UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (Fee Required)
For the fiscal year ended December 31, 1996
OR
[ ] 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 No. 1-11109
Lukens Medical Corporation
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(Name of small business issuer in its charter)
Delaware 22-2429965
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(State or other (IRS Employer
jurisdiction of incorporation) Identification Number)
3820 Academy Parkway North, N.E.
Albuquerque, New Mexico 87109
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (505) 892-4118
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.01 par value Pacific Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
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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 the 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 statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
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State issuer's revenues for its most recent fiscal year: $8,178,576.
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked price of such stock, as of March 19, 1997:
$14,754,347. In determining the market value of voting stock held by
non-affiliates, shares of Common Stock of the registrant beneficially owned by
directors, officers and holders of more than 10% of the outstanding shares of
Common Stock of the registrant have been excluded. The determination of
affiliate status is not necessarily a conclusive determination for other
persons.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of March 1, 1997: 2,731,988 shares of Common Stock, $.01
par value.
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DOCUMENTS INCORPORATED BY REFERENCE
Part III - Items 9, 10, 11 and 12 Included in the Company's Proxy
Statement to be filed with the
Securities and Exchange Commission
prior to April 30, 1997.
Part III - Certain exhibits listed Included in prior filings made under
in response to Item 13(a) the Securities Act of 1933, as amended,
and the Securities Exchange Act of
1934, as amended.
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Transitional Small Business Disclosure Format: Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Lukens Medical Corporation (the "Company") was incorporated
under the laws of the State of New Jersey on December 27, 1982 and operated
under the name Gyneco, Inc. until 1987 when it was renamed Lukens Corporation --
New Jersey. On April 27 1988, the Company reorganized in the State of Delaware
by merger with and into its Delaware wholly-owned subsidiary, Lukens Medical
Corporation. All references to the Company herein include the operations of the
Company's wholly-owned subsidiaries. The Company's executive offices are located
at 3820 Academy Parkway North, N.E., Albuquerque, New Mexico, 87109 and its
telephone number is (505) 892- 4118.
The Company is primarily engaged in the design, development,
manufacturing and marketing of wound closure products for use in the medical
industry, including, without limitation, suture products and bonewax Suture
products include sutures (a product consisting of suture material attached to a
surgical needle) and ligatures (suture material not attached to a surgical
needle). Suture materials are made from silk, catgut and other similar
materials. Bonewax is a product used to temporarily seal severed bones during
surgery. The Company markets its products for general surgery applications,
including for use in oral and veterinary surgery, and for specialty surgery
applications, including for use in plastic, ophthalmic and cardiovascular
surgery.
In March, 1996, the Company, through a wholly-owned
subsidiary, acquired assets constituting the following three product lines of
Ulster Scientific, Inc. ("Ulster") of New Paltz, New York (the "Ulster
Acquisition"): (i) lancets, including needles and accessories, (ii) dispettes
and (iii) infection control kits (collectively referred to herein as the "Ulster
Product Lines"). Lancets are finger-prick devices used to draw small amounts of
blood, primarily to test glucose levels. Dispettes are disposable diagnostic
devices used primarily in physicians' offices to test blood. Infection control
kits contain various items used in medical and scientific facilities to clean up
blood and other bodily fluid spills. Approximately 30% of the Company's revenues
for the fiscal year ended December 31, 1996 are attributable to the sale of such
products. For a further description of these Ulster Product Lines, see "Ulster
Product Lines."
In January, 1997, the Company entered into a new joint venture
with certain of its international distribution partners to manufacture
hypodermic needles, syringes and related medical products for distribution
worldwide (the "India Joint Venture"). As part of the transaction, the joint
venture acquired a modern, fully-equipped 22,000 square foot plant in the Cochin
Export Zone in Southern India. See "India Joint Venture."
PRODUCTS
SUTURE PRODUCTS. During 1996, the surgical suture industry
represented in excess of $2.3 billion of the overall disposable surgical product
industry, approximately 60% of which represented the international market and
40% of which represented the domestic market. Surgical suture products are
comprised of two principal categories: (i) general surgical suture products, and
(ii) specialty surgical suture products. Differentiating the categories are the
physical properties of the surgical needle such as size, sharpness and
ductility, the type of suture material used, as well as packaging and cost. The
Company designs, develops, manufactures and markets suture products for both
general and specialty surgery uses.
The Company's general surgical suture products are comprised
of approximately 750 standard products and approximately 3,000 additional
products which the Company is capable of providing to meet the specifications of
particular surgeons and practitioners. General surgical sutures primarily
include standard needles. The Company designs, develops, manufactures and
markets suture products that cover a broad spectrum of surgical categories,
including, without limitation, general, ob-gyn, urology, orthopedic, oral and
veterinary surgery, all of which generally utilize the same types of needles and
suture materials. The Company markets and sells its full line of general
surgical suture products worldwide. See "Sales, Marketing and Customers."
The Company's specialty surgical suture products consist of an
innovative line of laser-drilled needles and suture materials for use in the
areas of plastic, ophthalmic, cardiovascular and oral surgery. One major
advantage to the specialty surgeon of utilizing a drilled needle stems from the
manner in which the suture material
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is attached to such a needle. When suture material is attached to many standard
needles, the back end of the needle is sliced open, the suture is placed in the
opened portion of the needle and the metal is then crimped together (referred to
as "channel swaging") to hold the suture material in the needle. Over the years,
specialty surgeons have recognized that one of the major problems with such
sutures is that the crimped end of the needle becomes larger in diameter than
the rest of the needle, creating a larger hole in the tissue than is required.
Laser-drilled needles offer a significant improvement to the standard method.
Because the Company's specialty needles are laser-drilled, as opposed to sliced
open, there is no bulge at the end of the needle when the suture material is
inserted and crimped into place. During the laser drilling process, the excess
metal is removed from the needle. In addition, because the distortion of the
remaining metal is minimal, as compared to the standard process, the end of the
laser-drilled needle is not as prone to breakage or snapping. See "Production
and Quality Assurance."
Laser-drilled needles are manufactured for the Company by
independent suppliers in accordance with the Company's specifications using 300
Series stainless steel, an alloy which is more corrosion resistant than the
materials from which standard needles are generally made. This special alloy of
stainless steel also enables the Company's needles to remain sharper than
standard needles after repeated passes through tissue. In addition, as a result
of using the 300 Series stainless steel, the Company's laser-drilled needles are
also less brittle and more ductile than standard needles. The Company relies on
the confidential treatment of its proprietary needle design specifications by
its suppliers. See "Suppliers," "Competition" and "Patents and Proprietary
Rights." The Company markets and sells its full line of specialty surgical
products worldwide. See "Sales, Marketing and Customers."
BONEWAX. The Company believes it is one of only two companies
in the United States that sells, and has the approval of the Food and Drug
Administration (the "FDA") to manufacture and market, bonewax. Bonewax is used
to temporarily seal severed bones during surgery. The Company manufactures its
bonewax primarily from bees wax. Although the total worldwide bonewax market is
relatively small (estimated by the Company to be approximately $7 to $10 million
annually), gross margins in this area are relatively high. The Company sells
bonewax worldwide.
ULSTER PRODUCT LINES
In March 1996 in connection with the Ulster Acquisition, the
Company purchased the following product lines from Ulster:
LANCETS, NEEDLES AND ACCESSORIES. The Company now markets a
broad range of blood lancet-type devices, including general purpose style,
safety style and automatic single-use style. The target markets for lancets
include hospitals, nursing homes, doctor's offices, industrial establishments
and the home-use market. Blood lancing- type devices are used for several
purposes, including routine lab testing, diabetic monitoring, and cholesterol
monitoring.
DISPETTES. Dispettes are disposable diagnostic devices used
for sedimentation rate testing of blood and are a more affordable alternative to
the expensive automated blood testing labs. Because dispettes are convenient,
easy to use, and relatively inexpensive to purchase, the primary market for
these products are small medical clinics and individual physician practices. As
sophisticated blood testing technology in the United States continues to become
more prevalent, the use of dispettes is expected to gradually diminish. The
Company intends to expand the marketing of this product internationally where
access to sophisticated blood analysis technology is more limited.
INFECTION CONTROL KITS. Infection control kits contain various
items used in medical and scientific facilities to clean up blood and other
bodily fluid spills. The infection control clean-up kits are marketed by the
Company under the "BASKIT" name. Under the Occupational Safety and Health Act
(OSHA), safety spill clean up kits, such as the one marketed by the Company, are
required to be maintained in any facility working with blood and other bodily
fluids, including, without limitation, hospitals, laboratories, doctors offices
and ambulances.
The Company does not manufacture any of the products in the
Ulster Product Lines. The Company purchases these products under agreements with
certain suppliers and, following sterilization and packaging, resells the
products to other medical supply distributors and end-users. See "Suppliers".
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INDIA JOINT VENTURE
In January, 1997, the Company entered into a new joint venture
to manufacture hypodermic needles, syringes and related medical products for
distribution worldwide. As part of the transaction, the joint venture acquired a
modern, fully-equipped 22,000 square foot plant in the Cochin Export Zone in
Southern India. The new subsidiary, Lukens Medical Products Private Ltd., is a
joint venture between the Company and certain of its international distribution
partners. The Company is the majority shareholder, and will manage the
operations, with all partners contributing to the marketing of the products.
Production is expected to begin in April, 1997 and projects that the plant will
be capable of generating revenues of up to $3.5 million annually in syringes and
related products by the end of 1997, and $5 million by the end of 1998, although
there can be no assurance that any particular level of revenue can be achieved.
The Company estimates the worldwide market for syringes and related products to
be in excess of $2.5 billion.
SALES, MARKETING AND CUSTOMERS
PRODUCT SALES. The Company's principal means of selling its
products has been through independent distributors that have entered into either
exclusive or non-exclusive arrangements with the Company. Such arrangements have
involved the grant by the Company of exclusive or semi-exclusive rights to sell
specific products or product lines in particular geographic territories. Such
agreements generally contain specified minimum sales levels required in order
for the distributor to maintain exclusivity, as well as provisions requiring the
distributors to participate in trade shows and conventions in their respective
territories in order to promote the Company's products.
MARKETING STRATEGY. The Company's strategy with respect to its
suture products is to focus its marketing energies on its general and specialty
surgical products which are used by doctors and practitioners primarily outside
of a hospital (i.e., in doctor's offices, dentist's offices, veterinary clinics
and outpatient plastic and ophthalmic surgical centers), and where purchasing
decisions are made outside of the large hospital and institutional environment.
To this end, the Company aggressively markets in the United States its dental
and veterinary general surgical suture products and its plastic specialty
surgical suture products. The Company also continues to market and sell its full
line of general and specialty surgical products internationally where it is
better able to compete solely as a quality, low-cost supplier to the foreign
hospital and institutional market. As a result of the recent receipt by the
Company of approval from the FDA to begin marketing its synthetic absorbable
suture product for human use, the Company believes that its ability to compete
in the worldwide suture market will be enhanced. See "Research and Development
Activities".
The Company currently has a staff of five employees engaged in
direct sales, telemarketing and direct mail promotion of general surgical suture
products and bonewax products worldwide, as well as providing marketing support
to the Company's specialty and general suture distributors. In addition, the
Company has a five person sales staff responsible for selling the products in
the Ulster Product Lines.
CUSTOMERS. The primary customers for the Company's suture
products are its distributors, who then resell the products to end users,
generally under their own brand names. The Company sells its products directly
to certain foreign governments and is also a party to exclusive agreements with
distributors in a number of foreign countries, including Brazil, Honduras and
Italy and non-exclusive agreements in Costa Rica and Saudi Arabia for the sale
of its general surgery products (as well as certain of the Company's specialty
products) primarily under the "Lukens" name. The Company also markets and sells
its general surgery suture products and bonewax directly to the United States
government. During 1996, sales to the United States military accounted for
approximately 13% of the Company's total sales. Customers of the Ulster Product
Lines primarily include large medical and laboratory product distributors.
RESEARCH AND DEVELOPMENT ACTIVITIES
During 1996, the Company's research and development efforts
were focused on finalizing its FDA submission for a synthetic absorbable suture
product. The Company received clearance from the FDA in February of 1997 to
market its synthetic absorbable suture product for human use. The Company
expects to release its synthetic absorbable suture product to the human market
in the first half of 1997. See "Government Regulations".
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The current Research and Development activities of the Company are focused on
the development of the new products to be manufactured by the India Joint
Venture and ongoing improvements to the Company's product line.
PRODUCTION AND QUALITY ASSURANCE
The Company's manufacturing operations for the production of
surgical sutures generally consist of joining surgical needles with suture
material and packaging the finished suture product. The Company's general
surgical suture production operations are primarily conducted in Juarez, Mexico
pursuant to an agreement whereby a maquiladora conducts manufacturing and
assembly operations for the Company's benefit, with the Company supplying all
parts, components, materials, machinery and equipment and bearing all labor
costs. In addition, a number of the Company's suture products are also produced
at its facility in Albuquerque, New Mexico. Suture production and packaging
operations are extremely exacting and labor intensive processes. Because of the
extensive range of possible needle/suture material combinations and the large
number of short-run, special orders which must be filled, it is not economically
feasible to automate the predominant portion of the Company's production
activities. Most must instead be done by hand by highly-trained employees.
Materials (i.e., needles and "suture materials") which
comprise the suture products are purchased from a number of vendors. Upon their
receipt by the Company, all materials are subject to inspection by the Company's
quality assurance staff. Tests conducted by the Company's quality assurance
staff include visual inspection as well as physical tests. Conformity with the
Company's specifications is of prime importance and one of the staff's goals is
to detect non-conforming components prior to assembly and packaging. Upon
approval, needles and suture materials are released to storage areas for
pre-processing preparation and subsequent assembly.
Although many suture products consist solely of the "thread"
(e.g., silk, catgut or other materials), most consist of suture material which
has been attached to one or two needles. Braided suture materials (e.g., silk)
used in the Company's products undergo "tipping," a process which creates a
hardened tip on the end of the suture material to facilitate the attachment of
the material to the needles. The attaching process, known as "swaging", is a
critical step in the Company's production process, with the minimum strength of
the attachment prescribed by the U.S. Pharmacopeia. The attaching process is
largely performed by individuals operating small, pedal activated machines which
form the metal of the needle around the thread, crimping the two together. After
swaging, the completed sutures are wound by hand onto small cards and then
packaged according to suture type and intended use. Packaged and boxed sutures
are delivered to subcontractors for sterilization. After sterilization, the
products are returned to the Company for additional packaging and distribution.
The Company's quality assurance department is responsible for in-process and
post-production analyses of all of the Company's products. Quality assurance is
supported through the use of both manual and computerized systems to provide
traceability of product batches and track each stage of the production process.
The Company's production and quality assurance operations must comply with the
FDA's current GMP regulations and are subject to periodic FDA inspection. See
"Government Regulations."
The production of bonewax entails the preparation of the bees
wax-based product at the Company's New Mexico facility, where it is packaged and
sent to subcontractors for sterilization by gamma radiation. The products in the
Ulster Products Lines are largely purchased in finished condition and do not
involve extensive processing by the Company. The hypodermic needles, syringes
and related medical products to be produced by the India Joint Venture will be
manufactured and molded at the facility acquired by the joint venture.
SUPPLIERS
The Company's specialty needles are currently manufactured to
the Company's specifications by two independent overseas vendors. The Company's
general surgery needles and its suture materials are supplied by a number of
independent manufacturers. The Company believes that there are a number of
alternative sources for all of such products and product components. Further,
while the Company relies upon confidentiality agreements with its suppliers of
specialty needles to protect its particular proprietary needle design and
specifications, specialty needles are not proprietary to the Company and the
Company's arrangements with its suppliers of specialty needles are not
exclusive. See "Competition."
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In connection with the Ulster Acquisition, the Company entered
into two new exclusive supply arrangements with the principal suppliers of
certain of the products in the Ulster Product Lines. The supply agreement with
Guest Elchrom Scientific AG, relating to the dispette products, entitles the
Company to act as such supplier's exclusive distributer of such products in the
United States, with negotiations continuing with respect to other international
markets. The Company's supply agreement with America Techma, Inc., relating to
the automatic single-stick lancet sold under the "Gentle-let 1" tradename,
entitles the Company to act as such supplier's exclusive distributor throughout
the world (except for North and South Korea). The other products in the Ulster
Product Lines are purchased by the Company on a purchase-order basis from
various other suppliers. In general, the molds utilized by such suppliers in the
manufacture of the other products in the Ulster Product Lines are not
proprietary to the Company and the Company's arrangements with such suppliers
are not exclusive.
While the Company manufactures its newly approved synthetic
absorbable suture products, it purchases the synthetic absorbable suture threads
used in these products from third-party suppliers. While these materials are
currently available upon commercially reasonable terms, any disruption of the
supply of these materials could have an adverse impact upon the ability of the
Company to produce its synthetic absorbable suture line.
COMPETITION
For the past 40 years, the global surgical suture market has
been dominated by a small number of companies, primarily Ethicon, Inc.
("Ethicon"), a wholly-owned subsidiary of Johnson & Johnson, Inc., and Davis &
Geck, a division of American Cyanamid Company. In addition, there are several
small national firms and regional suppliers of suture products with which the
Company competes in both the general surgery and specialty surgery markets. In
1992, United States Surgical Corporation ("USSC") entered the market with a full
line of general and specialty surgery products. USSC is currently the world's
leading manufacturer and marketer of surgical staplers and endoscopic
instruments and supplies.
The Company believes that the extensive experience of its
management group, its access to an abundant and skilled labor pool, and its
economical manufacturing operations have enabled the Company to position itself
as a quality, low-cost supplier of general and specialty surgery suture products
to the foreign hospital and institutional market, and thus to compete in the
sale of such products on the basis of price. The Company currently markets
approximately 750 products for use in general surgical procedures, and has the
capability and know-how to manufacture approximately 3,000 additional products
in order to meet the specifications of particular customers. With the addition
of the Company's new synthetic absorbable suture line, the Company's product
line offerings are comparable to those offered by Ethicon and Davis & Geck. The
Company believes that its ability to remain a low-cost producer of general and
specialty surgical suture products in the international marketplace and its
focus on the dental and veterinary surgical suture markets in the United States
will be important to its ability to remain competitive with the larger and
better capitalized competitors in these markets.
With respect to the Ulster Product Lines, in the lancet and
needle market, the Company has essentially four major competitors: Sherwood
Medical Co., Owen Mumford, Ltd., Gainor Medical U.S.A., Inc., and Can-Am Care
Corporation. LP Italiana SpA is considered the Company's only competitor in the
dispette market. The Company believes the following four criteria, listed in
order of priority, influence market share: price, availability, customer
relationships and a well rounded product line. The Company hopes to capitalize
on Ulster's twenty years of experience in the market and its existing client
base, augmented by the Company's international presence, to compete effectively.
The primary competitors of the hypodermic needles, syringes
and related medical products to be produced by the new India Joint Venture are
Becton Dickinson and Terumo. The location of the joint venture's facility in the
Cochin Export Zone of Southern India offers a variety of competitive pricing
advantages over its competitors, including, low labor costs, the avoidance of
duties on export sales, an exemption from income taxes in India in respect of
export sales and lower transportation costs due to close proximity to its target
markets.
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GOVERNMENT REGULATIONS
The Company's products and operations are subject to
regulation by the FDA in the United States and by comparable regulatory agencies
in certain foreign countries. Under the Federal Food, Drug & Cosmetic Act (the
"FD&C Act"), the FDA has promulgated regulations and established guidelines and
policies governing "medical devices", including certain of the products sold by
the Company. Under these regulations, the Company's products may not be shipped
in interstate commerce (including export) without prior authorization from the
FDA (except any devices that were in commercial distribution prior to May 28,
1976 that were not then regulated as drugs and that have not changed since that
time). Such authorization is based on a review of the products' safety and
effectiveness for their intended use. Medical devices may be authorized by the
FDA for marketing either pursuant to a pre-market notification under Section
510(k) of the FD&C Act ("510(k)") or a pre-market approval application ("PMA").
A 510(k) consists of a submission, 90 days prior to planned marketing, of
information sufficient to establish that the device is substantially equivalent
to a device marketed prior to May 28, 1976 or a device substantially equivalent
to such a device. Such information normally consists of data comparing the
respective devices, and may include data from clinical studies. A finding by the
FDA of substantial equivalence may take significantly longer than 90 days. A PMA
consists of information sufficient to establish that a device is safe and
effective for its intended use, including data from clinical and other studies.
FDA approval of a PMA, may take as long as several years. Whether a product
requires a 510(k) or a PMA, depends on its classification under the law and FDA
regulations. Most of the Company's products require 510(k)s, although certain
products which the Company may develop in the future might require a PMA. In
addition, the testing of medical devices through clinical investigations
generally requires FDA authorization.
The Company believes that it currently has in place all the
requisite authorizations to market its current line of products, including nine
PMAs and fourteen 510(k)s. The Company's current line of suture products
includes all of the major suture materials that are marketed in the United
States. The Company believes that all of its current suture and non-suture
products are covered by its PMAs and 510(k)s, or are otherwise legally marketed,
and that, in view of a reclassification of suture products by the FDA, those
products for which the Company has PMAs now require only 510(k)s; however, there
is no assurance that the FDA would agree with these positions.
The Company is subject to additional requirements under the
FD&C Act, including registration, recordkeeping and reporting requirements. In
addition, the FDA regulates the promotion of medical devices (except for
advertising for non-restricted devices which is regulated by other authorities),
in particular to ensure that devices are promoted within the terms of their
authorized labeling guidelines.
The Company's manufacturing operations must comply with the
FDA's current GMP regulations and are subject to periodic FDA inspection.
Future changes in regulations or enforcement policies could
impose more stringent requirements on the Company, compliance with which could
adversely affect the Company's business. Failure to comply with applicable
regulatory requirements could result in enforcement action, including withdrawal
of marketing authorization, injunction, seizure of products, and liability for
civil and/or criminal penalties.
PATENTS AND PROPRIETARY RIGHTS
The Company considers its technology and procedures relating
to its suture lines proprietary and relies primarily on trade secret laws and
confidentiality agreements to protect its technology and innovations. Employees,
distributors and key suppliers of the Company, as well as consultants which from
time to time may be hired, enter into confidentiality and/or invention
assignment agreements providing for non-disclosure of proprietary and trade
secret information of the Company and the assignment to the Company of all
inventions, improvements, technical information and suggestions relating in any
way to the business of the Company (whether patentable or not) which the
employee or consultant develops during the period of their employment or
association with the Company. Despite these restrictions, it may be possible for
competitors or customers to copy one or more aspects of the Company's products
or obtain information that the Company regards as proprietary. In addition,
consultants of the Company will most likely be employed by third parties and,
accordingly, disputes could arise as to the proprietary rights to information
which has been applied to Company projects independently developed by such
consultants.
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Furthermore, there can be no assurance that others will not independently
develop products similar to those sold by the Company.
The Company owns one United States patent relating to its
cardiovascular product packaging and has filed one additional patent application
with the United States Patent and Trademark Office relating thereto. The Company
is also licensed under a patent for the coating of synthetic absorbable sutures.
In addition, in connection with the Ulster Acquisition, the Company acquired the
rights to a patent covering a mold used in the production and component of the
BASKIT product and various trademarks and trademark applications relating to the
products in the Ulster Product Lines. While the Company may seek patent
protection in the future for new products, there can be no assurance that any
patents, or patents which may be issued, will provide the Company with
sufficient protection in the case of an infringement of its technology or that
others will not independently develop technology comparable or superior to the
Company's.
Although the Company believes that the products sold by it do
not and will not infringe upon the patents or violate the proprietary rights of
others, it is possible that such infringement or violation has occurred or may
occur. In the event that products sold by the Company are deemed to infringe
upon the patents or proprietary rights of others, the Company could be required
to modify its products or obtain a license for the manufacture and/or sale of
such products. There can be no assurance that, in such an event, the Company
would be able to do so in a timely manner, upon acceptable terms and conditions
or at all, and the failure to do any of the foregoing could have a material
adverse effect upon the Company.
The Company has acquired a registered trademark for the
"Lukens" name. The Company believes that this name, established in 1906, is
important to its business and prospects. In connection with the Ulster
Acquisition, the Company acquired all rights to the trademarks and tradenames
used in connection with the sale of the products in the Ulster Product Lines.
The Company has also obtained a perpetual, non-exclusive, license to use the
name "Ulster Scientific" in connection with the sale of the products in the
Ulster Product Lines.
PRODUCT LIABILITY AND INSURANCE
The use of the Company's products entails an inherent risk of
medical complications to patients and resultant product liability claims. While
the Company presently maintains product liability insurance in the amount of $2
million per occurrence and in the aggregate which it believes is adequate for
its current activities, there can be no assurance that the Company will be able
to obtain such insurance in the future or that such insurance will be sufficient
to cover all possible liabilities. In the event of a successful suit against the
Company or one of its customers, lack or insufficiency of insurance coverage
could have a material adverse impact on the Company. To date, the Company has
had no material product liability claims.
EMPLOYEES
At March 14, 1997, the Company had 115 employees (including 63
contract employees and 52 full time employees), of which 97 were engaged in
production, 1 in development activities, 10 in sales and marketing and 7 in
finance and administration. The Company's employees are not covered by any
collective bargaining agreement. The Company considers relations with its
employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
On July 1, 1996, the Company relocated its principal executive
offices and certain of its production facilities to, and now occupies,
approximately 17,000 square feet of space in Albuquerque, New Mexico which is
leased by the Company (the "Facility"). Rental payments on the Facility are
equal to $10,000 per month. The term of the lease expires on August 31, 2001,
with two, two-year renewal options. Management believes that the Facility is
suitable and adequate for the Company's current and proposed use thereof and is
adequately covered by insurance.
In connection with the Ulster Acquisition, the Company leased
Ulster's 25,000 square foot warehouse and office facility in New Paltz, New York
for a period of one year, at a rent equal to $12,500 per month. Such lease
expired in March, 1997. In 1996, the Company relocated the Ulster Product Lines
to the Facility in Albuquerque, New Mexico.
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<PAGE>
See "Item 1. Description of Business, India Joint Venture,"
for a description of the joint venture which owns a production facility utilized
by the Company in Southern India. Since the facility is located in an export
zone, the India Joint Venture leases the site from the zone at a nominal rate
per year.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been quoted on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system under
the symbol "LUKN" since May 6, 1992. The Common Stock has also been listed on
the Pacific Stock Exchange under the symbol "LKN" since May 6, 1992.
The following table sets forth the range of high and low bid
prices for the Common Stock for the periods indicated, as reported by NASDAQ,
the principal system or exchange on which such securities are quoted or traded.
The quotations represent "inter-dealer" prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
Common Stock
<TABLE>
<CAPTION>
Fiscal Year Ending Fiscal Year Ending
December 31, 1996 High ($) Low ($) December 31, 1995 High ($) Low ($)
- ----------------- -------- ------- ----------------- -------- -------
<S> <C> <C> <C> <C> <C>
Quarter ended Quarter ended
March 31, 1996 3 11/16 1 7/16 March 31, 1995 1 7/8 1
Quarter ended Quarter ended
June 30, 1996 3 5/16 2 5/8 June 30, 1995 2 1/8 3/4
Quarter ended Quarter ended
September 30, 1996 3 9/16 2 9/16 September 30, 1995 2 1/8 1
Quarter ended Quarter ended
December 31, 1996 4 9/16 3 December 31, 1995 1 15/16 1 7/8
</TABLE>
- ----------
As of March 18, 1997 there were approximately 93 holders of record of the
Company's Common Stock.
On March 18, 1997, the closing bid and asked prices of the Common Stock
were $7.375 and $7.75, respectively.
The Company has never paid a cash dividend on its capital
stock and does not anticipate that it will declare or pay cash dividends in the
foreseeable future as earnings are expected to be retained to finance the
Company's growth. The Company's loan agreement with its bank contains
restrictions on the payment of dividends. Subject to then existing loan
agreements, declaration of dividends in the future will remain within the
discretion of the Company's Board of Directors, which will review its dividend
policy from time to time.
10
<PAGE>
CHANGES IN SECURITIES
In March, 1996, the Company issued a warrant to purchase
Common Stock to the sole stockholder of Ulster, who was an accredited investor,
in connection with the Ulster Acquisition. Such warrant is exercisable for up to
200,000 shares of Common Stock, subject to vesting based upon achieving
specified financial targets. The per share exercise price contained in such
warrant is $3.00 per share (subject to adjustment for stock splits, reverse
stock splits and the like). Such transaction was effected in reliance upon the
exemption from the registration requirements of the Securities Act contained in
Section 4(2) of the Securities Act on the basis that such transaction did not
involve any public offering.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1996 ("1996") COMPARED TO FISCAL YEAR
ENDED DECEMBER 31, 1995 ("1995")
Sales increased approximately 67% to approximately $8.2
million during 1996 from approximately $4.9 million during 1995, primarily as a
result of the Ulster Acquisition and increased government, veterinary and export
suture sales. The Company's export sales in 1996 and 1995 totaled $2,295,066 and
$1,788,944, respectively, which represents 28% and 37% of total sales in each of
those years, respectively.
The Company's gross margins declined slightly, from 30% in
1995 to 29% in 1996, due partially to the addition of certain of the Ulster
Product Lines, which have a lower gross margin compared to the other products
sold by the Company. The Company also reduced its margin for 1996 by booking a
special charge to its inventory which reduced the valuation of that inventory by
approximately $306,000. The adjustment was prompted by reductions in certain
manufacturing costs which the Company chose to reflect at year-end by reducing
the carrying value of certain items in inventory. The income statement effect of
this charge was an increase in the Cost of Goods Sold line for the year. The
manufacturing costs which were reduced included reductions in the effective
prices of certain raw materials due to improvements in foreign exchange rates
and increased labor efficiencies.
Selling expenses increased to $716,042 in 1996 from $364,906
in 1995 as a result of the Ulster Acquisition, which resulted in the hiring of a
small sales force to sell the products in the Ulster Product Lines, and other
marketing expenses such as convention and literature expenditures also relating
to the Ulster Product Lines.
General and administrative expenses increased approximately
19%, to $965,180 in 1996 compared to $813,574 in 1995, due mainly to the
amortization of the costs incurred in connection with the Ulster Acquisition.
Research and development expenses decreased approximately 22%,
to $108,594 in 1996 compared to approximately $138,450 in 1995, due primarily to
the finalization of the synthetic absorbable suture development project.
As a result of the above noted increases in revenues, which
allowed the Company to operate more efficiently, income from operations
increased to $592,226 in 1996 from $129,805 in 1995.
Interest income was $6,000 in 1996 compared to $18,000 in
1995. Interest expenses decreased to approximately $198,000 in 1996 from
approximately $210,000 in 1996 due primarily to the payoff of a capital lease
for certain production equipment, as well as the payoff of the Company's
mortgage in mid-1995.
The Company experienced a net profit of $463,481 for the year
ended December 31, 1996 compared to a net profit of $200,967 for the year ended
December 31, 1995, for the reasons described above.
LIQUIDITY AND CAPITAL RESOURCES
BANK FINANCING. As of December 31, 1996, the Company had drawn
$900,000 of its $1,000,000 working capital line of credit with its lending bank
(the "Line of Credit"). The Line of Credit also includes an
11
<PAGE>
additional $1,650,000 commitment for the issuance of standby and commercial
letters of credit. On that date, approximately $796,838 in standby letters of
credit were outstanding under this letter of credit commitment. The Line of
Credit matures and expires on August 30, 1997 unless it is renewed, and all
outstanding amounts are due and payable on such date. The Company expects the
Line of Credit to be renewed for an additional year prior to its expiration.
There can be no assurances, however, that such a renewal will be forthcoming,
or, if available, will be on terms acceptable to the Company.
In October 1996, the Company renewed a U.S. Small Business
Administration ("SBA") export working capital line of credit agreement, which
currently provides working capital for foreign sales up to the lesser of (a)
$600,000 or (b) 80 percent of the face amount of negotiated letters of credit
issued for the benefit of the Company and delivered to the lender. Interest is
payable monthly on the amount drawn at the New York prime rate as published in
the Wall Street Journal plus 1.5 percent (9.75% at December 31, 1996). At
December 31, 1996, there was $50,301 outstanding under this line-of-credit
agreement.
Also in October 1996, the Company renewed an SBA export
equipment term loan, which provides for the purchase of equipment and machinery
up to $150,000, interest and principal payable monthly on equal installments of
$2,510 at the New York prime rate as published in the Wall Street Journal, plus
1.5 percent (9.75% percent at December 31, 1996). At December 31, 1996, there
was $130,096 outstanding under this agreement.
In February 1996, the Company received SBA approval for a new
revolving working capital line of credit which allows the Company to draw up to
$420,000 to finance labor and inventory purchases relating to U.S.
government contracts.
To fund future acquisitions and joint ventures, the Company is
reliant upon obtaining long-term borrowing and/or equity financing. Management
believes that the Company will have access to the capital resources necessary to
continue to fund such expansion, although there is no assurance that such
financing will be available or, if available, will be on terms acceptable to the
Company. For a more complete description of the Company's current credit
facilities see Note 4 to Notes to Consolidated Financial Statements.
STOCKHOLDER LOANS. On April 13, 1995, the Company entered into
an agreement with John H. Robinson, a director and large stockholder of the
Company, whereby Mr. Robinson (i) loaned $400,000 to the Company (the "April
Loan") and (ii) was issued 400,000 five-year warrants to purchase Common Stock
at an exercise price of $1.10 per share. The April Loan bears interest at the
rate of 8% per annum, and all principal and interest accrued during the term
thereof is deferred and payable on April 15, 1999. On September 11, 1995, Mr.
Robinson loaned the Company an additional $250,000 to partially finance the
buyout of a capitalized lease obligation (the "Buyout Loan"). The Buyout Loan
bears interest at the rate of 8% per annum and all principal and interest
accrued during the term thereof is deferred and payable in October, 1999. On
March 5, 1996, Mr. Robinson loaned the Company $400,000 to fund a portion of the
purchase price relating to the Ulster Acquisition (the "Acquisition Loan"). The
Acquisition Loan bears interest at the rate of 10% per annum and all principal
and interest accrued during the term thereof is deferred and payable on
September 5, 2000. Repayment of the April Loan, the Buyout Loan and the
Acquisition Loan are subordinated to the Line of Credit, and at the request of
the Company's lending bank, the previous maturity dates thereunder were extended
for two additional years, to the maturity dates reflected above.
On February 28, 1997, the Company entered into an agreement
with John H. Robinson and Robert L. Priddy, also a director of the Company,
whereby Messrs. Robinson and Priddy loaned the Company an aggregate of $300,000
and agreed to loan the Company an additional $700,000 (the "Second Tranche")
upon the request of the President of the Company prior to April 30, 1997. Such
loans bear interest at the rate of 10% per annum and if the Second Tranche is
funded, will be repayable on or before May 31, 1998. In the event that the
Second Tranche is not funded in accordance with the terms of the agreement, such
loans shall be repayable on July 15, 1997. In connection therewith, Messrs.
Robinson and Priddy were each issued warrants to purchase 15,000 shares of
Common Stock at an exercise price of $8.25 per share, and, upon funding of the
Second Tranche, will each be issued warrants to purchase an additional 35,000
shares of Common Stock on the same terms. See "Item 12. Certain Relationships
and Related Transactions."
12
<PAGE>
In the past, the Company has been reliant upon Messrs.
Robinson or Priddy to finance the costs associated with certain acquisitions and
to restructure certain indebtedness, on terms favorable to the Company. There
can be no assurance the such financing, or other third party debt or equity
financing, will be available in the future or, if available, will be on terms
acceptable to the Company.
OTHER INFORMATION
SALES TO THE U.S. GOVERNMENT. During 1996, the department of
the U.S. Government responsible for procuring medical supplies, such as sutures,
began purchasing more of such items outside the traditional bid system. The
Company has been successful over the last several years in obtaining substantial
awards under the bid system. The new system, which incorporates local dealers
called Prime Vendors, is less sensitive to price and more sensitive to the
impact of a direct sales force. As a result of the foregoing, since the Company
has only a limited sales force, there can be no assurance that the Company will
continue to meet or exceed its historical levels of sales of its products to the
U.S. Government in the future.
ACQUISITION OF THE ULSTER PRODUCT LINES. For a description of
the consideration paid and payable by the Company in connection with the Ulster
Acquisition, including, without limitation, the royalty arrangements and the
warrants to purchase shares of the Company's Common Stock issued in connection
therewith, see Note 14 to Notes to Consolidated Financial Statements and the
Company's Current Report of Form 8-K and 8-K/A filed in connection with the
Ulster Acquisition.
NET OPERATING LOSS CARRYFORWARDS. As of December 31, 1996, the
Company had net operating loss carryforwards ("NOLs") of approximately
$10,675,000 which will expire from 1998 through 2009. The deductibility of
portions of the NOLs is subject to an annual limitation of approximately
$460,000; the excess of such annual limitation over the amount to be used in
subsequent year until they expire. See Note 9 of Notes to Consolidated Financial
Statements.
ITEM 7. FINANCIAL STATEMENTS.
The responses to this item are submitted in a separate section
of this Annual Report on Form 10- KSB. See Index to Consolidated Financial
Statements on page 18.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required under this item will be set forth in
the Company's proxy statement to be filed with the Securities and Exchange
Commission on or before April 30, 1997 and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information required under this item will be set forth in
the Company's proxy statement to be filed with the Securities and Exchange
Commission on or before April 30, 1997 and is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required under this item will be set forth in
the Company's proxy statement to be filed with the Securities and Exchange
Commission on or before April 30, 1997 and is incorporated herein by reference.
13
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For information regarding the recent loans to the Company by
John H. Robinson and Robert L. Priddy, two directors of the Company, and the
issuance of warrants in connection therewith, see "Management's Discussion and
Analysis or Plan of Operations." The other information required under this item
will be set forth in the Company's proxy statement to be filed with the
Securities and Exchange Commission on or before April 30, 1997 and is
incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
Exhibit No. Description
3.1 Certificate of Incorporation of the Registrant, as amended (1)
3.2 Form of Certificate of Amendment of Certificate of
Incorporation (1)
3.3 Form of Amended and Restated Bylaws of the Registrant (1)
10.1 1988 Amended and Restated Stock Option Plan (1)
10.2 1992 Stock Option Plan (1)
10.3* Exclusive Distributorship Agreement between the Registrant and
Meadox Medicals, Inc. (1)
10.4* Exclusive Distributorship Agreement between the Registrant and
Cottrell Limited (1)
10.5* Exclusive Distributorship Agreement between the Registrant and
Convergenza, as amended (1)
10.6* Exclusive Distributorship Agreement between the Registrant and
HP - medica GmbH (1)
10.7 Business Loan and Security Agreement among the Registrant,
Lukens Corporation - New Mexico and Sunwest Bank of
Albuquerque, N.A., as amended (1)
10.8 Form of Indemnity Agreement (1)
10.9 Employment Agreement between the Registrant and James A.
Wimbush (1)
10.10 Employment Agreements between the Registrant and each of
Steven J. Schroeder, Robert S. Huffstodt, Scott Henderson and
Donald E. Lawson (1)
10.11* Collaborative Development Agreement between the Registrant and
Medisorb Technologies International, L.P. (1)
10.12 Lease for Registrant's facility (1)
10.13 Form of Consulting Agreement between the Registrant and
Commonwealth Associates, Inc.(1)
10.14* Exclusive Distributorship Agreement between the Registrant and
Core Dynamics, Inc. (3)
10.15 Consulting Agreement between the Registrant and Kronenthal
Associates (3)
14
<PAGE>
10.16* Exclusive Patent License Agreement between the Registrant and
Innovative Surgical Technology, Inc. (4)
10.17 Agreement, dated November 19, 1992, between Sunwest Bank of
Albuquerque, National Association, and Lukens Medical
Corporation, a New Mexico corporation, together with
promissory note, as amended, security agreements and mortgages
executed pursuant thereto (5)
10.18* Amendment No. 1, dated as of May 17, 1994, to Exclusive Patent
License Agreement, dated August 9, 1993, between Lukens
Medical Corporation, a New Mexico corporation, and Innovative
Surgical Technology, Inc. (5)
10.19* Manufacturing Agreement, dated May 26, 1994, between the
Registrant and West Texas Engineering, Inc.(5)
10.20* Supply Agreement, dated June 29, 1994, between Lukens Medical
Corporation, a New Mexico corporation, and Farnam Companies,
Inc. d.b.a. Veterinary Products Laboratories (5)
10.21 Business Loan and Security Agreement, dated July 27, 1994 (the
"Sunwest Loan Agreement"), as amended pursuant to the Third
Amendment thereto, dated as of January 31, 1995, among the
Registrant, Lukens Medical Corporation (a New Mexico
corporation formerly known as Lukens Corporation) and Sunwest
Bank of Albuquerque, N.A., together with promissory notes,
guaranty and security agreements executed pursuant thereto (5)
10.22* Exclusive Distribution Agreement, dated October 7, 1994,
between Lukens Medical Corporation, a New Mexico corporation,
and Dentsply International Inc. (5)
10.23 Amendment No. 3, dated as of November 2, 1994, to 1992 Stock
Option Plan (5)
10.24* Supplier/Distributor Agreement, dated November 14, 1994,
between Lukens Medical Corporation, a New Mexico corporation,
and Henry Schein, Inc. (5)
10.25 Amendment No. 4, dated as of January 3, 1995, to 1992 Stock
Option Plan (5)
10.26 Promissory Note of the Company to John H. Robinson, dated as
of April 13, 1995, in the original principal amount of
$400,000; Commitment letter of John H. Robinson, dated as of
April 13, 1995. (5)
10.27 Warrant, dated as of April 13, 1995, granted by Lukens Medical
Corporation, a Delaware corporation, to John H. Robinson.
10.28 Lease for the Facility, dated July 14, 1995, between Rio
Rancho Public Schools, as landlord, and Lukens Medical
Corporation, as tenant.
10.29 Fourth Amendment, Fifth Amendment, Sixth Amendment and Seventh
Amendment to the Sunwest Loan Agreement, dated April 10, 1995,
April 28, 1995, July 14, 1995 and December 31, 1995,
respectively.
10.30 Promissory Notes of the Company to Sunwest Bank of
Albuquerque, N.A. relating to certain loans guaranteed by the
U.S. Small Business Administration, in the original principal
amounts of $150,000, $500,000 and $420,000, dated as of
October 31, 1995, October 31, 1995 and February 15, 1996,
respectively, and related Loan and Security Agreements.
10.31 Promissory Note of the Company to John H. Robinson, dated as
of September 11, 1996, in the original principal amount of
$250,000; Promissory Note of the Company to John H. Robinson,
dated as of March 5, 1996, in the original principal amount of
$400,000
15
<PAGE>
10.32 Distribution Agreement, dated as of March 5, 1996, by and
between Guest Elchrom Scientific AG and Lukens Medical
Corporation, a New Mexico corporation.
10.33 Agreement of Purchase and Sale of Assets, dated as of March 4,
1996 by and among the Company, Ulster Scientific, Inc. and
Peter F. Lordi, Jr. (6)
10.34 Lease Agreement, dated as of March 5, 1996, between Ulster
Scientific, Inc., a New York corporation, Peter F. Lordi, Jr.
and Lukens Medical Corporation, a New Mexico corporation. (6)
10.35 Consulting Agreement, dated as of March 5, 1996, between Peter
F. Lordi, Jr. and Lukens Medical Corporation, a New Mexico
corporation. (6)
10.36 Warrant, dated as of March 5, 1996, granted by Lukens Medical
Corporation, a Delaware corporation, to Peter F. Lordi, Jr.
(6)
10.37 Lease between Kenneth I. White, as landlord, and Lukens
Medical Corporation, as tenant, dated May 31, 1996. (7)
10.38 Joint Venture/Stockholders' Agreement, dated as of February
21, 1997, between Lukens Medical Products Private Limited and
the stockholders of the compnay listed on the signature page
thereto.
10.39 Letter Agreement, dated as of February 28, 1997, between
Lukens Medical Corporation and John H. Robinson; Promissory
Note of Lukens Medical Corporation dated as of February 28,
1997 to John H. Robinson in the amount of $150,000; and
Warrant Agreement between Lukens Medical Corporation and John
H. Robinson, dated as of February 28, 1997.
10.40 Letter Agreement, dated as of February 28, 1997, between
Lukens Medical Corporation and Robert L. Priddy; Promissory
Note of Lukens Medical Corporation dated as of February 28,
1997 to Robert L. Priddy in the amount of $150,000; and
Warrant Agreement between Lukens Medical Corporation and
Robert L. Priddy, dated as of February 28, 1997.
21 Subsidiaries
23 Consent of Neff & Company
27 Financial Data Schedule
- ----------
(1) These exhibits were filed as exhibits to the Company's Registration
Statement on Form S-1 (File No. 33- 46466) and are incorporated herein by
reference.
(2) This exhibit was filed with the Company's Amendment No. 1 to its Current
Report on Form 8-K dated July 17, 1992 and is incorporated herein by
reference.
(3) These exhibits were filed as exhibits to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1992 and are incorporated
herein by reference.
(4) These exhibits were filed as exhibits to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1993 and are incorporated
herein by reference.
(5) These exhibits were filed as exhibits to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1994 and are incorporated
herein by reference.
(6) These exhibits were filed as exhibits to the Company's Current Report on
Form 8-K filed on March 18, 1996, and are incorporated herein by reference.
16
<PAGE>
(7) This exhibit was filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1996, and is incorporated herein
by reference.
* Confidential treatment has been granted with respect to portions of these
exhibits.
(B) REPORTS ON FORM 8-K.
None.
17
<PAGE>
Lukens Medical Corporation and Subsidiaries
Consolidated Financial Statements
Index of Financial Statements
Reports of Independent Public Accountants F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-4
Consolidated Statement of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9
18
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Lukens Medical Corporation
We have audited the accompanying consolidated balance sheets of Lukens Medical
Corporation and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the two years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lukens Medical
Corporation and Subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the two years then ended, in
conformity with generally accepted accounting principles.
/s/ Neff & Company LLP
Albuquerque, New Mexico
March 25, 1997
F-1
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 878,090 39,049
Accounts receivable, net of allowance of
$5,790 in 1996 and 1995 (Notes 4, 5,
and 11) 1,901,947 1,269,211
Inventory (Notes 2, 4, 5, and 13) 5,565,210 3,849,051
Prepaid expenses 34,290 23,456
---------------------------------
Total current assets 8,379,537 5,180,767
Fixed assets, net (Notes 3, 4,
5 and 7) 2,062,842 1,710,633
Intangible assets, net of accumulated amortization
of $966,065 and $707,036 in 1996 and 1995,
respectively (Note 14) 1,098,487 469,408
Deferred start up costs 199,100 62,599
Other assets 62,194 35,381
---------------------------------
Total assets $ 11,802,160 7,458,788
=================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,406,243 665,080
Accrued payroll 28,634 20,029
Accrued liabilities 33,505 63,026
Current maturities of long-term debt
(Notes 4 and 5) 2,002,191 357,095
Current maturities of obligations under
capital leases (Note 7) 39,825 19,380
---------------------------------
Total current liabilities 3,510,398 1,124,610
Long-term debt, excluding current maturities
(Notes 4 and 5) 796,446 79,979
Stockholder payable and accrued interest (Note 6) 1,157,408 678,384
Obligations under capital leases, excluding
current maturities (Note 7) 59,378 37,227
---------------------------------
Total liabilities 5,523,630 1,920,200
Commitments and contingencies (Notes 4, 7, 12, 14, and 15)
Stockholders' equity (Notes 4 and 8):
Common stock $.01 par value, authorized
20,000,000 shares; issued and outstanding
2,731,988 shares in 1996 and 2,611,418 shares
in 1995 27,320 26,115
Additional paid-in capital 17,213,952 16,938,696
Accumulated deficit (10,962,742) (11,426,223)
---------------------------------
Total stockholders' equity 6,278,530 5,538,588
---------------------------------
Total liabilities and stockholders' equity $ 11,802,160 7,458,788
=================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net sales (Notes 1 and 11) $ 8,178,576 4,883,288
Cost of sales and inventory reduction (Note 13) 5,796,534 3,436,553
---------------------------------
Gross profit 2,382,042 1,446,735
---------------------------------
Selling expenses 716,042 364,906
General and administrative expenses 965,180 813,574
Research and development expenses (Note 1) 108,594 138,450
---------------------------------
Total operating expenses 1,789,816 1,316,930
---------------------------------
Earnings from operations 592,226 129,805
Other income (expense):
Interest income 6,578 18,133
Interest expense (197,566) (209,424)
Gain on sale of building - 150,721
Other, net 62,243 (121,508)
-------------------------
Total other expense, net (128,745) (162,078)
---------------------------------
Earnings (loss) before income taxes and
extraordinary item 463,481 (32,273)
Income tax expense (Note 9) - -
---------------------------------
Earnings (loss) before extraordinary item 463,481 (32,273)
Extraordinary gain on extinguishment of debt - 233,240
---------------------------------
Net earnings $ 463,481 200,967
=================================
Weighted average number of common and common
equivalent shares outstanding (Note 1):
Primary 2,743,659 2,611,418
Fully diluted 3,153,723 2,743,659
Net earnings (loss) per common and common
equivalent share-primary (Note 1):
Earnings (loss) before extraordinary item $ .169 (.012)
Extraordinary gain - .089
---------------------------------
Net earnings .169 .077
=================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
Net earnings per common and common equivalent
share-fully diluted (Note 1):
Earnings before extraordinary item $ .147 (.012)
Extraordinary gain - .085
-----------------------------
Net earnings .147 .073
=============================
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
(NOTES 8 AND 12) PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 2,610,255 $ 26,103 16,937,421 (11,627,190) 5,336,334
Exercise of options for common
stock 1,163 12 1,275 - 1,287
Net earnings - - - 200,967 200,967
----------------------------------------------------------------------------------
Balance December 31, 1995 2,611,418 26,115 16,938,696 (11,426,223) 5,538,588
Exercise of options for common
stock 120,570 1,205 275,256 - 276,461
Net earnings - - - 463,481 463,481
----------------------------------------------------------------------------------
Balance, December 31, 1996 2,731,988 $ 27,320 17,213,952 (10,962,742) 6,278,530
==================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operations:
Net earnings $ 463,481 200,967
Adjustments to reconcile net earnings
to cash flows used in operating activities:
Depreciation 262,941 265,702
Amortization of intangible assets 169,563 72,730
Gain on sale of building - (150,721)
Extraordinary gain on extinguishment
of debt - (233,240)
Decrease in inventory valuation allowance 250,000 -
Loss on disposal of fixed assets 9,855 -
Accrued interest due stockholder 79,024 28,384
Changes in current assets and liabilities:
Accounts receivable (632,736) (520,544)
Inventory (1,966,159) (271,822)
Prepaid expenses (10,834) 12,401
Accounts payable 741,163 (78,284)
Accrued payroll 8,605 (2,540)
Accrued liabilities (29,521) 17,058
---------------------------------
Net cash used in operating activities (654,618) (659,909)
---------------------------------
Cash flows from investing activities:
Proceeds from sale of marketable securities - 233,416
Purchase of equipment (561,910) (211,545)
Increase in intangible assets (785,377) (35,868)
Increase in deferred start-up costs (149,766) (62,691)
Purchase of other assets (26,813) 27,402
Proceeds from sale of building - 2,000,000
---------------------------------
Net cash flows (used by) provided
for investing activities (1,523,866) 1,950,714
---------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock
and equivalents 276,461 1,287
Borrowings on long-term debt 2,621,155 299,230
Principal payments on long-term debt and
capital leases (280,091) (2,680,235)
Borrowings from major stockholder 400,000 650,000
---------------------------------
Net cash flows (used by) provided
for financing activities 3,017,525 (1,731,005)
---------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net increase (decrease) in cash and cash
equivalents $ 839,041 (440,200)
Cash and cash equivalents at beginning of year 39,049 479,249
---------------------------------
Cash and cash equivalents at end of year $ 878,090 39,049
=================================
Supplemental disclosures:
Cash paid for interest $ 113,532 200,798
=================================
Production equipment acquired with capital
leases $ 63,095 -
=================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Principles of Consolidation. Lukens Medical Corporation, a
Delaware corporation, and its wholly-owned subsidiaries, (the Company) is a
disposable surgical products company engaged in the design, development,
manufacture, and marketing of needle suture products, disposable safety
scalpels, lancets, disposal supplies, and bone wax. The Company markets its
products worldwide to hospitals, independent care facilities, physicians'
offices, and to the United States government directly and through independent
distributors. Foreign operations consist of a maquiladora manufacturing
operation in Juarez, Mexico. Inventory and fixed assets related to the Juarez
facility are approximately $657,564 at December 31, 1996.
The consolidated financial statements include the accounts of Lukens Medical
Corporation and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents. Cash and cash equivalents consist substantially of
cash in banks and repurchase agreements which are collateralized by government
securities at a 102 percent of fair market value and recorded in the banks name.
The Company considers all highly liquid financial instruments with original
maturities of three months or less to be cash equivalents.
Inventory. Inventory, which consists principally of medical sutures, supplies
and components, is stated at the lower of cost or market value. Cost is
determined using the first-in, first-out (FIFO) method. Market value for raw
materials is based on replacement costs and for other inventory classifications
on net realizable value. Appropriate consideration is given to deterioration,
obsolescence and other factors in evaluating net realizable value. Inventory
costs include material, labor, and manufacturing overhead.
Fixed Assets. Equipment and leasehold improvements are recorded at cost.
Depreciation expense is calculated using the straight-line method based on the
estimated useful lives of the respective assets which approximate three to ten
years. The Company follows the policy of capitalizing expenditures that
materially increase asset useful lives and charging ordinary maintenance and
repairs to operations as incurred.
Intangible Assets. Intangible assets consist principally of costs incurred to
obtain Food and Drug Administration approvals, trademarks, organizational costs,
patents, and the rights to sell Ulster products. The Company evaluates its
intangible assets annually to determine potential impairment by comparing the
carrying value to the undiscounted future gross cash margins of related assets.
They are being amortized using the straight-line method over periods of 5 to 17
years.
F-9
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred Start Up Costs. The start up costs consist principally of costs
incurred for the start up of joint ventures and possible joint ventures in
India, Mexico, and Brazil.
Net Sales. Sales are recorded net of sales returns and allowances.
Research and Development Expenses. Research and development costs are expensed
as incurred.
Net Earnings Per Common and Common Equivalent Share. Net earnings per common and
common equivalent share is computed based on the weighted average (based on time
period outstanding) number of common shares outstanding and, if dilutive, common
equivalent shares (options and warrants (see Note 8) outstanding during the
year. Common equivalent shares included in the computation of weighted average
shares totaled 410,064 shares for 1996 and 132,241 shares for 1995, assuming the
exercise of all options outstanding and dilutive at year-end, as calculated
using the treasury stock method.
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
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.
Reclassification. The Company has reclassified certain amounts in the 1995
financial statements to conform to the 1996 presentation.
NOTE 2. INVENTORY
Inventory consists of the following components at December 31:
1996 1995
Raw materials $ 2,767,214 1,821,321
Work-in-process 1,419,685 874,080
Finished goods 1,378,311 1,153,650
--------------- -------------
$ 5,565,210 3,849,051
=================================
F-10
<PAGE>
NOTE 3. FIXED ASSETS
Fixed assets owned and held under capital lease (see Note 7) consist of the
following at December 31:
1996 1995
Leasehold improvements $ 172,677 102,395
Production equipment 3,018,600 2,555,378
Office equipment 229,646 202,884
---------------------------------
3,420,923 2,860,657
Less accumulated depreciation 1,358,081 1,150,024
---------------------------------
$ 2,062,842 1,710,633
=================================
Production equipment valued at $807,543 was not being utilized in 1995 or 1996
and as of December 31, 1996, was in Piedras Negras, Mexico in anticipation of
the start up of a joint venture (See Note 14).
NOTE 4. BANK FINANCING INSTRUMENTS
At December 31, 1996, the Company had the following bank borrowing agreements:
A working capital line-of-credit agreement, which provides for borrowings
for working capital up to the lesser of (a) $1,000,000 or (b) the sum of 80
percent of eligible accounts receivable (as defined in the agreement) plus
(i) the lesser of 40 percent of qualified inventory; or (ii) $1,200,000.
Interest is payable monthly on the amount drawn at the Bank's corporate
base rate (the Bank's prime rate) plus 1 percent. At December 31, 1996,
there was $900,000 outstanding under this line-of-credit agreement.
A letter-of-credit line, which provides for other credit instruments
including commercial letters-of-credit and banker's acceptances which
guarantee payment to raw material suppliers, and standby letters-of-credit
which may also be used for the purchase of raw material on forward currency
contracts. The sum of these shall not exceed $1,650,000 at any one time. At
December 31, 1996, there was $796,838 of outstanding letters of credit and
$153,761 in standby letters-of-credit outstanding under this line.
F-11
<PAGE>
NOTE 4. BANK FINANCING INSTRUMENTS (CONTINUED)
A SBA export working capital line-of-credit agreement, which provides
working capital for foreign sales up to the lesser of (a) $600,000 or (b)
80 percent of the face amount of negotiated Letters of Credit issued for
the benefit of the Borrower and delivered to Lender. Interest is payable
monthly on the amount drawn at the New York prime rate as published in the
Wall Street Journal plus 1.5 percent. At December 31, 1996, there was
$50,301 outstanding under this line-of-credit agreement.
A SBA government contract line-of-credit which provides for the use of
working capital for government contracts up to $420,000, interest is
payable monthly on the amount drawn at the New York prime rate as published
in the Wall Street Journal plus 1.5 percent. At December 31, 1996, there
was $15,801 outstanding under this line-of-credit agreement.
A SBA equipment term loan, which provides for the purchase of equipment and
machinery up to $150,000, interest and principal payable monthly on equal
installments of $2,510 at the New York prime rate as published in the Wall
Street Journal, plus 1.5 percent. At December 31, 1996, there was $130,096
outstanding under this agreement.
A SBA equipment term loan, which provides for the purchase of equipment and
machinery up to $150,000, interest and principal payable monthly on equal
installments of $2,535 at the New York prime rate as published in the Wall
Street Journal, plus 1.5 percent. At December 31, 1996, there was $23,150
outstanding under this agreement.
To evidence the Company's obligation to reimburse the Bank under these
credit instruments issued and drawn on behalf of the Company, the Company
is required to issue a promissory note payable upon demand, bearing
interest at one percent above the Bank's corporate base rate.
On May 24, 1996, the Company obtained a bank term loan for the purchase of
equipment and machinery in the amount of $120,000, interest and principal
payable monthly on equal installments of $3,859 at the bank's corporate
base rate plus 1.5 percent.
On December 30, 1996, the Company obtained a bank term loan for funding of
a joint venture in India in the amount of $700,000, interest and principal
payable monthly on equal installments of $14,700 at the bank's corporate
base rate plus 1 percent.
F-12
<PAGE>
NOTE 4. BANK FINANCING INSTRUMENTS (CONTINUED)
At December 31, 1996, these bank credit instruments had covenants which
provided, among other things, for: the maintenance of consolidated stockholders'
equity of not less than $4,700,000; a minimum current ratio, as defined in the
agreement, of 2:1; aggregate debt to consolidated stockholders' equity of not
greater than 1:1; fixed charges coverage not less than 1:3 and a quick ratio of
not less than 1:1. The agreements also provide for a security interest in
substantially all of the Company's assets and has certain covenants which
restrict the Company's payment of dividends and prohibit incurring any
additional material indebtedness without the consent of the Bank.
NOTE 5. LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
Bank Debt:
<S> <C> <C>
Outstanding line-of-credit payable, interest is accrued
at the corporate base rate plus 1% (9.25% at
December 31, 1996), maturing August 30, 1997 $ 796,838 -
Outstanding line-of-credit payable, interest is accrued
at the corporate base rate plus 1.5% (9.75% at
December 31, 1996), maturing August 30,1997 900,000 200,000
Notepayable, due in monthly installments of $3,859,
including interest at the bank's corporate base
rate plus 1.5% (9.75% at December 31, 1996),
maturing May 24, 1999 98,828 -
Notepayable, due in monthly installments of $14,700,
including interest at the bank's corporate base
rate plus 1% (9.25% at December 31, 1996),
maturing December 30, 2001 700,000 -
Outstanding line-of-credit payable, interest is
accrued at the prime rate from the Wall Street
Journal plus 1.5% (9.75% at December 31, 1996)
maturing November 8, 1997 50,301 28,000
---------------------------------
Balance forward 2,545,967 228,000
---------------------------------
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
NOTE 5. LONG-TERM DEBT (CONTINUED)
<S> <C> <C>
Balance forward $ 2,545,967 228,000
Notepayable will be due in monthly installments of
$2,510 including interest at New York Prime from
the Wall Street Journal plus 1.5% (9.75% at
December 31, 1996) maturing October 2002 130,096 71,230
Notepayable will be due in monthly installments of
$2,535 beginning April 1997, including interest
at New York prime from the Wall Street Journal
plus 1.5% (9.75% at December 31, 1996) maturing
November 2003 23,150 -
Outstanding line-of-credit payable, interest is
accrued at the prime rate from the Wall Street
Journal plus 1.5% (9.75% at December 31, 1996)
maturing February 1997 15,801 -
Other debt:
Community Development Block Grant note, due in
monthly installments of $4,167, plus interest
at a rate equal to the six-month Treasury Bill
rate with a minimum of 7% and a maximum of 9% (7%
at December 31, 1996), maturing July 7, 1998,
secured by equipment purchased with the proceeds
from the note 83,623 137,844
---------------------------------
Total long-term debt 2,798,637 437,074
Current maturities of long-term debt 2,002,191 357,095
---------------------------------
Long-term debt, excluding current maturities $ 796,446 79,979
=================================
</TABLE>
The aforementioned Bank debt is held by a single institution and is secured by
accounts receivable, inventory and fixed assets of the Company, except for those
purchased with the proceeds obtained from the Community Development Block Grant
note.
F-14
<PAGE>
NOTE 5. LONG-TERM DEBT (CONTINUED)
Future scheduled debt payments at December 31 are:
1997 $ 2,002,191
1998 210,747
1999 185,462
2000 182,506
2001 193,518
Thereafter 24,213
---------------
$ 2,798,637
NOTE 6. STOCKHOLDER PAYABLE
During 1995, a major stockholder loaned the Company $400,000 which defeased a
$350,000 line of credit and provided $50,000 for general operations. The note is
due April 1999, including all interest, accrued at 8 percent. The major
stockholder also received warrants for 400,000 shares of common stock
exercisable at 1.10 per share (Note 8).
In September 1995, the Company also received an additional $250,000 from the
stockholder for repayment of various capital leases. The note is due September
1999, including all interest, accrued at 8 percent.
In March 1996, the Company received $400,000 from the stockholder for use in the
Ulster acquisition. The note is due September 1999, including all interest,
accrued at 10 percent.
NOTE 7. LEASES
The Company has two capital lease obligations for production equipment that
expire in 1999. At December 31, 1996 and 1995, the Company had $126,508 and
$138,904, respectively, recorded as production equipment under capital leases
with related accumulated depreciation of $4,206 and $73,172, respectively (see
Note 3).
F-15
<PAGE>
NOTE 7. LEASES (CONTINUED)
The present value of future minimum capital lease payments as of December 31,
1996 follows:
1997 $ 48,586
1998 38,868
1999 25,333
---------------
Total minimum lease payments 112,787
Less amount representing interest
(at rates ranging from 8% to 9.75%) 13,584
Present value of net minimum capital
lease payments 99,203
Current maturities of obligations under
capital leases 39,825
Obligations under capital leases, ex-
cluding current maturities $ 59,378
===============
The Company leases its facilities and certain equipment under terms of various
operating leases. Future minimum rental payments required under the operating
leases as of December 31, 1996, are as follows:
Year ending December 31:
1997 $ 119,311
1998 125,748
1999 128,953
2000 132,253
2001 86,925
------------------
Total minimum payments required $ 593,190
==================
Total rental expense for operating leases during 1996 and 1995 was $111,787 and
$64,979, respectively.
F-16
<PAGE>
NOTE 8. STOCK WARRANTS AND OPTIONS
Warrants for Common Stock
The following warrants are outstanding at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE DATE DATE OF
COVERED BY WARRANTS PRICE EXERCISABLE EXPIRATION
<S> <C> <C> <C>
137,500 $ 9.00 Presently May 6, 1997
500,000 6.00 Presently May 6, 1998
400,000 1.10 Presently April 13, 2000
50,000 3.00 Presently March 5, 2004
</TABLE>
Each warrant allows the holder to purchase one share of common stock at the
warrant price. The 400,000 warrants are to the major stockholder.
Options for Common Stock
In 1992, the Company adopted a stock option plan (1992 Plan) which provides for
the issuance of incentive and nonqualified stock options for officers,
directors, key employees, and consultants of the Company. The 1992 Plan replaced
a similar plan in effect in prior years. The 1992 Plan allows the issuance of a
maximum of 850,000 options for exercise into common stock at an option price not
less than the fair market value (trading value) of the common stock on the date
such options are granted. Options outstanding under the 1992 Plan total 243,223
and 380,611 at December 31, 1996 and 1995, respectively. As of December 31, 1996
and 1995, an additional 103,000 and 103,531, respectively, of options were
granted under various other plans. All options terminate three to ten years from
the date of issuance. The Company has filed a registration statement for its
stock option plans.
A summary of the common stock options for the year ended December 31, 1996 and
1995 follows:
<TABLE>
<CAPTION>
OPTIONS PRICE RANGE
---------------------------------------------------
<S> <C> <C>
Balance, December 31, 1994 388,632 $ 1.125 - 6.50
Granted 125,400 1.063 - 3.00
Expired (28,727) 2.375 - 2.375
Exercised (1,163) 1.063 - 1.125
--------------------------------------------------
Balance, December 31, 1995 484,142 1.063 - 6.50
-------------------------------------------------
Granted 185,800 3.00 7.00
Expired (198,149) 2.375 3.00
Exercised (120,570) 1.063 2.375
--------------------------------------------------
Balance, December 31, 1996 351,223 1.063 7.00
=================================================
Options exercisable, December 31,
1996 115,425 1.063 - 6.50
=================================================
</TABLE>
F-17
<PAGE>
NOTE 8. STOCK WARRANTS AND OPTIONS (CONTINUED)
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its plans. FASB Statement No. 123 Accounting for Stock-Based Compensation
(SFAS 123) was issued by the FASB and, if fully adopted, changes the methods for
recognition of cost or plans similar to those of the Company. Adoption of SFAS
123 is optional; however, proforma disclosures as if the Company adopted the
cost recognition requirements under SFAS 123 in 1996 are presented below:
<TABLE>
<CAPTION>
AS REPORTED PROFORMA
<S> <C> <C>
Net income $ 463,481 267,225
Net earnings per common and
common equivalent share-primary (Note 1) .169 .097
Net earnings per common and common
equivalent share-fully diluted (Note 1) .147 .085
</TABLE>
The effects of applying SFAS 123 in this proforma disclosure are not indicative
of future amounts. SFAS 123 does not apply to awards prior to 1996 and
additional awards in future years are anticipated.
NOTE 9. INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes.
In 1994, a net deferred tax expense resulted from a reduction of valuation
allowance due to a change in circumstances as more fully discussed below.
Components of the net deferred income tax asset at December 31, 1996 and 1995,
are as follows:
1996 1995
Deferred income tax assets:
Resulting from net operating loss
carryforwards $ 3,845,000 3,844,000
Carryforward of capital loss 105,000 105,000
Carryforward credit from increasing
research activities 105,000 105,000
Other 264,000 244,000
------------------------------
4,319,000 4,298,000
Deferred income tax liabilities:
Depreciation and other basis differences (75,000) (62,000)
------------------------------
Net deferred tax asset before valuation
allowance 4,244,000 4,236,000
Valuation allowance (4,244,000) (4,236,000)
------------------------------
Net deferred income tax asset $ - -
==============================
F-18
<PAGE>
NOTE 9. INCOME TAXES (CONTINUED)
The Company conducts a periodic evaluation of its valuation allowance. Factors
considered in the evaluation include recent and demonstratable future earnings
and the Company's liquidity and equity positions. For 1996 and 1995, the
deferred tax assets were reserved for in the valuation allowance given the
Company's limited history of profitable operations.
There is no income tax payable at December 31, 1996, because of the usage of net
operating loss carryforwards.
The net operating loss and credit for increasing research activities
carryforwards are each subject to annual limitations of approximately $460,000
and as of December 31, 1996, expire as follows:
<TABLE>
<CAPTION>
INCREASING RESEARCH
APPROXIMATE NET OPERATING ACTIVITIES BOOK/TAX
LOSS CARRYFORWARD CREDITS
-------------------------------------------------------------- -------------------
STATE LOSS FEDERAL LOSS
AMOUNT AMOUNT TAX EFFECT TAX EFFECT
<C> <C> <C> <C> <C>
1999 $ 2,537,000 - 122,000 3,800
2000 - 2,056,000 699,000 37,200
2001 - 1,835,000 624,000 37,500
2002 - 1,132,000 385,000 1,400
2003 1,480,000 2,086,000 780,000 25,100
2004 315,000 390,000 148,000 -
2005 161,000 278,000 102,000 -
2006 - 50,000 17,000 -
2008 - 88,000 30,000 -
2009 - 2,760,000 938,000 -
-----------------------------------------------------------------------------------
$ 4,493,000 10,675,000 3,845,000 105,000
===================================================================================
</TABLE>
The capital loss carryforwards of approximately $271,000, tax effect of
$105,000, expire in 1998.
The provision (benefit) for income taxes consists of the following for the year
ended December 31:
1996 1995
Deferred:
Federal $ 112,001 66,374
State 3,548 2,102
---------------------------------
115,549 68,476
Adjustment to valuation allowance (115,549) (68,476)
---------------------------------
Total $ - -
=================================
F-19
<PAGE>
NOTE 9. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes is reconciled with the federal and
state statutory rates for the year ended December 31, as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------- -------------------------------
TAX TAX RATE TAX TAX RATE
<S> <C> <C> <C> <C>
Provision computed
at federal statutory
rate $ 157,584 34% 68,328 34%
State taxes, net of
federal tax benefit 4,697 1% 5,884 3%
Non-deductible meals
and entertainment 4,480 1% 3,057 2%
Other - - (2,600) (1)%
Adjustment of prior year
deferred tax asset attri-
butable to loss carry-
forwards (51,212) (11)% (6,193) (4)%
Adjustment of beginning
of year valuation allow-
ance (115,549) (25)% (68,476) (34)%
------------------------------------------------------------------
Total $ - 0% - 0%
==================================================================
</TABLE>
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions are used by the Company in determining its
fair value disclosures for financial investments:
Cash and cash equivalents. The carrying amount reported in the balance sheet
approximates fair value.
Long-term debt including current maturities and stockholder payable. The
floating-rate long-term debt approximates its fair value. The fair value of the
fixed-rate long-term debt is estimated using discounted cash flow analysis,
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
F-20
<PAGE>
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and fair values of the Company's financial instruments are:
CARRYING FAIR
AMOUNT VALUE
Cash and cash equivalents $ 878,090 $ 878,090
Long-term debt, including current
maturities $ 2,798,637 $ 2,780,346
Stockholder payable and accrued interest $ 1,157,408 $ 1,084,208
NOTE 11. SIGNIFICANT CUSTOMERS AND EXPORT SALES
During 1995, approximately 24 percent of the Company's net sales were from two
customers. At December 31, 1995, the two customers accounted for approximately
30 percent of total trade accounts receivable.
In addition, the Company's export sales for 1996 and 1995 totaled $2,295,066 and
$1,788,944 , respectively, which represent 28 percent and 37 percent of total
sales in each of those years.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Employment Agreement. The Company has entered into an employment agreement with
its Chief Executive Officer which provides for a three-year term expiring in
January 1998, with automatic one-year extensions thereafter. This agreement
provides for a base salary of $135,000 per annum. This agreement allows for an
annual base salary increase at least equal to the percentage increase in the
Consumer Price Index (or closest substitute for such index then available). For
future years, the employee's base salary shall increase no less than 10 percent
if the Company's net income increases at least 10 percent as compared to the
preceding year. The Chief Executive Officer is entitled to an annual bonus of up
to 35 percent of base compensation for such year for achieving objectives
established jointly by the employees and Board of Directors, as defined in the
agreement.
Litigation. The Company is involved in litigation in the ordinary course of
business. Management believes, after consulting with legal counsel, that the
ultimate outcome of this litigation will not result in a material adverse impact
on the Company's financial statements.
F-21
<PAGE>
NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Consulting Agreement. Effective March 1, 1996, the Company entered into a one
year consulting agreement with a major stockholder. Payments under the agreement
are $4,167 per month.
Profit Sharing/Savings Plan. The Company has a voluntary profit sharing/savings
plan (Plan) covering substantially all employees residing in the United States
over age 21 and who have been employed at least six months by the Company. The
Plan is qualified under section 401(k) of the Internal Revenue Code. The Plan
provides for voluntary employee contributions and discretionary Company profit
sharing/savings plan contributions. The Company matches employee contributions
at a rate of 50 percent of their contributions up to 3 percent of their base
pay. In addition, the Plan provides that the Company may pay for certain
administrative costs of the Plan. For 1996 and 1995, there were no Company
profit sharing contributions. Company matching contributions and administrative
expenses for 1996 and 1995 were $24,551 and $17,484, respectively.
NOTE 13. INVENTORY REDUCTION
During 1996, the Company experienced reductions in its cost, as compared to
1995, to manufacture certain products mainly from favorable shifts in overhead,
labor, and exchange rates. In order to more accurately reflect the new cost
structure inventory carrying amounts were reduced and cost of sales increased by
approximately $300,000.
NOTE 14. ACQUISITION AND JOINT VENTURE
On March 4, 1996, the Company completed an acquisition of three product lines
from Ulster Scientific, Inc. (USI), a New York corporation. The acquisition was
accounted for under the purchase method. USI was a wholesale distributor of
medical supplies. The Company paid $248,000 cash, assumed $320,000 in supplier
liabilities, and agreed to terms on a consulting and royalty contract with
payments of 3 percent to 7 percent of certain Ulster sales over eight years and
with minimum payments of $90,000 per year for the next five years. In addition,
the Company issued 200,000 warrants to the seller, 150,000 of which are
contingent upon future product sales. The Company acquired, in addition to
inventory and equipment, the rights to sell Ulster product lines, trademarks,
and other intangible assets. All intangibles are amortized over eight years.
F-22
<PAGE>
NOTE 14. ACQUISITION AND JOINT VENTURE (CONTINUED)
The proforma results of operations for the year ended December 31, 1995 as
though the companies had been combined at the beginning of that period is as
follows:
Net sales $ 8,705,783
=============
Earnings before extraordinary item $ 298,810
=============
Net earnings $ 532,050
=============
Weighted average number of common and
common equivalent shares outstanding:
Primary $ 2,611,418
Fully diluted 2,743,659
Net earnings per common and
common equivalent share-
primary:
Before extraordinary
item .11
Extraordinary gain .09
---------------
Net earnings $ .20
===============
Net earnings per common and
common equivalent share-
fully diluted:
Before extraordinary
item $ .11
Extraordinary gain .08
---------------
Net earnings $ .19
===============
In 1996, the Company formed a joint venture with Serral, SADECV, a Mexican
Corporation, to produce needles. The joint venture is formed as an equal
partnership. Each partner will retain ownership of the equipment it provides. As
of December 31, 1996, the joint venture was not yet active.
NOTE 15. SUBSEQUENT EVENTS
On January 9, 1997, the Company became the majority shareholder in a new joint
manufacturing venture based in Cochin, India. The venture, which will
manufacture syringes, hypodermic needles, and related products, has acquired the
basic equipment required for the process, as well as a 22,000 square-foot
facility which is being renovated and is to be operational by mid-1997. The
venture will market the products through Lukens and the three minority
shareholders who are all current distribution partners of Lukens in various
parts of the world.
F-23
<PAGE>
NOTE 15. SUBSEQUENT EVENTS (CONTINUED)
The Company's initial investment in the venture was $494,228. In addition, the
Company has issued a standby guaranty of the venture's $360,000 two-year term
note payable to a bank.
Two outside directors have committed to loan up to $1 million to the Company.
The funds will be used for continued expansion of its recently-acquired India
facility. Terms of the loan include an interest rate of 10 percent, and issuance
of up to 100,000 warrants to purchase common stock of Lukens Medical Corporation
at an exercise price of $8.25 per share.
In February 1997, the Company received 510K clearance from the FDA for its new
synthetic absorbable suture material. The new suture will be marketed worldwide
and is heavily used in gynecology, orthopedics and general surgery.
On March 25, 1997, the Company signed a letter of intent to acquire 100 percent
of Pro-Tec Containers, Inc. of Sanford, Florida. The letter of intent outlines
general terms and conditions of the transaction, which will be a reverse
triangular merger of Pro-Tec and a newly formed subsidiary of Lukens.
Consideration will be $250,000 cash and $1,300,000 in Lukens common stock at
closing, with closing scheduled within 45 days.
Pro-Tec specializes in the manufacture and marketing of containers for used
needles, scalpel blades, and other sharp items used by healthcare professionals.
Pro-Tec had revenues of approximately $1.3 million in 1996. The Company feels
the products will fit well with their existing lines, the use of which generates
the need for Pro-Tec's products. While the two companies share many common
customers and distribution channels, Lukens plans to expand distribution of the
Pro-Tec products into its overseas markets as well.
NOTE 16. MANAGEMENT'S PLANS FOR FUTURE OPERATIONS (UNAUDITED)
The Company produced net earnings for 1995 and 1996. However, to remain viable
as a going concern, it must achieve profitability from operations consistently
in the future. The Company's acquisition of three product lines from Ulster
Scientific, Inc., its recent joint venture and the Pro-Tec acquisition, provide
an opportunity to increase revenues. There can be no assurance that the
Company's efforts will be successful or that existing inventory can be sold on
favorable terms.
F-24
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LUKENS MEDICAL CORPORATION
By: /s/ Robert S. Huffstodt
--------------------------------------
Robert S. Huffstodt, President
Date: March 28, 1997
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.
SIGNATURE AND TITLE DATE
------------------- ----
/s/ Robert S. Huffstodt March 28, 1997
- ----------------------------------------------
Robert S. Huffstodt
Chairman of the Board of Directors, President and
Chief Executive Officer (Principal Executive Officer)
/s/ Robert S. Huffstodt March 28, 1997
- ----------------------------------------------
Robert S. Huffstodt
Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer)
/s/ John H. Robinson March 28, 1997
- ----------------------------------------------
John H. Robinson
Director
/s/ Robert L. Priddy March 28, 1997
- ----------------------------------------------
Robert L. Priddy
Director
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Description Page #
<S> <C>
3.1 Certificate of Incorporation of the Registrant, as amended (1)
3.2 Form of Certificate of Amendment of Certificate of Incorporation (1)
3.3 Form of Amended and Restated Bylaws of the Registrant (1)
10.1 1988 Amended and Restated Stock Option Plan (1)
10.2 1992 Stock Option Plan (1)
10.3* Exclusive Distributorship Agreement between the Registrant and Meadox Medicals, Inc. (1)
10.4* Exclusive Distributorship Agreement between the Registrant and Cottrell Limited (1)
10.5* Exclusive Distributorship Agreement between the Registrant and Convergenza, as amended (1)
10.6* Exclusive Distributorship Agreement between the Registrant and HP - medica GmbH (1)
10.7 Business Loan and Security Agreement among the Registrant, Lukens Corporation - New Mexico and Sunwest
Bank of Albuquerque, N.A., as amended (1)
10.8 Form of Indemnity Agreement (1)
10.9 Employment Agreement between the Registrant and James A. Wimbush (1)
10.10 Employment Agreements between the Registrant and each of Steven J. Schroeder, Robert S. Huffstodt,
Scott Henderson and Donald E. Lawson (1)
10.11* Collaborative Development Agreement between the Registrant and Medisorb Technologies International,
L.P. (1)
10.12 Lease for Registrant's facility (1)
10.13 Form of Consulting Agreement between the Registrant and Commonwealth Associates, Inc.(1)
10.14* Exclusive Distributorship Agreement between the Registrant and Core Dynamics, Inc. (3)
10.15 Consulting Agreement between the Registrant and Kronenthal Associates (3)
10.16* Exclusive Patent License Agreement between the Registrant and Innovative Surgical Technology, Inc. (4)
10.17 Agreement, dated November 19, 1992, between Sunwest Bank of Albuquerque, National Association, and
Lukens Medical Corporation, a New Mexico corporation, together with promissory note, as amended,
security agreements and mortgages executed pursuant thereto (5)
10.18* Amendment No. 1, dated as of May 17, 1994, to Exclusive Patent License Agreement, dated August 9,
1993, between Lukens Medical Corporation, a New Mexico corporation, and Innovative Surgical
Technology, Inc. (5)
20
<PAGE>
10.19* Manufacturing Agreement, dated May 26, 1994, between the Registrant and West Texas Engineering,
Inc.(5)
10.20* Supply Agreement, dated June 29, 1994, between Lukens Medical Corporation, a New Mexico corporation,
and Farnam Companies, Inc. d.b.a. Veterinary Products Laboratories (5)
10.21 Business Loan and Security Agreement, dated July 27, 1994 (the "Sunwest Loan Agreement"), as amended
pursuant to the Third Amendment thereto, dated as of January 31, 1995, among the Registrant, Lukens
Medical Corporation (a New Mexico corporation formerly known as Lukens Corporation) and Sunwest Bank
of Albuquerque, N.A., together with promissory notes, guaranty and security agreements executed
pursuant thereto (5)
10.22* Exclusive Distribution Agreement, dated October 7, 1994, between Lukens Medical Corporation, a New
Mexico corporation, and Dentsply International Inc. (5)
10.23 Amendment No. 3, dated as of November 2, 1994, to 1992 Stock Option Plan (5)
10.24* Supplier/Distributor Agreement, dated November 14, 1994, between Lukens Medical Corporation, a New
Mexico corporation, and Henry Schein, Inc. (5)
10.25 Amendment No. 4, dated as of January 3, 1995, to 1992 Stock Option Plan (5)
10.26 Promissory Note of the Company to John H. Robinson, dated as of April 13, 1995, in the original
principal amount of $400,000; Commitment letter of John H. Robinson, dated as of April 13, 1995. (5)
10.27 Warrant, dated as of April 13, 1995, granted by Lukens Medical Corporation, a Delaware corporation, to
John H. Robinson.
10.28 Lease for the Facility, dated July 14, 1995, between Rio Rancho Public Schools, as landlord, and
Lukens Medical Corporation, as tenant.
10.29 Fourth Amendment, Fifth Amendment, Sixth Amendment and Seventh Amendment to the Sunwest Loan
Agreement, dated April 10, 1995, April 28, 1995, July 14, 1995 and December 31, 1995, respectively.
10.30 Promissory Notes of the Company to Sunwest Bank of Albuquerque, N.A. relating to certain loans
guaranteed by the U.S. Small Business Administration, in the original principal amounts of $150,000,
$500,000 and $420,000, dated as of October 31, 1995, October 31, 1995 and February 15, 1996,
respectively, and related Loan and Security Agreements.
10.31 Promissory Note of the Company to John H. Robinson, dated as of September 11, 1996, in the original
principal amount of $250,000; Promissory Note of the Company to John H. Robinson, dated as of March 5,
1996, in the original principal amount of $400,000
10.32 Distribution Agreement, dated as of March 5, 1996, by and between Guest Elchrom Scientific AG and
Lukens Medical Corporation, a New Mexico corporation.
10.33 Agreement of Purchase and Sale of Assets, dated as of March 4, 1996 by and among the Company, Ulster
Scientific, Inc. and Peter F. Lordi, Jr. (6)
10.34 Lease Agreement, dated as of March 5, 1996, between Ulster Scientific, Inc., a New York corporation,
Peter F. Lordi, Jr. and Lukens Medical Corporation, a New Mexico corporation. (6)
21
<PAGE>
10.35 Consulting Agreement, dated as of March 5, 1996, between Peter F. Lordi, Jr. and Lukens Medical
Corporation, a New Mexico corporation. (6)
10.36 Warrant, dated as of March 5, 1996, granted by Lukens Medical Corporation, a Delaware corporation, to
Peter F. Lordi, Jr. (6)
10.37 Lease between Kenneth I. White, as landlord, and Lukens Medical Corporation, as tenant, dated May 31,
1996. (7)
10.38 Joint Venture/Stockholders' Agreement, dated as of February 21, 1997, between Lukens Medical Products
Private Limited and the stockholders of the compnay listed on the signature page thereto.
10.39 Letter Agreement, dated as of February 28, 1997, between Lukens Medical Corporation and John H.
Robinson; Promissory Note of Lukens Medical Corporation dated as of February 28, 1997 to John H.
Robinson in the amount of $150,000; and Warrant Agreement between Lukens Medical Corporation and John
H. Robinson, dated as of February 28, 1997.
10.40 Letter Agreement, dated as of February 28, 1997, between Lukens Medical Corporation and Robert L.
Priddy; Promissory Note of Lukens Medical Corporation dated as of February 28, 1997 to Robert L.
Priddy in the amount of $150,000; and Warrant Agreement between Lukens Medical Corporation and Robert
L. Priddy, dated as of February 28, 1997.
21 Subsidiaries
23 Consent of Neff & Company
27 Financial Data Schedule
</TABLE>
- ----------
(1) These exhibits were filed as exhibits to the Company's Registration
Statement on Form S-1 (File No. 33-46466) and are incorporated herein by
reference.
(2) This exhibit was filed with the Company's Amendment No. 1 to its Current
Report on Form 8-K dated July 17, 1992 and is incorporated herein by
reference.
(3) These exhibits were filed as exhibits to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1992 and are incorporated
herein by reference.
(4) These exhibits were filed as exhibits to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1993 and are incorporated
herein by reference.
(5) These exhibits were filed as exhibits to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1994 and are incorporated
herein by reference.
(6) These exhibits were filed as exhibits to the Company's Current Report on
Form 8-K filed on March 18, 1996, and are incorporated herein by reference.
(7) This exhibit was filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1996, and is incorporated herein
by reference.
* Confidential treatment has been granted with respect to portions of these
exhibits.
22
JOINT VENTURE/STOCKHOLDERS' AGREEMENT
JOINT VENTURE/STOCKHOLDERS' AGREEMENT, made and entered into on the
dates of the respective signatures set out below among Lukens Medical Products
Private Limited, a company registered under the Companies Act, 1956, laws of
India and limited by shares acting through _________________its Managing
Director and constituted attorney Sri___________ and having its registered
office at Plot No. 7 in Cochin Export Processing Zone, Kakkanad, Cochin, India
(hereinafter called the "Company") and the stockholders of the Company listed on
attached Schedule A, acting through those representatives set out on Schedule A
(the "Stockholders").
Background
The Stockholders are desirous of organizing and acquiring an interest
in the Company under the laws of India to engage in the manufacture of modern
syringes and hypodermic needles in India and to set out in this Agreement their
respective rights, powers, duties and obligations with respect to the creation
and operation of the Company and their ownership of the shares of the Company.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement, the parties agree as follows:
Section 1
Definitions
1.1 Defined Terms. Capitalized terms used in this Agreement and not
defined elsewhere are defined in the attached Glossary.
Section 2
Organization of Company
2.1 Organization Of Company. The Company has been organized in
accordance with Organization Documents substantially in the form
<PAGE>
attached hereto as Exhibit A and in accordance with all applicable laws and
regulations, including the 1992-1993 U.S./India Treaty, and the rules and
regulations of the Reserve Bank of India ("RBI") and all laws regulating or
pertaining to the issuance of shares of stock in the Company.
2.2 Capital of Company. The initial authorized share capital of the
Company is Rs. 3,00,00,000/- (Rupees Three Crores only) and each of the
Stockholders shall contribute the following amounts to the Company for the
following number of shares:
(a) Lukens has contributed or will contribute to the Company
cash or property in the amount of U.S. Eight Hundred Thousand Dollars ($800,000)
and preincorporation services in exchange for that number of shares of the
Company stock, which at Closing shall constitute 70% of the issued and
outstanding stock of the Company;
(b) S.A. Diagnostics shall contribute to the Company the
equipment listed on attached Schedule B (the "Equipment") having a value in the
amount of U.S. Three Hundred Thousand Dollars ($300,000) in exchange for that
number of shares of the Company stock, which at Closing shall constitute 15 % of
the issued and outstanding stock of the Company;
(c) Superior Medical Supplies shall contribute to the Company
the amount of U.S. One Hundred Thousand Dollars ($100,000) in exchange for that
number of shares of the Company stock, which at Closing shall constitute 5 % of
the issued and outstanding stock of the Company; and
(d) PENPOL shall contribute to the Company its promissory note
in the amount of U.S. Two Hundred Thousand Dollars ($200,000) in exchange for
that number of shares of the Company stock, which at Closing shall constitute 10
% of the issued and outstanding stock of the Company.
2.3 Closing. The contributions to the Company described in Section 2.2,
above shall occur at a closing to be held at a time and place mutually agreed
upon by the Parties, on or before February 28, 1997
<PAGE>
unless such date of closing is extended by the mutual consent of the Parties. At
or prior to the Closing:
(a) each Stockholder shall make its contribution to the
Company as provided in Section 2.2, above;
(b) the Company shall issue a certificate or certificates
representing the Shares to be issued to each Stockholder under Section 2.2,
above; and
(c) the parties shall execute such other documents and
instruments necessary or desirable for the consummation of the Contemplated
Transactions and to conform to any legal requirement.
(d) the rights and obligations of the parties at Closing and
under this Agreement are subject to any rules and regulations of Indian
government authorities, including, but not limited to the RBI, the Foreign
Investment Board and SEBI.
2.4 Company Operations. Subject always to the business judgment of the
Company's Board of Directors and management, the Company and the Stockholders
anticipate that the Company will use reasonable efforts to accomplish the
following:
(a) in order to take advantage of the business expertise and
experience of the Stockholders, the Company wit(, from time to time, consult
with the Stockholders, either individually or collectively, regarding strategic
planning and direction related to the business of the Company;
(b) within two (2) years of the date of this Agreement,
research and make a recommendations to the Stockholders with respect to possible
advantages and disadvantages of incorporation of the Company's business under
the laws of a political jurisdiction other than India; and
(c) when and if determined appropriate in the business
judgment of the Company's Board of Directors and when permitted under the laws
governing the operation of the Company, consider the declaration
<PAGE>
and payment of dividends in such amounts and at such times that will not impair
the Company's operations. The Company and the Stockholders do not anticipate
that the Company will be in a position to declare and pay any dividends for a
period of at least two (2) years from the date of this Agreement, and thereafter
only at such times and in such amounts as are commercially reasonable and
prudent in the business judgment of the Company's Board of Directors considering
the business needs of the Company.
Section 3
Other Commitments and Agreements
3.1 Transfer of Acquired Indian Assets by Lukens. Lukens has purchased
certain assets of Affiliated Medical Equipments, Ltd. from Kerala State
Industrial Development Corporation Ltd., acting for itself and on behalf of
Kerala Financial Corporation, State Bank of Travancore and State Bank of Mysore
under that Agreement dated January 7, 1997, a copy of which is attached as
Exhibit B. (the "KSIDC Purchase Agreement"). At or prior to the Closing, Lukens
will transfer to the Company all of the assets so acquired under the KSIDC
Purchase Agreement as a part of its contribution to the Company under Section
2.2(a), above. Notwithstanding the foregoing, Lukens shall provide the Bank
Guarantee referenced in the KSIDC Purchase Agreement.
3.2 Bank Guarantees. Each Stockholder does hereby guarantee to Sunwest
Bank of Albuquerque, N.A., Albuquerque, New Mexico ("Sunwest") that the Company
and Lukens' wholly-owned New Mexico subsidiary shall promptly and fully pay any
and all indebtedness, of any kind or nature whatsoever, which now exists or may
hereafter arise or accrue in any manner from Company or Lukens' wholly-owned New
Mexico subsidiary to Sunwest related to that certain loan specifically described
on attached Exhibit C, including renewals, extensions and modifications thereof
and interest or other charges accruing thereon. All such indebtedness,
liabilities and obligations of Company and Lukens' wholly-owned New Mexico
subsidiary to Sunwest are hereinafter called the "Guaranteed Obligations." If
Company or Lukens' wholly-owned New Mexico subsidiary fails at any time to
promptly pay or perform any of the Guaranteed
<PAGE>
Obligations when due, by acceleration or otherwise, each Stockholder promises,
to the extent of such Stockholder's Proportionate Share, to pay or perform the
same when due immediately upon demand, together with: (i) such Stockholder's
Proportionate Share of attorneys' fees, court costs and other out-of-pocket
expenses incurred by reason of Company's default and; (ii) the amount of all
actual 'attorneys' fees, court costs and other out-of-pocket expenses incurred
in establishing and enforcing payment against such Stockholder. As used in this
Section 3.2, the term "Proportionate Share" means an amount equal to the
percentage of the Guaranteed Obligations that is equal to such Stockholder's
percentage ownership of Stock of the Company. As of the date hereof, each
Stockholder's Proportionate Share of the Guaranteed Obligations is set forth on
attached Exhibit D. At Closing, and thereafter, each Stockholder agrees to
execute and deliver any and all agreements, documents and instruments which may
be required by Sunwest to evidence the guarantee provided for hereunder. The
guarantees of the Stockholders hereunder shall apply only with respect to the
specific indebtedness described on Exhibit C, and shall not apply to any other
indebtedness of the Company or of Lukens or its subsidiaries.
The parties acknowledge, understand and agree that the loan referenced
in this Section 3.2 secures a standby letter of credit for the benefit of the
Company and such loan, if required to be drawn upon, is an obligation of and
will be repaid by the Company out of assets of the Company and that the
guarantees herein are guarantees that the Company will repay such loan.
3.3 Post-Closing Agreements. Subsequent to the Closing, the Company
shall enter into one or more agreements to provide products manufactured by the
Company to Lukens, S.A. Diagnostics, Superior Medical Supplies and PENPOL. Such
agreements shall provide that such products will be sold fully loaded
manufacturing costs for the products plus twenty-five percent (25%). The
agreements shall also provide that in the event that the Company's capacity is
unable to meet the needs of each of Lukens, S.A. Diagnostics, Superior Medical
Supplies and PENPOL with respect to products, then the products shall be
allocated among Lukens, S.A. Diagnostics, Superior Medical Supplies and PENPOL
prorata based upon the number of Shares held by each in relation to the total
number of
<PAGE>
Shares held by Lukens, S.A. Diagnostics, Superior Medical Supplies and PENPOL.
Section 4
Financial Information
4.1 Financial information. For so long as a Stockholder owns any of the
Shares, the Company agrees to furnish the Stockholder with the following:
(a) Quarterly Statements. Within sixty (60) days after the end
of the first, second, and third quarterly periods of each fiscal year, a balance
sheet of the Company as at the end of each such period and statements of
operations and of changes in financial position of the Company for each such
quarterly period, prepared in accordance with the Company's books and records.
This balance sheet and these statements need not be audited, but shall be
certified as correct by the principal financial officer of the Company, subject
to year-end audit adjustments.
(b) Annual Statements. Within ninety (90) days after the last
day of each fiscal year of the Company, or if later as soon as the audited
accounts are ready, to deliver to each Stockholder a copy of its audited report
containing a balance sheet of the Company as at the end of such fiscal period
and copies of statements of operations and of changes in financial position of
the Company for such fiscal period.
(c) Accountant's Reports. Promptly when received by the
Company, a copy of any report submitted to the Company by its accountants or
Statutory Auditor in connection with each annual audit of the books of the
Company made by such accountants.
(d) Other Information. On ten (10) days' written notice, the
Company shall permit a Stockholder, at such Stockholder's expense, to discuss
the Company's affairs, finances, and accounts with its present and comparable
officers of the Company at such reasonable times and as often as such
Stockholder may reasonably request.
<PAGE>
Section 5
Representations & Warranties of Stockholders
5.1 General Representations and Warranties. Each Stockholder represents
and warrants to the Company and to each of the other Stockholders as follows:
(a) This Agreement constitutes the legal, valid, and binding
obligation of the Stockholder, enforceable against the Stockholder in accordance
with its terms. The Stockholder has the absolute and unrestricted right, power,
and authority to execute and deliver this Agreement and to perform its
obligations under this Agreement. The Stockholder does not and will not be
required to obtain any consent from any Person in connection with the execution
and delivery of this Agreement or the consummation or performance of any of the
Contemplated Transactions.
(b) Each of the Stockholders makes the following
representations with respect to its acquisition of the Shares:
(i) the Stockholder was not formed for the specific
purpose of acquiring the Shares;
(ii) the Stockholder is able to bear the economic
risk of loss of its investment in the Shares;
(iii) the Stockholder is not aware of any
advertising, article, notice or other communication published in any newspaper,
magazine, or similar media or broadcast over television or radio or of any
public solicitation by the Company or any other Person acting on behalf of the
Company with respect to the offering or sale of the Shares;
(iv) the Stockholder is fully familiar with the
proposed business of the Company;
(v) the Stockholder recognizes the risks of investing
in the Company and/or purchasing the Shares;
<PAGE>
(vi) each Stockholder has had an opportunity to
examine any and all Company documents, corporate financial records, and any
other business records which may be appropriate in connection with a decision to
purchase the Shares, and an opportunity to discuss the business of the Company
with its officers and directors;
(vii) each Stockholder believes that the Stockholder
and its representatives are adequately informed about the business and financial
condition of the Company and are able to evaluate the risks and merits of making
an investment in the Company;
(viii) each Stockholder agrees that all projections
of revenue growth and potential profits of the Company, if any, that may have
been discussed with any representative of the Stockholder, are highly
speculative and estimates only, that may not be relied upon as indicative of
actual results that may be achieved;
(ix) in entering into this Agreement and in
purchasing the Shares, each Stockholder is and will be acting for its own
account and not for or on behalf of the account of any other person, and is
purchasing the Shares for investment and not for distribution; and
(x) the Stockholder has not paid and will not pay any
commission, fee or other remuneration to any person, directly or indirectly, in
connection with its purchase of the Shares.
(c) There is no pending proceeding that has been commenced
against the Stockholder and that challenges, or may have the effect of
preventing, delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions. To such Stockholder's knowledge, no such proceeding
has been threatened.
(d) There is no suit, action, arbitration, or legal,
administrative, or other proceeding, governmental investigation, or contract
renegotiation pending nor, to the knowledge of the Stockholder any basis
therefor or any threat thereof against or affecting the Stockholder or any of
its businesses, assets, or its financial condition, or
<PAGE>
which questions the validity of this Agreement or the Contemplated Transactions.
(e) To the knowledge of the Stockholder, the Stockholder is
not in violation, breach, or default in any material respect of any term or
provision of any statute, rule, governmental regulation, lease, license, note,
contract, commitment, indenture, mortgage, deed of trust, or other agreement,
instrument, or arrangement applicable to or binding on the Stockholder and the
execution, delivery, and performance of this Agreement and the Contemplated
Transactions, will not, with notice or lapse of time or both: (i) result in any
violation of, or be in conflict with or constitute a breach of or default under,
any such term or provision; or, (ii) result in or constitute an event that would
permit any party to terminate any agreement or to accelerate the maturity,
require payment of, or allow removal of any guaranty of, any indebtedness or any
other obligation of the Stockholder.
(f) To the knowledge of the Stockholder, no consent, approval,
order or authorization of, or registration, qualification, designation,
declaration or filing with, any governmental authority by the Stockholder or the
Company is required in connection with the execution and delivery of this
Agreement or the Contemplated Transactions.
(g) Each Stockholder represents to the Company that it has not
dealt with any broker, finder, investment banker, or financial advisor in
connection with this Agreement or the Contemplated Transactions or in connection
with any investment in or loan to the Company and agrees to indemnify and hold
harmless the Company, against any loss, liability, damage, cost, claim, or
expense (including attorneys' fees) incurred by reason of any brokerage,
commission, investment banking, investment advisers, or finder's fee payable or
alleged to be payable due to this Agreement or the Contemplated Transactions
arising out of the acts of the Stockholder.
(h) This Agreement, and all statements, certificates and other
written material furnished to the Company by or on behalf of the Stockholder as
required by or referred to in this Agreement, when read together, do not contain
any untrue statement of a material fact or omit
<PAGE>
to state a material fact necessary in order to make the statements made in them,
in light of the circumstances under which they are made, are not misleading.
5.2 Representations and Warranties Regarding Equipment. With respect to
the Equipment, S.A. Diagnostics represents and warrants as follows:
(a) At Closing, the Company shall obtain good and marketable
title to all of the Equipment, free and clear of all title defects, liens,
restrictions, claims, charges, security interests, or other encumbrances of any
nature whatsoever, including any mortgages, leases, chattel mortgages,
conditional sales contracts, collateral security arrangements, or other title or
interest retention arrangements and free and clear of all taxes and duties or
similar charges; and
(b) the Equipment is in good operating order, condition, and
repair, ordinary wear and tear excepted, and is suitable for use in the
Company's business.
Section 6
Conditions To Obligations of a Party
Each party's obligations at the Closing are subject to the fulfillment
to that party's satisfaction, except to the extent waived or modified in
accordance herewith, at or before the Closing, of each of the following
conditions:
6. 1 Warranties and Statements Correct. Except as affected by the
Contemplated Transactions, the representations and warranties made by each of
the other parties to this Agreement and all written material in all
certifications and documents referred to in this Agreement or delivered to such
party under this Agreement shall be true and correct when made, and shall be
deemed to be repeated at and as of the time of the Closing, and shall be true
and correct at and as of that time.
<PAGE>
6.2 Performance. Each other party and the Company shall have performed
and complied with all agreements and conditions in this Agreement required to be
performed or complied with by it before or at the Closing.
6.3 Consents and Waivers. Each party shall have obtained all approvals,
consents and waivers necessary or appropriate for consummation of the
Contemplated Transactions.
6.4 Legal Investment. At the time of the Closing, the party's purchase
of the Shares under this Agreement shall be legally permitted by all laws and
regulations to which the party and the Company are subject.
6.5 Proceedings and Documents. All corporate and other proceedings in
connection with the Contemplated Transactions shall be reasonably satisfactory
in substance and form to such party and such party shall have received all such
counterpart originals or certified or other copies of such documents as such
party may reasonably request.
6.6 Waiver of Conditions to a Party's Obligations. A party may waive or
modify in writing any or all of the above conditions to its obligations to
purchase the Shares in whole or in part without prior notice; provided, however,
that no such waiver of a condition shall constitute a waiver by such party of
any of such party's other rights or remedies, at law or in equity.
Section 7
Limitations on Transfers of Shares
7.1 Limitation on Shares Transfer. Except as otherwise expressly
provided herein, if a Stockholder desires to transfer any or all of the Stock
then owned by such Stockholder (a "Shares Transfer"), then at least sixty days
prior to any such Shares Transfer other than a Permitted Transfer (as
hereinafter defined), such transferring Stockholder (the "Transferring
Stockholder") will give notice (the "Notice") to the Company and the
non-transferring Stockholders of the Company of its intention to effect the
Shares Transfer. The Notice will set forth (i) the number and
<PAGE>
class of shares to be sold by the transferring Stockholder (the "Sale Shares"),
(ii) the date or proposed date of the Shares Transfer and the name and address
of the proposed transferee, (iii) the principal terms of the Shares Transfer,
including the cash or other property or consideration to be received upon such
Shares Transfer, (iv) the percentage which the number of Sale Shares constitutes
with respect to the aggregate number of shares of Stock then held by
Transferring Stockholder, and (v) the written consent of the proposed transferee
to be bound by all the terms of this Agreement if the proposed Shares Transfer
is consummated.
7.2 Corporation's Option. Subject to applicable laws of the
jurisdiction under which the Company is organized, the Company shall have the
option, but not the obligation, to purchase the Sale Shares on the same terms as
specified in the Notice. Within 20 days after the giving of the Notice (the
Notice Date"), the Company shall give written notice to transferring Stockholder
and the remaining Stockholders stating whether or not it elects to exercise its
option, the number of Sale Shares, if any, it elects to purchase, and a date and
time for consummation of the purchase not less than 60 or more than 90 days
after the Notice Date. Failure by the Company to give such notice within such
time period shall be deemed an election by it not to exercise its option. The
Transferring Stockholder shall not be entitled to vote, either as a shareholder
or director, in connection with the decision of the Company whether to exercise
its option to purchase the Transferring Stockholder's Sale Shares, provided that
if the Transferring Stockholder's vote is required for valid corporate action,
the Transferring Stockholder shall vote in accordance with the decision of the
majority of the other directors or shareholders.
7.3 Stockholders' 0ption. If the Company fails or is unable under
applicable law to exercise the option with respect to all of the Sale Shares,
the Stockholders other than the Transferring Stockholder shall thereupon have
the option, but not the obligation, to purchase the remaining Sale Shares on the
same terms as specified in the Notice. After the expiration of the 20-day period
in Section 7.2 hereof, but within 30 days after the Notice Date, any electing
Stockholder shall give written notice to the Transferring Stockholder and the
Company stating whether or not such Stockholder elects to exercise its option,
the number of Sale Shares, if any, such Stockholder elects to purchase, and
(unless a closing
<PAGE>
date has already been set) a date and time for consummation of the purchase not
more than 90 days after the Notice Date. Failure by such Stockholder to give
such notice within such time period shall be deemed an election by such
Stockholder not to exercise such Stockholder's option. If more than one
Stockholder exercises this option, the number of remaining Sale Shares purchased
shall be pro rated based on their equity ownership on a fully diluted basis.
7.4 Definitions. For purposes of this Section 7, the term "Permitted
Transfer" shall mean a Shares Transfer to a corporate Affiliate in the case of a
transferring Stockholder that is a corporation, to any of its general or limited
partners or any Affiliate thereof in the case of a transferring Stockholder that
is a partnership, to any spouse, parents, brothers, sisters, children (natural
or adopted), stepchildren or grandchildren or a trust for any of their benefit
in the case of a transferring Stockholder that is an individual (each a
"Permitted Transferee"); provided, that, prior to such Shares Transfer, such
Permitted Transferee shall agree in writing to be bound by the terms and
conditions of this Agreement. For purposes of this Section, "Stock" shall mean
(a) the presently issued and outstanding shares of capital stock of the Company,
(b) any presently issued and outstanding options or stock subscription warrants
exercisable for shares of capital stock of the Company (which options and
warrants shall be deemed to be outstanding shares of stock), (c) any additional
shares of capital stock hereafter issued and outstanding, (d) any options or
stock subscription warrants exercisable for shares of capital stock of the
Company hereafter issued and outstanding (which options and warrants shall be
deemed to be outstanding shares of stock) and (e) any shares of capital stock of
the Company into which such shares, options or stock subscription warrants may
be converted or for which they may be exchanged or exercised.
7.5 Other Limitations. Notwithstanding anything to the contrary
contained herein, the Transferring Stockholder shall not be obligated to sell
any of the Sale Shares offered to the Company or the other Stockholders pursuant
to this Section 7 to the Company or such Stockholders, as the case may be,
unless notice is received as to the purchase of all of the Sale Shares by the
Company and/or such Stockholders within the time period specified. In the event
that such
<PAGE>
notice is not received, or if such notice is received but the purchase of all of
the Sale Shares is not consummated within 90 days after the Notice Date, the
Transferring Stockholder may, not later than 120 days after the Notice Date,
sell all, but not less than all, of the Sale Shares to the proposed transferee
specified in the Notice on terms and conditions which in all material respects
are no more favorable to such proposed transferee than those set forth in the
Notice. Following such transfer any transferee thereof shall be bound by all of
the terms of the Agreement whether or not he, she or it shall become a signatory
hereto. If at the end of such 120 day period the Transferring Stockholder has
not completed the sale of the Sale Shares as provided in the Notice, no Sale
Shares may be sold or otherwise disposed of until they are again offered under
the procedures specified in this Section 7.
7.6 Transfers Void. Any attempted transfer in violation of the terms of
this Section 7 shall be ineffective to vest in any transferee any interest held
by the Transferring Stockholder in the Stock. Without limiting the foregoing,
any purported Shares Transfer in violation of this Section 7 shall be
ineffective as against the Company, and the Company shall have a continuing
right and option (but not an obligation) to purchase the shares purported to be
transferred by the Transferring Stockholder for a price and on terms the same as
those at which the purported Shares Transfer was sought to be effected.
Section 8
Preemptive Rights
8.1 Preemptive Rights. The Company shall not issue, sell or exchange to
or with any Person, agree to issue, sell or exchange to or with any Person, or
reserve or set aside for issuance, sale or exchange to or with any Person, any:
(a) shares of Common Stock; (b) any other equity security of the Company; (c)
any debt security of the Company which by its terms is convertible into or
exchangeable for any equity security of the Company; (d) any security of the
Company that is a combination of debt and equity; or (a) any option, warrant or
other right to subscribe for, purchase or otherwise acquire any equity security
or any such debt security of the Company (the "Offered Securities"), unless in
each case the
<PAGE>
Company shall have first offered to sell to each Stockholder up to its
Proportionate Share of the Offered Securities, at a price and on such other
terms as offered to such other Person or Persons and which price and terms she((
have been specified by the Company in a writing delivered to the Stockholders
(the "Offer"), which offer by its terms shall remain open and irrevocable for a
period of 20 days from the date it is delivered by the Company to the
Stockholders (the "Notice Period"). For the purposes of this Section, a
Stockholder's Proportionate Share shall be that percentage of the Offered
Securities which is equal to the percentage which the number of shares of Common
Stock of the Company owned by the Stockholder at the time of its receipt of the
Offer bears to the total outstanding Common Stock of the Company at the time of
the Stockholder's receipt of the Offer.
8.2 Notice. Notice of a Stockholder's intention to accept, in whole or
in part, an Offer shall be evidenced by a writing signed by the Stockholder and
delivered to the Company prior to the end of the Notice Period, setting forth
such portion of the Offered Securities as the Stockholder elects to purchase
(the "Notice of Acceptance").
8.3 Sale of Securities by the Company. The Company shall have 90 days
from the expiration of the Notice Period to sell all or any part of such Offered
Securities as to which a Notice of Acceptance has not been given by the
Stockholders (the "Refused Securities") to any other Person or Persons, but only
upon terms and conditions in all material respects, including, without
limitation, unit price and interest rates which, in the aggregate, are no more
favorable to such other Person or Persons or less favorable to the Company than
those set forth in the Offer. Upon and subject to the closing of the sale to
such other Person or Persons of all the Refused Securities, which shall include
payment of the purchase price to the Company in accordance with the terms of the
Offer, each Stockholder shall purchase from the Company, and the Company shall
sell to such Stockholder, the Offered Securities in respect of which a Notice of
Acceptance was delivered to the Company by that Stockholder, at the terms
specified in the Offer. The purchase by a Stockholder of any Offered Securities
is subject in all cases to the preparation, execution and delivery by the
Company and the Stockholder of a customary purchase agreement relating to such
Offered Securities reasonably satisfactory in form and substance to the Company
and the Stockholder.
<PAGE>
8.4 Unpurchased Securities. In each case, any Offered Securities not
purchased by the Stockholders or any other Person or Persons in accordance with
this Section 8 may not be sold or otherwise disposed of until they are again
offered to the Stockholders under the procedures specified in this Section 8.
8.5 Excluded Securities. The rights of the Stockholders under this
Section 8 shall not apply to the following securities (the "Excluded
Securities"):
(a) Common Stock or options to purchase or rights to subscribe
for Common Stock, or securities by their terms convertible into or exchangeable
for Common Stock, or options to purchase or rights to subscribe for such
convertible or exchangeable securities issued to officers, employees or
directors of, consultants to, executive recruiters for, or lessors of personal
property to, the Company, pursuant to any agreement, plan or arrangement
approved by the Board of Directors of the Company;
(b) Common Stock issued as a stock dividend or upon any stock
split or other subdivision or combination of shares of Common Stock; and
(c) any securities issued for consideration other than cash
pursuant to a merger, consolidation, acquisition or similar business
combination.
Section 9
Legend on Stock Certificates
9.1 Legends. Each certificate of the signatories hereto representing the
Shares shall bear the following legend:
THE RIGHTS OF THE HOLDER OF THESE SECURITIES IN RESPECT OF THE
TRANSFER OF THESE SECURITIES ARE SUBJECT TO THE TERMS AND
CONDITIONS OF
<PAGE>
THAT CERTAIN JOINT VENTURE/STOCKHOLDERS' AGREEMENT DATED AS OF
[the date of this Agreement], AS THE SAME MAY BE AMENDED FROM
TIME TO TIME, AMONG LUKENS MEDICAL PRODUCTS PRIVATE LIMITED AND
CERTAIN HOLDERS OF OUTSTANDING CAPITAL STOCK OF SUCH CORPORATION.
NO TRANSFER OF THESE SECURITIES SHALL BE VALID OR EFFECTIVE UNTIL
SUCH CONDITIONS ARE FULFILLED. COPIES OF SUCH AGREEMENT MAY BE
OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF
RECORD OF THIS CERTIFICATE TO THE SECRETARY OF LUKENS MEDICAL
PRODUCTS PRIVATE LIMITED.
Section 10
Termination
10.1 Termination. This Agreement shall remain in full force and effect
from the date hereof until (a) ownership of all of the Shares of the Company by
one of the parties hereto; or (b) the liquidation of the Company.
Notwithstanding the foregoing, and notwithstanding termination of this Agreement
the rights and powers of each party and the duties and obligations of each party
under Sections 3.2, 11, 12 13 and 14 shall survive termination and the parties
shall continue to be bound by such provisions indefinitely.
Section 11
Indemnification
11.1 Indemnification. The Company shall indemnify and hold Lukens
harmless from and against, for and in respect of any and all liability,
judgments, damages, losses, penalties, costs and expenses (including court costs
and reasonable attorneys' and experts' fees) suffered, sustained, incurred or
required to be paid by Lukens arising out of or in connection with or as a
result of the Bank Guarantee referenced in Section 3.1 of this Agreement.
<PAGE>
Section 12
Confidentiality
12.1 Reciprocal Confidentiality Obligations. During the term of this
Agreement, Confidential Information of one party may be disclosed to one or more
of the other parties. A party to whom any Confidential Information is disclosed
shall not disclose such Confidential Information to any other Person or entity
or use such Confidential Information except for Company purposes or purposes
specifically contemplated by this Agreement. The disclosure of Confidential
information by one party to another shall not constitute a license, sale or
offer to license or sell Confidential Information. Confidential Information
shall be maintained in confidence for a period of five (5) years after the date
of termination of this Agreement. Nothing contained in this Agreement will in
any way restrict or impair a party's right to use, disclose, or otherwise deal
with any Confidential Information which: (a) as shown by written records, was
known to it prior to its receipt from the other party; (b) is or becomes part of
the general public knowledge otherwise than as a consequence of a breach of
duties or obligations of the party; (c) becomes known or available to the party
from sources other than the other party without restrictions as to use or
disclosure and otherwise than as a consequence of a breach of duties or
obligations of the party under this Agreement; or (d) as shown by written
records, is independently developed by employees, agents, contractors or
consultants of the party. Notwithstanding the foregoing, a party shall have no
obligation respecting, or be liable for, use or disclosure of Confidential
Information where such disclosure is compelled by judicial or other governmental
action initiated against the party; only if, however, the party promptly
notifies the other party of such action and cooperates with the other party in
obtaining any available protective order or its equivalent.
Section 13
Dispute Resolution
13.1 Dispute Resolution/Pre-Arbitration. Each party agrees that, unless
otherwise required in order to comply with deadlines under the law, it will not
institute arbitration under Section 13.2 of this
<PAGE>
Agreement with respect to any dispute, controversy, or claim arising out of,
relating to, or in connection with, this Agreement or an alleged breach of this
Agreement, until:
(a) It has given each of the other parties written notice
of its grievance;
(b) The other parties have failed to provide a prompt and
effective remedy within a reasonable period of time;
(c) The parties have submitted the matter to each of the chief
executive officers of the corporate stockholders and each of the individual
stockholders for resolution, and they are unable, after a reasonable period of
time, to produce a mutually satisfactory resolution of the matter.
13.2 Arbitration. In the event that the pre-arbitration dispute
resolution procedures set forth in Section 13.1 do not result in the resolution
of any dispute, controversy, or claim arising out of, relating to, or in
connection with, this Agreement or an alleged breach of this Agreement
(including the validity, scope, and enforceability of this arbitration
agreement) and except as provided under Section 13.3 of this Agreement, such
dispute, controversy, or claim shall be solely and finally settled by
arbitration in accordance with the Commercial Rules of the American Arbitration
Association. The place of arbitration shall be in Albuquerque, New Mexico,
U.S.A. and the law applicable to the arbitration procedure shall be the Federal
Arbitration Act (9 USC ss. 2). Judgment on the arbitration award may be entered
and enforced in any court having jurisdiction over the parties or their assets.
Each party shall, except as otherwise provided herein, be responsible
for its own expenses, including legal fees, incurred in the course of any
arbitration proceedings. The costs and fees of the arbitration shall be divided
evenly between the parties.
13.3 Injunctive Relief. Sections 13.1 and 13.2 shall not be construed to
limit or preclude a party from bringing any action in any court of competent
jurisdiction for injunctive or other provisional relief
<PAGE>
as necessary or appropriate, but only for such injunctive or provisional relief.
Section 14
Miscellaneous
14.1 Governing Law. The laws of the State of New Mexico will govern this
transaction and the interpretation and construction of this Agreement without
reference to choice of law principles.
14.2 Representations and Warranties. All agreements, representations,
and warranties in this Agreement shall survive the execution and delivery of
this Agreement.
14.3 Assignment, Successors and Assigns. No party may assign any of its
rights, powers, duties or obligations under this Agreement without the prior
written consent of the other party, which consent shall not be unreasonably
withheld. Subject to the preceding sentence, the provisions of this Agreement
shall inure to the benefit of, and be binding on, the successors and assigns of
the parties to this Agreement.
14.4 Third Party Beneficiaries. Subject to the provisions of the
preceding Section, nothing in this Agreement, express or implied, is intended to
confer any rights or remedies under or by reason of this Agreement on any
Persons other than the parties to it, nor is anything in this Agreement intended
to relieve or discharge the obligation or liability of any third person to any
party to this Agreement, nor shall any provision give any third Person any right
of subrogation or action over or against any party to this Agreement.
14.5 Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subjects of
this Agreement, and supersedes all prior and contemporaneous agreements,
representations, and understandings of the parties.
<PAGE>
14.6 Separability and Severability. Unless otherwise expressly provided
in this Agreement, any invalidity, illegality, or limitation on the
enforceability of all or part of this Agreement, whether at!sing by reason of
the law of a party's domicile or otherwise, shall in no way affect or impair the
validity, legality, or enforceability of this Agreement. If any provision of
this Agreement shall be invalid, illegal, or unenforceable, the validity,
legality, or enforceability of the remaining provisions shall not in any way be
affected or impaired by such invalidity, illegality, or unenforceability.
14.7 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument. It is contemplated that there will be one
original of this Agreement which shall be retained by the Company and that each
of the other parties shall received copies of the original.
14.8 Headings. The various headings of this Agreement are for
convenience of reference only, shall not affect the meaning or interpretation of
this Agreement, and shall not be considered in construing this Agreement.
14.9 Amendments and Waivers. Except as specifically provided in this
Agreement, neither this Agreement nor any term of this Agreement may be amended,
waived, discharged, or terminated by any act or failure to act, but only by a
written instrument signed by the party against whom enforcement of any such
amendment, waiver, discharge, or termination is sought.
14.10 Cumulative Rights/No Waiver. The rights and remedies of the
parties to this Agreement are cumulative and not alternative. Neither the
failure nor any delay by any party in exercising any right, power, or privilege
under this Agreement will operate as a waiver of such right, power, or
privilege, and no single or partial exercise of any such right, power, or
privilege will preclude any other or further exercise of such right, power, or
privilege or the exercise of any other right, power, or privilege. To the
maximum extent permitted by applicable law, (a) no claim or right arising out of
this Agreement can be discharged by one
<PAGE>
party, in whole or in part, by a waiver or renunciation of the claim or right
unless in writing signed by the other party; (b) no waiver that may be given by
a party will be applicable except in the specific instance for which it is
given; and (c) no notice to or demand on one party will be deemed to be a waiver
of any obligation of such party or of the right of the party giving such notice
or demand to take further action without notice or demand as provided in this
Agreement.
14.11 Further Assurances. The parties agree to furnish upon request to
each other such further information, to execute and deliver to each other such
other documents, and to do such other acts and things, all as the other party
may reasonably request for the purpose of carrying out the intent of this
Agreement.
14.12 Notices. All notices and other communications required or
permitted under this Agreement shall be in writing and shall be deemed to have
been given when personally delivered to the party to whom the notice or
communication is to be given, when sent by facsimile transmission to the
telephone number set forth in attached Schedule A or such other number as may
hereinafter be designated in writing by the recipient to the sender listing all
parties, or when duly sent by first class registered or certified mail, return
receipt requested, postage prepaid, addressed to such party at the address set
forth in attached Schedule A or such other address as may hereinafter be
designated in writing by the addressee to the addressor listing all parties. All
such notices shall be deemed to have been received: (a) in the case of personal
delivery, on the date of such delivery; (b) in the case of facsimile
transmission, on the date of transmission; and (c) in the case of mailing, on
the fourteenth day after the posting thereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on their behalf.
Lukens Medical Products Private
Limited, a company registered under
the Companies Act, 1956, laws of
India
By: /s/ Robert S. Huffstodt
-------------------------------
Title:
Date: 2/21/97
Lukens Medical Corporation,
a Delaware corporation
By: /s/ Robert S. Huffstodt
-------------------------------
Title: President & CEO
--------------------------------
Date: 2/21/97
--------------------------------
S.A. Diagnostics,
a South African corporation
By: /s/ Roy Richmond
--------------------------------
Title
--------------------------------
Date: 2/21/97
--------------------------------
Superior Medical Supplies
a Texas corporation
By: /s/ Shirley Frankel
--------------------------------
Shirley Frankel, President
Date: 2/21/97
--------------------------------
<PAGE>
PENPOL,
a company registered under the
Companies Act, 1956, laws of India
By:
--------------------------------
Title:
--------------------------------
Date:
--------------------------------
<PAGE>
GLOSSARY
"Affiliate" When used with respect to a specified Person, a Person that
directly, or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with the Person specified.
"Closing" The consummation of the acquisition of the Shares by the Stockholders
and the delivery of this Agreement as provided in Section 2 of this Agreement.
"Company" Lukens Medical Products Private Limited, an Indian company registered
under the Companies Act, 1956 of India.
"Confidential Information" Trade secrets, know-how, inventions, concepts,
designs, U.S. and foreign patents and/or patent applications, copyrighted
materials, software, schematics, code, source listings, flow charts,
specifications, copies of source or object code or other documentation of any
type, and other data, knowledge, and information, relating to a party's
technology, methods and procedures of operation, business or marketing plans,
financial information, customer lists and data, as well as the nature and
results of research and development activities, and all other materials or
information related to the business or activities of a party or its existing or
new products and component developments, processes and techniques.
"Contemplated Transactions" All of the transactions contemplated by this
Agreement, including:
(a) the acquisition of the Shares by each Stockholder pursuant to the terms
and conditions of this Agreement;
(b) the execution, delivery, and performance of all instruments, agreements
and documents to be executed and delivered under this Agreement; and
(c) the performance by the Company and each of the Stockholders of their
respective covenants and obligations under this Agreement.
<PAGE>
"Excluded Securities" As defined in Section 8.5 hereof.
"Lukens" Lukens Medical Corporation, a Delaware corporation.
"Notice Date" As defined in Section 7.2 hereof.
"Notice of Acceptance" As defined in Section 8.2 hereof.
"Notice Period" As defined in Section 8.1 hereof.
"Offer" As defined in Section 8.1 hereof.
"Notice" As defined in Section 7.1 hereof.
"Offered Securities" As defined in Section 8.1 hereof.
"Offered Shares" As defined in Section 7.4 hereof.
"Organization Documents" The Memorandum and Articles of Association of Lukens
Medical Products Private Ltd, a copy of which is attached as Exhibit A.
"PENPOL" Peninsula Polymer Limited (PENPOL), a company registered under the
Companies Act, 1956, laws of India.
"Permitted Transfer" As defined in Section 7.4 hereof.
"Person" Any individual, corporation (including any nonprofit corporation),
general or limited partnership, limited liability company, joint venture,
estate, trust, association, organization, labor union, or other entity or
governmental body.
"Refused Securities" As defined in Section 8.3 hereof.
"S.A. Diagnostics" S.A. Diagnostics, a company organized under the laws of South
Africa.
"Sale Shares" As defined in Section 7.1 hereof.
<PAGE>
"Shares" The shares of the Company's Stock to be acquired by each Stockholder
under this Agreement.
"Shares Transfer" As defined in Section 7.1 hereof.
"Stock" As defined in Section 7.4 hereof.
"Stockholders" The holders of the of the Stock of the Company listed on Schedule
A attached hereto and any transferee of shares owned by any such person or any
successor or assign of any such person.
"Superior Medical Supplies" Superior Medical Supplies, Inc., a Texas
corporation.
"Transferring Stockholder" As defined in Section 7.1 hereof.
<PAGE>
Exhibit A
Organization Documents
<PAGE>
Exhibit D
Proportionate Share of Guaranteed Obligations
Stockholder Proportionate Share Principal Amount Guaranteed
- ----------- ------------------- ---------------------------
Lukens Medical 70% $252,000
Corporation
S.A. Diagnostics 15% $ 54,000
PENPOL 10% $ 36,000
Superior Medical 5% $ 18,000
Supplies
Each Stockholder's Proportionate Share will vary from time to time as a
consequence of the accrual of that Stockholder's Proportionate Share of interest
and other costs that may be payable under the loan documents and the
Stockholders' guaranty under Section 3.2 of this Agreement.
<PAGE>
Schedule A
Stockholders
<TABLE>
<CAPTION>
<S> <C>
NAME PERCENTAGE OWNERSHIP
- ---- --------------------
Lukens Medical Corporation 70%
a Delaware corporation (U.S.A.)
3820 Academy Parkway North N.E.
Albuquerque, New Mexico, 87109
By: Robert S. Huffstodt, its President & CEO
Facsimile No.: (505) 342-9735
S.A. Diagnostics 15%
a South African corporation
302 Yoron Street
Waterkloof Glen
Pretoria 0081
South Africa
By: Roy Richmond, its
Facsimile No.: 011-27-12-99-88957
Peninsula Polymers Limited (PENPOL) 10%
an Indian Company
P.O. Box 2205
1X/1323 Sasthamangalam
Trivandrum, India 695 010
By: C. Balagopol, its Managing Director and constituted attorney Sri
______________.
Facsimile No.: 011-91-471-324599
Superior Medical Supplies, Inc. 5%
2112 Menton Drive
Carrollton, Texas 75006
By: Shirley Frankel, its President
Facsimile No.: (214) 416-9310
</TABLE>
Exhibit 10.39
<PAGE>
JOHN H. ROBINSON
February 28, 1997
Lukens Medical Corporation
3820 Academy Parkway North, NE
Albuquerque, New Mexico 87109
Re: Loan to Lukens Medical Corporation (the "Company")
The undersigned hereby irrevocably agrees to loan to the
Company up to $500,000, at an interest rate of 10% per annum, which amount,
together with all accrued interest due thereon, shall be repayable by the
Company on May 31, 1998 (the "Loan"). The undersigned agrees that (a) the first
tranche of the Loan in the amount of $150,000 (the "First Tranche") shall be
funded on the date hereof and (b) the second tranche of the Loan in the amount
of $350,000 (the "Second Tranche") shall be funded upon the request of the
President of the Company, but not later than April 30, 1997. Notwithstanding the
foregoing, in the event that the Second Tranche is not funded, the maturity date
for the First Tranche shall be July 15, 1997. The Second Tranche shall be
evidenced by a Promissory Note in substantially the same form as the Promissory
Note delivered to the undersigned contemporaneously herewith in respect of the
First Tranche. In consideration for the Loan, the Company hereby agrees to issue
to the undersigned (i) upon the funding of the First Tranche, a warrant to
purchase 15,000 shares of the Company's Common Stock, par value $.01 per share
(the "Common Stock"), at an exercise price of $8.25 per share and (ii) upon the
funding of the Second Tranche, a warrant to purchase 35,000 shares of Common
Stock at an exercise price $8.25 per share in substantially the same form as the
Warrant delivered to the undersigned contemporaneously herewith in respect of
the First Tranche (collectively, the "Warrants").
The undersigned hereby represents and warrants as follows:
(a) The undersigned understands that neither the Warrants nor
the Common Stock issuable upon the exercise thereof have been registered under
the Securities Act of 1933, as amended (the "Securities Act"), or the securities
laws of certain states, in reliance upon specific exemptions from registration
thereunder, and the undersigned agrees that neither the undersigned's Warrants
nor the Common Stock issuable upon the exercise thereof may be sold, offered for
sale, transferred, pledged, hypothecated or otherwise disposed of except in
compliance with the Securities Act and applicable state securities laws. The
undersigned has been advised that the Company has no obligation to cause the
Warrants or the Common Stock issuable upon the exercise thereof to be registered
under the Securities
<PAGE>
Act or to comply with any exemption under the Securities Act, including but not
limited to that set forth in Rule 144 promulgated under the Act, which otherwise
might permit the Warrants or the Common Stock issuable upon the exercise thereof
to be sold by the undersigned. The undersigned understands that the Warrants and
all certificates representing the Common Stock issuable upon the exercise
thereof may bear legends restricting the transfer thereof.
(b) The undersigned is acquiring the Warrants and the Common
Stock issuable upon the exercise thereof in good faith solely for the
undersigned's own account, and the undersigned is acquiring such Warrants and
the Common Stock issuable upon the exercise thereof for investment purposes and
not with a view to, or for, subdivision, distribution, fractionalization or
resale, or for the account, in whole or in part, of others.
Very truly yours,
/s/ John H. Robinson
John H. Robinson
AGREED:
LUKENS MEDICAL CORPORATION
By: /s/ Robert S. Huffstodt
------------------------------
Robert S. Huffstodt, President
2
<PAGE>
NON-TRANSFERABLE SUBORDINATED PROMISSORY NOTE
$150,000 February 28, 1997
FOR VALUE RECEIVED, Lukens Medical Corporation, a Delaware
corporation (the "Maker"), with offices at 3820 Academy Parkway North, NE,
Albuquerque, New Mexico 87109, promises to pay to John H. Robinson ("Payee"), at
such place in the United States as shall be designated in writing by Payee, a
principal sum of $150,000 (the "Principal Sum") on May 31, 1998 (the "Maturity
Date"). From and after the date hereof, the balance of the Principal Sum
outstanding from time to time shall bear interest at the rate of ten percent
(10%) per annum, all then accrued but unpaid interest being due and payable
concurrently with the Principal Sum as herein provided. This Note may be
prepaid, at the option of Maker, in whole or in part at any time and from time
to time, without penalty or premium, provided that the amount so prepaid shall
be accompanied by the payment of all interest accrued to the prepayment date of
the amount so prepaid.
This Note evidences the first tranche of an aggregate loan by
Payee to the Maker of $500,000 (the "Loan"). Notwithstanding anything to the
contrary contained herein, in the event that the second tranche of the Loan in
the amount of $350,000 is not funded in accordance with the terms of the Letter
Agreement, dated of even date herewith, between Maker and Payee, the Maturity
Date hereunder shall be July 15, 1997. This Note is non-negotiable.
Notwithstanding any provision of this Note to the contrary,
the indebtedness evidenced by this Note (including all interest thereon), and
all renewals, extensions and modifications thereof and hereof, is and shall
remain subordinate and junior in right of payment, to the extent set forth in
this Note, to the prior payment in full of all indebtedness (including
principal, interest, fees and other charges), and any other obligations, whether
direct or contingent, presently existing or hereafter incurred, of the Maker,
for money borrowed from, and/or arising out of any credit facilities and/or any
loan agreement(s) with, Sunwest Bank of Albuquerque, N.A. ("Bank") and/or to any
successor to Bank and/or to any one or more banks or other lending institutions
which shall repay a portion or all of the indebtedness or obligations of the
Maker to Bank or any such successor in the future, or which otherwise shall
become the primary institutional lenders to the Maker, and/or under guaranties
from time to time by the Maker of any of such indebtedness or obligations, all
as the same may be refinanced, restated, modified or amended from time to time
(collectively, "Senior Indebtedness"). No payments of, nor any cancellation,
set-off or discharge of, nor any transfer of collateral in respect of, any
principal or interest shall be made, given or received hereunder or in respect
of the indebtedness evidenced by this Note, nor shall any holder of this Note be
entitled to demand or accept payment of any amount due or payable under this
Note, whether by acceleration or upon demand by reason of the occurrence of an
Event of Default (as hereinafter defined), at maturity, or otherwise, nor shall
the holder hereof be entitled to declare an acceleration or demand immediate
payment of the indebtedness evidenced by this Note, until the Senior
Indebtedness shall have been paid in full, if there shall have occurred and be
continuing a default in the payment of principal and/or interest under Senior
Indebtedness, or a default under any financial covenant of the Maker under
Senior Indebtedness which shall have occurred and be continuing or would occur
or exist by reason of such payment under this Note which has not been waived by
Bank or the then holder(s) of such Senior Indebtedness. All payments and
distributions
<PAGE>
which would otherwise be payable or deliverable in respect of this Note (but for
the terms hereof) shall be paid or delivered directly to the holders of Senior
Indebtedness at the time outstanding, ratably, until all such Senior
Indebtedness shall have been paid in full. If any payment, distribution or
collateral shall be received by any holder of this Note in contravention of any
of the terms hereof and before all Senior Indebtedness shall have been paid in
full, such payment, distribution or collateral shall be held in trust for the
benefit of, and shall be paid over or delivered to, the holders of the Senior
Indebtedness at the time outstanding for application to the payment of all
Senior Indebtedness remaining unpaid, ratably, to the extent necessary to pay
all such Senior Indebtedness in full. Nothing in this paragraph shall impair or
qualify, as among the Maker and the holder hereof, the obligation of the Maker
to pay the holder hereof the principal of and interest on this Note when and as
due as set forth elsewhere herein, subject, however, to the rights of the
holders of Senior Indebtedness, and to the provisions as to subordination, as
provided herein.
In the event of any liquidation, dissolution or any other
winding up of the Maker or in the event of any receivership, insolvency,
bankruptcy, assignment for the benefit of creditors, reorganization or
arrangement with creditors, whether or not pursuant to bankruptcy laws, or any
other marshalling of the assets or liabilities of the Maker, or any proceeding
as to any of the foregoing, (i) Senior Indebtedness shall first be paid in full
before the holder of this Note shall be entitled to receive any moneys,
dividends or assets in any such proceeding, and (ii) the holder of this Note
will at the request of the holders of the Senior Indebtedness file any claim,
proof of claim or other instrument of similar character necessary to enforce the
obligations of the Maker in respect of this Note and will hold in trust for the
holders of the Senior Indebtedness and pay over to them, in the form received,
to be applied to Senior Indebtedness, pro rata, any and all moneys, dividends or
other assets, received in any such proceeding on account of this Note, until the
Senior Indebtedness shall be paid in full. In the event that the holder of this
Note shall fail to take such action requested by the holders of Senior
Indebtedness, such holders may, as attorneys-in-fact for the holder of this
Note, and are hereby irrevocably authorized by the holder hereof to, take such
action on behalf of the holder of this Note as shall be necessary to effect or
in furtherance of the provisions of this paragraph, and without limiting the
generality of the foregoing:
(i) to enforce claims under this Note either in
their own name or the name of the holder hereof by proof of debt, proof of
claim, suit or otherwise;
(ii) to vote in their sole discretion in connection
with any resolution, arrangement, plan of reorganization, compromise, settlement
or extension and to take all such other action, including, without limitation,
the right to participate in any composition of creditors and the right to vote
this Note at creditors' meetings; and
(iii) to take generally any action in connection with
any such proceeding or meeting which the holder hereof might otherwise take.
2
<PAGE>
No payment or distribution to the holder of any Senior
Indebtedness as contemplated by the provisions of this Note shall entitle the
holder hereof to exercise any rights of subrogation in respect thereof until all
Senior Indebtedness shall have been paid in full; and, for the purposes of such
subrogation, payments or distributions to the holder of any Senior Indebtedness
of any cash, property or securities to which the holder hereof would be entitled
except for the provisions of this Note shall, as between the Maker and its
creditors other than the holders of Senior Indebtedness and the holder hereof,
be deemed to be a payment by the Maker to or on account of the Senior
Indebtedness, it being understood that the provisions of this Note are for the
purpose of defining the relative rights of the holder hereof, on the one hand,
and the holders of Senior Indebtedness on the other hand.
The holders of the Senior Indebtedness may, at any time and
from time to time, without consent of or notice to the holder of this Note and
without impairing or releasing any of the rights of the holders of Senior
Indebtedness under this Note, effect, consent to and/or permit, and the rights
and interests of the holders of the Senior Indebtedness under this Note shall
remain in full force and effect irrespective of, any of the following:
(i) any change in the terms of the Senior
Indebtedness, including the amount, time, place, manner or terms of payment, or
any amendment or waiver of any agreement relating to Senior Indebtedness;
(ii) any sale, exchange or release of or any other
dealing with any property by whomsoever at any time pledged or mortgaged to
secure the Senior Indebtedness, other than a provision expressly prohibiting the
payment of this Note as a device to avoid the obligation hereunder to make such
payment;
(iii) any release of anyone liable in any manner for
the payment and collection of Senior Indebtedness;
(iv) any exercise or refraining from the exercise of
any rights against the Maker or others, including the holder of this Note;
(v) any application of any funds received by holders
of Senior Indebtedness by whomsoever paid or however realized to the Senior
Indebtedness; or
(vi) any other circumstance which might otherwise
constitute a defense available to any holder hereof as against any holder of
Senior Indebtedness.
The provisions of this Note as to the rights of the holders of
Senior Indebtedness and the obligations of the holder hereof with respect to the
Senior Indebtedness shall continue to be effective or be reinstated, as the case
may be, if at any time any payment of any of the Senior Indebtedness is
rescinded or must otherwise be returned by the holder
3
<PAGE>
thereof upon the insolvency, bankruptcy or reorganization of any party hereto or
otherwise, all as though such payment had not been made.
The holder of this Note, by acceptance of same, absolutely
agrees to be bound by all of the provisions hereof relating to the subordination
of the indebtedness evidenced by this Note to the Senior Indebtedness and/or the
rights of the holders of Senior Indebtedness and the obligations of the holder
hereof with respect thereto, in each case for the benefit of the holders of such
Senior Indebtedness. Such provisions of this Note shall inure to the benefit of
the holders of the Senior Indebtedness and their respective successors and
assigns and shall be binding upon the holder hereof and its successors and
assigns.
An "Event of Default" shall be deemed to have occurred
hereunder if and only if the Maker shall fail to make any payment under this
Note when due and such failure shall not be cured within 30 days following
written notice thereof from the Payee to the Maker; or (a) the Maker shall
approve of, consent to or acquiesce in the appointment of a trustee, receiver,
liquidator, custodian, sequestrator or similar official (collectively,
"Custodians") for itself or substantially all of its assets; or (b) a Custodian
shall be appointed for the Maker without its consent, or for substantially all
of its assets, and such appointment shall not be terminated or stayed within 90
days; or (c) any voluntary bankruptcy proceeding shall be commenced by the
Maker, as debtor; or (d) any involuntary bankruptcy proceeding commenced against
the Maker shall not be dismissed or stayed within 90 days or an order for relief
is granted against the Maker in such proceeding.
If an Event of Default shall occur and be continuing, then the
Principal Sum under this Note and all accrued interest thereon, if any, shall,
at the election of the Payee, but subject always to the subordination provisions
hereof and/or the rights of the holders of Senior Indebtedness and the
obligations of the holder hereof with respect thereto, become due and payable
immediately, without presentment, notice of dishonor, protest and notice of
protest and nonpayment, entitlement to which is hereby waived by the Maker.
Payee shall be entitled to recover reasonable attorneys' fees incurred in the
collection of the indebtedness evidenced by this Note after the occurrence of an
Event of Default.
This Note may not be changed or terminated orally. This Note
shall be governed by the internal laws of the State of New York without regard
to principles of conflict of laws.
LUKENS MEDICAL CORPORATION
By: /s/ Robert S. Huffstodt
---------------------------------
Robert S. Huffstodt, President
4
<PAGE>
NEITHER THIS WARRANT NOR ANY SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE OF SUCH WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AND NONE OF THEM MAY BE TRANSFERRED, NOR WILL ANY ASSIGNEE OR ENDORSEE
OF SUCH WARRANT OR SHARES OF COMMON STOCK BE RECOGNIZED AS AN OWNER THEREOF
BY THE ISSUER FOR ANY PURPOSE, UNLESS A REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, WITH RESPECT TO SUCH WARRANT OR SHARES
SHALL THEN BE IN EFFECT OR UNLESS THE AVAILABILITY OF AN EXEMPTION FROM
REGISTRATION WITH RESPECT TO ANY PROPOSED TRANSFER OR DISPOSITION OF SUCH
WARRANT OR SHARES SHALL BE ESTABLISHED TO THE SATISFACTION OF THE ISSUER.
NEITHER THIS WARRANT NOR ANY SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE OF SUCH WARRANT MAY BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT OR SIMILAR QUALIFICATION UNDER APPLICABLE
STATE SECURITIES LAWS, OR UNLESS IT IS ESTABLISHED TO THE SATISFACTION OF
THE ISSUER THAT SUCH SALE OR TRANSFER IS IN A TRANSACTION WHICH IS EXEMPT
UNDER, OR OTHERWISE IN COMPLIANCE WITH, SUCH LAWS.
LUKENS MEDICAL CORPORATION
3820 Academy Parkway North NE
Albuquerque, New Mexico 87109
To: John H. Robinson (the "Warrantholder")
For value received, subject to the terms and conditions set
forth below, Lukens Medical Corporation (the "Company") hereby promises to issue
to the Warrantholder Fifteen Thousand (15,000) shares of Common Stock, $.01 par
value per share, of the Company (the "Common Stock"), upon payment by the
Warrantholder to the Company of the purchase price of Eight Dollars and
Twenty-Five Cents ($8.25) per share, subject to adjustment as hereinafter
provided (the "Warrant Price"), and to deliver to the Warrantholder a
certificate or certificates representing the shares purchased (with such shares
of Common Stock subject to issuance hereunder being referred to herein as the
"Shares).
1. Warrant Exercise. This Warrant may be exercised by the
Warrantholder from time to time, in part or in full (but subject to the terms
and conditions set forth herein), at any time on or prior to March 1, 2002 (the
"Expiration Date").
(a) This Warrant can be exercised only with respect
to full Shares and only with respect to a minimum of 2,000 Shares at the time of
any exercise.
(b) Any exercise of this Warrant must be in writing
addressed to the Board of Directors of the Company at the principal place of
business of the Company and delivered at least ten (10) business days prior to
the proposed date of exercise, which writing shall indicate the number of Shares
as to which this Warrant is being exercised and shall be accompanied by a check
payable to the order of the Company in the full amount of the aggregate Warrant
Price of the Shares covered by such exercise.
2. Certain Conditions to Exercise. This Warrant may be
exercised by the Warrantholder only if on the date of exercise the Warrantholder
satisfies the Company, in such manner as the Company shall reasonably specify,
that the Shares issuable upon such exercise
<PAGE>
may be issued to the Warrantholder pursuant to an exemption from the
registration requirements of, and otherwise in compliance with, applicable
federal and state securities laws.
3. Reservation of Shares. The Company will at all times
through the close of business on the Expiration Date reserve and keep available,
out of the aggregate of its authorized but unissued or treasury shares of Common
Stock, for the purpose of enabling it to satisfy any obligation to issue shares
of Common Stock upon exercise of this Warrant, the number of Shares deliverable
upon the exercise of this Warrant. The Company covenants that all Shares issued
upon exercise of this Warrant shall, upon issuance in accordance with the terms
of this Warrant, be fully paid and nonassessable.
4. Certain Other Adjustments; Mergers, Consolidations, Etc.
Notwithstanding any other provisions contained in this Warrant, in the event of
the merger or consolidation of the Company, or reorganization or
recapitalization of, stock dividend on, stock split, split-up, split-off,
spin-off or combination of, shares of Common Stock, this Warrant shall entitle
the Warrantholder to receive, upon the exercise of this Warrant, the number of
shares of Common Stock which the Warrantholder would have owned immediately
following such action had this Warrant been exercised immediately prior thereto,
and appropriate adjustments shall be made by the Board of Directors of the
Company as to the number of Shares and/or the Warrant Price as shall be
equitable to prevent reduction or enlargement of rights under this Warrant; the
determination of the Board of Directors as to such matters shall be conclusive
and binding. References in this Warrant to Common Stock shall include any such
securities or other property (including cash) into which shares of Common Stock
may be changed pursuant to or in accordance with the preceding sentence through
merger, consolidation, reorganization, recapitalization, stock dividend, stock
split, split-up, split-off, spin-off, or combination of shares.
5. Restrictions on Transfers. (a) This Warrant is not
transferable by the Warrantholder, and is exercisable only by the Warrantholder,
and may not be sold, assigned, transferred, pledged or hypothecated in any way
(whether by operation of law or otherwise), and shall not be subject to
execution, attachment or similar proceeding. Any attempted assignment, transfer,
pledge, hypothecation or other disposition of this Warrant or any interest
herein, and the levy of any attachment or similar proceeding upon this Warrant
or any interest herein, shall be null and void and without effect except as
provided in the preceding sentence.
(b) The Company may postpone the time of delivery of
certificates for the shares issuable upon the exercise of this Warrant for such
additional time as the Company shall deem necessary or desirable to enable it to
comply with the listing or quotation requirements of any securities exchange
upon which shares of the Company may or are then contemplated to be listed or
the National Association of Securities Dealers, Inc., or the requirements of the
Securities Act of 1933, as amended the Securities Exchange Act of 1934, as
amended, any applicable rules or regulations of the Securities and Exchange
Commission or the requirements of applicable state securities laws.
2
<PAGE>
6. Miscellaneous. (a) The Warrantholder shall not have any
rights to dividends or any other rights of a stockholder with respect to any
shares subject to this Warrant, except to the extent that the Warrantholder
shall have paid for such Shares and a certificate for such shares shall have
been actually issued in the Warrantholder's name upon the due, proper and timely
exercise of this Warrant as provided for herein.
(b) Each notice relating to this Warrant shall be in
writing and delivered in person or by certified mail, return receipt requested,
to the proper address. All notices to the Warrantholder shall be addressed to
the Warrantholder at the Warrantholder's address below specified. All notices to
the Company shall be addressed to the Company at the address set forth on the
first page of this Warrant. Anyone to whom a notice may be given under this
Warrant may designate a new address by notice to that effect given to the other
party in accordance with this subparagraph (b).
(c) If this Warrant shall be mutilated, lost, stolen
or destroyed, the Company shall issue in exchange and substitution for and upon
cancellation of the mutilated Warrant, or in lieu of and in substitution for the
Warrant lost, stolen or destroyed, a new Warrant of like tenor and denomination,
but only upon receipt of evidence satisfactory to the Company of such loss,
theft or destruction of such Warrant and such indemnity and, if requested by the
Company, such bond, as shall in each case be satisfactory to the Company. The
Warrantholder must also comply with such other reasonable regulations and pay
such other reasonable charges as the Company may prescribe in connection with
such issuance.
(d) This Warrant shall be governed and construed in
accordance with the substantive laws of the State of Delaware applicable to
contracts executed, delivered and to be fully performed in the State of
Delaware, without giving effect to contrary provisions regarding conflict of
laws.
(e) This Warrant shall inure to the benefit of and
shall be binding upon the Warrantholder's heirs, executors, administrators,
successors, legal representatives and permitted assigns, and shall inure to the
benefit of and be binding upon the Company and its successors and assigns. The
Warrantholder may not assign, transfer, pledge, encumber, hypothecate or
otherwise dispose of this Warrant, or any of the Warrantholder's rights
hereunder, and any such attempted prohibited delegation or disposition shall be
null and void and without effect.
(f) This Warrant constitutes the complete
understanding between the parties with respect to the subject matter hereof, and
no statement, representation, warranty or covenant has been made by either party
with respect thereto except as expressly set forth herein. This Warrant shall
not be altered, modified, amended or terminated except by written instrument
signed by each of the parties hereto.
3
<PAGE>
(g) This Warrant may be executed in any number of
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
(h) The paragraph headings contained herein are for
the purposes of convenience only, are not intended to define or limit the
contents of said paragraphs and are not part of this Warrant.
(i) By signing below, the Warrantholder hereby
accepts this Warrant subject to all of the terms and provisions hereof and
acknowledge all of the representations, warranties and agreements set forth
above. This Warrant shall not be effective until the Warrantholder has signed
this Warrant and delivered it to the Company.
IN WITNESS WHEREOF, Lukens Medical Corporation has caused this
Warrant to be executed as of the 28th day of February, 1997.
LUKENS MEDICAL CORPORATION
By: /s/ Robert S. Huffstodt
---------------------------------
Robert S. Huffstodt, President
ACCEPTED AND AGREED TO:
/s/ John H. Robinson
- ------------------------------
John H. Robinson
[Address]
- ------------------------------
- ------------------------------
- ------------------------------
- ------------------------------
4
Exhibit 10.40
<PAGE>
ROBERT L. PRIDDY
February 28, 1997
Lukens Medical Corporation
3820 Academy Parkway North, NE
Albuquerque, New Mexico 87109
Re: Loan to Lukens Medical Corporation (the "Company")
The undersigned hereby irrevocably agrees to loan to the
Company up to $500,000, at an interest rate of 10% per annum, which amount,
together with all accrued interest due thereon, shall be repayable by the
Company on May 31, 1998 (the "Loan"). The undersigned agrees that (j) the first
tranche of the Loan in the amount of $150,000 (the "First Tranche") shall be
funded on the date hereof and (k) the second tranche of the Loan in the amount
of $350,000 (the "Second Tranche") shall be funded upon the request of the
President of the Company, but not later than April 30, 1997. Notwithstanding the
foregoing, in the event that the Second Tranche is not funded, the maturity date
for the First Tranche shall be July 15, 1997. The Second Tranche shall be
evidenced by a Promissory Note in substantially the same form as the Promissory
Note delivered to the undersigned contemporaneously herewith in respect of the
First Tranche. In consideration for the Loan, the Company hereby agrees to issue
to the undersigned (i) upon the funding of the First Tranche, a warrant to
purchase 15,000 shares of the Company's Common Stock, par value $.01 per share
(the "Common Stock"), at an exercise price of $8.25 per share and (ii) upon the
funding of the Second Tranche, a warrant to purchase 35,000 shares of Common
Stock at an exercise price $8.25 per share in substantially the same form as the
Warrant delivered to the undersigned contemporaneously herewith in respect of
the First Tranche (collectively, the "Warrants").
The undersigned hereby represents and warrants as follows:
(a) The undersigned understands that neither the Warrants nor
the Common Stock issuable upon the exercise thereof have been registered under
the Securities Act of 1933, as amended (the "Securities Act"), or the securities
laws of certain states, in reliance upon specific exemptions from registration
thereunder, and the undersigned agrees that neither the undersigned's Warrants
nor the Common Stock issuable upon the exercise thereof may be sold, offered for
sale, transferred, pledged, hypothecated or otherwise disposed of except in
compliance with the Securities Act and applicable state securities laws. The
undersigned has been advised that the Company has no obligation to cause the
Warrants or the Common Stock issuable upon the exercise thereof to be registered
under the Securities Act or to comply with any exemption under the Securities
Act, including but not limited to that set forth in Rule 144
<PAGE>
promulgated under the Act, which otherwise might permit the Warrants or the
Common Stock issuable upon the exercise thereof to be sold by the undersigned.
The undersigned understands that the Warrants and all certificates representing
the Common Stock issuable upon the exercise thereof may bear legends restricting
the transfer thereof.
(b) The undersigned is acquiring the Warrants and the Common
Stock issuable upon the exercise thereof in good faith solely for the
undersigned's own account, and the undersigned is acquiring such Warrants and
the Common Stock issuable upon the exercise thereof for investment purposes and
not with a view to, or for, subdivision, distribution, fractionalization or
resale, or for the account, in whole or in part, of others.
Very truly yours,
/s/ Robert L. Priddy
Robert L. Priddy
AGREED:
LUKENS MEDICAL CORPORATION
By: /s/ Robert S. Huffstodt
-----------------------------------
Robert S. Huffstodt, President
2
<PAGE>
NON-TRANSFERABLE SUBORDINATED PROMISSORY NOTE
$150,000 February 28, 1997
FOR VALUE RECEIVED, Lukens Medical Corporation, a Delaware
corporation (the "Maker"), with offices at 3820 Academy Parkway North, NE,
Albuquerque, New Mexico 87109, promises to pay to Robert L. Priddy ("Payee"), at
such place in the United States as shall be designated in writing by Payee, a
principal sum of $150,000 (the "Principal Sum") on May 31, 1998 (the "Maturity
Date"). From and after the date hereof, the balance of the Principal Sum
outstanding from time to time shall bear interest at the rate of ten percent
(10%) per annum, all then accrued but unpaid interest being due and payable
concurrently with the Principal Sum as herein provided. This Note may be
prepaid, at the option of Maker, in whole or in part at any time and from time
to time, without penalty or premium, provided that the amount so prepaid shall
be accompanied by the payment of all interest accrued to the prepayment date of
the amount so prepaid.
This Note evidences the first tranche of an aggregate loan by
Payee to the Maker of $500,000 (the "Loan"). Notwithstanding anything to the
contrary contained herein, in the event that the second tranche of the Loan in
the amount of $350,000 is not funded in accordance with the terms of the Letter
Agreement, dated of even date herewith, between Maker and Payee, the Maturity
Date hereunder shall be July 15, 1997. This Note is non-negotiable.
Notwithstanding any provision of this Note to the contrary,
the indebtedness evidenced by this Note (including all interest thereon), and
all renewals, extensions and modifications thereof and hereof, is and shall
remain subordinate and junior in right of payment, to the extent set forth in
this Note, to the prior payment in full of all indebtedness (including
principal, interest, fees and other charges), and any other obligations, whether
direct or contingent, presently existing or hereafter incurred, of the Maker,
for money borrowed from, and/or arising out of any credit facilities and/or any
loan agreement(s) with, Sunwest Bank of Albuquerque, N.A. ("Bank") and/or to any
successor to Bank and/or to any one or more banks or other lending institutions
which shall repay a portion or all of the indebtedness or obligations of the
Maker to Bank or any such successor in the future, or which otherwise shall
become the primary institutional lenders to the Maker, and/or under guaranties
from time to time by the Maker of any of such indebtedness or obligations, all
as the same may be refinanced, restated, modified or amended from time to time
(collectively, "Senior Indebtedness"). No payments of, nor any cancellation,
set-off or discharge of, nor any transfer of collateral in respect of, any
principal or interest shall be made, given or received hereunder or in respect
of the indebtedness evidenced by this Note, nor shall any holder of this Note be
entitled to demand or accept payment of any amount due or payable under this
Note, whether by acceleration or upon demand by reason of the occurrence of an
Event of Default (as hereinafter defined), at maturity, or otherwise, nor shall
the holder hereof be entitled to declare an acceleration or demand immediate
payment of the indebtedness evidenced by this Note, until the Senior
Indebtedness shall have been paid in full, if there shall have occurred and be
continuing a default in the payment of principal and/or interest under Senior
Indebtedness, or a default under any financial covenant of the Maker under
Senior Indebtedness which shall have occurred and be continuing or would occur
or exist by reason of such payment under this Note which has not been waived by
Bank or the then holder(s) of such Senior Indebtedness. All payments and
distributions which would otherwise be payable or deliverable in respect of this
Note (but for the terms hereof) shall be paid or delivered directly to the
holders of Senior Indebtedness at the time outstanding, ratably,
<PAGE>
until all such Senior Indebtedness shall have been paid in full. If any payment,
distribution or collateral shall be received by any holder of this Note in
contravention of any of the terms hereof and before all Senior Indebtedness
shall have been paid in full, such payment, distribution or collateral shall be
held in trust for the benefit of, and shall be paid over or delivered to, the
holders of the Senior Indebtedness at the time outstanding for application to
the payment of all Senior Indebtedness remaining unpaid, ratably, to the extent
necessary to pay all such Senior Indebtedness in full. Nothing in this paragraph
shall impair or qualify, as among the Maker and the holder hereof, the
obligation of the Maker to pay the holder hereof the principal of and interest
on this Note when and as due as set forth elsewhere herein, subject, however, to
the rights of the holders of Senior Indebtedness, and to the provisions as to
subordination, as provided herein.
In the event of any liquidation, dissolution or any other
winding up of the Maker or in the event of any receivership, insolvency,
bankruptcy, assignment for the benefit of creditors, reorganization or
arrangement with creditors, whether or not pursuant to bankruptcy laws, or any
other marshalling of the assets or liabilities of the Maker, or any proceeding
as to any of the foregoing, (i) Senior Indebtedness shall first be paid in full
before the holder of this Note shall be entitled to receive any moneys,
dividends or assets in any such proceeding, and (ii) the holder of this Note
will at the request of the holders of the Senior Indebtedness file any claim,
proof of claim or other instrument of similar character necessary to enforce the
obligations of the Maker in respect of this Note and will hold in trust for the
holders of the Senior Indebtedness and pay over to them, in the form received,
to be applied to Senior Indebtedness, pro rata, any and all moneys, dividends or
other assets, received in any such proceeding on account of this Note, until the
Senior Indebtedness shall be paid in full. In the event that the holder of this
Note shall fail to take such action requested by the holders of Senior
Indebtedness, such holders may, as attorneys-in-fact for the holder of this
Note, and are hereby irrevocably authorized by the holder hereof to, take such
action on behalf of the holder of this Note as shall be necessary to effect or
in furtherance of the provisions of this paragraph, and without limiting the
generality of the foregoing:
(i) to enforce claims under this Note either in their
own name or the name of the holder hereof by proof of debt, proof of claim, suit
or otherwise;
(ii) to vote in their sole discretion in connection
with any resolution, arrangement, plan of reorganization, compromise, settlement
or extension and to take all such other action, including, without limitation,
the right to participate in any composition of creditors and the right to vote
this Note at creditors' meetings; and
(iii) to take generally any action in connection with
any such proceeding or meeting which the holder hereof might otherwise take.
No payment or distribution to the holder of any Senior
Indebtedness as contemplated by the provisions of this Note shall entitle the
holder hereof to exercise any rights
2
<PAGE>
of subrogation in respect thereof until all Senior Indebtedness shall have been
paid in full; and, for the purposes of such subrogation, payments or
distributions to the holder of any Senior Indebtedness of any cash, property or
securities to which the holder hereof would be entitled except for the
provisions of this Note shall, as between the Maker and its creditors other than
the holders of Senior Indebtedness and the holder hereof, be deemed to be a
payment by the Maker to or on account of the Senior Indebtedness, it being
understood that the provisions of this Note are for the purpose of defining the
relative rights of the holder hereof, on the one hand, and the holders of Senior
Indebtedness on the other hand.
The holders of the Senior Indebtedness may, at any time and
from time to time, without consent of or notice to the holder of this Note and
without impairing or releasing any of the rights of the holders of Senior
Indebtedness under this Note, effect, consent to and/or permit, and the rights
and interests of the holders of the Senior Indebtedness under this Note shall
remain in full force and effect irrespective of, any of the following:
(i) any change in the terms of the Senior
Indebtedness, including the amount, time, place, manner or terms of payment, or
any amendment or waiver of any agreement relating to Senior Indebtedness;
(ii) any sale, exchange or release of or any other
dealing with any property by whomsoever at any time pledged or mortgaged to
secure the Senior Indebtedness, other than a provision expressly prohibiting the
payment of this Note as a device to avoid the obligation hereunder to make such
payment;
(iii) any release of anyone liable in any manner for
the payment and collection of Senior Indebtedness;
(iv) any exercise or refraining from the exercise of
any rights against the Maker or others, including the holder of this Note;
(v) any application of any funds received by holders
of Senior Indebtedness by whomsoever paid or however realized to the Senior
Indebtedness; or
(vi) any other circumstance which might otherwise
constitute a defense available to any holder hereof as against any holder of
Senior Indebtedness.
The provisions of this Note as to the rights of the holders of
Senior Indebtedness and the obligations of the holder hereof with respect to the
Senior Indebtedness shall continue to be effective or be reinstated, as the case
may be, if at any time any payment of any of the Senior Indebtedness is
rescinded or must otherwise be returned by the holder thereof upon the
insolvency, bankruptcy or reorganization of any party hereto or otherwise, all
as though such payment had not been made.
3
<PAGE>
The holder of this Note, by acceptance of same, absolutely
agrees to be bound by all of the provisions hereof relating to the subordination
of the indebtedness evidenced by this Note to the Senior Indebtedness and/or the
rights of the holders of Senior Indebtedness and the obligations of the holder
hereof with respect thereto, in each case for the benefit of the holders of such
Senior Indebtedness. Such provisions of this Note shall inure to the benefit of
the holders of the Senior Indebtedness and their respective successors and
assigns and shall be binding upon the holder hereof and its successors and
assigns.
An "Event of Default" shall be deemed to have occurred
hereunder if and only if the Maker shall fail to make any payment under this
Note when due and such failure shall not be cured within 30 days following
written notice thereof from the Payee to the Maker; or (a) the Maker shall
approve of, consent to or acquiesce in the appointment of a trustee, receiver,
liquidator, custodian, sequestrator or similar official (collectively,
"Custodians") for itself or substantially all of its assets; or (b) a Custodian
shall be appointed for the Maker without its consent, or for substantially all
of its assets, and such appointment shall not be terminated or stayed within 90
days; or (c) any voluntary bankruptcy proceeding shall be commenced by the
Maker, as debtor; or (d) any involuntary bankruptcy proceeding commenced against
the Maker shall not be dismissed or stayed within 90 days or an order for relief
is granted against the Maker in such proceeding.
If an Event of Default shall occur and be continuing, then the
Principal Sum under this Note and all accrued interest thereon, if any, shall,
at the election of the Payee, but subject always to the subordination provisions
hereof and/or the rights of the holders of Senior Indebtedness and the
obligations of the holder hereof with respect thereto, become due and payable
immediately, without presentment, notice of dishonor, protest and notice of
protest and nonpayment, entitlement to which is hereby waived by the Maker.
Payee shall be entitled to recover reasonable attorneys' fees incurred in the
collection of the indebtedness evidenced by this Note after the occurrence of an
Event of Default.
4
<PAGE>
This Note may not be changed or terminated orally. This Note
shall be governed by the internal laws of the State of New York without regard
to principles of conflict of laws.
LUKENS MEDICAL CORPORATION
By: /s/ Robert S. Huffstodt
---------------------------------
Robert S. Huffstodt, President
5
<PAGE>
NEITHER THIS WARRANT NOR ANY SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE OF SUCH WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 AND NONE OF THEM MAY BE TRANSFERRED, NOR WILL ANY ASSIGNEE OR
ENDORSEE OF SUCH WARRANT OR SHARES OF COMMON STOCK BE RECOGNIZED AS AN
OWNER THEREOF BY THE ISSUER FOR ANY PURPOSE, UNLESS A REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, WITH RESPECT TO
SUCH WARRANT OR SHARES SHALL THEN BE IN EFFECT OR UNLESS THE
AVAILABILITY OF AN EXEMPTION FROM REGISTRATION WITH RESPECT TO ANY
PROPOSED TRANSFER OR DISPOSITION OF SUCH WARRANT OR SHARES SHALL BE
ESTABLISHED TO THE SATISFACTION OF THE ISSUER. NEITHER THIS WARRANT NOR
ANY SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF SUCH WARRANT
MAY BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT OR SIMILAR QUALIFICATION UNDER APPLICABLE STATE SECURITIES
LAWS, OR UNLESS IT IS ESTABLISHED TO THE SATISFACTION OF THE ISSUER
THAT SUCH SALE OR TRANSFER IS IN A TRANSACTION WHICH IS EXEMPT UNDER,
OR OTHERWISE IN COMPLIANCE WITH, SUCH LAWS.
LUKENS MEDICAL CORPORATION
3820 Academy Parkway North NE
Albuquerque, New Mexico 87109
To: Robert L. Priddy (the "Warrantholder")
For value received, subject to the terms and conditions set
forth below, Lukens Medical Corporation (the "Company") hereby promises to issue
to the Warrantholder Fifteen Thousand (15,000) shares of Common Stock, $.01 par
value per share, of the Company (the "Common Stock"), upon payment by the
Warrantholder to the Company of the purchase price of Eight Dollars and
Twenty-Five Cents ($8.25) per share, subject to adjustment as hereinafter
provided (the "Warrant Price"), and to deliver to the Warrantholder a
certificate or certificates representing the shares purchased (with such shares
of Common Stock subject to issuance hereunder being referred to herein as the
"Shares).
1. Warrant Exercise. This Warrant may be exercised by the
Warrantholder from time to time, in part or in full (but subject to the terms
and conditions set forth herein), at any time on or prior to March 1, 2002 (the
"Expiration Date").
(a) This Warrant can be exercised only with respect
to full Shares and only with respect to a minimum of 2,000 Shares at the time of
any exercise.
(b) Any exercise of this Warrant must be in writing
addressed to the Board of Directors of the Company at the principal place of
business of the Company and delivered at least ten (10) business days prior to
the proposed date of exercise, which writing shall indicate the number of Shares
as to which this Warrant is being exercised and shall be accompanied by a check
payable to the order of the Company in the full amount of the aggregate Warrant
Price of the Shares covered by such exercise.
2. Certain Conditions to Exercise. This Warrant may be
exercised by the Warrantholder only if on the date of exercise the Warrantholder
satisfies the Company, in such manner as the Company shall reasonably specify,
that the Shares issuable upon such exercise
<PAGE>
may be issued to the Warrantholder pursuant to an exemption from the
registration requirements of, and otherwise in compliance with, applicable
federal and state securities laws.
3. Reservation of Shares. The Company will at all times
through the close of business on the Expiration Date reserve and keep available,
out of the aggregate of its authorized but unissued or treasury shares of Common
Stock, for the purpose of enabling it to satisfy any obligation to issue shares
of Common Stock upon exercise of this Warrant, the number of Shares deliverable
upon the exercise of this Warrant. The Company covenants that all Shares issued
upon exercise of this Warrant shall, upon issuance in accordance with the terms
of this Warrant, be fully paid and nonassessable.
4. Certain Other Adjustments; Mergers, Consolidations, Etc.
Notwithstanding any other provisions contained in this Warrant, in the event of
the merger or consolidation of the Company, or reorganization or
recapitalization of, stock dividend on, stock split, split-up, split-off,
spin-off or combination of, shares of Common Stock, this Warrant shall entitle
the Warrantholder to receive, upon the exercise of this Warrant, the number of
shares of Common Stock which the Warrantholder would have owned immediately
following such action had this Warrant been exercised immediately prior thereto,
and appropriate adjustments shall be made by the Board of Directors of the
Company as to the number of Shares and/or the Warrant Price as shall be
equitable to prevent reduction or enlargement of rights under this Warrant; the
determination of the Board of Directors as to such matters shall be conclusive
and binding. References in this Warrant to Common Stock shall include any such
securities or other property (including cash) into which shares of Common Stock
may be changed pursuant to or in accordance with the preceding sentence through
merger, consolidation, reorganization, recapitalization, stock dividend, stock
split, split-up, split-off, spin-off, or combination of shares.
5. Restrictions on Transfers. (a) This Warrant is not
transferable by the Warrantholder, and is exercisable only by the Warrantholder,
and may not be sold, assigned, transferred, pledged or hypothecated in any way
(whether by operation of law or otherwise), and shall not be subject to
execution, attachment or similar proceeding. Any attempted assignment, transfer,
pledge, hypothecation or other disposition of this Warrant or any interest
herein, and the levy of any attachment or similar proceeding upon this Warrant
or any interest herein, shall be null and void and without effect except as
provided in the preceding sentence.
(b) The Company may postpone the time of delivery of
certificates for the shares issuable upon the exercise of this Warrant for such
additional time as the Company shall deem necessary or desirable to enable it to
comply with the listing or quotation requirements of any securities exchange
upon which shares of the Company may or are then contemplated to be listed or
the National Association of Securities Dealers, Inc., or the requirements of the
Securities Act of 1933, as amended the Securities Exchange Act of 1934, as
amended, any applicable rules or regulations of the Securities and Exchange
Commission or the requirements of applicable state securities laws.
2
<PAGE>
6. Miscellaneous. (a) The Warrantholder shall not have any
rights to dividends or any other rights of a stockholder with respect to any
shares subject to this Warrant, except to the extent that the Warrantholder
shall have paid for such Shares and a certificate for such shares shall have
been actually issued in the Warrantholder's name upon the due, proper and timely
exercise of this Warrant as provided for herein.
(b) Each notice relating to this Warrant shall be in
writing and delivered in person or by certified mail, return receipt requested,
to the proper address. All notices to the Warrantholder shall be addressed to
the Warrantholder at the Warrantholder's address below specified. All notices to
the Company shall be addressed to the Company at the address set forth on the
first page of this Warrant. Anyone to whom a notice may be given under this
Warrant may designate a new address by notice to that effect given to the other
party in accordance with this subparagraph (b).
(c) If this Warrant shall be mutilated, lost, stolen
or destroyed, the Company shall issue in exchange and substitution for and upon
cancellation of the mutilated Warrant, or in lieu of and in substitution for the
Warrant lost, stolen or destroyed, a new Warrant of like tenor and denomination,
but only upon receipt of evidence satisfactory to the Company of such loss,
theft or destruction of such Warrant and such indemnity and, if requested by the
Company, such bond, as shall in each case be satisfactory to the Company. The
Warrantholder must also comply with such other reasonable regulations and pay
such other reasonable charges as the Company may prescribe in connection with
such issuance.
(d) This Warrant shall be governed and construed in
accordance with the substantive laws of the State of Delaware applicable to
contracts executed, delivered and to be fully performed in the State of
Delaware, without giving effect to contrary provisions regarding conflict of
laws.
(e) This Warrant shall inure to the benefit of and
shall be binding upon the Warrantholder's heirs, executors, administrators,
successors, legal representatives and permitted assigns, and shall inure to the
benefit of and be binding upon the Company and its successors and assigns. The
Warrantholder may not assign, transfer, pledge, encumber, hypothecate or
otherwise dispose of this Warrant, or any of the Warrantholder's rights
hereunder, and any such attempted prohibited delegation or disposition shall be
null and void and without effect.
(f) This Warrant constitutes the complete
understanding between the parties with respect to the subject matter hereof, and
no statement, representation, warranty or covenant has been made by either party
with respect thereto except as expressly set forth herein. This Warrant shall
not be altered, modified, amended or terminated except by written instrument
signed by each of the parties hereto.
3
<PAGE>
(g) This Warrant may be executed in any number of
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
(h) The paragraph headings contained herein are for
the purposes of convenience only, are not intended to define or limit the
contents of said paragraphs and are not part of this Warrant.
(i) By signing below, the Warrantholder hereby
accepts this Warrant subject to all of the terms and provisions hereof and
acknowledge all of the representations, warranties and agreements set forth
above. This Warrant shall not be effective until the Warrantholder has signed
this Warrant and delivered it to the Company.
IN WITNESS WHEREOF, Lukens Medical Corporation has caused this
Warrant to be executed as of the 28th day of February, 1997.
LUKENS MEDICAL CORPORATION
By: /s/ Robert S. Huffstodt
------------------------------------
Robert S. Huffstodt, President
ACCEPTED AND AGREED TO:
/s/ Robert L. Priddy
- --------------------------------
Robert L. Priddy
[Address]
- ------------------------------
- ------------------------------
- ------------------------------
- ------------------------------
4
Exhibit 21
Subsidiaries of the Registrant
1. Lukens Medical Corporation, a New Mexico corporation.
2. Lukens Medical Products Private Limited, a company registered under the
Companies Act, 1956, laws of India.
3. Lukens-Somar S.A de C.V., a Mexican corporation.
Independent Auditors' Consent
We consent to the incorporation by reference, in this Registration Statement of
Lukens Medical Corporation on Form S-8 of our reports dated March 25, 1997,
appearing in the Annual Report on Form 10-KSB of Lukens Medical Corporation for
the year ended December 31, 1996.
Neff and Company LLP
Albuquerque, New Mexico
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 878,090
<SECURITIES> 0
<RECEIVABLES> 1,901,947
<ALLOWANCES> 5,790
<INVENTORY> 5,565,210
<CURRENT-ASSETS> 8,379,537
<PP&E> 2,062,842
<DEPRECIATION> 1,358,081
<TOTAL-ASSETS> 11,802,160
<CURRENT-LIABILITIES> 3,510,398
<BONDS> 0
0
0
<COMMON> 27,320
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,802,160
<SALES> 8,178,576
<TOTAL-REVENUES> 8,178,576
<CGS> 5,796,534
<TOTAL-COSTS> 7,586,350
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 197,566
<INCOME-PRETAX> 463,481
<INCOME-TAX> 0
<INCOME-CONTINUING> 463,481
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 463,481
<EPS-PRIMARY> .169
<EPS-DILUTED> .147
</TABLE>
