS
The Company provides credit in the normal course of business to customers
throughout the United States and foreign markets. During 1997, two customers
accounted for approximately 12% and 9%, respectively, of total product sales,
and during 1996 two customers accounted for approximately 15% and 12%,
respectively, of total product sales. At June 30, 1997, two customers accounted
for approximately 21% and 9%, respectively, of accounts receivable. The Company
performs ongoing credit evaluations of its customers. The Company does not
obtain collateral with which to secure its accounts receivable. The Company
provides for potential credit losses based upon the Company's historical
experience related to credit losses.
F-7
<PAGE>
Luther Medical Products, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CERTAIN CONCENTRATIONS (CONTINUED)
During 1997, two of the Company's vendors accounted for approximately 26% and
9%, respectively, of material and supply purchases, and during 1996, two vendors
accounted for approximately 25% and 14% of the Company's material and supply
purchases. At June 30, 1997, two vendors accounted for approximately 36% and
11%, respectively, of accounts payable. The Company believes that it could
purchase such materials and supplies from other vendors without a material
adverse effect to the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has financial instruments whereby the fair value of the financial
instruments could be different than that recorded on a historical basis on the
accompanying balance sheet. The Company's financial instruments consist of cash
and cash equivalents, accounts receivable and accounts payable. The carrying
amounts of the Company's financial instruments generally approximate their fair
values at June 30, 1997.
CASH AND CASH EQUIVALENTS
For financial statement purposes, cash and cash equivalents are defined as
highly liquid holdings which have remaining maturities of three months or less
when purchased. The Company has $650,565 in U.S. Treasury bills which are
considered to be cash equivalents at June 30, 1997.
INVESTMENTS
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115, (SFAS 115), Accounting for Certain
Investments in Debt and Equity Securities, which requires that investments be
classified as "held-to-maturity", "available-for-sale" or "trading securities".
The Company has no investments which qualify for such treatment under SFAS 115
at June 30, 1997.
F-8
<PAGE>
Luther Medical Products, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or net realizable value. Cost is
determined under the first-in, first-out method. Costs include materials, direct
labor, and an allocable portion of direct and indirect manufacturing overhead
based upon standard rates derived from historical trends and experience factors.
The industry in which the Company operates is characterized by technological
changes. Should demand for the Company's products prove to be significantly less
than anticipated, the ultimate realizable value of such products could be less
than the amount shown in the accompanying balance sheet.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the respective assets of
five years. Leasehold improvements are amortized over the lesser of the
estimated useful lives of the improvements or the related lease term.
INTANGIBLE ASSETS
Intangible assets consist of the following at June 30, 1997 and are being
amortized using the straight-line method over three and five years for license
and manufacturing rights, respectively:
<TABLE>
<S> <C>
Licensing rights $ 65,000
Manufacturing rights 60,000
--------
125,000
Less accumulated amortization (35,270)
--------
$ 89,730
========
</TABLE>
LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those assets. No impairment losses were recorded in 1997
or 1996.
F-9
<PAGE>
Luther Medical Products, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
The Company expenses all advertising as incurred. Advertising expense was
$28,801 and $31,273 in 1997 and 1996, respectively.
INCOME TAXES
The Company provides for income taxes under the liability method. Accordingly,
deferred tax assets and liabilities are determined based on differences between
the financial reporting and the tax basis of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to the period in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts which are more likely than not to be
realized. The provision for income taxes represents the tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.
PER SHARE AMOUNTS
Per share amounts are computed based on the weighted average number of common
and, if applicable, common equivalent shares outstanding during each of the
respective years. Common equivalent shares which relate to shares issuable upon
the exercise of stock options and warrants, have been excluded from the
calculation in 1997 and 1996 as the effect of their inclusion would be
antidilutive. Net loss per share is the same on a primary and fully diluted
basis for both years presented.
STOCK-BASED COMPENSATION
The Company grants options for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. The
Company accounts for stock option grants in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25") and , accordingly,
recognizes no compensation expense for the stock option grants. However, the
Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-based Compensation ("SFAS No.
123").
F-10
<PAGE>
Luther Medical Products, Inc.
Notes to Financial Statements (continued)
2. INVENTORIES
Inventories at June 30, 1997 consist of the following:
<TABLE>
<S> <C>
Raw materials $ 877,671
Work in process 403,796
Finished goods 561,958
----------
$1,843,425
==========
</TABLE>
3. INCOME TAXES
The provision from income taxes for 1997 and 1996 consists of minimum state
taxes.
Differences between the Company's income tax expense and an amount computed by
using the federal statutory rate of 34 percent are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------
<S> <C> <C>
Income tax benefit at statutory rate $(247,900) $(248,500)
Change in valuation allowance for deferred tax assets 201,400 246,000
Meals and entertainment 46,800 2,800
State taxes, net of benefit 500 500
----------------------
$ 800 $ 800
======================
</TABLE>
Significant components of the Company's deferred tax assets at June 30, 1997 are
presented below:
<TABLE>
<CAPTION>
Deferred tax assets:
<S> <C>
Allowance for doubtful accounts $ 5,900
Reserve for obsolete inventory 62,800
Compensated absences 21,200
Depreciation methods 89,000
Net operating loss carryforwards 1,498,900
Research tax credit carryforwards 92,000
Alternative minimum tax credit carryforwards 50,400
-----------
Total gross deferred tax assets 1,820,200
Less valuation allowance (1,820,200)
-----------
Net deferred tax assets $ -
===========
</TABLE>
F-11
<PAGE>
Luther Medical Products, Inc.
Notes to Financial Statements (continued)
3. INCOME TAXES (CONTINUED)
At June 30, 1997 the Company had net operating loss carryforwards of
approximately $4,252,300 and $571,300 available to offset future taxable Federal
and state income, respectively. The carryforward amounts expire in varying
amounts between 2001 and 2012. The Company also has research and development
credits of $92,000 which begin to expire in 2001.
Due to the change in ownership provisions of the Tax Reform Act of 1986, net
operating loss carryforwards for Federal income tax reporting purposes are
subject to annual limitations. Should a change in ownership occur, net operating
loss carryforwards may be limited as to use in future years.
4. STOCKHOLDERS' EQUITY
STOCK COMPENSATION PLANS
The Company has various stock-based compensation plans, which are described
below. The Company applies the provisions of APB No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation
expense has been recognized upon granting of options under its fixed stock
option and warrant plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method prescribed by SFAS No.
123, the Company's net loss and loss per share would have been increased to the
pro forma amounts indicated below. The provisions of SFAS No. 123 have been
applied to awards with grant dates in 1997 and 1996 only. Therefore, until the
new rules are applied to all outstanding, nonvested awards, the compensation
cost reflected in the pro forma amounts presented below is not indicative of
future amounts.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net loss:
As reported $(730,026) $(608,655)
Pro forma $(924,500) $(658,100)
Net loss per share:
As reported $ (.23) $ (.20)
Pro forma $ (.29) $ (.21)
</TABLE>
F-12
<PAGE>
Luther Medical Products, Inc.
Notes to Financial Statements (continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS
The Company has various fixed stock option plans that provide for the granting
of incentive or non-statutory options to its key employees, non-employee members
of the Board of Directors, consultants and independent contractors. In the case
of incentive stock options, the exercise price may not be less than the fair
market value of the Company's stock on the date of the grant, and may not be
less than 110% of the fair market value of the Company's stock on the date of
the grant for any individual possessing 10% or more of the voting power of all
classes of stock of the Company. The options are generally exercisable
immediately upon grant and expire not later than 10 years from the date of
grant. Approximately 850,000 shares of common stock are reserved for future
issuance upon exercise of fixed options.
For purposes of pro forma disclosure, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions used for grants in 1997 and 1996:
risk-free interest rate of 6.5%; dividend yield of 0%; volatility of 47%; and a
weighted average expected life of the option of 4 years.
A Summary of the status of the Company's fixed stock option plans as of December
31, 1997 and 1996, and the activity during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------ ------------------------------------------
Weighted-average Weighted-average
Number of exercise price Number of exercise price
shares per share shares per share
------------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C>
Outstanding - beginning of year 162,057 $3.07 200,949 $2.96
Granted 58,300 $4.56 714 $2.69
Exercised (5,400) $3.32 (38,606) $2.50
Expired (7,429) $4.15 (1,000) $2.82
----------------- -----------------
Outstanding - end of year 207,528 $3.44 162,057 $3.07
================= =================
Exercisable at end of year 98,462 $3.30 62,515 $3.31
================= =================
Weighted-average fair value of
options granted during the year $2.02 $1.19
</TABLE>
F-13
<PAGE>
Luther Medical Products, Inc.
Notes to Financial Statements (continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
Options outstanding at June 30, 1996 have exercise prices ranging from $2.56 to
$4.56 and a weighted average remaining contractual life of 2.5 years.
STOCK WARRANT PLANS
The Company has an officers and directors warrant compensation plan (the Plan)
under which warrants are granted at exercise prices established by the Board of
Directors. Warrants have historically been granted for a period of five years
with immediate vesting. Such terms, however, are at the discretion of the
Company's Board of Directors and may vary.
On December 8, 1995, the Company's board of directors established a five-year
warrant program (the Program), pursuant to which each of the Company's outside
directors was granted warrants to purchase 30,000 shares of the Company's common
stock at fair market value as of the date of grant. The warrants vest, ratably
over a five year period commencing one year following the date of grant and
ending upon cessation of the grantee's services as a director of the Company. In
the event of a sale of the Company while the grantee is a director, the warrants
immediately vest and become exercisable.
The following table summarizes warrant transactions under the Plan and the
Program for each of the years in the two-year period ended June 30, 1997:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------- ------------------------------------------
Weighted-average Weighted-average
Number of warrant price Number of warrant price
shares per share shares per share
----------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C>
Outstanding - beginning of year 965,457 $3.63 813,615 $3.41
Granted 300,700 $4.20
Exercised (84,286) $3.74 (148,858) $3.20
Expired (122,500) $5.13 -
------------ ---------
Outstanding - end of year 758,671 $3.38 965,457 $3.63
============ =========
Exercisable at end of year 558,672 $3.12 695,458 $3.48
============ =========
Weighted-average fair value of
warrants granted during the year $1.93
</TABLE>
F-14
<PAGE>
Luther Medical Products, Inc.
Notes to Financial Statements (continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK WARRANT PLANS (CONTINUED)
Warrants outstanding at June 30, 1996 have exercise prices ranging from $2.25 to
$4.81 and a weighted average remaining contractual life of 3.4 years.
In connection with a private placement offering in 1992, warrants were granted
to a group of investors to purchase 100,000 shares of the company's common stock
at $12.50 per share. No value was ascribed to such warrants. During 1995, the
Company canceled the warrants and issued new warrants to purchase 50,000 shares
of common stock at $5.00 per share. The warrants expire in 1997. No value was
ascribed to such warrants.
5. PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan covering all employees who have
completed one year of service, consisting of at least 1,000 hours of service,
and have attained the age of 21 years, unless otherwise excluded. The plan
permits eligible employees to contribute to the plan up to 20% of their pre-tax
earnings, up to the annual maximum. The Company may make qualified non-elective
contributions to employees not classified as highly compensated. Additionally,
the Company may make profit sharing contributions to qualifying participants on
a pro-rata basis. Qualified participants become fully vested in the profit
sharing contribution over a period of six years of service. The Company did not
make contributions to the plan in 1997 and 1996.
6. COMMITMENTS AND CONTINGENCIES
LICENSE AGREEMENT
During 1987, the Company entered into an agreement whereby it acquired an
exclusive worldwide license to make, use and sell products covered by certain
patents owned by the licensor. Under the agreement, the Company was obligated to
pay the licensor minimum annual royalties of $60,000 for a period of 25 years,
earned royalties each year of 2% to 3.5% of net sales of products incorporating
the patented rights, and a royalty of 40% of all income the Company receives
from sublicensees, if any. For the year ended June 30, 1996, net royalties of
$45,000 were charged to operations. During April 1996, the agreement was amended
resulting in the Company paying a one-time fee of $65,000 to purchase the rights
to use the products covered by the above mentioned patents on a
F-15
<PAGE>
Luther Medical Products, Inc.
Notes to Financial Statements (continued)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LICENSE AGREEMENT (CONTINUED)
more limited scale than that which was previously in effect. These licensing
rights are included in intangible assets in the accompanying consolidated
balance sheet at June 30, 1997. No further minimum royalty payments are required
though the remaining term of the agreement.
EMPLOYMENT AGREEMENT
During 1996, the Company entered into an employment agreement with an officer of
the Company. In addition to base salary, bonus plan participation and
termination benefits, the agreement provides for the unlimited payment of
royalties by the Company to the officer subsequent to December 1998. Such
royalties are calculated at 1 to 2 percent of the "net sales price" of products
for which the Company had received a 510(k) notification from the United States
Food and Drug Administration subsequent to November 19, 1993.
CONSULTING AGREEMENT
During March 1995, the Company entered into a consulting agreement with an
unrelated third party, under which the consultant has been engaged to promote
and develop a national accounts program for the Company's products for sale to
certain hospital groups, organizations and health care delivery systems. The
agreement required the Company to pay the consultant $396,000 over a two-year
period.
DISTRIBUTION AGREEMENTS
During September 1995, the Company entered into a distributorship agreement (the
Distributorship Agreement) with an unrelated company (Distributor), thereby
appointing the Distributor as the Company's exclusive world-wide distributor in
the field of interventional radiology and to supply the Distributor with
peripherally inserted central catheters (PICC Products). The transfer price to
the Distributor for PICC Products has been fixed for the first two years of the
Distributorship Agreement and may be revised thereafter by either party in
accordance with the terms of said agreement. The distributorship may become non-
exclusive in certain circumstances. The Distributorship Agreement is effective
through September 2000, at which time it may be renewed for an additional three
years unless sooner terminated. The Distributor Agreement also grants
F-16
<PAGE>
Luther Medical Products, Inc.
Notes to Financial Statements (continued)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
DISTRIBUTION AGREEMENTS (CONTINUED)
the Distributor a three-year option to purchase certain property, plant and
equipment used in the development, manufacture and preparation of the PICC
Products and a paid-up irrevocable license to all related patent rights and
know-how related to the PICC Products at a purchase price equal to a percentage
of one year's sales of the PICC Products (as defined in the Distributorship
Agreement). The Distributor can exercise its purchase option in 1998 or upon
certain events.
During August 1994, the Company entered into an exclusive five-year distribution
agreement for the sale of intra-vascular catheters in certain western U.S.
states. The agreement provides certain termination privileges for the Company
and for the distributor. The Company's sales to this distributor represented 9%
of total product sales for each of 1997 and 1996.
MANUFACTURING AGREEMENT
During March 1996, the Company entered into a product development and supply
agreement (the Agreement) with an unrelated company (Seller), to manufacture and
sell tracheostomy and cricothyroidotomy products. The Agreement provided for the
assignment to the Company of certain patents issued to the former owners of the
Seller.
The Agreement requires the payment of certain royalties based on amounts derived
from the application of the then-relevant royalty percentage to the "gross sales
price" for all products utilizing the patented technology. The royalty
percentages are as follows:
<TABLE>
<CAPTION>
PERIOD PERCENTAGE
- -------------------------------------------------------------------------------------
<S> <C>
March 1996 through February 1997 15%
March 1997 through expiration of patents (ranging from December
1999 through December 2007) 10%
</TABLE>
Under the Agreement, royalty payments of 3% of the "gross sales price" shall
continue if a certain former owner of the Seller survives the expiration of the
patents and shall cease upon the death of the former owner. Royalty expense
relating to this agreement amounted to $3,293 in 1997.
F-17
<PAGE>
Luther Medical Products, Inc.
Notes to Financial Statements (continued)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
MANUFACTURING AGREEMENT (CONTINUED)
The purchase price for the assignment of the patents was $60,000, which is
included in intangible assets at June 30, 1997.
OPERATING LEASE
The Company leases its corporate and manufacturing facility under a non-
cancelable operating lease which expires in 1998. The agreement reflects
periodic rental payment increases, provides that the Company pay operating costs
such as taxes, insurance and maintenance, and certain renewal options among
other items. Rent expense is being recognized on a straight-line basis over the
lease term. The excess of rent expense recognized over the payment made is
included in other accrued liabilities in the accompanying consolidated balance
sheet. Future minimum lease payments under the lease amount to $130,000 for
1998.
Rent expense was $144,408 in each of 1997 and 1996.
7. ROYALTY, LICENSE AND DEBT FORGIVENESS AGREEMENT
During March 1992, the Company entered into agreements with Sims Deltec, Inc.,
formerly Pharmacia Deltec, Inc., (PDI) related to certain of the Company's
catheter products, minimum purchase obligations and credit facilities. Effective
March 9, 1994, the Company and PDI entered into a release and termination
agreement, which, among other things, provided for the termination of all prior
agreements between the parties, execution of a promissory note payable to PDI in
the principal amount of $625,000, and the granting by the Company to PDI of
certain nonexclusive licenses for the distribution and sale of certain of the
Company's products, and the use of certain of the Company's patents. The product
license terms were one year for non-neonate products and five years for neonate
products.
On November 3, 1995, PDI agreed to accept a payment from the Company in the
amount of $400,000 in full satisfaction of the promissory note balance of
$481,250 and accrued interest of $41,708. The resulting gain from the
forgiveness of debt of $122,958 was reflected as an extraordinary item in the
accompanying consolidated statement of operations for the year ended June 30,
1996.
F-18
<PAGE>
Luther Medical Products, Inc.
Notes to Financial Statements (continued)
7. ROYALTY, LICENSE AND DEBT FORGIVENESS AGREEMENT (CONTINUED)
Royalties ranging from 3 and 7 percent were to be paid by PDI to the Company
based on net sales of licensed products. The Company did not earn any royalties
under this agreement in 1997 and 1996.
8. FOURTH QUARTER ADJUSTMENT
In the fourth quarter of 1997, based on management's review of inventory
quantities, the Company recorded an adjustment in the amount of $154,000 to
increase its reserves for excess and obsolete inventory.
F-19
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: October 8, 1997 LUTHER MEDICAL PRODUCTS, INC.
By: /s/ DAVID ROLLO
---------------
David Rollo
President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ DAVID ROLLO Chairman of the Board October 8, 1997
- --------------------- President, Chief Executive
David Rollo Officer, Principal Financial
Officer, Principal Accounting
Officer, and a Director
/s/ MARK ISAACS Director October 8, 1997
- ---------------------
Mark S. Isaacs
/s/ JACK PAYNE Director October 8, 1997
- ---------------------
Jack Payne
/s/ D. ROSS HAMILTON Director October 8, 1997
- ---------------------
D. Ross Hamilton
/s/ BARRY W. HALL Director October 8, 1997
- ---------------------
Barry W. Hall
/s/ WILLIAM R. DAHLMAN Director October 8, 1997
- ----------------------
William R. Dahlman
</TABLE>
F-20
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE
<C> <S> <C>
10.40 Employment Agreement, dated December 2, 1996, between the
Registrant and George Brdlik.
10.40a Amendment No. 1, dated July 16, 1997, to Employment Agreement,
dated December 2, 1996, between the Registrant and George Brdlik.
10.41 Distribution Agreement, dated August 11, 1997, between the
Registrant and ALARIS Medical Systems, Inc.
23.1 Consent of Thelen, Marrin, Johnson & Bridges.
23.2 Consent of Arter & Hadden.
23.3 Consent of Robert L. Pike, Esq.
23.4 Consent of Ernst & Young LLP.
23.5 Consent of Corbin & Wertz.
27.1 Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 10.40
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made as of the 2nd day of December, 1996, between Luther
Medical Products, Inc., a California corporation (the "Company"), and GEORGE
BRDLIK (the "Executive").
WHEREAS, the Executive has expertise with the U.S. Food and Drug
Administration's ("FDA") good manufacturing practices ("gmp") requirements and
in the areas of quality assurance and regulatory affairs; and
WHEREAS, the Company is engaged in the design and manufacture of
sterile medical devices in compliance with gmp;
WHEREAS, the Company desires to engage Executive to provide his time
and talents in supporting the Company's quality assurance programs and
regulatory affairs compliance in connection with the design and manufacture of
its products in accordance with gmp;
WHEREAS, the Executive desires to serve the Company on the terms
herein provided;
NOW, THEREFORE, in consideration of the foregoing and of the
respective covenants and agreements of the parties herein contained, the parties
hereto agree as follows:
1. Employment; Employee Handbook; Confidentiality and Patent
---------------------------------------------------------
Assignment Agreement. The Company hereby agrees to employ the Executive and the
- --------------------
Executive hereby agrees to serve the Company, on an "at will" basis and such
other terms and conditions as are set forth herein. The anticipated
commencement date of the employment relationship shall be on or about January 6,
1997, and shall continue until terminated as hereinafter set forth. The terms
and conditions hereof merely act to supplement the contents of the Company's
Employee Handbook, the contents of which govern the employment relationship
created hereby. Not later than the effective date hereof, the Executive shall
execute and deliver to the Company the Company's Confidentiality and Patent
Assignment Agreement.
2. Position; Duties; Place of Performance. The Executive shall serve
--------------------------------------
as the Company's Vice President of Quality Assurance and Regulatory Affairs and
shall report directly to the President, and shall emphasize daily review and
analysis of the Company's operations in respect of quality assurance and
regulatory affairs compliance in connection with the gmp requirements of the FDA
and analogous international regulatory agencies.
3. Compensation and Related Matters.
--------------------------------
(a) Base Salary. During the period that this Agreement is effective,
-----------
the Company shall pay to the Executive a base salary ("Base Salary") of not less
than $100,000 (on an annualized basis), all payable in substantially equal
semi-monthly installments. The Company's Compensation Committee may
periodically review the Executive's Base Salary and other compensation, if any,
and shall cause the Base Salary and such other compensation to be modified, if
appropriate in their sole discretion.
-1-
<PAGE>
(b) Housing. In addition to Base Salary, the Executive shall be
-------
entitled to be reimbursed for the costs incurred by him in respect of an
apartment, i.e., rent and utilities, exclusive of telephone and cable
television charges, for the first three months of the Executive's employment
with the Company; provided, however, that the aggregate of such reimbursement
shall not exceed $2,300 per month.
(c) Expenses. During the term of his employment hereunder, the
--------
Executive shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him (in accordance with the Company's then-current policies
and procedures for its senior executive officers) in performing services
hereunder, provided that the Executive properly accounts therefor in accordance
with Company policy.
4. Termination. THE EMPLOYMENT RELATIONSHIP CREATED HEREBY IS "AT
-----------
WILL." The employment relationship created hereby may be terminated without any
breach of this Agreement by either the Company or the Executive at any time with
or without cause. Such termination, in and of itself, shall not entitle either
party hereto to any compensation therefor. The provisions of Sections 4 through
10, inclusive, shall survive any termination of this Agreement.
5. Successors; Binding Agreement.
-----------------------------
(a) If any successor (whether direct or indirect, by purchase, merger,
consolidation, or otherwise) to all or substantially all of the business and/or
assets of the Company, shall fail to continue to employ the Executive on terms
no less favorable to the Executive than those contained for a six-month period
commencing from and after the closing of such transaction, the Executive shall
be entitled to receive compensation from such successor in the same amount and
on the same terms as if this Agreement had continued in effect during such six-
month period. As used in this Agreement, "Company" shall mean the Company as
herein-before defined and any successor to its business and/or assets as
aforesaid that executes and delivers the agreement provided for in this Section
5 or that otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law.
(b) This Agreement and all rights of the Executive hereunder shall
inure to the benefit of and be enforceable by the Executive's devisee, legatee,
or other designee or, if there be no such designee, to the Executive's estate.
6. Notice. For purposes of this Agreement, notices and all other
------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified or registered mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
George Brdlik
7543 New Salem Street
San Diego, California 92126
-2-
<PAGE>
If to the Company:
Luther Medical Products, Inc.
14332 Chambers Road
Tustin, California 92780
Attention: President
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
7. Miscellaneous. No provisions of this Agreement may be modified,
-------------
waived, or discharged, unless such waiver, modification, or discharge is agreed
to in writing signed by the Executive and the President. No waiver by either
party hereto of, or in compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have been made by either
party that are not set forth expressly in this Agreement. The validity,
interpretation, construction, and performance of this Agreement shall be
governed by the laws of the State of California.
8. Validity. The invalidity or unenforceability of any provision or
--------
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
9. Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
10. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
Orange County, California, in accordance with the rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, that the Company
shall be entitled to seek a restraining order or injunction in any court of
competent jurisdiction to prevent any continuance of any violation of
Confidentiality and Patent Assignment Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date and year first above written.
LUTHER MEDICAL PRODUCTS, INC.
By: --------------------------------- ----------------------------------
David Rollo, President GEORGE BRDLIK
-3-
<PAGE>
EXHIBIT 10.40a
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
---------------------------------------
THIS AMENDMENT NO. 1 (the "Amendment") to the Employment Agreement
dated as of December 2, 1996 (the "Agreement"), by and between Luther Medical
Products, Inc., a California corporation (the "Company"), and GEORGE BRDLIK (the
"Executive") is made as of the 16th day of July, 1997.
WHEREAS, the parties hereto desire to modify certain of the at-will
and termination provisions of the Agreement;
NOW, THEREFORE, in consideration of the foregoing and of the
respective covenants and agreements of the parties herein contained, the parties
hereto agree as follows:
1. Amendment in Full of Section 4. The parties hereto agree that
------------------------------
Section 4 of the Agreement shall be amended in full by deleting former Section 4
and replacing it as follows:
"4. Termination.
-----------
"(a) At-Will Employment. EXCEPT AS SET FORTH IN SUBSECTION (B)
------------------
BELOW, THE EMPLOYMENT RELATIONSHIP CREATED HEREBY IS "AT-WILL." Accordingly,
except as set forth in subsection (b) below, the employment relationship created
hereby may be terminated without any breach of this Agreement by either the
Company or the Executive at any time with or without cause. Such termination,
in and of itself, shall not entitle either party hereto to any compensation
therefor. The provisions of Sections 4 through 10, inclusive, shall survive
any termination of this Agreement.
"(b) Termination by the Executive. The Executive may terminate his
----------------------------
employment hereunder if (i) the Company sells all or substantially all of its
assets or (ii) a "Change of Control of the Company" shall occur. For purposes
of this Agreement, a "Change in Control of the Company" shall mean a change in
control of a nature that would be required to be reported in response to Item
5(f) of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); provided, however, that
such "person" (as such term is used in Section 13(d) and 14(d) of the Exchange
Act), other than the Company or any "person" who on the date hereof is a
director or officer of the Company, becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Company representing 80% or more of the combined voting power of the
Company's then outstanding securities.
"If, within the 90-day period immediately subsequent to the occurrence
of an event specified in Subsection 4(b)(i) or 4(b)(ii) hereof, the Executive
terminates his employment hereunder, then the Company or its successor-in-
interest, if applicable, shall pay the Executive, through the "Date of
Termination," his full Base Salary at the rate in effect at the time a notice of
termination is given and, in lieu of any further Base Salary payments to the
Executive for periods subsequent to the Date of Termination, the Company shall
pay as severance pay to the Executive on the fifth day following the Date of
Termination a lump sum amount equal to 100% of the annual Base Salary at the
highest rate in effect during the 12 months immediately preceding the Date of
Termination.
"Notwithstanding the at-will status of the Executive's employment
hereunder, if within the 90-day periods immediately prior or subsequent to the
occurrence of an event specified in Subsection 4(b)(i) or 4(b)(ii) hereof, the
Company, or any successor-in-interest thereof, terminates the Executive's
employment hereunder for any reason (other than for "Cause"), then the Company
or its successor-in-interest, if applicable, shall pay the Executive, through
the "Date of Termination," his full Base Salary at the rate in effect at the
time a notice of termination is given and, in lieu
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of any further Base Salary payments to the Executive for periods subsequent to
the Date of Termination, the Company shall pay as severance pay to the Executive
on the fifth day following the Date of Termination a lump sum amount equal to
100% of the annual Base Salary at the highest rate in effect during the 12
months immediately preceding the Date of Termination.
"For purposes of this Agreement, the Company shall have "Cause" to
terminate the Executive's employment hereunder upon (i) the willful and
continued failure by the Executive substantially to perform his duties hereunder
(other than any such failure resulting from the Executive's incapacity due to
physical or mental illness) after demand for substantial performance has been
delivered to the Executive in writing by the Company's President or Chief
Executive Officer specifically identifying the manner in which such executive
officer believes the Executive has not substantially performed his duties or
(ii) the willful engaging by the Executive in misconduct that is materially
injurious to the Company, monetarily or otherwise. For purposes of this
paragraph, no act, or failure to act, on the Executive's part shall be
considered "willful" unless done, or omitted to be done, by him not in good
faith and without reasonable belief that his action or omission was in the best
interest of the Company.
"For purposes of this Agreement, "Date of Termination" shall mean the
date on which a notice of termination is given."
2. No further Amendments. Except as set forth in paragraph 1, above,
---------------------
this Amendment does not amend any other term of the Agreement.
IN WITNESS WHEREOF, the parties have executed this Amendment on the
date and year first above written.
LUTHER MEDICAL PRODUCTS, INC.
By:
------------------------ -----------------------------------
David Rollo, President GEORGE BRDLIK
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CONFIDENTIAL EXHIBIT 10.41
DISTRIBUTION AGREEMENT
THIS DISTRIBUTION AGREEMENT ("Agreement"), effective as of August 11,
--
1997, ("Effective Date"), by and between Luther Medical Products, Inc., a
California corporation with a principal place of business at 14332 Chambers
Road, Tustin, California 92780-6912 (the "Company") and ALARIS Medical Systems,
Inc., a Delaware corporation with a principal place of business at 10221
Wateridge Road, San Diego, California 92121 ("Distributor"), in consideration of
the mutual covenants and agreements set forth below:
1. Definitions.
------------
For the purposes of this Agreement, the following words and phrases
shall have the following meanings:
1.1 "Affiliate" shall mean directors, officers, employees, agents,
shareholders, persons, corporations or other legal entities other than Company
or Distributor in whatever country organized, controlling, controlled by or
under common control with Company or Distributor.
1.2 "Applicable Laws" shall mean laws, regulations and restrictions of
those governmental or regulatory agencies within the United States and each
country in the Territory (as hereinafter defined) responsible for regulating the
manufacture, sale and distribution of medical devices.
1.3 "Average Selling Price" shall mean, for any time period, for each
specific Product, Net Sales in the Territory for that specific Product divided
by the number of each such Product sold in the Territory.
1.4 "Company Cost of Goods Sold" shall mean the sum of the costs of
direct labor, direct materials, fixed manufacturing equipment (capitalized over
the useful life of the equipment) and indirect labor reasonably applicable to
each such the Product in accordance with generally accepted accounting
principles consistently applied.
1.5 "Company Gross Margin" shall mean the percentage obtained by
dividing (a) the difference of the Distributor Price minus Company Cost of Goods
Sold by (b) the Distributor Price.
1.6 "Contract Year" shall mean the period commencing with the
Effective Date and ending on the anniversary of such date, and thereafter, each
consecutive twelve (12) month period during the term of this Agreement.
1.7 "Distributor Cost of Goods Sold" shall mean the sum of the
Distributor Price, customs duties and freight costs from Tustin, California, to
Distributor's warehouse in Veghel, the Netherlands (INTEXO), but not selling,
marketing and promotional costs related to sale of each such Product by
Distributor, in accordance with generally accepted accounting principles
consistently applied.
1.8 "Distributor Gross Margin" shall mean the percentage obtained by
dividing (a) the Average Selling Price minus Distributor Cost of Goods Sold by
(b) the Average Selling Price.
1.9 "Distributor Prices" shall mean the prices charged by Company, in
accordance with the provisions of Article 7 hereof, for Products sold to
Distributor.
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1.10 "Net Sales" shall mean the gross sales of the Products by
Distributor and its Affiliates to unaffiliated third parties, excluding
commissions paid by Distributor to its internal sales representatives and
discounts allowed to distributors, reasonable discounts allowed dealers,
reasonable cash discounts, refunds, replacements or credits allowed to
purchasers for return of the Products or as reimbursement for damaged Products.
Should any Products be sold in combination with other components or products,
then the computation of Net Sales shall be based upon the Average Selling Price
charged during the applicable quarter for such Products when separately invoiced
or priced. In the event the Products have not been separately invoiced or priced
during the applicable annual period, the Net Sales computation shall be based on
the fair market price which Distributor would have charged for the Products to
an unrelated purchaser in any arm's length transaction.
1.11 "U.S. GMP's" shall mean the good manufacturing practices /
quality systems regulations for manufacturing medical devices (21USC820 et seq.,
as amended from time to time) and other applicable laws, regulations and
restrictions of those governmental or regulatory agencies within the U.S.
responsible for regulating the manufacture, sale and distribution of medical
devices.
2. Appointment of Distributor.
---------------------------
2.1 Appointment. Company hereby appoints Distributor as its Semi-
------------
Exclusive Distributor, as defined below, of peripherally inserted central and
midline catheters and related products and accessories described in Section 2.2,
below, in the territory described in attached Exhibit A ("Territory"), and
Distributor hereby accepts such appointment. Distributor agrees to promote,
market, distribute, in-service and sell the Products only within the Territory.
For the purposes of this Agreement, "Semi-Exclusive Distributor" shall be
defined as the sole distributor of the Products in the Territory, subject only
to a pre-existing contractual distribution relationship between Company and
Pharmacia Deltec, Inc., which shall expire in May, 1999. Company shall make
available for purchase by Distributor sufficient quantities of the Products to
meet Distributor's reasonable needs and requirements in order to fulfill the
terms and conditions of this Agreement. Subject to Company's ability to supply
Distributor's requirements, Distributor agrees that it shall purchase
peripherally inserted central or midline catheters exclusively from Company
during the term of this Agreement.
2.2 Products. The products subject to this Agreement ("Products") are
---------
set forth on Exhibit B, as modified by mutual written agreement from time to
time as provided herein and including, but not limited to, modifications and/or
improvements of such products.
2.3 Performance Goals. Distributor agrees to use commercially
------------------
reasonable efforts to sell the Products in the Territory. Annual sales
performance criteria ("Performance Goals") for Distributor for Contract Years
following the first Contract Year shall be established by mutual agreement of
the parties upon the conclusion of the preceding Contract Year. There shall be
no Performance Goal for the first Contract Year.
(a) In the event that, following negotiations in good faith,
Company and Distributor are unable to reach agreement on the Performance Goals
for the second Contract Year, Company may give written notice to Distributor
that Distributor's appointment as Semi-Exclusive Distributor of the Products in
the Territory shall become non-exclusive six (6) months after the date of
receipt of such written notice, and that Distributor's appointment shall
terminate entirely twenty-four (24) months after the date of receipt of such
written notice.
(b) In the event that, following negotiations in good faith,
Company and Distributor are unable to reach agreement on the Performance Goals
for Contract Years following the second Contract Year, Company may give written
notice to Distributor that Distributor's appointment as
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Semi-Exclusive Distributor of the Products in the Territory shall become non-
exclusive six (6) months after the date of such written notice, and that
Distributor's appointment shall terminate entirely eighteen (18) months after
the date of such written notice.
(c) Notwithstanding any provision of this Agreement to the
contrary, Company agrees that for the duration of this Agreement it shall not
engage or offer to another individual or business entity distribution rights to
the Products in the Territory on terms and conditions which are more favorable
than those offered to Distributor under this Agreement, unless Company first
offers Distributor the opportunity to distribute such Products on terms and
conditions no less favorable than those offered by Company to any such third
party.
(d) In the event that Distributor fails to achieve at least
seventy-five percent (75%) of the Performance Goal for any Contract Year,
Company may, within thirty (30) days following the end of that Contract Year,
give written notice to Distributor that Distributor's appointment as Semi-
Exclusive Distributor for the Products shall become non-exclusive thirty (30)
days after the date of receipt of such written notice, unless Distributor's
failure to achieve the Performance Goals is due to: (i) the failure of Company
to deliver the Products to Distributor in such reasonable quantities and time
frames as specified in Distributor's purchase orders; (ii) the failure of the
Products to meet the Product Specifications; or (iii) the failure of the
Products to comply with the U.S. GMP's.
(e) In the event that Distributor fails to achieve at least fifty
percent (50%) of the Performance Goal for any Contract Year in which Distributor
has been appointed as a non-exclusive distributor for the Products, Company may,
within thirty (30) days of the end of that Contract Year, give written notice to
Distributor that Distributor's appointment as nonexclusive distributor shall be
terminated (30) days after the date of receipt of such written notice, unless
Distributor's failure to achieve the Performance Goal is due to: (i) the failure
of Company to deliver the Products to Distributor in such quantities and time
frames as specified in Distributor's purchase orders; (ii) the failure of the
Products to meet the Product Specifications; or (iii) the failure of the
Products to comply with the U.S. GMP's.
(f) Despite the provisions of Sections 2.3(d) and (e) hereof,
Distributor shall have the right, within thirty (30) days from the date of
receipt of such written notice, to pay Company an amount equal to the Company
Gross Margin on the difference between the Performance Goal and Distributor's
actual performance for the applicable Contract Year in order to maintain its
then-current status as either Semi-Exclusive or non-exclusive distributor of the
Products, as applicable, in the Territory.
3. Promotion of the Products
-------------------------
3.1 Promotional Activities. Distributor shall encourage industry
----------------------
acceptance of the Products through such marketing, advertising and promotional
efforts as Distributor, in its sole discretion, deems appropriate. Company
agrees to cooperate actively with Distributor in the implementation of
marketing, advertising or other promotional activities sponsored by Distributor.
3.2 Promotional Materials. Company agrees to make available to
---------------------
Distributor all brochures, sales aids, clinical support papers and other
technical and promotional materials ("Product Support Materials") which Company
has provided or may provide to other customers or distributors of the Products.
Company agrees to supply to Distributor, within thirty (30) days after the
Effective Date, a total of two (2) copies of all training videotapes and three
hundred (300) copies of all other Product Support Materials which are then in
existence, at no cost to Distributor, and to permit Distributor to modify,
reproduce and distribute such additional copies of the Product Support Materials
as Distributor may, in its sole discretion, require. Permissible modification
of the Product Support Materials shall be in
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conformance with applicable legal and regulatory requirements and may include,
but not be limited to, replacement of all occurrences the name, logos or other
corporate identification of Company by that of Distributor.
3.3 Demonstration Product. Company agrees that Distributor may purchase
----------------------
such quantities and model designations of the Products ("Demonstration
Products") as Distributor may reasonably require for use in Distributor's
training and sales activities hereunder at fifty percent (50%) of the then-
current Distributor Price. The Demonstration Products may, at the discretion of
the Company, bear labels affixed by Company indicating "For Demonstration Use
Only."
3.4 Training. Company shall provide a total of sixty (60) days of
--------
training on the Products to Distributor's sales and technical support personnel
during the first Contract Year, and thirty (30) days of training during each
subsequent Contract Year, at locations and times to be established by
Distributor. Company shall pay for the salary of its training personnel and
for a sufficient quantity of training materials (in English only). Distributor
shall reimburse Company for reasonable travel and living expenses incurred by
Company's training personnel and shall provide all non-English training
materials.
4. Regulatory Matters.
-------------------
4.1 Compliance. Distributor shall comply with the Applicable Laws, and
----------
Company shall comply with the U.S. GMP's. Distributor shall cease distribution
of any of the Products or any other activity under this Agreement with respect
thereto in connection with any adverse or unexpected results or any actual or
potential government action relevant to the sale of any of the Products within
the Territory.
4.2 Regulatory Approvals. Company shall be responsible for obtaining CE
---------------------
marking approval for all of the Products ("CE Approval"), including all costs,
with the exception of labor costs of Distributor, if any, related thereto.
Distributor agrees to provide such reasonable assistance as may be requested by
Company in support of Company's efforts to obtain CE Approval. Notwithstanding
any provision of this Agreement to the contrary, in the event that Company has
not obtained CE Approval by the beginning of the second Contract Year:
(a) the Performance Goals for the second Contract Year shall be reduced in
direct proportion to the amount of time that has elapsed from the beginning of
the second Contract Year until the date that CE Approval is obtained by the
Company. (For example, in the event that CE Approval is not obtained until six
months following the beginning of the second Contract Year, the Performance
Goals shall be reduced by fifty percent (50%)); and
(b) the parties hereto agree that the term of this Agreement shall
automatically be extended for the same amount of time that has elapsed from July
1, 1998, until the date that CE Approval is obtained by the Company.
Distributor shall be responsible for obtaining such additional regulatory
approvals (the "Additional Approvals") as Distributor determines are reasonably
necessary to market the Products in the Territory. Company shall provide
adequate documentation and such reasonable assistance as may be requested by
Distributor in support of Distributor's efforts to obtain the Additional
Approvals. Upon termination of the Agreement, Distributor agrees to use
commercially reasonable efforts to assist in the transfer of the Additional
Approvals to Company or its designee.
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CONFIDENTIAL
4.3 Product Manufacturing Facilities.
---------------------------------
(a) Company shall manufacture the Products in accordance with: (i) the
Product Specifications, as defined hereafter in this Agreement; and (ii) the
U.S. GMP's. Company and Distributor agree to enter into and to comply with the
terms of a Supplier Quality Agreement, the terms of which shall be consistent
with the U.S. GMP's and the Applicable Laws. Notwithstanding any other
provision of this Agreement, Company shall not manufacture the Products for
delivery to Distributor, other than the Demonstration Products, until Company's
plant has been inspected and approved in writing by an authorized representative
of Distributor. Company agrees to initiate an International Standards
Organization ("ISO") 9001 certification process for its manufacturing facilities
and Products by August 31, 1997, and to take all necessary steps to ensure
issuance of said certification in a timely manner.
(b) During the term of this Agreement, Company shall notify and obtain
the approval of Distributor in advance of any changes which Company determines
are significant and which are related to Company's testing, quality control, or
quality assurance procedures, manufacturing processes and procedures, packaging
or design of the Products, including component or materials changes, or other
procedures or methods which could adversely affect the safety or efficacy of the
Products.
(c) Upon reasonable prior notice to Company, Distributor shall have the
right to have qualified employees of Distributor present during Company's normal
business hours to inspect Company's facilities, manufacturing procedures,
inventories, work-in-process, raw materials, production records and such other
matters as may be pertinent reasonably to assess compliance of the Products with
the GMP's and such other requirements as mutually agreed upon between the
parties.
(d) Company shall permit authorized representatives of the US Food and
Drug Administration ("FDA") and other appropriate state, local or foreign
regulatory agencies to inspect Company's plant and production facilities
relating to or used in connection with the Products and shall promptly notify
Distributor of any such inspection. Company shall advise Distributor of the
findings of any such regulatory inspection in a timely manner, and shall take
such steps as Company deems are necessary to correct deficiencies found by such
regulatory agency relating to the Products.
4.4 Product Complaints. If either party becomes aware of any actual or
-------------------
potential safety risks arising out of the use or performance of the Products, it
shall notify the other party immediately. Company and Distributor will agree on
appropriate Product complaint reporting procedures and ensure that these are in
place for the reporting of adverse events directly to the appropriate regulatory
authorities as required by the Applicable Laws and the U.S. GMP's. Company
agrees to provide a written analysis of all complaints regarding the Products
which it receives from Distributor within three (3) working days of receiving
documentation and/or samples of the complaint Product.
4.5 Recalls. If, in the judgment of Company or Distributor, any product
-------
defect or any governmental action requires a product corrective action at the
distributor or customer level, a recall of or the issuance of a customer
advisory letter regarding the Products (collectively, a "Recall"), either party
may undertake a Recall after consultation with the other party. The parties
shall agree, in writing, prior to initiating a Recall, regarding the manner,
text and timing of any publicity to be given such matters in time to comply with
all Applicable Laws and the U.S. GMP's, but such agreement shall not be a
precondition to any action that either party deems necessary to protect users of
the Products or to comply with any applicable governmental orders.
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CONFIDENTIAL
(a) If the Recall is caused by the actions or inactions of both parties
hereto, then the parties shall allocate between themselves, on a comparative
fault basis, the aggregate of the reasonable expenses incurred by the parties in
implementing the Recall. If the Recall is caused by the actions or inactions of
one of the parties hereto, as well as the actions or inactions of an otherwise
unaffiliated third party which has a business relationship with that party, then
the party hereto that caused the Recall shall reimburse the other party hereto
for all reasonable expenses incurred by it in implementing such Recall. The
reimbursing party shall retain any rights to reimbursement that it might have
against such unaffiliated third party.
5. Manufacturing of the Products
-----------------------------
5.1 Manufacturing. Company agrees to manufacture and sell the Products to
--------------
Distributor subject to the terms and conditions set forth herein.
5.2 Conformance with Specifications. The Products shall conform to the
--------------------------------
specifications for the Products, as defined in the Company's device master
record ("Product Specifications"). Company shall provide Distributor with
documentation detailing the Product Specifications which is sufficient, in the
reasonable opinion of Distributor, to meet Distributor's regulatory obligations
under the Applicable Laws and to comply with Distributor's internal quality
assurance requirements. Company shall provide a Certificate of Conformance with
each delivery of the Products to Distributor, indicating compliance of the
Products with the Product Specifications. The parties agree that Product
Specifications may be supplemented, modified and updated from time to time by
Company, but that significant changes to the Product Specifications shall
require the prior written approval of both parties hereto, without formal
amendment of this Agreement. Company agrees to notify Distributor in a timely
manner of modifications which may affect the form, fit or function of the
Products. Neither Company nor Distributor shall unreasonably withhold agreement
on changes to the Product Specifications, provided that both parties must
approve any changes which may adversely affect the safety or efficacy of the
Products.
5.3 Distributor Labeling. Distributor shall develop and provide
---------------------
production-ready artwork to Company for the labeling, packaging, directions for
use and other materials accompanying the Products under the name of Distributor
("Distributor Labeling"). Company shall secure written approval of the final
artwork from Distributor in advance of printing any of the Distributor Labeling.
Distributor agrees to reimburse Company promptly for reasonable printing set-up
charges actually incurred by Company as a result of implementing the
Distributor Labeling upon submission of third party invoices in support of such
expenses to Distributor. Company agrees that Distributor shall retain all
right, title and interest in and to the production-ready artwork for the
Distributor Labeling, including the right to repossess such artwork at any time
during or after the term of this Agreement, and Company further agrees that it
will return the artwork to Distributor within seven days after receipt of such
written request. Company shall take all reasonable steps to implement the
Distributor Labeling in a timely manner.
6. Ordering, Delivery and Acceptance of the Products.
--------------------------------------------------
6.1 Orders. All orders for the Products shall be on Distributor's
-------
standard purchase order. Any term or condition on any purchase order which is
inconsistent with the terms and conditions of this Agreement shall be of no
effect.
6.2 Forecasts. Distributor shall provide Company, on a quarterly basis, a
----------
non-binding forecast of requirements for the Products with respect to the
following twelve (12) month period. In addition, Distributor shall provide
Company, on a monthly basis, with a binding order for Products which are to be
delivered within the following sixty (60) days. Binding orders shall continue to
be binding even if
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CONFIDENTIAL
delivery of the Products occurs after termination of this Agreement for any
reason except in the event of termination by Distributor due to the
nonconformance the Products with the Product Specifications.
6.3 Shipment. Products will be shipped in sterile condition, packaged as
---------
reasonably requested by Distributor in writing, and in conformance with Product
Specifications. The Products shall be shipped FOB Los Angeles, CA. Title to
and risk of loss and damage for any shipment of the Products shall pass to
Distributor immediately upon delivery of the shipment to Distributor or its
designated agent at Distributor's designated destination point.
6.4 Acceptance. Within forty-five (45) days after receipt of the Products
-----------
at Distributor's warehouse in Veghel, the Netherlands, Distributor may reject
any of the Products which fail to meet the Product Specifications by sending
Company notice of the lot numbers of the rejected Products, together with an
indication of the basis for such rejection. Distributor shall return the
rejected Products to Company, at Company's expense, within ninety (90) days of
Distributor's receipt of the Products in Veghel. Distributor shall not be
required to pay Company for any such rejected Products. Any Products not
rejected by Distributor within forty-five (45) days after receipt by Distributor
in Veghel shall be deemed to have been accepted.
7. Price and Payment.
------------------
7.1 Currency. All prices in this Agreement shall be in U.S. Dollars.
---------
7.2 Price. Distributor Prices for the Products ("Distributor Prices") for
------
the first Contract Year of this Agreement shall be sixty percent (60%) of
Company's U.S. list prices on the Effective Date, as set forth in Exhibit B
hereto. Thereafter, thirty (30) days prior to the end of each Contract Year,
Distributor and Company shall conduct a review of the Distributor Prices for the
ensuing Contract Year ("Pricing Review"). The parties agree that the goal of
the Pricing Review shall be to enable Company to achieve a fifty percent (50%)
Company Gross Margin, and to enable Distributor to achieve a forty percent (40%)
Distributor Gross Margin (each, the "Goal"). In the event that the parties are
not able to reach agreement on a negotiated Distributor Price, then the
Distributor Prices for the next year shall be adjusted as necessary to provide,
based on the reasonable estimates of the financial data for the then-current
Contract Year, a Company Gross Margin and Distributor Gross Margin that
represent the same percentage of each party's respective Goals.
7.3 Payment. Distributor shall pay Company for the Products delivered as
--------
provided herein within fifteen (15) days after acceptance of the Products by
Distributor, in accordance with Section 6.4 hereof.
8. Term and Termination.
---------------------
8.1 Term of Agreement. This Agreement shall become effective as of the
-----------------
Effective Date and shall extend for five (5) years from the date first written
above unless sooner terminated or extended as provided herein.
8.2 Post-Acquisition Rights. Notwithstanding any provision to the
------------------------
contrary in this Agreement, in the event that all or substantially all of
Company's business or assets to which this Agreement pertains are sold or
transferred, or in the event that a merger or consolidation of Company with
another company is concluded in which the Company is not the surviving entity
(collectively, an "Acquisition") at any time during the term of this Agreement,
Company may give written notice to Distributor of its intention to terminate
this Agreement ("Post-Acquisition Termination Notice"), subject to: (i) the
right of Distributor to retain its Semi-Exclusive distributorship for the
Products for six (6) months
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CONFIDENTIAL
and a non-exclusive distributorship for the Products for an additional twelve
(12) months following its receipt of the Post-Acquisition Termination Notice;
and (ii) Distributor's confirmation to each of Company and its acquirer that
Distributor's sole remedies against each such entity for such termination shall
be as set forth in this Section 8.2. However, nothing in this Article 8.2 shall
be construed to give Distributor the right to retain either Semi-Exclusive or
non-exclusive distribution rights for the Products beyond the completion of the
fifth Contract Year or such extended term as may be determined in accordance
with Section 4.2(b) hereof. Company agrees that the Distributor Prices for the
Products shall remain unchanged for the entire eighteen month period following
delivery of the Post-Acquisition Termination Notice to Distributor.
Notwithstanding any provisions of this Agreement to the contrary, Company
further agrees to compensate Distributor as follows:
(a) if the Post-Acquisition Termination Notice is given to Distributor
up to twelve (12) months of the Effective Date, and Distributor has committed
resources to the task of becoming a Distributor, such as by training its sales
force, assisting in the CE mark approval process, or developing product
literature, then the compensation shall be the sum of US$150,000, which sum is
to be paid to Distributor by Company within six (6) months after Distributor's
receipt of such notice; or
(b) if the Post-Acquisition Termination Notice is given to Distributor
later than twelve (12) months after the Effective Date, then the compensation
shall be in the form of a 10% reduction in the then-current Distributor Prices,
which reduced Distributor Prices shall then remain in effect for the duration of
the Agreement, notwithstanding any other provision of this Agreement to the
contrary.
8.3 Termination. In the event of any material breach by a party, the non-
-----------
breaching party may terminate this Agreement if such breach remains uncured
sixty (60) days after the breaching party's receipt of written notice of such
breach from the non-breaching party or immediately if such breach is of an
incurable nature. Notwithstanding the foregoing, in the event that either
party:
(a) is adjudicated bankrupt or insolvent or a receiver for its
property is appointed or becomes subject to the commencement of proceedings of
any nature against it under bankruptcy, insolvency or debtor's relief laws
(which proceeding is not vacated or set aside within 60 days of commencement);
(b) voluntarily files a bankruptcy petition, or otherwise seeks relief
under bankruptcy, insolvency or debtor's relief laws (which filing is not
withdrawn within 120 days of filing);
(c) materially breaches a provision of this Agreement of a non-curable
nature;
(d) makes a non-permitted assignment or delegation of this Agreement;
(e) fails to comply with the Applicable Laws and the U.S. GMP's in
connection herewith; or
(f) repeats a breach of the same provision hereof,
the non-breaching party may, at its, option terminate this Agreement by giving
written notice effective as of the date thereof. Acceptance or satisfaction of
any order for the Products or the purchase or sale of any of the Products after
notice of breach, termination or expiration shall not be construed as a revival,
renewal or extension of this Agreement nor as a waiver or withdrawal of any
notice of termination, expiration or breach.
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8.4 No Termination Damages. Except as expressly provided in this
----------------------
Agreement, neither Distributor nor Company shall by reason of any permitted
termination or expiration hereunder be liable to the other for, and each shall
release and hold the other harmless from, all claims of any nature, including
(without limitation) claims for compensation, reimbursement or damages on
account of the loss of prospective profits on anticipated sales, or on account
of expenditures, investments, leases or commitments in connection with the
business or goodwill of either party, resulting from or arising out of such
termination or expiration, or for any other indirect, special or consequential
damages.
8.5 Effect of Termination or Expiration. Notwithstanding any other
-----------------------------------
provision hereof, the provisions of this Agreement which by their nature create
rights or obligations that should survive the expiration or termination of this
Agreement shall so survive, including (without limitation) the rights and
obligations under Articles 4, 6, 7, 8, 9, 13, 16 and 17 hereof and paragraphs
10.3, 10.4 and 10.5 hereof, and the obligation to pay any purchase price and
charges for Products hereunder. Within 10 days after the expiration or the
termination of this Agreement for any reason, the parties shall promptly return
to one another all property and other materials of the other party in their
respective possessions, including all media (and copies thereof) containing
confidential information of either party. Termination is not the sole remedy
under this Agreement and, whether or not termination is effected, all other
remedies shall remain available.
9. Confidential Information and Proprietary Rights.
------------------------------------------------
9.1 Confidentiality. All information of a business or technical nature
---------------
(including information about the use, design, specifications, costs, profits
margins, manufacturing, packaging, distribution, marketing or selling of the
Products) learned from a disclosing party ("Discloser") by a receiving party
("Recipient") during the term hereof with respect to the Discloser's business
shall be deemed confidential, shall be used by Recipient only as absolutely
necessary in the distribution and sale of the Products, and shall not be
disclosed by Recipient to anyone except its employees with a need to know and
who are aware of Recipient's confidentiality obligations hereunder. Recipient
agrees that it shall take all reasonable measures necessary to protect the
secrecy and confidentiality of and avoid disclosure or use of such confidential
information, including the same degree of care that Recipient utilizes to
protect its own confidential information. The obligations of confidentiality
shall not apply to information which has entered the public domain except where
such entry is the result of the Recipient's breach of this Agreement. No
provision of this Agreement shall be construed so as to preclude such disclosure
of Confidential Information as may be inherent in or reasonably necessary for
marketing the Products pursuant to this Agreement, or for securing from any
governmental agency any necessary approval or license, or for obtaining patents
by the parties relating to the subject or performance of this Agreement.
9.2 Proprietary Rights. Company hereby grants to the Distributor the non-
------------------
exclusive limited right to use its trade names, trademarks, service marks and
other trade designations ("Marks") solely in connection with the marketing or
sale of Products as provided for herein. Distributor shall not acquire any
interest, other than the interest set forth in the immediately preceding
sentence, in the Marks, by virtue of performance by either or both of the
parties hereto. At no time during or after the term of this Agreement shall
Distributor challenge or assist others to challenge Company's ownership or
registration of any Mark.
9
<PAGE>
CONFIDENTIAL
10. Representations, Warranties, Insurance and Indemnification.
---------------- -----------------------------------------
10.1 Representations and Warranties of Company. Company represents and
------------------- ----------------------
warrants to Distributor that:
(a) All of the Products delivered hereunder shall conform to and meet
the Product Specifications.
(b) No article delivered hereunder is adulterated or misbranded
within the meaning of the U.S. Food, Drug and Cosmetic Act, as amended ("FDC
Act"), or within the meaning of the U.S. GMP's or any other Applicable Laws in
which the definitions of adulteration or misbranding are substantially the same
as those contained in the FDC Act as constituted and effective at the time of
such shipment or delivery, or as an article which may not, under the provisions
of Sections 404 or 505 of the FDC Act be introduced into interstate commerce.
(c) The marketing, sale, distribution, use or other exploitation of
the Products by Distributor, Affiliates or customers of Distributor in
accordance with the terms of this Agreement will not, to the best of Company's
knowledge, infringe any patent, know-how, trademark, trade name, copyright or
other proprietary rights of any third party.
(d) Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of California.
(e) This Agreement has been duly authorized, executed and delivered
by Company and constitutes a legal, valid and binding obligation of Company,
enforceable against it in accordance with its terms.
(f) The execution, delivery and performance of this Agreement by
Company do not violate, or conflict with, or constitute a default under the
articles of incorporation or bylaws of Company.
(g) The execution, delivery and performance of this Agreement by
Company do not violate, or conflict with, or constitute a default under any
contract, agreement or understanding to which Company is a party or by which it
or its property is bound including, without limitation, any contract, agreement
or understanding between Company and any third party related to distribution of
the Products within the Territory.
10.2 Representations and Warranties of Distributor. Distributor
------------------- --------------------------
represents and warrants to Company that:
(a) Distributor is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware.
(b) This Agreement has been duly authorized, executed and delivered
by Distributor and constitutes a legal, valid and binding obligation of
Distributor, enforceable against it in accordance with its terms.
(c) The execution, delivery and performance of this Agreement by
Distributor do not violate, or conflict with, or constitute a default under the
certificate of incorporation or bylaws of Distributor or any agreement, contract
or understanding to which Distributor is a party or by which it or its property
is bound.
10
<PAGE>
CONFIDENTIAL
10.3 Survival of Representations and Warranties. Except for the
-------------------------------------------
representations and warranties contained in Articles 10.1(a)-(c), which shall
survive termination of this Agreement, the representations and warranties
contained in paragraphs 10.1(d)-(f) and 10.2 shall expire and cease to be of any
legal effect after the termination of this Agreement.
10.4 Insurance. Each party agrees, at its own expense, to maintain
----------
insurance from a recognized insurance company providing at least $1,000,000 of
comprehensive general liability coverage per occurrence and $1,000,000 annual
aggregate coverage against claims, suits, losses and damages for which it is
responsible pursuant to this Agreement. Each party further agrees to name the
other party as an additional insured under such policies and to provide the
other with a certificate of insurance evidencing its obligations hereunder.
Such certificates shall provide the other party with thirty (30) days written
notice of cancellation, modification or termination. Such comprehensive general
liability insurance shall provide product liability coverage and broad form
contractual liability coverage Company's indemnification Distributor in
accordance with the provisions of this Agreement. The minimum amounts of
insurance coverage required under this paragraph 10.4 shall not be construed to
create a limit of either party's liability with respect to its indemnification
of the other party in accordance with the provisions of this Agreement.
10.5 Indemnification
---------------
(a) By Company. Company agrees to indemnify, defend and hold harmless
----------
Distributor and its Affiliates against any and all liability, loss, damages,
costs or expenses which Distributor or its Affiliates may hereafter incur,
suffer or be required to pay, defend, settle or satisfy a judgment or a claim by
any person for damages incurred as a result of an injury, illness or death of
any person which is caused by the Products arising out of any theory of product
liability (including, but not limited to, actions in the form of tort, warranty
or strict liability) if such injury, illness or death resulted from: (i) any
act or omission of Company or its Affiliates; (ii) any inadequacy or failure to
warn of the labeling or user manuals for the Products, unless such inadequacy
consists of inaccurate information supplied by Distributor; or (iii) any breach
of warranty.
(b) By Distributor. Distributor agrees to indemnify, defend and hold
--------------
harmless Company and its Affiliates against any and all liability, loss,
damages, costs or expenses which Company or its Affiliates may hereafter incur,
suffer or be required to pay, defend, settle or satisfy a judgment or a claim by
any person for damages incurred as a result of an injury, illness or death of
any person which is caused by (i) any description, claim, direction or
indication for use made by Distributor in relation to the Products which was not
approved in writing by Company; or (ii) any act or omission of Distributor with
respect to the distribution, marketing or sale of the Products.
(c) Procedures. In any case in which either party receives a written
-----------
claim for damages for bodily injury alleged to have been caused by the Products,
such party shall promptly, and in any case within thirty (30) days thereafter,
give notice of any possible claim to the other party and shall cooperate fully
with the other party in the defense of all such claims. The indemnifying party
shall be entitled to make all litigation decisions, subject to counsel's
obligations not to represent two clients with differing or potentially
differing interests, and the party being indemnified reserves the right to
approve all settlements as set forth herein. The indemnified party shall
cooperate with such defense. The giving of such notice promptly shall be a
condition precedent to the right to be indemnified hereunder. Notwithstanding
any provision of this Agreement to the contrary, no settlement or compromise
entered into without its prior written consent shall be binding upon a party
hereto or be used in any way as evidence by a party hereto against the other
party, nor shall the non-consenting party be required to indemnify the other
party against such settlement or be subject to its provisions in any way. The
11
<PAGE>
CONFIDENTIAL
contracting parties shall not bring cross-claims against each other in any
personal injury or wrongful death action brought by a third person, but instead
agree to arbitrate such issues.
(d) Patent, Copyright and Trademark Infringement - Indemnification by
-----------------------------------------------------------------
Company. Company will defend, at its expense, and Distributor shall permit
- -------
Company to defend, using attorneys of Company's choice and with Company making
all litigation decisions, any threatened or actual suits or proceedings against
Distributor or its Affiliates for direct infringement of patents, copyrights and
trademarks by the Products and the Product Support Materials, with the exception
of suits or proceedings which are based solely upon modifications to the
Products or the Product Support Materials made by Distributor. Company shall
pay all damages and costs finally awarded against Distributor because of direct
infringement covered by this indemnification. Company's duties under this
paragraph 10.5(d) are conditioned upon Distributor giving Company prompt written
notice of commencement of any suit or proceeding or any claim of infringement
and furnishing to Company a copy of each communication relating to the alleged
infringement and giving to Company all authority (including the right to semi-
exclusive control of defense of any such suit or proceeding), information and
assistance (at Company's expense) necessary to defend or settle such suit or
proceeding.
(e) Patent, Copyright and Trademark Infringement - Indemnification by
-----------------------------------------------------------------
Distributor. Distributor will defend, at its expense, and Company shall permit
- -----------
Distributor to defend, using attorneys of Distributor's choice and with
Distributor making all litigation decisions, any threatened or actual suits or
proceedings against Company or its Affiliates for direct infringement of
patents, copyrights and trademarks based solely upon modifications to the
Products or the Product Support Materials made by Distributor. Distributor
shall pay all damages and costs finally awarded against Company because of
direct infringement covered by this indemnification. Distributor's duties under
this paragraph 10.5(e) are conditioned upon Company giving Distributor prompt
written notice of commencement of any suit or proceeding or any claim of
infringement and furnishing to Distributor a copy of each communication relating
to the alleged infringement and giving to Distributor all authority (including
the right to semi-exclusive control of defense of any such suit or proceeding),
information and assistance (at Distributor's expense) necessary to defend or
settle such suit or proceeding.
11. Relationship Between Parties. The relationship between Distributor and
----------------------------
Company under this Agreement is intended to be that of independent contractors.
Nothing in this Agreement is intended to be construed so as to constitute
Distributor and Company as partners or joint venturers, or either party hereto
as the employee, agent or legal representative of the other party. Each party
agrees that it shall not hold itself out as an agent of the other party or
claim or represent that it is operating or doing business as a sales office of
the other party, nor shall either party purport to pledge the credit of or enter
into any agreement or commitment for the other party. This Agreement and the
performance thereunder does not convey nor shall either party claim any property
interest in the other party's corporate name, Marks, patents, patent
applications or other proprietary or intangible property rights, except as
expressly set forth herein. Each party shall be obligated to use its
commercially reasonable efforts to assure that its employees, or other persons
whose services it may require, comply with all of the terms of this Agreement.
Each party shall in no manner be associated with or otherwise connected with the
actual performance of this Agreement on the part of the other party, nor with
the other party's employment of other persons or incurring of expenses.
12. Force Majeure. Any delay in the performance of the duties or obligations
--------------
of either party hereto shall be extended for a period equal to the period of
such delay; provided that such delay has been caused by or is the result of any
acts of God or public authorities, acts of the public enemy, insurrections,
riots, embargoes, labor disputes, including strikes, lockouts, job actions, or
boycotts, fires, explosions, epidemics, floods, shortages of material or energy,
delays in transportation, delivery of supply, or other unforseeable causes
beyond the control and without the fault or negligence of the party so affected.
The
12
<PAGE>
CONFIDENTIAL
party so affected shall give prompt notice to the other party of such cause
and shall take whatever reasonable steps are necessary to relieve the effect of
such cause as rapidly as possible.
13. Notices. All notices, orders, authorizations, approvals, reports and other
-------
communications required or permitted herein shall be in writing and shall be
delivered personally (which shall include delivery by courier or reputable
overnight delivery service) or sent by certified or registered mail, postage
prepaid, return receipt requested or sent by telecopier or other similar
facsimile transmission. Items delivered personally or by telecopier or
facsimile shall be deemed delivered on the date of delivery; items sent by
certified or registered mail shall be deemed delivered three business (3) days
after mailing. The address of the parties for purposes of this provision are as
follows (as may be amended pursuant to a notice delivered hereunder):
<TABLE>
<CAPTION>
Company: Distributor:
-------- ----------
<S> <C>
Luther Medical Products, Inc. ALARIS Medical Systems, Inc.
14332 Chambers Road, 10221 Wateridge Circle
Tustin, CA 92780-6912 San Diego, CA 92121-2733
Attn.: Mr. David Rollo Attn.: General Counsel
With copy to: With a copy to:
Arter & Hadden ALARIS Medical UK, Ltd.
Jamboree Center Unit 13, Intec 2
5 Park Plaza, Suite 1000 Wade Road
Irvine, CA 92614-8528 Basingstoke, Hampshire, UK RG24 8NE
Attn.: Randolf W. Katz Attn.: Henk van Rossem
</TABLE>
14. Assignment. Neither party shall delegate any duties or assign any rights
-----------
under this Agreement without the prior written consent of the other party;
provided, however, that either party, without such consent, may assign or sell
the same in connection with the transfer or sale of substantially its entire
business to which this Agreement pertains or in the event of a merger or
consolidation with another company which has the capability to perform this
Agreement. Any permitted assignee shall assume all obligations of its assignor
under this Agreement. No assignment shall relieve any party of responsibility
for the performance of any accrued obligation which such party then has
hereunder. Subject to the foregoing, this Agreement shall bind and inure to the
benefit of the parties and their respective successors and assigns.
15. Waiver, Modification of Agreement. No modification of this Agreement shall
----------------------------------
be binding unless made in writing clearly identified as a modification and
signed by an authorized representative of the party against whom enforcement of
such modification is sought. Either party may, by an instrument in writing,
waive compliance by the other party with any term or provision of this
Agreement. No waiver shall be implied from conduct or a failure to enforce
rights or a delay in enforcing rights, including any delay by in exercising or
asserting any right of one party to terminate this Agreement due to breach of
the other party's obligations hereunder. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original but all of which
shall constitute one and the same instrument.
16. Entire Agreement. This Agreement, together with all ancillary agreements,
----------------
Exhibits and Schedules attached hereto, including a Quality Agreement to be
entered into between the parties on or before October 1, 1997, represents the
entire agreement between the parties relating to the subject matter hereof and
supersedes all prior and contemporaneous representations, understandings,
discussions, negotiations, correspondence, commitments and agreements, whether
written or oral. In the event of a conflict between this Agreement and the
Quality Agreement, the terms of this Agreement shall
13
<PAGE>
CONFIDENTIAL
prevail. Neither party hereto has relied on any representation, agreement or
understanding not expressly set forth herein. In the event that any provision of
this Agreement is determined to be illegal or otherwise enforceable, such
provision shall be construed as if it were written so as to be legal and
enforceable to the maximum extent possible, the entire Agreement shall not fail
on account thereof, and the balance of the Agreement shall be continued in full
force and effect, all so as to effectuate to the greatest extent possible the
parties' intent. No person not a party to this Agreement shall have any rights
by reason of this Agreement nor shall any party hereto have any obligations or
liabilities to such other person by reason of this Agreement. All exhibits
referred to herein are deemed incorporated by this reference as if fully set
forth herein.
17. Dispute Resolution, Governing Law. The parties agree that this Agreement
----------------------------------
shall be governed by and construed under the internal laws of the State of
California, as applicable to agreements made and to be performed in such state,
without regard to principles of conflicts of law. Company and Distributor agree
that any dispute regarding the interpretation or validity of, or otherwise
arising out of, this Agreement or relating to the Products sold or distributed
under this Agreement, shall be subject to the exclusive jurisdiction of the
California State Courts in and for San Diego County, California or the United
States District Court for the Southern District of California sitting in San
Diego County, California. Company and Distributor hereby agree to submit to the
personal and exclusive jurisdiction and venue of such courts and agree that
process may be served in the manner provided therein for the giving of notices
or otherwise as allowed by applicable law.
18. Headings. The headings contained in this Agreement are for convenience and
---------
reference purposes only and shall not affect the meaning or interpretation of
this Agreement.
19. Public Announcements. Company and Distributor shall consult with each
---------------------
other before issuing any press release or otherwise making any public statements
with respect to this Agreement and shall not issue any press release to make any
such public statement unless both parties agree to the terms thereof in writing,
except as may be required by applicable law or the requirements of any national
securities exchange or other securities market to which the Company and
Distributor may be subject.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the Effective Date.
COMPANY DISTRIBUTOR
Luther Medical Products, Inc. ALARIS Medical Systems, Inc.
a California corporation a Delaware corporation
By: /s/ DAVID ROLLO By: /s/ HENK VAN ROSSEM
----------------------------- --------------------------------
DAVID ROLLO HENK VAN ROSSEM
Title: PRESIDENT, CEO Title: VP & GEN'L MGR
--------------------------- ------------------------------
14
<PAGE>
CONFIDENTIAL
EXHIBIT A
"Territory"
All countries of the European Economic Union (EU), Australia, Norway,
Switzerland, Kuwait, Bahrain, Saudi Arabia, United Arab Emirates (UAE),
Yemen and Oman.
15
<PAGE>
EXHIBIT 23.1
We hereby consent to the use of our name in the Prospectus on Form S-8, File No.
33-48850, and the use of our opinion as an exhibit to said registration
Statement with the amendment of said Registration Statement by the incorporation
of the Annual Report on Form 10-KSB of Luther Medical Products, Inc., for the
fiscal year ended June 30, 1997.
THELEN, MARRIN, JOHNSON & BRIDGES
October 8, 1997
<PAGE>
EXHIBIT 23.2
We hereby consent to the use of our name in the Prospectus on Form S-8, File No.
333-25005, and the use of our opinion as an exhibit to said registration
Statement with the amendment of said Registration Statement by the incorporation
of the Annual Report on Form 10-KSB of Luther Medical Products, Inc., for the
fiscal year ended June 30, 1997.
ARTER & HADDEN
October 8, 1997
<PAGE>
[LETTERHEAD OF LAW OFFICES OF ROBERT L. PIKE]
EXHIBIT 23.3
October 8, 1997
Luther Medical Products, Inc.
14332 Chambers Road
Tustin, California 92680
Gentlemen:
I hereby consent to the use of my name in the Prospectus on Form S-8,
File No. 33-15612, and the use of my opinion as an exhibit to said Registration
Statement with the amendment of said Registration Statement by the incorporation
of the Annual Report on Form 10KSB, File No. 0-9570 of Luther Medical Products,
Inc. for the year ended June 30, 1997.
Respectfully submitted
/s/ ROBERT L. PIKE
-------------------
Robert L. Pike
<PAGE>
EXHIBIT 23.4
Consent of Independent Auditors
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-25005) pertaining to the 1997 Stock Plan of Luther Medical
Products, Inc. of our report dated August 29, 1997, with respect to the
financial statements of Luther Medical Products, Inc. incorporated by reference
in the Annual Report (Form 10-KSB) for the year ended June 30, 1997.
ERNST & YOUNG LLP
Irvine, California
October 6, 1997
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Luther Medical Products, Inc.
We hereby consent to the incorporation by reference in the Registration
Statements No. 33-48850 and No. 33-15612 on Form S-8 of our report dated August
8, 1996 appearing in the Annual Report on Form 10-KSB of Luther Medical
Products, Inc. for the year ended June 30, 1997.
/s/ Corbin & Wertz
-----------------------------
CORBIN & WERTZ
Irvine, California
October 8, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 811,974
<SECURITIES> 0
<RECEIVABLES> 825,364
<ALLOWANCES> 0
<INVENTORY> 1,843,425
<CURRENT-ASSETS> 3,540,340
<PP&E> 1,260,025
<DEPRECIATION> 921,022
<TOTAL-ASSETS> 3,979,272
<CURRENT-LIABILITIES> 490,382
<BONDS> 0
0
0
<COMMON> 10,487,478
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,979,272
<SALES> 5,400,907
<TOTAL-REVENUES> 5,476,569
<CGS> 3,273,322
<TOTAL-COSTS> 6,205,795
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (729,226)
<INCOME-TAX> 800
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (730,026)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> 0
</TABLE>
