SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities and Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
LUKENS MEDICAL CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
LUKENS MEDICAL CORPORATION
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and O-11.
1) Title of each class of securities to which transaction applies:
COMMON STOCK, $.01 PAR VALUE
2) Aggregate number of securities to which transaction applies:
3,150,859 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule O-11:
$4.00 FOR THE COMMON STOCK, PAR VALUE $.01 PER SHARE
4) Proposed maximum aggregate value of transaction: $
12,603,436.00
(5) Amount of filing fee:
$2,520.69
[X] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule O-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing:
1) Amount previously paid: $2,474.69
--------------------------------------
2) Form, schedule or registration statement no.: Schedule 14A
-------------------------
3) Filing Party: Lukens Medical Corporation
-----------------------------------------------
4) Date Filed: June 3, 1998
-----------------------------------------------
<PAGE>
LUKENS MEDICAL CORPORATION
3820 Academy Parkway North, NE
Albuquerque, New Mexico 87109
_________, 1998
To Our Stockholders:
You are cordially invited to attend a Special Meeting of
Stockholders of Lukens Medical Corporation (the "Company") to be held at 10:00
a.m. local time on September 23, 1998 at ___________________, New York, New
York.
At this important meeting, you will be asked to consider and
vote upon an Agreement and Plan of Merger (the "Merger Agreement") dated as of
April 28, 1998, among Medisys PLC ("Medisys"), a Scottish public limited
company, LMC Acquisition Corp. ("Merger Sub"), a Delaware corporation and a
wholly owned subsidiary of Medisys, and the Company pursuant to which Merger Sub
will be merged with and into the Company (the "Merger"), with the Company being
the surviving corporation and wholly owned by Medisys. If the proposed Merger is
consummated, the Company's stockholders will be entitled to receive $4.00 in
cash for each share of Common Stock of the Company, par value $.01 per share
("Lukens Common Stock") owned by such stockholders.
Approval and adoption of the Merger Agreement requires the
affirmative vote of the holders of a majority of the outstanding shares of the
Company, as more fully described in the accompanying Proxy Statement in the
section entitled "Voting at the Special Meeting -- Record Date; Vote Required."
YOUR BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS FAIR TO,
AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS STOCKHOLDERS. THE BOARD OF
DIRECTORS HAS UNANIMOUSLY APPROVED OF THE TERMS OF THE MERGER AGREEMENT AND
UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
Sands Brothers & Co., Ltd., a financial advisor to the
Company, has rendered a written opinion to the Board of Directors of the Company
that as of the date of the Merger Agreement, the consideration to be received by
each stockholder of the Company in connection with the Merger pursuant to the
Merger Agreement is fair from a financial point of view to the Company and to
such stockholders. A copy of such opinion is attached as Annex B to the Proxy
Statement and should be read in its entirety by the holders of Common Stock.
Important information regarding the Company and the proposed
Merger is included in the enclosed Proxy Statement which contains a more
complete description of the proposed Merger and the background thereof. You are
urged to read the Proxy Statement carefully.
Your vote is important. Whether or not you plan to attend the
Special Meeting, please complete, sign and date your proxy card and return it in
the enclosed envelope. If you do attend, you will be entitled to vote in person,
and such vote will revoke your proxy.
Sincerely,
-------------------------------------
Robert S. Huffstodt
President and Chief Executive Officer
<PAGE>
LUKENS MEDICAL CORPORATION
3820 Academy Parkway North, NE
Albuquerque, New Mexico 87109
NOTICE IS HEREBY GIVEN that a special meeting of the
stockholders (the "Special Meeting") of Lukens Medical Corporation, a Delaware
corporation (the "Company"), will be held at ______________________ New York,
New York on September 23, 1998 at 10:00 a.m. (local time) to (i) consider and
vote upon a proposal to approve and adopt the Agreement and Plan of Merger dated
as of April 28, 1998 (the "Merger Agreement"), by and among the Company, Medisys
PLC ("Medisys"), a Scottish public limited company and LMC Acquisition Corp.
("Merger Sub"), a Delaware corporation and a wholly owned subsidiary of Medisys,
providing for a merger (the "Merger") pursuant to which Merger Sub will be
merged with and into the Company, and each share of Common Stock, par value $.01
per share of the Company (the "Lukens Common Stock") issued and outstanding
immediately prior to the effective date of the Merger (the "Effective Date"),
other than dissenting shares and shares held by Medisys and its subsidiaries,
will be converted into the right to receive, and will be exchangeable for, $4.00
in cash, without any interest thereon; and (ii) transact such other business as
may properly be brought before the Special Meeting or any adjournment or
postponement thereof. A copy of the Merger Agreement is attached as Annex A to
the accompanying Proxy Statement.
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY
DETERMINED THAT THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY,
TAKEN AS A WHOLE, ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS
STOCKHOLDERS. THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS
APPROVAL OF THE MERGER BY THE COMPANY'S STOCKHOLDERS.
All stockholders are cordially invited to attend the Special
Meeting. Only stockholders of record at the close of business on August 14, 1998
are entitled to notice of and to vote at the Special Meeting or any adjournment
thereof. The affirmative vote of a majority of the shares of the Lukens Common
Stock outstanding on such record date is necessary to approve the Merger. PLEASE
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND MAIL IT IN THE ENCLOSED
ENVELOPE WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING.
If the Merger is approved by the stockholders of the Company
at the Special Meeting and the Merger becomes effective, holders of Lukens
Common Stock who comply with the requirements of Section 262 of the Delaware
General Corporation Law, a copy of which is attached as Annex C to the
accompanying Proxy Statement, will be entitled to dissenters' rights with
respect to their shares. See "Dissenters' Rights" in the accompanying Proxy
Statement for a description of the procedures to be followed to perfect
dissenters' rights.
BY ORDER OF THE BOARD OF DIRECTORS
----------------------------------------------------------
Robert S. Huffstodt, President and Chief Executive Officer
Dated: , 1998
------------
<PAGE>
LUKENS MEDICAL CORPORATION
3820 Academy Parkway North, NE
Albuquerque, New Mexico 87109
------------------
PROXY STATEMENT
FOR
------------------
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 23, 1998
This Proxy Statement is being furnished to the holders of
Common Stock, par value $.01 per share ("Lukens Common Stock"), of Lukens
Medical Corporation ("Lukens" or the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company for use at the
special meeting of the stockholders of the Company to be held at 10:00 a.m.,
local time, on September 23, 1998 at _______________________, New York, New
York, and at any adjournment or postponement thereof (the "Special Meeting").
The purpose of the Special Meeting is to consider and vote upon an
Agreement and Plan of Merger (the "Merger Agreement") dated as of April 28,
1998, among Medisys PLC ("Medisys"), a Scottish public limited company, LMC
Acquisition Corp. ("Merger Sub"), a Delaware corporation and a wholly owned
subsidiary of Medisys, and the Company pursuant to which Merger Sub will be
merged with and into the Company (the "Merger"), with the Company being the
surviving corporation and wholly owned by Medisys. If the proposed Merger is
consummated, the Company's stockholders will be entitled to receive $4.00 in
cash for each share of Lukens Common Stock owned by such stockholders.
This Proxy Statement is dated _________________, 1998 and is,
along with the accompanying form of proxy, first being distributed to the
stockholders of the Company on or about such date.
<PAGE>
AVAILABLE INFORMATION
Lukens is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files periodic reports, proxy and information statements
and other information with the SEC. Lukens' registration statements (including
exhibits thereto), as well as such reports, proxy and information statements and
other information, may be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and are available for inspection and
copying at the public reference facilities maintained by the regional offices of
the SEC located at 7 World Trade Center, Suite 1300, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such information can be obtained by mail from the Public
Reference Section of the SEC, Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates.
The SEC maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC. The address of the SEC's web site is
http:\\www.sec.gov.
<PAGE>
TABLE OF CONTENTS
SUMMARY ......................................................................1
The Parties...............................................................1
The Special Meeting.......................................................1
Record Date; Vote Required................................................1
Background of the Merger..................................................2
Recommendation of Lukens' Board of Directors..............................2
Opinion of Financial Advisor..............................................2
Interests of Certain Persons in the Merger................................2
Market Information Regarding Lukens' Common Stock ............................3
Certain Federal Income Tax Consequences...................................4
Regulatory Approvals......................................................4
Effective Date............................................................4
Conditions to the Merger..................................................4
Treatment of Stock Options................................................4
Termination...............................................................5
Dissenters' Rights........................................................5
Cancellation of Stock Certificates........................................5
VOTING AT THE SPECIAL MEETING.................................................6
Introduction..............................................................6
Time, Date and Place of Meeting...........................................6
Record Date; Vote Required................................................6
Quorum ...................................................................6
Solicitation, Revocation and Use of Proxies...............................6
Dissenters' Rights........................................................7
Trading Market for and Market Price of Lukens Common Stock................7
FACTORS TO BE CONSIDERED......................................................8
Purposes and Effects of the Merger........................................8
Background of the Merger..................................................8
Recommendation of the Board of Directors; Fairness of the Merger.........10
Opinion of Financial Advisor.............................................12
Interests of Certain Persons in the Merger; Indemnification..............14
Accounting Treatment.....................................................15
Certain Effects of the Merger............................................15
Certain Federal Income Tax Consequences .................................16
Regulatory and Other Approvals...........................................16
MERGER AGREEMENT.............................................................17
The Merger...............................................................17
Representations and Warranties...........................................18
Certain Covenants........................................................19
Conduct of Business by the Company Pending the Merger ..........19
Stockholder Approval; Proxies...................................19
Employee Matters................................................20
Indemnification.................................................20
Alternative Proposals...........................................20
<PAGE>
Cancellation of Warrants; Repayment of Loans from Affiliates....21
Agreement of Principal Stockholders.............................21
Fairness Opinion................................................21
Miscellaneous...................................................22
Conditions to the Merger.................................................22
Termination..............................................................22
Non-Survival of Representations, Warranties and Agreements...............24
Fees and Expenses........................................................25
DISSENTERS' RIGHTS...........................................................25
BUSINESS OF THE COMPANY......................................................26
Products ................................................................27
Suture Products.................................................28
Bone Wax .......................................................28
Ulster Product Lines.....................................................28
Lancets, Needles and Accessories................................28
Dispettes.......................................................28
Infection Control Kits..........................................28
Pro-Tec Product Lines....................................................28
New Products ............................................................28
India Joint Venture......................................................29
Brazil Joint Venture.....................................................29
Sales, Marketing and Customers...........................................29
Product Sales...................................................29
Marketing Strategy..............................................29
Customers.......................................................30
Research and Development Activities......................................30
Production and Quality Assurance.........................................30
Suppliers................................................................31
Competition..............................................................32
Government Regulations...................................................32
Patents and Proprietary Rights...........................................33
Product Liability and Insurance..........................................34
Employees................................................................34
Description of Property..................................................35
Legal Proceedings........................................................35
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF THE COMPANY............................................35
CERTAIN TRANSACTIONS.........................................................36
MARKET INFORMATION REGARDING LUKENS COMMON STOCK ............................37
LUKENS DIVIDEND POLICY.......................................................38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF LUKENS' FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .....................................38
Results of Operations....................................................38
Liquidity and Capital Resources..........................................40
Other Information........................................................42
<PAGE>
INFORMATION REGARDING MEDISYS AND MERGER SUB.................................42
FINANCIAL INFORMATION........................................................42
FEES AND EXPENSES............................................................43
OTHER MATTERS................................................................43
1998 ANNUAL MEETING OF STOCKHOLDERS..........................................43
INDEPENDENT CERTIFIED ACCOUNTANTS............................................43
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-1
Annex A -- Merger Agreement
Annex B -- Fairness Opinion of Sands Brothers & Co., Ltd.
Annex C -- Section 262 of Delaware General Corporation Law
Annex D -- Consent of Neff & Company LLP
Annex E -- Quarterly Report on 10-QSB for the Quarter ended June 30, 1998
[To Be Supplied]
<PAGE>
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Proxy Statement or incorporated herein by reference. This
summary is not intended to be complete and is qualified in its entirety by
reference to the more detailed information appearing elsewhere in, or
incorporated by reference in, this Proxy Statement and the Annexes hereto.
Capitalized terms used herein without definition have the meanings ascribed to
them elsewhere in this Proxy Statement. STOCKHOLDERS ARE URGED TO REVIEW THE
ENTIRE PROXY STATEMENT, AND THE ANNEXES HERETO, CAREFULLY.
THE PARTIES
Lukens Medical Corporation, a Delaware corporation ("Lukens"
or the "Company"), is engaged in the design, development, manufacturing and
marketing of wound closure products and other devices for use in the medical
industry, including, without limitation, suture products, bone wax, lancets,
sharps containers and diagnostic devices. Suture products include sutures
(suture material attached to a surgical needle) and ligatures (suture materials
not attached to a surgical needle). The Company's principal executive offices
are located at 3820 Academy Parkway North NE, Albuquerque, New Mexico 87109,
(505) 342-9638.
Medisys PLC, a Scottish public limited company ("Medisys"), is a
medical technology company providing products, through its divisions and
subsidiaries, to the point of care environment, at present focused on two
markets -the point of care and over the counter diagnostics market and the
market for on-site disposal of biohazardous medical waste.. LMC Acquisition
Corp., a Delaware corporation and a wholly owned subsidiary of Medisys ("Merger
Sub"), is a corporation recently organized in connection with the Merger and has
not conducted any other business. Medisys' and Merger Sub's principal executive
offices are located at Walmar House, 288-292 Regent Street, London W1R SH8
England, (011) 44-171-436-3353
THE SPECIAL MEETING
The special meeting (the "Special Meeting") of stockholders of Lukens
will be held at 10:00 a.m. (local time) on September 23, 1998, at
_________________, New York, New York.
The Special Meeting will be held to permit holders of shares of Lukens
Common Stock to consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of April 28, 1998, a copy of which is
attached hereto as Annex A (the "Merger Agreement"), among Lukens, Medisys, and
Merger Sub providing for the merger of Merger Sub with and into Lukens (the
"Merger") and the conversion, upon consummation of the Merger, of all shares of
Common Stock, par value $.01 per share of Lukens ("Lukens Common Stock") issued
and outstanding immediately prior to the Effective Date of the Merger (other
than dissenting shares and shares held by Medisys and its subsidiaries) into the
right to receive, and be exchangeable for, $4.00 in cash, without any interest
thereon (the "Merger Consideration"). See "Voting at the Special Meeting."
RECORD DATE; VOTE REQUIRED
Only holders of record of Lukens Common Stock as of the close of
business on August 14, 1998 (the "Record Date"), will be entitled to notice of
and to vote at the Special Meeting. On the Record Date, 3,150,859 shares of
Lukens Common Stock were outstanding.
Under the Delaware General Corporation Law (the "DGCL") and the
Company's bylaws, the presence, in person or by proxy, of the holders of a
majority of the shares of Lukens Common Stock outstanding on the Record Date is
necessary to constitute a quorum at the Special Meeting. Stockholders of record
on the Record Date are entitled to one vote per share on any matter which may
properly come before the Special Meeting. Under the DGCL, the affirmative vote
of the holders of a majority of the shares of Lukens Common Stock is required to
approve the Merger Agreement. The obligations of Lukens and Medisys to
consummate the Merger are subject, among other things, to the
<PAGE>
condition that the affirmative vote of the holders of a majority of shares of
Lukens Common Stock shall have been obtained. See "Merger Agreement --
Conditions to the Merger." The Board of Directors of Lukens unanimously approved
the Merger Agreement on April 27, 1998. The Board of Directors of Medisys also
has approved the Merger Agreement.
As of the Record Date, the directors and executive officers of Lukens
owned 885,857 shares of Lukens Common Stock (representing approximately 28.6% of
the total outstanding shares of Lukens Common Stock). See "Security Ownership of
Certain Beneficial Owners and Management of the Company." Pursuant to the Merger
Agreement and subject to the qualifications se forth therein, each of Messrs.
Robert L. Priddy, John H. Robinson and John P. Holmes have agreed that from and
after the date of the Merger Agreement until August 31, 1998, or such earlier
date as the Merger Agreement shall be terminated that he shall not transfer or
pledge his shares of Lukens Common Stock and he shall vote all of his shares of
Lukens Common Stock in favor of the Merger. See "Merger Agreement -- Certain
Covenants -- Agreement of Principal Stockholders."
BACKGROUND OF THE MERGER
For a description of the events leading up to the approval of the
Merger Agreement by the Board, see "Factors to be Considered -- Background of
the Merger."
RECOMMENDATION OF LUKENS' BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF LUKENS HAS UNANIMOUSLY DETERMINED THAT THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, TAKEN AS A WHOLE,
ARE FAIR TO, AND IN THE BEST INTERESTS OF, LUKENS AND ITS STOCKHOLDERS. THE
BOARD OF DIRECTORS OF LUKENS UNANIMOUSLY RECOMMENDS APPROVAL OF THE MERGER
AGREEMENTBY LUKENS' STOCKHOLDERS. For a discussion of the factors considered by
Lukens' Board of Directors in approving the Merger, see "Factors to be
Considered -- Recommendation of the Board of Directors; Fairness of the Merger."
OPINION OF FINANCIAL ADVISOR
The Board has retained Sands Brothers & Co., Ltd. ("Sands Brothers") to
deliver to the Board of Directors of Lukens a written opinion dated May 15,
1998, to the effect that, as of the date of such opinion and based upon and
subject to certain matters stated therein, the Merger Consideration was fair,
from a financial point of view, to the holders of Lukens Common Stock. The full
text of the written opinion of Sands Brothers dated May 15, 1998, which sets
forth the assumptions made, matters considered and limitations on the review
undertaken, is attached as Annex B to this Proxy Statement and should be read
carefully in its entirety. The opinion of Sands Brothers is directed to the
Board of Directors of Lukens and relates only to the fairness of the Merger
Consideration from a financial point of view, does not address any other aspect
of the Merger or related transactions and does not constitute a recommendation
to any stockholder as to how such stockholder should vote at the Special
Meeting. See "Factors to be Considered -- Opinion of Financial Advisor."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
On the Effective Date, pursuant to the Merger Agreement (a) warrants to
purchase 400,000 shares of Lukens Common Stock at an exercise price of $1.10 per
share held by Mr. John Robinson, a director of the Company, are to be canceled
and in lieu thereof, Mr. Robinson shall have the right to payment in cash equal
to $400,000 in exchange therefor, which payment shall be made by Medisys
promptly after the Effective Date and (b) the outstanding loans by Mr. Robinson
and Mr. Robert Priddy to the Company in the original principal amounts of
$1,700,000 and $500,000, respectively, shall be repaid by Medisys by (i) making
a cash payment to Mr. Robinson of $1,200,000, plus all accrued and unpaid
interest, and the issuance to Mr. Robinson of Medisys ordinary shares, par value
1p per share, having a value equal to $500,000 and (ii) making a cash payment to
Mr. Priddy of all accrued and unpaid interest on his loan and the
-2-
<PAGE>
issuance to Mr. Priddy of Medisys ordinary shares, par value 1p per share,
having a value equal to $500,000, which payments and issuances shall be made
promptly after the Effective Date. The 50,000 warrants to purchase Common Stock
held by Mr. Robinson with an exercise price of $6.25 per share and the options
to purchase 12,000 shares of Common Stock at an exercise price of $6.00 per
share shall be canceled on the Effective Date for no consideration. The 50,000
warrants to purchase Common Stock held by Mr. Priddy with an exercise price of
$6.25 per share, the options to purchase 300,000 shares of Common Stock (100,000
of which are fully vested at this time) at an exercise price of $4.00 per share
and the option to purchase 12,000 shares of Common Stock at an exercise price of
$6.00 per share shall be canceled on the Effective Date for no consideration.
Additionally, all employee stock options held by Mr. Robert Huffstodt,
a director and President of the Company, as well as all employee stock options
held by the other officers and employees of the Company will be converted, on
the same terms and conditions of the existing options, into the right to
purchase Medisys ordinary shares. The total number of outstanding options, both
vested and unvested, held by the officers and directors of the Company as of the
date hereof, including those described above, is 404,600 (or approximately 11.4%
of the outstanding on a fully-diluted, as-converted basis), 180,050 of which are
exercisable within 60 days of the Record Date. Furthermore, pursuant to the
Merger Agreement, Medisys and Merger Sub have agreed to cause the Surviving
Corporation to continue to indemnify the present and former officers and
directors of Lukens to the fullest extent provided under Lukens' Articles of
Incorporation and Bylaws, as in effect on the date of the Merger, for a period
of three years following the Effective Date.
MARKET INFORMATION REGARDING LUKENS' COMMON STOCK
Lukens Common Stock has been quoted on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") system under the symbol "LUKN"
since May 6, 1992. The Common Stock has also been listed on the Pacific Stock
Exchange under the symbol "LKN" since May 6, 1992.
The following table sets forth the range of high and low bid prices for
the Common Stock for the periods indicated, as reported by NASDAQ, the principal
system or exchange on which such securities are quoted or traded. The quotations
represent "inter-dealer" prices, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
High ($) Low ($) High ($) Low ($)
-------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Quarter ended Quarter ended
March 31, 1997 8 3/4 4 1/2 March 31, 1996 3 11/16 1 7/16
Quarter ended Quarter ended
June 30, 1997 6 3/4 5 1/2 June 30, 1996 3 5/16 2 5/8
Quarter ended Quarter ended
September 30, 1997 6 1/8 3 3/4 September 30, 1996 3 9/16 2 9/16
Quarter ended Quarter ended
December 31, 1997 5 1/4 1 1/2 December 31, 1996 4 9/16 3
Fiscal Quarter Ending
March 31, 1998 3 3/8 1 5/8
Fiscal Quarter Ending
June 30, 1998 3 9/16 2 1/2
- -------------
</TABLE>
-3-
<PAGE>
On April 28, 1998, the day prior to the date of public announcement of
the proposed Merger, the closing bid and asked prices of the Lukens Common Stock
were $2-13/16 and $3, respectively, as reported on the National Association of
Securities Dealers Automated Quotation system. As of July 30, 1998, the closing
bid and asked prices of the Lukens Common Stock were $3 and $3 1/4,
respectively, as reported on the National Association of Securities Dealers
Automated Quotation system.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Each Lukens stockholder will generally recognize gain or loss, for
federal income tax purposes, in an amount equal to the difference between the
amount of cash received by such stockholder for his or her shares of Lukens
Common Stock pursuant to the Merger and the adjusted tax basis in such shares.
Lukens stockholders should read carefully the discussion under "Factors to be
Considered -- Certain Federal Income Tax Consequences" and are urged to consult
their own tax advisors as to the tax consequences of the Merger to them under
federal, state, local or any other applicable law.
REGULATORY APPROVALS
Lukens is not aware of any governmental or regulatory approvals
required for consummation of the Merger other than the filing of the Certificate
of Merger with the Secretary of State of the State of Delaware. See "Factors to
be Considered -- Regulatory Approvals."
EFFECTIVE DATE
Under the Merger Agreement, the required filing of the Certificate of
Merger is expected to be made as soon as practicable after the satisfaction or
waiver of all conditions to the Merger, including the approval of the Merger
Agreement by the stockholders of Lukens at the Special Meeting. The Merger will
be effective as of the date and time of filing of a Certificate of Merger with
the Secretary of State of the State of Delaware in accordance with the DGCL or
at such time thereafter as provided in such Certificate of Merger (the
"Effective Date"). See "Merger Agreement -- The Merger."
CONDITIONS TO THE MERGER
The obligations of Lukens, Merger Sub and Medisys to consummate the
Merger are subject to the approval of the Merger by the stockholders of Lukens.
The Merger also is subject to certain other customary closing conditions that
may be waived by the parties, subject to applicable law and certain limitations
imposed by the Merger Agreement. Lukens does not presently intend to waive any
such conditions although it reserves the right to do so. See "Merger Agreement
- -- Conditions to the Merger."
TREATMENT OF STOCK OPTIONS
Each outstanding option to purchase Lukens Common Stock under Lukens'
employee stock option plan shall be assumed by Medisys at the Effective Date,
and each such option shall become, on the same terms and conditions of the
existing option, an option to purchase a number of ordinary shares of Medisys,
par value 1p, equal to the number of shares of Lukens Common Stock subject to
each such option multiplied by the "Option Exchange Ratio" which is defined in
the Merger Agreement as the ratio of (x) $4.00 to (y) the U.S. dollar equivalent
of the average of the middle-market closing price per share of Medisys ordinary
shares on the Alternative Investment Market of the London Stock Exchange, as
shown in the "London Stock Exchange Daily Official List," for each of the ten
trading days ending two trading days prior to the Effective Date. See "Merger
Agreement -- The Merger."
-4-
<PAGE>
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Date by mutual written consent of Medisys, Lukens
and Merger Sub, or by either Lukens or Medisys in certain other circumstances,
in accordance with the termination provisions of the Merger Agreement,
including, without limitation, the right of Medisys to terminate the Merger
Agreement at any time prior to June 30, 1998 in the event that they fail to
obtain a commitment to obtain the necessary financing on terms acceptable to
Medisys in its sole discretion, and Lukens' ability to terminate the Merger
Agreement at any time after June 30, 1998 in the event that Medisys does not
provide Lukens with a letter affirming the fact that all necessary financing has
been committed. The June 30, 1998 expiration date was subsequently extended by
the parties to August 10, 1998. See "Merger Agreement -- Termination."
DISSENTERS' RIGHTS
Under Section 262 of the DGCL, stockholders who do not vote in favor of
the Merger Agreement nor consent thereto in writing, and file demands for
appraisal prior to the stockholder vote on the Merger Agreement and who
otherwise comply with the requirements of Section 262 of the DGCL, upon the
consummation of the Merger, have the right to obtain a cash payment for the
"fair value" of their shares of Lukens Common Stock. In order to exercise such
rights, a stockholder must comply with all the procedural requirements of
Section 262 of the DGCL ("Section 262"), a description of which is provided in
"Dissenters' Rights" herein and the full text of which is attached to this proxy
statement as Annex C. Such "fair value" would be determined in judicial
proceedings, the result of which cannot be predicted. Failure to take any steps
required under Section 262 may result in a loss of such dissenters' rights.
CANCELLATION OF STOCK CERTIFICATES
Promptly following the Effective Date, notice of consummation of the
Merger, together with a letter of transmittal for use in surrendering
certificates representing shares of Lukens Common Stock in exchange for the
Merger Consideration, will be mailed by a bank or trust company or such other
person designated by Medisys prior to the Effective Date as to the paying agent
(the "Paying Agent") to holders of shares of Lukens Common Stock. DO NOT
SURRENDER YOUR CERTIFICATES OF LUKENS COMMON STOCK UNTIL YOU RECEIVE AND
COMPLETE SUCH LETTER OF TRANSMITTAL. See "Merger Agreement -- The Merger."
VOTING AT THE SPECIAL MEETING
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Lukens for the Special Meeting. At the
Special Meeting, the stockholders of Lukens will consider and vote on a proposal
to approve the Merger Agreement.
TIME, DATE AND PLACE OF MEETING
The Special Meeting will be held at 10:00 a.m. (local time) on
September 23, 1998 at ____________________, New York, New York.
RECORD DATE; VOTE REQUIRED
The Board of Directors of Lukens has fixed the close of business on
August 14, 1998, as the record date (the "Record Date") for the determination of
stockholders entitled to notice of and to vote at the Special Meeting.
Accordingly, only stockholders of record of Lukens at the close of business on
the Record Date have the right to receive notice of and to vote at the Special
Meeting and any postponement or adjournment thereof and will be entitled to one
vote for each share of Lukens Common Stock held. As of the Record Date, there
were 3,150,859 shares of Lukens Common Stock outstanding, held by approximately
83 holders of record.
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As of the Record Date, the directors and executive officers of Lukens
owned 885,857 shares of Lukens Common Stock (representing approximately 28.6% of
the total outstanding shares of Lukens Common Stock). See "Factors to be
Considered - -- Interests of Certain Persons in the Merger; Indemnification" and
"Security Ownership of Certain Beneficial Owners and Management of the Company."
Pursuant to the Merger Agreement and subject to the qualifications se forth
therein, each of Messrs. Robert L. Priddy, John H. Robinson and John P. Holmes
have agreed that from and after the date of the Merger Agreement until August
31, 1998, or such earlier date as the Merger Agreement shall be terminated that
he shall not transfer or pledge his shares of Lukens Common Stock and he shall
vote all of his shares of Lukens Common Stock in favor of the Merger. See
"Merger Agreement -- Certain Covenants -- Agreement of Principal Stockholders."
Under the DGCL, the affirmative vote of holders of a majority of the
shares of Lukens Common Stock outstanding as of the Record Date is required to
approve the Merger Agreement. Accordingly, abstentions and broker nonvotes will
have the effect of votes against the Merger Agreement.
The Board of Directors of Lukens unanimously determined on April 27,
1998, that the Merger Agreement and the transactions contemplated thereby, taken
as a whole, are fair to, and in the best interests of, Lukens and its
stockholders. The Board of Directors of Lukens unanimously approved the Merger
Agreement and recommends approval of the Merger Agreement by Lukens'
stockholders. Each of the Boards of Directors of Medisys and Merger Sub, and
Medisys, as the sole stockholder of Merger Sub, have approved the Merger and the
Merger Agreement.
QUORUM
The presence in person or by properly executed proxy of holders of a
majority of the issued and outstanding shares of Common Stock is necessary to
constitute a quorum at the Special Meeting.
SOLICITATION, REVOCATION AND USE OF PROXIES
Shares of Lukens Common Stock represented by a properly executed proxy
received by Lukens will, unless such proxy is properly revoked prior to the
Special Meeting, be voted at the Special Meeting in accordance with the
instructions thereon. Shares of Lukens Common Stock represented by properly
executed proxies that do not contain instructions to the contrary will be voted
FOR approval of the Merger and in the discretion of the proxy holder as to any
other matter that may properly come before the Special Meeting or any
adjournment or postponement thereof. The Board of Directors of Lukens knows of
no other business that will be presented for consideration at the Special
Meeting other than the proposal to approve the Merger. If other matters should
properly come before the meeting, the proxy holders will vote on such matters in
accordance with their best judgments. Proxies are being solicited hereby on
behalf of the Board of Directors of Lukens.
Any stockholder may revoke his or her proxy at any time before it is
voted by executing and delivering to the Secretary of Lukens, at Lukens'
principal executive offices as set forth above, an instrument of revocation or a
proxy bearing a later date, and by delivering a written notice to the Secretary
of Lukens stating that the proxy is revoked, or by voting in person at the
Special Meeting.
The cost of soliciting proxies, including the cost of preparing,
assembling, printing and mailing this Proxy Statement, the Proxy and any
additional soliciting materials furnished to stockholders, will be borne by the
Company and Medisys. Arrangements will be made with brokerage houses and other
custodians, nominees and fiduciaries to send proxies and proxy materials to the
beneficial owners of stock, and such persons may be reimbursed for their
expenses. Proxies may be solicited by directors, officers or employees of the
Company in person or by telephone, telegram or other means. No additional
compensation will be paid for these services.
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DISSENTERS' RIGHTS
Under Section 262 of the DGCL, stockholders who do not vote in favor of
the Merger Agreement not consent thereto in writing and file demands for
appraisal prior to the stockholder vote on the Merger Agreement and otherwise
comply with the requirements of Section 262 of the DGCL, upon the consummation
of the Merger, have the right to obtain a cash payment for the "fair value" of
their shares of Lukens Common Stock. In order to exercise such rights, a
stockholder must comply with all the procedural requirements of Section 262 of
the DGCL ("Section 262"), a description of which is provided in "Dissenters'
Rights" herein and the full text of which is attached to this proxy statement as
Annex C. Such "fair value" would be determined in judicial proceedings, the
result of which cannot be predicted. Failure to take any steps required under
Section 262 may result in a loss of such dissenters' rights. Pursuant to the
Merger Agreement, the obligations of Medisys and Merger Sub to effect the Merger
is subject the condition that the number of shares of Lukens Common Stock for
which written demand for appraisal has been properly made pursuant to Section
262 of the DGCL shall not have exceeded 5% of the total number of shares of
Lukens Common Stock outstanding immediately prior to the Effective Date. See
"Merger Agreement -- Conditions to the Merger."
TRADING MARKET FOR AND MARKET PRICE OF LUKENS COMMON STOCK
On April 28, 1998, the day prior to the date of public announcement of
the proposed Merger, the closing bid and asked prices of the Lukens Common Stock
were $2-13/16 and $3, respectively, as reported on the National Association of
Securities Dealers Automated Quotation system. As of July 30, 1998, the closing
bid and asked prices of the Lukens Common Stock were $3 and $3 1/4,
respectively, as reported on the National Association of Securities Dealers
Automated Quotation system.
FACTORS TO BE CONSIDERED
PURPOSES AND EFFECTS OF THE MERGER
The purpose of the Merger is to provide Lukens' stockholders with $4.00
in cash for each share of Lukens Common Stock they hold and for Medisys, through
Merger Sub, to acquire all of the outstanding shares of Lukens Common Stock. For
information concerning the factors leading to the decision by Lukens to approve
the Merger and concerning alternatives to the Merger considered by Lukens, see
"Factors to be Considered -- Background of the Merger."
The acquisition of Lukens is structured as a cash merger. The Merger
has been structured as a cash merger in order to provide a prompt and orderly
transfer of ownership of the Company to Medisys and to provide the stockholders
of the Company with cash for all their shares.
If the Merger is consummated, the stockholders of the Company will no
longer have any equity interest in the Company, and therefore will not share in
its future earnings and growth. Instead, each such stockholder (other than such
stockholders who properly perfect appraisal rights in accordance with Section
262 of the DGCL) will receive, upon surrender of the certificate or certificates
evidencing Lukens Common Stock, the Merger Consideration in exchange for each
share of Lukens Common Stock owned immediately prior to the Effective Date. See
"Factors to be Considered -- Certain Effects of the Merger."
BACKGROUND OF THE MERGER
The Company's management periodically has investigated various
alternatives to enhance the value of the Company's Common Stock, including
acquisitions by the Company of other publicly or privately held firms,
continuation of the Company's growth internally, and strategic alliances with
key vendors as well as with other participants in the medical device industry.
As of December 1997, the Company's management and Board of Directors believed
that the Company's competitive position within the industry would be improved by
a strategic partnership or business combination with a larger company.
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In August, 1997, Robert S. Huffstodt, the Company's President and Chief
Executive Officer, had been contacted by a competitor ("Company A") who
indicated an interest in acquiring the Company for cash. After two visits to the
Company, Company A invited Mr. Huffstodt and Mr. Priddy, the Company's Chairman,
to a meeting at Company A's offices. At this meeting, possible offers were
discussed; however valuations suggested by Company A were not sufficiently above
the current market price of the Lukens Common Stock to interest the Company's
Board of Directors. As the Company began discussions in earnest with other
parties in 1998, Company A was again contacted, however Company A declined to
participate in discussions at the valuations then being discussed with other
parties.
In December, 1997, after it was determined by the Board of Directors
that the Company should explore the option of being acquired in order to attempt
to maximize shareholder value, Mr. Huffstodt had a meeting with one of the
Company's larger customers ("Company B") to discuss a potential acquisition by
Company B. At that meeting, the parties discussed an acquisition of the Company
in its entirety, and alternatively, a purchase of only certain product lines. In
early January 1998, Company B indicated that it was only interested in acquiring
one product line, but that it was not prepared to pay the purchase price
suggested by that product line's share of the Company's revenues and earnings.
Accordingly, discussions were discontinued.
In December 1997, Robert L. Priddy, the Company's Chairman, was
contacted by a medical distribution company ("Company C") concerning a potential
acquisition of the Company. At a meeting at the Company's headquarters, Company
C's representatives performed preliminary due diligence in connection with the
potential acquisition of the Company by Company C. In January 1998, Mr. Priddy
met with Company C to discuss structural alternatives with respect to the
potential acquisition. The parties had no further significant discussions until
February 1998, when the Chairman of Company C contacted the Company and, at this
point, discussed acquiring the Company whereby each share of the Lukens Common
Stock outstanding would be exchanged for Company C stock with a stock market
value at the time in excess of the market value of the Lukens Common Stock as of
the date of such proposal.
Mr. Priddy indicated that the Board of Directors would consider the
proposal, but that another party (Medisys) had expressed interest in the
Company, and had offered to purchase all of the outstanding shares of the Lukens
Common Stock for cash. Thus, unless the price offered by Company C was greater
than the per share cash consideration offered by such other party, the Company
would most likely accept the cash offer. Company C replied that it would
consider this point and respond later. The following day, Company C revised its
proposal for a share exchange and increased the value of the stock to be offered
for each share of the Lukens Common Stock. Mr. Priddy then contacted members of
the Board, who unanimously stated that they still believed the cash offer to be
superior, based partly on the fact that Company C's stock was not traded on a
national stock exchange or the NASDAQ National Market and there were risks
associated with its liquidity and price fluctuations. Mr. Priddy contacted
Company C, which declined to increase its offer further.
In January 1998, the Company was contacted by representatives of
Medisys, who asked for a meeting to discuss a strategic product alliance. At the
meeting held at the Company's headquarters, Medisys' representatives also
indicated that they had been following the Company for a number of months, and
that they had great respect for the Company's management team, and would be
interested in conducting acquisition discussions with the Company if the Company
were interested. The Company's Board of Directors and the Medisys
representatives held further discussions regarding such acquisition. In early
February, 1998, Medisys offered to purchase all of the outstanding shares of the
Lukens Common Stock at a purchase price of $4.00 per share. At the time the
Company received the offer from Medisys, the Company issued a press release and
a Current Report on Form 8-K to publicly announce the $4.00 per share offer and
the fact that it was then in negotiations regarding a sale of the Company. From
the time of the public announcement to the signing of the Merger Agreement with
Medisys, the Company did not receive any higher or better offers for the Company
or its assets.
Although there was no definitive agreement on the terms of a potential
transaction, Medisys began to conduct its due diligence review of the Company,
with various Medisys officials and professional consultants visiting the
Company's facilities on several occasions throughout March, April, and May,
1998. In March and April 1998, as a sign
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of good faith, Medisys purchased 75,000 shares of Common Stock from the Company
for $4.00 per share in cash in private transactions with the Company.
In late March 1998, Lukens was contacted by an independent agent
representing a principal in the medical device industry ("Company D"). Company D
was interested in entering the U.S. market for certain of the Company's product
lines. After an exchange of confidentiality agreements and preliminary
discussions about the status of the Company's negotiations with Medisys, Company
D indicated it would not be pursuing the discussions further.
In late April, the Company was contacted by a party interested in
acquiring only certain product lines from the Company. Since the price offered
was not sufficient to adequately address the Company's liquidity problems, and
in any event, the funding of the party was not firm, the Company rejected the
offer, which has not been subsequently raised.
Medisys delivered drafts to the Company of the Merger Agreement on
April 1, 1998. Shortly thereafter, representatives of Lukens, Medisys and their
legal advisors began negotiating the definitive agreement.
The Company's Board of Directors met by conference call on April 27,
1998, after having received a copy of the most recent draft of the Merger
Agreement. The Board then proceeded to discuss whether the Merger was in the
best interest of the Company and its stockholders. In connection therewith, the
Board discussed various aspects of, and factors pertaining to, the Merger. The
Board discussed at length various issues regarding the Merger including that the
Merger would be structured as a cash merger whereby the stockholders of the
Company would have the right to receive $4.00 for each outstanding share of
Lukens Common Stock, and in connection with such Merger, certain warrants,
options and debt instruments would be canceled and in some circumstances, the
holders thereof would receive cash consideration therefor. The Board considered
and discussed the possible interest in the transaction of Mr. John Robinson, a
director of the Company and Mr. Priddy, as the Merger Agreement contemplates
repayment of certain indebtedness owed by the Company to Messrs. Robinson and
Priddy upon the consummation of the Merger. Messrs. Robinson and Priddy agreed
to excuse themselves from the deliberations, but it was decided by the other
members of the Board not to be necessary as they were all fully aware of their
personal interest in the transaction.
The Board also discussed the fact that pursuant to the Merger
Agreement, Medisys was given a very broad financing contingency through June 30,
1998, that is, Medisys could terminate the Merger Agreement at any time prior to
June 30, 1998 if they failed to raise financing to fund the Merger and other
costs on terms acceptable to them in their sole discretion. The Board also
discussed the fact that Medisys was also to be granted a right to terminate the
Merger Agreement at any time prior to May 15, 1998 if its due diligence
investigation of the Company did not prove to be satisfactory.
The Board then discussed the reasons for the sale and considered and
discussed various alternatives to the Merger that could possibly enhance the
value of the Lukens Common Stock, including a sale of the stock or assets of the
Company to other publicly or privately held entities, continuation of the
Company's growth internally and strategic alliances with other participants in
the medical supply industry. Specifically, the Board discussed previous offers
made for the Company and its assets and determined the offer by Medisys to be
superior to the others. The Board also discussed the Company's current liquidity
problems and the existence of certain payment and financial covenant defaults
under its line of credit with its lending bank. Mr. Huffstodt reported that,
based upon discussions, the Company's lending bank had agreed to waive the
Company's existing defaults under the Company's bank facility and amend certain
of its financial covenants, subject to the execution of the Merger Agreement
with Medisys and the closing of the Merger.
It was then determined that the Board would retain an investment
banking firm to prepare a fairness opinion in respect of the consideration to be
received in the Merger. The Company' legal counsel explained to the Board that
they could terminate the Merger Agreement at any time prior to the expiration of
the three week period from the date the Merger Agreement was signed if it did
not receive an acceptable fairness opinion within such time period. It was
discussed that either Sands Brothers or another investment banking firm with
previous experience with and knowledge about the Company should be retained to
provide the fairness opinion due to their familiarity with the Company. Mr.
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Priddy fully disclosed to all of the Board members his relationship with the
other possible investment banking firm and it was determined that such
relationship would not have any impact on the quality of the fairness opinion to
be received from such other firm. It was determined that each of these firms
should be contacted by the Board to determine if they could provide a fairness
opinion within the requisite time period and at a reasonable price.
The Company's legal counsel summarized and reviewed for the Board the
proposed terms of the Merger and various provisions of the Merger Agreement to
be executed in connection therewith. The Company's counsel pointed out various
positive and negative aspects of the Merger, including the existence of a
financing contingency for Medisys.
Based upon its discussions, the Board determined that in light of the
current circumstances and future prospects of the Company, the Merger and the
Merger Agreement and the transactions contemplated thereby, taken as a whole,
were fair to and in the best interest of the Company and the stockholders of the
Company. The Board approved the Merger Agreement, but retained the right to
terminate the Merger Agreement (as set forth therein) if the Company did not
receive a fairness opinion acceptable to the Board indicating that the
consideration to be received by the stockholders of the Company was fair from a
financial point of view. See "Merger Agreement -- Termination." The Merger
Agreement was executed on April 28, 1998.
During the week of May 1, 1998, the Company retained Sands Brothers to
render an opinion to the Company's Board as to the fairness, from a financial
point of view, of the consideration to be received by the stockholders in the
proposed transaction with Medisys. The Board decided to retain Sands Brothers
over the other investment banking firm as Sands Brothers offered to complete its
analysis of the Merger and to deliver its fairness opinion in a shorter period
of time and for a lower fee than the other investment banking firm. Such
fairness opinion was issued to the Company on May 15, 1998. See "Factors to be
Considered -- Opinion of Financial Advisor."
In July, 1998, Medisys purchased an additional 57,500 shares of Common
Stock from the Company for $4.00 per share in cash in private transactions with
the Company.
RECOMMENDATION OF THE BOARD OF DIRECTORS; FAIRNESS OF THE MERGER
The proposed Merger transaction was negotiated by the Board of
Directors on an arms-length basis with Medisys, a third party unaffiliated with
Lukens or any member of the Board of Directors or management. The Board of
Directors of Lukens has unanimously determined that the Merger Agreement and the
transactions contemplated thereby, taken as a whole, are fair to, and in the
best interests of, Lukens and its stockholders, and unanimously recommends
approval of the Merger by Lukens's stockholders. The Board based its
recommendation on a number of factors, including the following:
(i) The Board determined that the purchase price per share of
Lukens Common Stock is fair to the stockholders of the Company. This
determination was based on the directors' assessment of the Company's value
considering the following factors taken as a whole: the recent and anticipated
stock market valuation of the Company's publicly-traded stock in the absence of
the Merger, the Company's current and anticipated operations and performance,
the current and anticipated opportunities in the markets for the Company's
products and in the medical products market generally, and the analysis and
fairness opinion presented by Sands Brothers. The purchase price per share of
Lukens Common Stock represents a premium over prices at which the Company's
stock was trading immediately prior to the public announcement of the Merger and
expected future prices.
(ii) The Board reviewed and analyzed the alternatives to the
Merger, including: (a) the continuation of the Company's operation as a stand
alone entity; (b) the availability of other potential business partners or
strategic alliances; and (c) the probability that another form of corporate
restructuring would yield a comparable value to the stockholders of the Company.
Specifically, the directors analyzed the opportunities and risks associated with
these alternatives in light of the current and projected difficulties in the
worldwide medical products market, together with the stock market's perception
of that industry. The Board concluded that due to the Company's chronic working
capital deficiency, and its inability to raise adequate funding from outside
sources, the Company would have a very
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difficult time sustaining its growth. On past occasions, members of the Board
engaged in preliminary discussions with various financing sources, but was
unable to solicit any serious interest with respect to equity or debt cash
investments on terms acceptable to the Company. As a result, the Company was
reliant upon certain of its directors to provide growth financing for the
Company. See, "Management's Discussion and Analysis of Lukens' Financial
Condition and Results of Operations, Liquidity and Capital Resources." The Board
also believed that other potential corporate partnerships or alliances, if
available at all, would be, at best, complex and time consuming to structure
and, in any event, difficult to achieve.
(iii) The Board's belief that the terms of the Merger
Agreement were attractive to the Company and its stockholders. Particularly, the
Board noted the benefits of an all cash purchase price which was determined by
the Board to be superior to a stock proposal due to the certainty provided by
cash versus receipt of an illiquid or volatile security, despite the fact that
the receipt of cash for shares would be currently taxable to the stockholders.
(iv) The fact that Lukens has experienced significant
volatility in its share prices due, in part, to occasional earnings
fluctuations, and the fact that future earnings fluctuations could result in
decreased stock prices for Lukens. Such lower stock prices could further result
in (i) difficulty for Lukens to continue growth through acquisitions, (ii)
difficulty in designing appropriate equity incentive arrangements for the
Company's employees, and (iii) the need for management to focus attention on
short-term operating results rather than building long-term value for
stockholders.
(v) The fact that during the two month period during which
Lukens actively had responded to potential collaboration or acquisition
opportunities, and since February 22, 1998 when Lukens issued a press release
that it had received an offer to purchase the Company at a price of $4.00 per
share, Lukens received no other acquisition proposal, offer or collaboration
opportunity that, in the Board's judgment, offered a more favorable opportunity
for the Company and its stockholders than the Merger, even though Lukens had
given early indications to likely candidates that Lukens would consider an
acquisition offer.
(vi) The Board's review of the Merger Agreement, including the
provisions permitting Lukens to respond to unsolicited inquiries and proposals
from, provide any confidential information to, and participate in any
discussions and negotiations with, third parties concerning mergers or similar
transactions with Lukens to the extent required to satisfy the fiduciary duties
of its directors, subject to Lukens's obligation to pay Medisys a $500,000
breakup fee under certain circumstances.
(vii) The conditions to the closing of the Merger and the
Board's determination that such conditions could reasonably be expected to be
satisfied.
(viii) The opinion of Sands Brothers to the effect that, and
based upon and subject to certain matters stated in such opinion, the Merger
Consideration was fair, from a financial point of view, to holders of Lukens
Common Stock. See "Factors to be Considered -- Opinion of Financial Advisor."
In view of the wide variety of factors considered in connection with
its evaluation of the Merger, the Lukens Board did not find it practicable to,
and did not, quantify or otherwise assign relative weights to the specific
factors considered in reaching its decisions.
Subsequent to announcement of the proposed Merger, the trading prices
of Lukens's Common Stock have approached the proposed Merger Consideration. See
"Market Information Regarding Lukens Common Stock." The Company believes this
appreciation in price to be due in part to market expectations that the proposed
Merger will be consummated and to be typical of companies that have announced
pending acquisitions and for which there is an active trading market.
Accordingly, the Merger Consideration may represent little or no premium to the
trading prices of Lukens Common Stock at or near the time of the Merger.
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OPINION OF FINANCIAL ADVISOR
On May 1, 1998, Sands Brothers was retained by Lukens to render an
opinion as to the fairness, from a financial point of view, to the holders of
Lukens Common Stock of the consideration to be received by such holders in the
Merger. At a meeting of the Lukens Board held on April 27, 1998, to evaluate the
Proposed Merger, the Board discussed that it would retain either Sands Brothers
or a different named investment banking firm to deliver a fairness opinion based
on the fact that each firm was familiar with the Company. In addition, pursuant
to the Merger Agreement, Lukens agreed to engage such investment bank to deliver
the Fairness Opinion within three weeks of the date of the Merger Agreement (the
"Fairness Opinion Period"), and that in the event that Sands Brothers or another
investment bank satisfactory to the Board was unable to deliver the Fairness
Opinion due to the inadequacy of the value of the Merger Consideration, the
Company had the right to terminate the Merger Agreement.
In arriving at its opinion, Sands Brothers reviewed the Merger
Agreement and held discussions with certain senior officers, directors and other
representatives and advisors of Lukens concerning the business, operations and
prospects of Lukens. A representative of Sands Brothers visited the Company to
review current operations and meet firsthand with members of the management
team. Sands Brothers also discussed the terms of the Merger Agreement with
management, and reviewed the Board minutes approving the Merger Transaction. In
addition, Sands Brothers discussed the proposed transaction and the Company's
operations with members of the management team at Medisys PLC. Sands Brothers
also reviewed the Company's public SEC filings, including its audited and
interim financial statements for 1996 and 1997. In conjunction with its review
of the financial statements, Sands Brothers reviewed the financial performance
and financial ratios relating to the Company's operations. It also reviewed the
financial projections provided by the Company, and discussed these projections
with various members of the management team to determine how realistic the
execution of said projections would be. In looking at the projected financial
performance that it believed the Company was capable of achieving, Sands
Brothers performed a cash flow analysis of the projected operations in order to
evaluate the capital structure and cash needs of the Company necessary to
achieve this level of performance. The analysis of the Company's future
liquidity needs were based upon historical levels of sales growth and future
purchase commitments from customers, historical receivables collections,
supplier payment patterns, and the available credit of the Company.
Sands Brothers evaluated possible levels of performance for the Company
both as an independent company and as a division of Medisys. In reviewing these
projections, Sands Brothers evaluated the possible future performance of the
Company's Common Stock based on the achievable performance of the Company if it
were to remain an independent entity in comparison to the cash offer from
Medisys. Sands Brothers also performed an evaluation of the historical and
trading price of Lukens Common Stock in comparison to the Medisys offer. Sands
Brothers noted the following factors: (i) over the lifetime of trading history
of Lukens' Common Stock, prices have ranged from a historical low of $1 in April
1995 to a historical high of $8 1/4 in February 1997, (ii) the Common Stock has
not traded in a range above the offered price of $4 per share since October 1997
and (iii) the offer price of $4 per share represents a 33% appreciation in the
current price of the Common Stock of $3 per share.
Sands Brothers also looked at the valuation of comparable medical
products companies in relation to both the current and potential future
valuation of Lukens' stock, as well as in relation to the cash tender offer from
Medisys. It also reviewed the terms of several recent acquisitions in the
medical products industry, and compared the valuation of such companies under
these acquisitions to the valuation of Lukens both in the public markets and
under the proposed acquisition by Medisys. In conjunction with the
above-mentioned analyses, Sands Brothers considered the historical performance
of the Company's stock, both independently and in relation to other comparable
companies. Using publicly available information, Sands Brothers analyzed, among
other things, the market values and trading multiples of the Company and the
following selected publicly traded companies in the medical products industry:
(i) LifeQuest Medical, (ii) Luther Medical, (iii) U.S. Surgical Corp. and (iv)
Univec, Inc. Sands Brothers compared market values as a multiple of revenues,
EBITDA and net income. It was determined by Sands Brothers that the revenue
multiple calculation was the most applicable frame of reference for valuing the
transaction, because two of the comparable companies had negative EBITDA, and
three of the comparable companies, as well as the Company itself, had negative
earnings. Sands Brothers deduced that based on market capitalization to
revenues, the comparable companies had an average multiple
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of 2.11. Sands Brothers compared this multiple to a multiple for Lukens of 1.08
at the current stock price of $3 per share, and a multiple of 1.44 at the
offered price of $4 per share.
Using publicly available information, Sands Brothers analyzed, among
other things, the implied transaction value multiples paid in selected
transactions in the medical products industry, consisting of (acquirer/target):
Elan/Neurex, Respironics/Healthdyne, Engelhard/Catalyst unit of MKG,
Interpore/Cross Medical and Sulzer Medical/Spine-Tech. Of these five
transactions, a core group consisting of Respironics, Engelhard and Interpore
were determined by Sands Brothers to be the most directly comparable to the
proposed transaction. Sands Brothers compared the total consideration paid in
these transactions as a multiple of the latest twelve month revenues (prior to
the acquisition) and value of assets acquired. For the core acquisitions,
average multiples of 2.47 for consideration/revenues and 2.85 for
consideration/assets were found. These multiples compared to proposed multiples
in the Lukens transaction of 1.14 times consideration/revenues and 1.12 times
consideration/assets.
In rendering its opinion, Sands Brothers assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by or discussed with Sands Brothers. Sands Brothers did not make and
was not provided with an independent evaluation or appraisal of the assets of
the Company.
The full text of the written opinion of Sands Brothers dated May 15,
1998, which sets forth the assumptions made, matters considered and limitations
on the review undertaken, is attached hereto as Annex B and should be read
carefully in its entirety. The opinion of Sands Brothers is directed to the
Board of Directors of Lukens and relates only to the fairness of the Merger
Consideration from a financial point of view, does not address any other aspect
of the Merger or related transactions and does not constitute a recommendation
to any stockholder as to how such stockholder should vote at the Special
Meeting. The summary of the opinion of Sands Brothers set forth in this Proxy
Statement is qualified in its entirety by reference to the full text of such
opinion.
In preparing its opinion, Sands Brothers performed a variety of
financial and comparative analyses, including those described above and below.
The summary of such analyses does not purport to be a complete description of
the analyses underlying Sands Brothers' opinion. The preparation of a fairness
opinion is a complex analytic process involving various determinations as to the
most appropriate and relevant methods of financial analyses and the application
of those methods to the particular circumstances and, therefore, such an opinion
is not readily susceptible to summary description. Accordingly, Sands Brothers
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors, without considering all analyses and
factors, could create a misleading or incomplete view of the processes
underlying such analyses and opinion. In its analyses, Sands Brothers made
numerous assumptions with respect to the Company, industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of the Company. The estimates contained in such
analyses and the valuation ranges resulting from any particular analysis are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than those suggested
by such analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. No company,
transaction or business used in the above-referenced analyses as a comparison is
identical to Lukens or the proposed acquisition by Medisys. Accordingly, an
analysis of the results of the foregoing is not entirely mathematical; rather it
involves complex considerations and judgements concerning differences in
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the selected companies, selected
transactions or the business segment, company or transaction to which they are
being compared. Sands Brothers' opinion and analyses should not be viewed as
determinative of the views of the Board of Directors or management of Lukens
with respect to the Merger Consideration or the proposed Merger.
After careful analysis of the financial position of the Company as a
stand-alone company, it was determined by Sands Brothers that the offered price
of $4 per share was fair, from a financial point of view, to the stockholders of
the Company. Although it was determined that the demand would exist for the
Company's projected level of sales, it
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was also determined by Sands Brothers that, in order to achieve that level of
sales, the Company would need to obtain a significant amount of additional
capital. Sands Brothers noted that without a significant amount of additional
capital, the future operating results of the Company would be less than the
projected operating results, and as a result, the Company would deserve a
discount to the multiple valuation enjoyed by comparable companies whose capital
resources are significantly greater than that of the Company. In it review of
the Company' current financial position, it appeared to Sands Brothers that the
completion of the proposed acquisition by Medisys would be the most viable means
for the Company to obtain the necessary capital to finance the projected
operating results. As the current offer represents a 33% premium to the
stockholders based on the current stock price, Sands Brothers has determined
that the offered price of $4 per share is fair to the stockholders from a
financial point of view.
Pursuant to the terms of Sands Brothers' engagement, the Company has
agreed to pay Sands Brothers an opinion fee of $60,000 for its services in
rendering the Fairness Opinion in connection with the Merger. The Company has
also agreed to indemnify Sands Brothers and related persons against certain
liabilities, including liabilities under the federal securities laws, arising
out of Sands Brothers' engagement.
Sands Brothers has advised Lukens that, in the ordinary course of
business, Sands Brothers and its affiliates may actively trade or hold the
securities of Lukens and Medisys for their own account or for the account of
customers and, accordingly, may at any time hold a long or short position in
such securities. Sands Brothers and its affiliates may maintain relationships
with the Company and Medisys and their respective affiliates.
Sands Brothers is a recognized investment banking firm and was selected
by Lukens based on its experience and expertise. Sands Brothers regularly
engages in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements, and
valuations for estate, corporate and other purposes.
INTERESTS OF CERTAIN PERSONS IN THE MERGER; INDEMNIFICATION
In considering the recommendations of Lukens's Board of Directors with
respect to the Merger, stockholders should be aware that certain members of
Lukens's management and Board of Directors have certain interests in the Merger
that are in addition to or different from the interests of the public
stockholders. The Board of Directors of Lukens was aware of these interests and
considered them, among other things, in approving the Merger Agreement. Pursuant
to the Merger Agreement, on the Effective Date, (a) warrants to purchase 400,000
shares of Lukens Common Stock at an exercise price of $1.10 per share held by
Mr. John Robinson, a director of the Company, are to be canceled and in lieu
thereof, Mr. Robinson shall have the right to payment in cash equal to $400,000
in exchange therefor, which payment shall be made by Medisys promptly after the
Effective Date and (b) the outstanding loans by Mr. Robinson and Mr. Priddy to
the Company in the original principal amounts of $1,700,000 and $500,000,
respectively, shall be repaid by Medisys by (i) making a cash payment to Mr.
Robinson of $1,200,000, plus all accrued and unpaid interest, and the issuance
to Mr. Robinson of Medisys ordinary shares, par value 1p per share, having a
value equal to $500,000 and (ii) making a cash payment to Mr. Priddy of all
accrued and unpaid interest on his loan and the issuance to Mr. Priddy of
Medisys ordinary shares, par value 1p per share, having a value equal to
$500,000, which payments and issuances shall be made promptly after the
Effective Date.
The 50,000 warrants to purchase Common Stock held by Mr. Robinson with
an exercise price of $6.25 per share and the options to purchase 12,000 shares
of Common Stock at an exercise price of $6.00 per share shall be canceled on the
Effective Date for no consideration. The 50,000 warrants to purchase Common
Stock held by Mr. Priddy with an exercise price of $6.25 per share, the options
to purchase 300,000 shares of Common Stock at an exercise price of $4.00 per
share and the option to purchase 12,000 shares of Common Stock at an exercise
price of $6.00 per share shall be canceled on the Effective Date for no
consideration. Mr. Robinson's consulting agreement with the Company will be
terminated as of the Effective Date.
Additionally, Mr. Robert S. Huffstodt, President, Chief Executive
Officer and a Director of the Company, as well as each of the other officers and
employees of the Company, will have all of the employee stock options held by
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them converted into the right to purchase a number of ordinary shares of
Medisys, par value 1p, equal to the number of shares of Lukens Common Stock
subject to each such option multiplied by the Option Exchange Ratio (as defined
in the Merger Agreement) (the "Substitute Options"). The Substitute Options
shall have a per share exercise price equal to the current exercise price per
share of Lukens Common Stock divided by the Option Exchange Ratio, and each
Substitute Option otherwise shall after the Effective Date be subject to all of
the other terms and conditions of the original option to which it relates.
Each of Messrs. Robinson, Priddy and Holmes (also a director of the
Company) agreed pursuant to the Merger Agreement not to sell or otherwise
transfer or encumber any shares of Lukens Common Stock and vote all such shares
in favor of the Merger. Such obligation expires on August 31, 1998 or such
earlier date as the Merger Agreement shall terminate.
The Merger Agreement also provides that the Company shall indemnify,
and after the Effective Date, the Surviving Corporation shall indemnify the
officers, directors and employees of the Company and its Subsidiaries who were
such at any time prior to the Effective Date from and against all losses,
expenses, claims, damages or liabilities arising out of the transactions
contemplated by the Merger Agreement occurring before the Effective Date to the
fullest extent permitted or required under applicable law; provided, however,
that such indemnification shall not be available with respect to Losses arising
out of the failure of the Company to obtain the Fairness Opinion. In addition,
Medisys has agreed that all rights to indemnification existing in favor of the
directors, officers or employees of the Company as provided in the Company's
Certificate of Incorporation or By-Laws, as in effect as of the date of the
Merger Agreement, with respect to matters occurring through the Effective Date,
shall survive the Merger and shall continue in full force and effect for a
period of not less than three years from the Effective Date. See "Merger
Agreement -- Certain Covenants -- Indemnification."
There are no post-Merger employment agreements currently anticipated to
be entered into with management. However, the existing employment agreement
between the Company and Robert Huffstodt, a director and the President of the
Company will remain in place and will be unaffected by the transactions
contemplated by the Merger.
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase in accordance with GAAP.
From and after the Effective Date, Lukens's results of operations will be
included in Medisys' consolidated results of operation.
CERTAIN EFFECTS OF THE MERGER
Upon consummation of the Merger, Merger Sub will be merged with and
into the Company, the separate corporate existence of Merger Sub will cease, and
the Company will continue as the Surviving Corporation. Medisys will own all of
the outstanding shares of common stock of the Surviving Corporation and will be
entitled to all of the benefits and detriments resulting from that interest,
including all income or losses generated by the Surviving Corporation's
operations and any future increase or decrease in the Surviving Corporation's
value. After the Effective Date, the present holders of the Lukens Common Stock
will no longer have any equity interest in the Company, will not share in the
results of operations of the Surviving Corporation and will no longer have
rights to vote on corporate matters. The Company is currently subject to the
information filing requirements of the Exchange Act, and in accordance
therewith, is required to file reports and other information with the SEC
relating to its business, financial statements and other matters. As a result of
the Merger, the Company will become a wholly-owned subsidiary of Medisys and
there will cease to be any public market for the Lukens Common Stock, and after
the Effective Date, the Lukens Common Stock will be delisted from the Nasdaq
Stock Market. Upon such event, the Surviving Corporation will apply to the SEC
for the deregistration of the Lukens Common Stock under the Exchange Act. The
termination of the registration of the Lukens Common Stock under the Exchange
Act would make certain provisions of the Exchange Act (including the proxy
solicitation provisions of Section 14(a), and the short swing trading provisions
of Section 16(b)), no longer applicable to the Surviving Corporation.
Additionally, upon the termination of the registration of the Common Stock
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under the Exchange Act, the Lukens Common Stock will no longer constitute
"margin securities" under the regulations of the Board of Governors of the
federal Reserve System.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal federal income tax
consequences relating to the Merger based on the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), and applicable regulations,
rulings and judicial authority as in effect on the date of this Proxy Statement.
Subsequent changes in the law could alter the federal income tax consequences of
the Merger.
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW ARE INCLUDED FOR
GENERAL INFORMATIONAL PURPOSES ONLY AND ARE BASED UPON PRESENT LAW. BECAUSE
INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH STOCKHOLDER IS URGED TO CONSULT SUCH
STOCKHOLDER'S OWN TAX ADVISOR TO DETERMINE THE APPLICABILITY OF THE RULES
DISCUSSED BELOW TO SUCH STOCKHOLDER AND THE PARTICULAR TAX EFFECTS OF THE
MERGER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND OTHER TAX LAWS.
The receipt by a stockholder of cash for shares of Lukens Common Stock
pursuant to the Merger (including any cash amounts received by dissenting
stockholders pursuant to the exercise of appraisal rights) will be a taxable
transaction for federal income tax purposes under the Code and also may be a
taxable transaction under applicable state, local and other tax laws. The tax
consequences of such receipt may vary depending upon, among other things, the
particular circumstances of the stockholder. A stockholder will generally
recognize gain or loss equal to the difference between the amount of cash
received by the holder pursuant to the Merger in exchange for his or her shares
and the stockholder's adjusted tax basis in such shares. Gain or loss will be
calculated separately for each block of shares (i.e., shares acquired in a
single transaction at the same price). Such gain or loss generally will be
capital gain or loss if the shares are a capital asset in the hands of the
stockholder and will be long-term gain or loss if the shares have a holding
period of more than one year at the time of their conversion at the Effective
Date. Long-term capital gain recognized by an individual stockholder will be
taxed at the lowest rates applicable to capital gains if the stockholder has
held the shares of Common Stock for more than eighteen months. Certain
limitations apply with respect to the deductibility of capital losses.
The receipt of cash by a stockholder pursuant to the Merger may be
subject to backup withholding at the rate of 31% unless the stockholder (i) is a
corporation or comes within other exempt categories, or (ii) provides a
certified taxpayer identification number on Form W-9 and otherwise complies with
the backup withholding rules. Backup withholding is not an additional tax; any
amounts so withheld may be credited against the federal income tax liability of
the stockholder subject to the withholding.
This tax discussion is included for general information only. This
discussion applies only to stockholders holding shares of Lukens Common Stock as
capital assets, and to stockholders holding shares of Lukens Common Stock
received pursuant to the exercise of employee stock options or otherwise as
compensation. This discussion does not apply to Lukens stockholders who are not
citizens or residents of the United States, to Lukens stockholders who are
tax-exempt or to other Lukens stockholders of special status.
REGULATORY AND OTHER APPROVALS
Lukens is not aware of any material governmental or regulatory
requirements to be complied with in connection with the Merger, other than the
filing of Certificate of Merger conforming to the requirements of the DGCL with
the Delaware Secretary of State. The Company conducts operations in a number of
foreign countries where regulatory filings may be required as a result of the
Merger. The Company will make such filings as it deems necessary or appropriate.
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MERGER AGREEMENT
The following is a brief summary of the Merger Agreement, a copy of
which is attached as Annex A to this Proxy Statement and is incorporated herein
by reference. Although the material provisions of the Merger Agreement set forth
in this Proxy Statement have been summarized accurately, the statements made
herein concerning such document are not necessarily complete, and reference is
made to the full text of the Merger Agreement attached hereto as Annex A. Each
such statement is qualified in its entirety by such reference. Capitalized terms
that are not otherwise defined in this summary have the meanings set forth in
the Merger Agreement.
THE MERGER
The Merger Agreement provides that, upon the terms and subject to the
satisfaction or waiver of certain conditions set forth therein, Merger Sub will
be merged with and into Lukens, the separate corporate existence of Merger Sub
will cease and Lukens will continue as the Surviving Corporation. The Merger
will become effective on the Effective Date upon the filing of the Certificate
of Merger with the Secretary of State of the State of Delaware in accordance
with the DGCL.
The Merger Agreement also provides that: (i) the Articles of
Incorporation of Merger Sub, as in effect immediately prior to the Effective
Date, will thereafter be the Articles of Incorporation of the Surviving
Corporation; (ii) the Bylaws of Merger Sub, as in effect immediately prior to
the Effective Date, will remain in effect on the Effective Date and will be the
Bylaws of the Surviving Corporation; and (iii) the directors of Merger Sub
immediately prior to the Effective Date shall be the directors of the Surviving
Corporation and the officers of the Company immediately prior to the Effective
Date shall be the officers of the Surviving Corporation, in each case until
their respective successors are duly elected and qualified.
Pursuant to the Merger Agreement, on the Effective Date (i) each share
of Lukens Common Stock issued and outstanding immediately prior to the Effective
Date (other than shares of Lukens Common Stock held by stockholders, if any, who
properly exercise their dissenters' rights under Section 262 of the DGCL and
shares held by Medisys and its subsidiaries) will be canceled and converted into
the right to receive $4.00 in cash (the "Merger Consideration"), without
interest, upon surrender of the certificate evidencing such share in the manner
provided below and (ii) each share of Merger Sub Common Stock issued and
outstanding immediately prior to the Effective Date will be converted into and
become one validly issued, fully paid and nonassessable share of Common Stock of
the Surviving Corporation.
Shares of Lukens Common Stock that are outstanding immediately prior to
the Effective Date and which are held by holders who shall have not voted in
favor of the Merger or consented thereto in writing and who shall have demanded
properly in writing appraisal for such shares in accordance with Section 262 of
the DGCL and who shall not have withdrawn such demand or otherwise have
forfeited appraisal rights (collectively, the "Dissenting Shares") shall not be
converted into or represent the right to receive the Merger Consideration. Such
holders shall be entitled to receive payment of the appraised value of such
shares, except that all Dissenting Shares held by holders who shall have failed
to perfect or who effectively shall have withdrawn or lost their rights to
appraisal of such shares under such Section 262 shall thereupon be deemed to
have been converted into and to have become exchangeable, as of the Effective
Date, for the right to receive, without any interest thereon, the Merger
Consideration, upon surrender of the certificates evidencing such shares. See
"Dissenter's Rights."
Promptly after the Effective Date, an agent selected by Medisys (the
"Payment Agent") shall mail to each holder of shares of Lukens Common Stock
(other than Dissenting Shares) ("Certificates") a letter of transmittal and
instructions to effect the surrender of the Certificates in exchange for the
Merger Consideration. Each holder of Lukens Common Stock, upon surrender to the
Payment Agent of such holder's Certificates with the letter of transmittal, duly
executed, and such other customary documents as may be required pursuant to such
instructions, shall be paid the amount of cash to which such holder is entitled,
pursuant to the Merger Agreement, as payment of the Merger Consideration
(without any interest accrued thereon). Until so surrendered, each Certificate
shall after the Effective Date represent for all purposes only the right to
receive the Merger Consideration. At the Closing, Medisys shall deposit in trust
with the
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Payment Agent, for the ratable benefit of the holders of Lukens Common Stock
(other than Dissenting Shares and shares held by Medisys and its subsidiaries),
the appropriate amount of cash to which such holders are entitled pursuant to
the Merger Agreement as payment of the Merger Consideration. The Payment Agent
shall, pursuant to irrevocable instructions, make the payments to the holders of
Lukens Common Stock as set forth in the Merger Agreement.LUKENS STOCKHOLDERS
SHOULD NOT SEND IN THEIR CERTIFICATES OR INSTRUMENTS UNTIL THEY RECEIVE A
TRANSMITTAL FORM.
In addition, the holders of options to acquire shares of Lukens Common
Stock issued pursuant to the Company's employee stock option plan and
outstanding immediately prior to the Effective Date, whether vested or unvested,
shall be assumed by Medisys at the Effective Date, and each such option shall
become an option (the "Substitute Option") to purchase a number of ordinary
shares of Medisys, par value 1p, equal to the number of shares of Lukens Common
Stock subject to each such option multiplied by the Option Exchange Ratio (as
defined below). The Substitute Options shall have a per share exercise price
equal to the current exercise price per share of Lukens Common Stock divided by
the Option Exchange Ratio, and each Substitute Option otherwise shall after the
Effective Date be subject to all of the other terms and conditions of the
original option to which it relates. The "Option Exchange Ratio" is the ratio of
(x) $4.00 to (y) the U.S. dollar equivalent of the average of the middle-market
closing price per share of Medisys ordinary shares on the Alternative Investment
Market of the London Stock Exchange, as shown in the "London Stock Exchange
Daily Official List," for each of the ten trading days ending two trading days
prior to the Effective Date.
If the Merger is approved by the requisite vote of the stockholders of
Lukens and certain other conditions to the Merger are satisfied or waived (as
more fully described below), the Closing will be held on the earlier of (A)
August 14, 1998 or (B) the day which is no later than two (2) business days
after the day on which the last of the closing conditions set forth in Article X
of the Merger Agreement is fulfilled or waived and the meeting of Medisys'
stockholders with respect to the Merger and related financing has been held, or
such other date as is agreed upon by the parties.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
Lukens as to, among other things: (i) the due organization, valid existence and
good standing of Lukens and its Subsidiaries, (ii) the capitalization of Lukens
and its Subsidiaries; (iii) the authorization of the execution and delivery of
the Merger Agreement and related agreements, the validity and enforceability
thereof against Lukens, the noncontravention thereby of the articles of
incorporation, bylaws, relationships or other contracts, commitments or
agreements of Lukens or any of its Subsidiaries or of any material order, writ,
injunction, decree, statute, rule or regulation applicable to Lukens or any
Subsidiary and, other than filing the Articles of Merger with the Delaware
Secretary of State, the absence of requirements for any consents, approvals,
notices or registrations to be obtained or filed by Lukens or any of its
Subsidiaries in connection with consummation of the Merger; (iv) compliance in
all material respects of Lukens' filings with the SEC under the Securities Act
of 1933, as amended, and the Exchange Act (the "SEC Documents"), and the
accuracy of certain information and financial statements of Lukens included in
the SEC Documents; (v) the absence of undisclosed liabilities; (vi) certain
Company action; (vii) material contracts; (viii) compliance with applicable
laws; (ix) certain insurance matters; (x) product liability; (xi) the absence of
certain changes or events since December 31, 1997; (xii) certain tax matters;
(xiii) certain intellectual property matters; (xiv) litigation involving Lukens
or any of its Subsidiaries; (xv) certain employee benefit matters; (xvi) certain
labor and employment matters; (xvii) certain environmental matters; (xviii)
title to property and (xix) absence of certain business practices.
The Merger Agreement also contains representations and warranties of
each of Medisys and Merger Sub as to, among other things: (i) their due
organization, valid existence and good standing; (ii) capitalization of Merger
Sub; (iii) due authorization of the execution and delivery of the Merger
Agreement and related agreements, the validity and enforceability thereof
against Medisys and the noncontravention thereby of the Memorandum and Articles
of Association of Medisys; (iv) the good faith belief by Medisys that it will
have funds sufficient to enable it to consummate the Merger and (v)the absence
of litigation involving Medisys.
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CERTAIN COVENANTS
CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER. The Company
agreed that prior to the Effective Date, unless Parent shall otherwise agree in
writing it shall, and shall cause its Subsidiaries to (i) carry on their
respective businesses in the ordinary course in substantially the same manner as
previously conducted, (ii) use their commercially reasonable efforts to preserve
intact their present business organizations and preserve their relationships
with customers, suppliers and others having business dealings with them to the
end that their goodwill and ongoing businesses shall be unimpaired at the
Effective Date, (iii) maintain insurance coverages and its books, accounts and
records in the usual manner consistent with prior practices; (iv) comply in all
material respects with all laws, ordinances and regulations of Governmental
Entities applicable to the Company and its subsidiaries; (v) maintain and keep
its properties and equipment in good repair, working order and condition in
accordance with past practice, ordinary wear and tear excepted; and (vi) perform
in all material respects its obligations under all material contracts and
commitments to which it is a party or by which it is bound.
The Company also agreed that prior to the Effective Date, it shall not
and shall not propose to (i) sell or pledge or agree to sell or pledge any
capital stock owned by it in any of its Subsidiaries (subject to the fiduciary
duties of the Company's Board of Directors), (ii) amend its Certificate of
Incorporation or By-laws, (iii) split, combine or reclassify its outstanding
capital stock or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for shares of capital
stock of the Company, or declare, set aside or pay any dividend or other
distribution payable in cash, stock or property, or (iii) directly or indirectly
redeem, purchase or otherwise acquire or agree to redeem, purchase or otherwise
acquire any shares of Company capital stock. In addition, subject to the
fiduciary duties of the Company's Board of Directors, the Company agreed that
prior to the Effective Date, it shall not, nor shall it permit any of its
Subsidiaries to, without the consent of Medisys which shall not be unreasonably
withheld (i) issue, deliver or sell or agree to issue, deliver or sell any
additional shares of, or rights of any kind to acquire any shares of, its
capital stock of any class, any indebtedness having the right to vote on which
the Company's stockholders may vote or any option, rights or warrants to
acquire, or securities convertible into, shares of capital stock other than
issuances of Lukens Common Stock pursuant to employment agreements as in effect
on the date hereof, the exercise of stock options outstanding on the date hereof
or granted prior to the Effective Date under automatic grants under the
Company's Employee Stock Option Plan; (ii) acquire, lease or dispose or agree to
acquire, lease or dispose of any capital assets or any other assets other than
in the ordinary course of business consistent with past practice; (iii) incur
additional indebtedness or encumber or grant a security interest in any asset or
enter into any other material transaction other than in each case in the
ordinary course of business consistent with past practice; (iv) acquire or agree
to acquire by merging or consolidating with, or by purchasing a substantial
equity interest in, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof; or
(v) enter into any contract, agreement, commitment or arrangement with respect
to any of the foregoing. The Company also agreed that prior to the Effective
Date, it shall not, nor shall it permit any of its Subsidiaries to, except as
required to comply with applicable law, enter into any new (or amend any
existing) Company Benefit Plan or any new (or amend any existing) employment,
severance or consulting agreement, grant any general increase in the
compensation of directors, officers or employees (including any such increase
pursuant to any bonus, pension, profit-sharing or other plan or commitment) or
grant any increase in the compensation payable or to become payable to any
director, officer or employee, except in any of the foregoing cases in
accordance with pre-existing contractual provisions or in the ordinary course of
business consistent with past practice. The Company also agreed that prior to
the Effective Date, it shall not, nor shall it permit any of its Subsidiaries
to, make any investments in non-investment grade securities.
STOCKHOLDER APPROVAL; PROXIES. Pursuant to the Merger Agreement, Lukens
has agreed to take all action necessary in accordance with applicable law and
its Certificate of Incorporation and Bylaws to convene the Special Meeting as
promptly as practicable to consider and vote upon the approval of the Merger
Agreement and the transactions contemplated thereby. Lukens also has agreed that
its Board of Directors will, subject to the Board of Directors' fiduciary
duties, recommend that the Lukens' stockholders vote in favor of and approve the
Merger and the adoption of the Merger Agreement and the transactions
contemplated thereby.
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Pursuant to the Merger Agreement, Medisys has agreed to take all action
necessary, in accordance with applicable law, stock exchange rules and its
Memorandum and Articles of Association, to convene an extraordinary meeting of
the holders of its ordinary shares to approve the Merger Agreement, the Merger
and the related issuance of securities to Medisys, to the extent approval is
required and sought by Medisys. Medisys has also agreed that its Board of
Directors will, subject to its fiduciary duties, recommend that the Medisys
stockholders vote in favor of and approve the Merger and the adoption of the
Merger Agreement and the transactions contemplated thereby.
The parties also agreed to cooperate and prepare and file with the SEC
this Proxy Statement and the Company has agreed to use all reasonable efforts,
and Medisys has agreed to cooperate with the Company, to have this Proxy
Statement cleared by the SEC as promptly as practical.
EMPLOYEE MATTERS. Pursuant to the Agreement, as of the Effective Date,
the employees of the Company and each Subsidiary shall continue employment with
the Surviving Corporation and the Subsidiaries, respectively, in the same
positions and at the same level of wages and without having incurred a
termination of employment or separation from service; provided that, except as
required by law or by contract, the Surviving Corporation and the Subsidiaries
shall not be required to continue any employment relationship with any employee
for any specified period of time. As of the Effective Date, the Surviving
Corporation shall be the sponsor of Lukens' Employee Benefit Plans sponsored by
Lukens immediately prior to the Effective Date, and Medisys has agreed to cause
the Surviving Corporation and the Subsidiaries to satisfy all obligations and
liabilities under such plans.
INDEMNIFICATION. Pursuant to the Merger Agreement, the Company has
agreed to indemnify, and after the Effective Date, the Surviving Corporation has
agreed to indemnify the officers, directors and employees of the Company and its
Subsidiaries who were such at any time prior to the Effective Date (the
"Indemnified Parties") from and against all losses, expenses, claims, damages or
liabilities ("Losses") arising out of the transactions contemplated by the
Merger Agreement occurring before the Effective Date to the fullest extent
permitted or required under applicable law; provided, however, that such
indemnification shall not be available with respect to Losses arising out of the
failure of the Company to obtain the Fairness Opinion. Medisys has agreed that
all rights to indemnification existing in favor of the directors, officers or
employees of the Company as provided in the Company's Certificate of
Incorporation or By-Laws, as in effect as of the date of the Merger Agreement,
with respect to matters occurring through the Effective Date, shall survive the
Merger and shall continue in full force and effect for a period of not less than
three years from the Effective Date. In addition, Medisys has agreed to cause
the Surviving Corporation to maintain in effect for not less than three years
after the Effective Date the current policies of directors' and officers'
liability insurance maintained by the Company with respect to matters occurring
on or prior to the Effective Date; provided, however, that the Surviving
Corporation may substitute therefor policies of at least the same coverage and
Medisys shall not be required to maintain or procure such coverage to pay an
annual premium in excess of 150% of the current annual premium paid by the
Company for its existing coverage (the "Cap"); and provided, further, that if
equivalent coverage cannot be obtained, or can be obtained only by paying an
annual premium in excess of the Cap, Medisys shall only be required to obtain as
much coverage as can be obtained by paying an annual premium equal to the Cap.
ALTERNATIVE PROPOSALS. Pursuant to the Merger Agreement, prior to the
Effective Date, the Company has agreed (a) that neither it nor any of its
Subsidiaries shall, and it shall direct and use its best efforts to cause it and
its Subsidiaries' officers, directors, employees, agents and representatives not
to, initiate, solicit or encourage any inquiries or the making or implementation
of any proposal or offer with respect to a merger, acquisition, consolidation or
similar transaction involving, or any purchase of all or substantially all of
the assets or any equity securities of, the Company or any of its Subsidiaries
(any such proposal or offer being hereinafter referred to as an "Alternative
Proposal") or engage in any negotiations concerning, or provide any confidential
information to, or have any discussions with, any person relating to an
Alternative Proposal, or release any third party from any obligations under any
existing standstill agreement or arrangement relating to any Alternative
Proposal, or otherwise facilitate any effort to implement an Alternative
Proposal; (b) that it will cause to be terminated any existing activities or
discussions with any parties with respect to any of the foregoing, and it will
take the necessary steps to inform the individuals or entities referred to above
of its obligations with respect to Alternative Proposals under the Merger
Agreement; and (c) that it will notify Medisys if any such inquiries or
proposals are received by, any such information is requested from, or any such
negotiations or
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discussions are sought to be initiated or continued with, it or any of its
Subsidiaries; provided, however, the Board of Directors of the Company shall not
be prohibited from (i) furnishing information to or entering into discussions or
negotiations with, any person or entity that makes an unsolicited bona fide
proposal to acquire the Company pursuant to a merger, consolidation, share
exchange, purchase of a substantial portion of assets, business combination or
other similar transaction, if, and only to the extent that, (A) the Board of
Directors of the Company determines in good faith that such action is required
for the Board of Directors to comply with its fiduciary duties to stockholders
imposed by law, (B) prior to furnishing such information to, or entering into
discussions or negotiations with, such person or entity, (i) the Company
provides written notice to Medisys to the effect that it is furnishing
information to, or entering into discussions or negotiations with, such person
or entity and (ii) the Company and such person or entity enter into an
appropriate confidentiality agreement with respect to information to be supplied
by the Company and (C) the Company keeps Medisys promptly informed of the status
and all material terms and conditions of any such discussions and, if any such
proposal is in writing, furnishes a copy of such proposal to Medisys; and (ii)
to the extent applicable, complying with Rule 14e-2 promulgated under the
Exchange Act with regard to an Alternative Proposal.
CANCELLATION OF WARRANTS; REPAYMENT OF LOANS FROM AFFILIATES. Pursuant
to the Merger Agreement, on the Effective Date, (a) warrants to purchase 400,000
shares of Lukens Common Stock at an exercise price of $1.10 per share held by
Mr. John Robinson, a director of the Company, are to be canceled and in lieu
thereof, Mr. Robinson shall have the right to payment in cash equal to $400,000
in exchange therefor, which payment shall be made by the Surviving Corporation
promptly after the Effective Date, (b) warrants to purchase 50,000 shares of
Lukens Common Stock held by Mr. Peter Lordi shall be canceled and in lieu
thereof, Mr. Lordi shall have the right to payment in cash equal to $50,000 in
exchange therefor, which payment shall be made by the Surviving Corporation
promptly after the Effective Date and (c) the outstanding loans by Mr. Robinson
and Mr. Robert L. Priddy, another director of the Company, to the Company in the
original principal amounts of $1,700,000 and $500,000, respectively, shall be
repaid by Medisys by (i) making a cash payment to Mr. Robinson of $1,200,000,
plus all accrued and unpaid interest, and the issuance to Mr. Robinson of
Medisys ordinary shares, par value 1p per share, having a value equal to
$500,000 and (ii) making a cash payment to Mr. Priddy of all accrued and unpaid
interest on his loan and the issuance to Mr. Priddy of Medisys ordinary shares,
par value 1p per share, having a value equal to $500,000, which payments and
issuances shall be made promptly after the Effective Date. Options to purchase
300,000 shares of Lukens Common Stock at an exercise price of $4.00 per share,
which are owned by Mr. Priddy, will be canceled.
Additionally, Mr. Robert S. Huffstodt, President, Chief Executive
Officer and a Director of the Company, as well as each of the other officers and
employees of the Company will have all of the employee stock options held by
them converted into the right to purchase a number of ordinary shares of
Medisys, par value 1p, equal to the number of shares of Lukens Common Stock
subject to each such option multiplied by the Option Exchange Ratio (as defined
above) (the "Substitute Options"). The Substitute Options shall have a per share
exercise price equal to the current exercise price per share of Lukens Common
Stock divided by the Option Exchange Ratio, and each Substitute Option otherwise
shall after the Effective Date be subject to all of the other terms and
conditions of the original option to which it relates. See "Factors to Be
Considered -- Interests of Certain Persons in the Merger; Indemnification."
AGREEMENT OF PRINCIPAL STOCKHOLDERS. Each of Messrs. Priddy and
Robinson and Mr. John Holmes have agreed that from and after the date of the
Merger Agreement until August 31, 1998, or such earlier date as the Merger
Agreement shall be terminated that (a) he shall not pledge, hypothecate or
otherwise transfer his shares of Lukens Common Stock in any manner and (b) he
shall vote all of his shares of Lukens Common Stock in favor of the Merger (and
against any Alternative Proposal), provided that nothing shall prevent any of
them, when acting in their capacities as directors of the Company, from
exercising their fiduciary duties as directors in accordance with applicable
law.
FAIRNESS OPINION. Pursuant to the Merger Agreement, the Company has
agreed to engage an investment bank for the purpose of delivering the Fairness
Opinion. The Company has agreed to engage such investment bank to deliver the
Fairness Opinion within three weeks of the date of the Merger Agreement (the
"Fairness Opinion Period"). Any failure by the Company's investment bank to
deliver the Fairness Opinion for any reason other than the adequacy of the value
of the Merger Consideration shall be deemed, under the Merger Agreement, to be a
breach of such covenant by the Company.
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MISCELLANEOUS. The Company has agreed to confer on a regular basis with
Medisys on operational matters and advise Medisys orally and in writing of any
change or event that has had, or could reasonably be expected to have, a
material adverse effect. The Company has also agreed to promptly provide to
Medisys (and its counsel) copies of all filings made by such party with the SEC
or any other state or federal governmental entity in connection with the Merger
Agreement and the transactions contemplated thereby. In addition, upon the
mutual agreement of Medisys and the Company, the parties have agreed that the
Merger shall be restructured in the form of a forward subsidiary merger of the
Company into Merger Sub or as a merger of the Company into Medisys and in such
event, the Merger Agreement shall be deemed appropriately modified to reflect
such form of merger.
CONDITIONS TO THE MERGER
The obligations of each of Medisys, Merger Sub and Lukens to consummate
the Merger are subject to the satisfaction of certain conditions prior to the
Effective Date, including: (i) the approval of the Merger by the requisite vote
of the stockholders of Lukens and (ii) the absence of any injunction or other
order preventing the consummation of the Merger. The obligation of Lukens to
consummate the Merger is subject to the satisfaction (or waiver by Lukens) of
certain additional conditions at or prior to the Effective Date, including: (i)
the accuracy of the representations and warranties of Medisys and Merger Sub in
all material respects when made and on the Effective Date; (ii) the performance
by each of Medisys and Merger Sub in all material respects of each obligation
required in the Merger Agreement to be performed by it on or prior to the
Effective Date; and (iii) the delivery by Medisys and Merger Sub of certified
Board resolutions, various officers' certificates and a legal opinion of
Medisys' and Merger Sub's legal counsel. The obligations of Medisys and Merger
Sub to consummate the Merger are further subject to the fulfillment (or waiver
by Medisys) of certain additional conditions at or prior to the Effective Date,
including: (i) the accuracy of the representations and warranties of Lukens in
all material respects when made and on the Effective Date; (ii) the performance
by Lukens in all material respects of each obligation required by the Merger
Agreement to be performed on or prior to the Effective Date; (iii) the absence
of any change which has had or would reasonably be expected to have a material
adverse change in the financial condition, business, results of operations or
prospects of the Company and its Subsidiaries, taken as a whole; (iv) that
Lukens has not received a written demand for appraisal by holders of the number
of shares of Lukens Common Stock exceeding 5% of the total number of shares of
Lukens Common Stock outstanding immediately prior to the Effective Date; and (v)
the delivery by Lukens of certified Board and stockholder resolutions, various
officers' certificates and a legal opinion of Lukens' legal counsel.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned
at any time prior to the Effective Date, before or after the approval of this
Agreement by the stockholders of the Company, by the mutual consent of Medisys
and the Company.
In addition, the parties have agreed that the Merger Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either Medisys or the Company if (a) the Merger shall not have been
consummated by August 31, 1998 (provided that the terminating party shall not
have breached in any material respect its obligations under the Merger Agreement
that shall have proximately contributed to the failure to consummate the
Merger), or (b) the approval of the Company's stockholders shall not have been
obtained, or (c) a United States federal or state court of competent
jurisdiction or United States federal or state governmental, regulatory or
administrative agency or commission shall have issued an order, decree or ruling
or taken any other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by the Merger Agreement and such
order, decree, ruling or other action shall have become final and
non-appealable.
The Merger Agreement may be terminated and the Merger may be abandoned
at any time prior to the Effective Date, before or after the adoption and
approval by the stockholders of the Company, by action of the Board of Directors
of the Company and written notice to Medisys, if (a) in the exercise of its
fiduciary duties to its stockholders imposed by law, the Board of Directors of
the Company determines that such termination is required by reason of an
Alternative Proposal being made, or (b) there has been a material breach by
Medisys or Merger Sub of any representation or
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warranty contained in the Merger Agreement, or (c) there has been a material
breach of any of the covenants or agreements set forth in the Merger Agreement
on the part of Medisys, which breach is not curable or, if curable, is not cured
within 30 days after written notice of such breach is given by the Company to
Medisys. In addition, the Company has the right to terminate the Merger
Agreement and abandon the Merger (A) during the Fairness Opinion Period if the
Company receives a written opinion from the investment bank to the effect that
the Merger Consideration is not fair from a financial point of view to the
holders of the Lukens Common Stock, or on the last day of the Fairness Opinion
Period if the Fairness Opinion has not been delivered, or (B) at any time after
June 30, 1998, if, within five (5) days after the written request by the Company
after such date, Medisys has not furnish to the Company a written letter
addressed to the Company from Henry Ansbacher & Co. Limited and/or other
reputable investment banks capable of providing such financing confirming their
firm commitment to provide the financing required in connection with the
transactions contemplated by the Merger Agreement for the payment of all amounts
due thereunder or related thereto (including fees and expenses of its financial
advisors and legal counsel). The aforementioned June 30, 1998 termination date
was subsequently extended by the parties until August 10, 1998.
In addition, the Merger Agreement may be terminated and the Merger may
be abandoned at any time prior to the Effective Date, by action of the Board of
Directors of Medisys and written notice to the Company, if (a) the Board of
Directors of the Company shall have withdrawn or modified in a manner adverse to
Medisys its approval or recommendation of the Merger Agreement or the Merger or
shall have recommended an Alternative Proposal to the Company's stockholders, or
(b) there has been a material breach by the Company of any representation or
warranty contained in the Merger Agreement, or (c) there has been a material
breach by the Company of any of the covenants or agreements set forth in the
Merger Agreement, which breach is not curable or, if curable, is not cured
within 30 days after written notice of such breach is given by Medisys to the
Company, or (d) there has been a change which has the effect of producing a
material adverse change in the financial condition, business, results of
operations or prospects of the Company and its Subsidiaries, taken as a whole.
The Merger Agreement may also be terminated by Medisys and the Merger may be
abandoned (A) at any time prior to May 15, 1998 (which date was later extended
to June 14, 1998), by action of the Board of Directors of Medisys and written
notice to the Company, if Medisys concludes as a result of Medisys's legal,
business and financial due diligence review of the Company, that (i) the
Company's business, properties, assets, condition (financial or otherwise),
liabilities or operations are not satisfactory, or (ii) the Company is in
material breach of any representation or warranty made in the Merger Agreement,
or (B) during the Fairness Opinion Period if the Company receives a written
opinion from the investment bank to the effect that the Merger consideration is
not fair from a financial point of view to the holders of the Lukens Common
Stock, or within two business days after the termination of the Fairness Opinion
Period if the Company shall not have obtained the Fairness Opinion, or (C)
before June 30, 1998 if Medisys shall have failed to obtain the irrevocable
undertaking from holders of a majority of Medisys's ordinary shares to vote in
favor of the resolutions necessary to effect the Merger and the related
financing or (D) prior to June 30, 1998 if Medisys and Merger Sub shall not have
obtained a firm commitment from Henry Ansbacher & Co. Limited and/or other
reputable investment banks capable of providing such financing to provide the
financing required in connection with the transactions contemplated by the
Merger Agreement for the payment of all amounts due thereunder or related
thereto (including fees and expenses of its financial advisors and legal
counsel). The aforementioned June 30, 1998 termination date was subsequently
extended by the parties until August 10, 1998.
Pursuant to the Merger Agreement, in the event that (x) any person
shall have made an Alternative Proposal and thereafter the Merger Agreement is
terminated either by the Company due to the Company Board of Directors'
determination that such termination is required by reason of an Alternative
Proposal being made, or by either Medisys or the Company because the approval of
the Company's stockholders has not been obtained, (y) the Board of Directors of
the Company shall have withdrawn or modified in a manner adverse to Medisys its
approval or recommendation of the Merger Agreement or the Merger or shall have
recommended an Alternative Proposal to the Company stockholders and Medisys
shall have terminated the Merger Agreement pursuant to clause (a) of the
immediately preceding paragraph or (z) any person shall have made an Alternative
Proposal and thereafter the Merger Agreement is terminated for any reason other
than those set forth in clauses (x) or (y) above and within 12 months thereafter
any Alternative Proposal shall have been consummated with the third party who
made such Alternative Proposal, then the Company shall promptly, but in no event
later than two days after such termination or consummation with respect to
clause (z), pay
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Medisys a fee of $500,000 (the "Termination Fee"), but Medisys shall only be
entitled to be paid the Termination Fee in the event that at the time of the
termination of the Merger Agreement Medisys is not in material breach of any of
the representations, warranties or covenants set forth in the Merger Agreement.
The parties have agreed that if the Company fails to promptly pay the
Termination Fee, and, in order to obtain such payment, Medisys or Merger Sub
commences a suit which results in a judgment against the Company for such fee,
the Company shall pay to Medisys its costs and expenses (including attorneys'
fees) in connection with such suit, together with interest on the amount of the
fee at the rate of 12% per annum from the date such payment should have been
made.
In the event of termination of the Merger Agreement and the abandonment
of the Merger pursuant to Article XI of the Merger Agreement (as described
above), all obligations of the parties thereto shall terminate, except the
obligations of the parties pursuant to this paragraph and the immediately
preceding paragraph, and Section 12.3 (Fees and Expenses) and except for the
provisions of certain other miscellaneous sections including specific
performance, assignment, governing law and severability.
NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
All representations and warranties set forth in the Merger Agreement
shall terminate at the Effective Date. All covenants and agreements set forth in
the Merger Agreement and any instrument delivered pursuant to the Merger
Agreement shall survive in accordance with their terms.
FEES AND EXPENSES
The Merger Agreement provides that whether or not the Merger is
consummated, all costs and expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby shall be paid by the party
incurring such expenses, whether or not the Merger is consummated except as
expressly provided in the Merger Agreement and except that the filing fee in
connection with the filing of this Proxy Statement with the SEC and the expenses
incurred in connection with printing and mailing this Proxy Statement shall be
shared equally by Lukens and Medisys.
DISSENTERS' RIGHTS
Stockholders who have not voted in favor of the Merger or consented
thereto in writing have the right to demand an appraisal of the fair value of
their Lukens Common Stock in accordance with the provisions of Section 262 of
the DGCL ("Section 262"), which sets forth the rights and obligations of
stockholders demanding an appraisal and the procedures to be followed.
Stockholders who perfect such rights will not be entitled to surrender their
Lukens Common Stock for payment of the Merger Consideration in the manner
otherwise described in this Proxy Statement. Stockholders should assume that the
Surviving Corporation will take no action to perfect any appraisal rights of any
stockholder. Therefore, to exercise his or her appraisal rights, a stockholder
should strictly comply with the procedures set forth in Section 262 and is urged
to consult his or her legal advisor before electing or attempting to exercise
such appraisal rights. Stockholders who vote in favor of the Merger or consent
thereto in writing cannot demand appraisal rights, but stockholders are not
required to vote their shares of Common Stock against the Merger in order to
obtain such appraisal rights. Stockholders who sign and return the proxy card
included with this Proxy Statement with instructions to vote in favor of the
Merger or, since proxy cards returned without instructions will be voted in
favor of the Merger, with no instruction to vote against or abstain from voting
with respect to the Merger, will not be entitled to appraisal rights.
The following is a summary of the procedures to be followed under
Section 262, the text of which is attached to this Proxy Statement as Annex C.
The summary does not purport to be a complete statement of, and is qualified in
its entirety by reference to, Section 262 and to any amendments to Section 262
after the date of this Proxy Statement. Failure to follow any Section 262
procedure may result in termination or waiver of appraisal rights under Section
262.
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Any stockholder who desires to exercise his or her appraisal rights should
review carefully Section 262 and is urged to consult his or her legal advisor
before electing or attempting to exercise such rights.
Only a stockholder of record is entitled to seek appraisal. The demand
for appraisal must be executed by or for the stockholder of record, fully and
correctly, as such stockholder's name appears on the holder's stock
certificates. If the stock is owned of record in a fiduciary capacity, such as
by a trustee, guardian or custodian, the demand should be made in that capacity,
and if the stock is owned of record by more than one person, as in a joint
tenancy in common, the demand should be made by or for all owners of record. An
authorized agent, including one or more joint owners, may execute the demand for
appraisal for a stockholder of record; however, such agent must identify the
record owner or owners and expressly disclose in such demand that the agent is
acting as agent for the record owner or owners of such shares of Lukens Common
Stock. A record stockholder, such as a broker, who holds shares of Lukens Common
Stock as a nominee for beneficial owners, some of whom desire to demand
appraisal, must exercise appraisal rights on behalf of such beneficial owners
with respect to the shares of Lukens Common Stock held for such beneficial
owners. In such case, the written demand for appraisal must set forth the number
of shares of Lukens Common Stock covered by such demand. Unless a demand for
appraisal specifies a number of shares of Lukens Common Stock, such demand will
be presumed to cover all shares of Lukens Common Stock held in the name of such
record owner.
The Company is mailing to each stockholder of record as of the Record
Date this Proxy Statement, which constitutes the notice required under Section
262. Included with this Proxy Statement is a copy of Section 262. Any
stockholder entitled to appraisal rights may demand, in writing, from the
Company, prior to the vote on the Merger, an appraisal of his or her shares of
Lukens Common Stock. Such demand will be sufficient if it reasonably informs the
Company of the identity of the stockholder and that the stockholder intends to
demand an appraisal of the fair value of his or her shares of Lukens Common
Stock. Failure to make such a demand will foreclose a stockholder's right to
appraisal. A proxy or vote against the Merger shall not constitute a demand. In
addition, any stockholder voting in favor of the Merger or consenting thereto in
writing is not entitled to appraisal rights under Section 262. Stockholders who
sign and return the proxy card included with this Proxy Statement with
instructions to vote in favor of the Merger or, since proxy cards returned
without instructions will be voted in favor of the Merger, with no instruction
to vote against or abstain from voting with respect to the Merger, will not be
entitled to appraisal rights.
A stockholder may withdraw his or her demand for appraisal by written
request within 60 days after the Effective Date of the Merger, but thereafter
the approval of the Surviving Corporation is needed for such a withdrawal. Upon
withdrawal of an appraisal demand, a stockholder will be entitled to receive the
Merger Consideration, without interest.
Within 10 days after the Effective Date of the Merger, the Surviving
Corporation shall notify each stockholder who has complied with the provisions
of Section 262. Within 120 days after the Effective Date (the "120-Day Period"),
in compliance with Section 262, any stockholder who has properly demanded an
appraisal and who has not withdrawn his or her demand as provided above (such
stockholders being referred to collectively as the "Dissenting Stockholders")
and the Surviving Corporation each has the right to file in the Delaware Court
of Chancery (the "Delaware Court") a petition (the "Petition") demanding a
determination of the value of the Lukens Common Stock held by all of the
Dissenting Stockholders. If, within the 120-Day Period, no Petition shall have
been filed as provided above, all rights to appraisal will cease and all of the
Dissenting Stockholders who owned Lukens Common Stock will become entitled to
receive the Merger Consideration. The Surviving Corporation is not obligated and
does not intend to file a Petition. Any Dissenting Stockholder is entitled,
within the 120-Day Period and upon written request to the Surviving Corporation,
to receive from the Surviving Corporation a statement setting forth the
aggregate number of shares of Common Stock not voted in favor of the Merger and
the aggregate number of shares of Lukens Common Stock with respect to which
demands for appraisal have been received and the aggregate number of Dissenting
Stockholders.
Upon the filing of the Petition by a Dissenting Stockholder, the
Delaware Court may order that notice of the time and place fixed for the hearing
on the Petition be mailed to the Surviving Corporation and all of the Dissenting
Stockholders and be published at least one week before the day of the hearing in
a newspaper of general circulation published in the City of Wilmington, Delaware
or in another publication determined by the Delaware Court. The costs
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relating to these notices will be borne by the Surviving Corporation. If a
hearing on the Petition is held, the Delaware Court is empowered to determine
which Dissenting Stockholders have complied with the provisions of Section 262
and are entitled to an appraisal of their Common Stock. The Delaware Court may
require that Dissenting Stockholders submit their certificates for notation
thereon of the pendency of the appraisal proceedings. The Delaware Court is
empowered to dismiss the proceedings as to any Dissenting Stockholder who does
not comply with such requirement. Accordingly, Dissenting Stockholders are
cautioned to retain their certificates pending resolution of the appraisal
proceedings.
Stockholders considering seeking appraisal should have in mind that the
fair value of their shares of Lukens Common Stock determined under Section 262
could be more, the same, or less than the Merger Consideration and that
investment banking opinions as to fairness from a financial point of view are
not necessarily opinions as to fair value under Section 262. The Delaware Court
has discretion to require the Surviving Corporation to pay interest on the fair
value of the shares determined pursuant to Section 262.
Dissenting Stockholders are generally permitted to participate in the
appraisal proceedings. No appraisal proceeding in the Delaware Court shall be
dismissed as to any Dissenting Stockholder without the approval of the Delaware
Court, and this approval may be conditioned upon terms which the Delaware Court
deems just.
From and after the Effective Date, Dissenting Stockholders will not be
entitled to vote their Common Stock for any purpose and will not be entitled to
receive payment of dividends or other distributions in respect of such Common
Stock payable to stockholders of record thereafter.
BUSINESS OF THE COMPANY
Lukens 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 NE, Albuquerque, New Mexico 87109 and its telephone number is
(505) 342-9638.
The Company has been engaged since 1906 in the design, development,
manufacturing and marketing of wound closure products for use in the medical
industry, including, without limitation, suture products and bone wax, and more
recently has expanded its product line to include other medical devices,
including, without limitation, lancets, sharps containers and diagnostic
devices. 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. Bone wax 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, 1997 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, and other medical products for distribution worldwide (the "India Joint
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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."
In May 1997, the Company acquired a new subsidiary, Pro-Tec Containers,
Inc. ("Pro-Tec") of Sanford, Florida (the "Pro-Tec Acquisition"). Pro-Tec
manufactures and markets a line of sharps disposal containers which are used by
health care providers for safe disposal of used "sharps," such as hypodermic
needles, scalpels, blades, lancets, and suture needles (the "Pro-Tec Product
Lines"). Approximately 8% of the Company's revenues for the fiscal year ended
December 31, 1997 are derived from the sale of such products. For a further
description of these Pro-Tec Product Lines, see "Pro-Tec Product Lines."
Also in May 1997, the Company acquired a 51% interest in its
Brazilian-based distributor, Techsynt, which then changed its name to Techsynt
Lukens Ltd. ("Techsynt"). Techsynt is engaged primarily in the manufacture and
marketing of sutures for the Brazilian market, although it is anticipated that
Techsynt will eventually export sutures to selected other markets worldwide, and
will market certain of the Company's other products where the local market is
suitable. Techsynt did not commence operations until October 1, 1997, and
therefore did not contribute significant revenues or earnings for the fiscal
year ended December 31, 1997.
PRODUCTS
SUTURE PRODUCTS. During 1997, the surgical suture industry represented
in excess of $2.4 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 250 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 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
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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 "Patent and Proprietary Rights." The Company markets and sells
its full line of specialty surgical products worldwide. See "Sales, Marketing
and Customers."
BONE WAX. The Company believes it is one of only three companies in the
United States that sells, and has the approval of the Food and Drug
Administration (the "FDA") to manufacture and market, bone wax. Bone wax is used
to temporarily seal severed bones during surgery. The Company manufactures its
bone wax primarily from bees wax. Although the total worldwide bone wax 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 bone wax worldwide.
ULSTER PRODUCT LINES
The Company's Ulster Product Lines are as follows:
LANCETS, NEEDLES AND ACCESSORIES. The Company 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, doctors' 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 marketing 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.
With the exception of certain raw materials produced in the Company's
Indian facility (see India Joint Venture), 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."
PRO-TEC PRODUCT LINES
In May 1997, in connection with the Pro-Tec Acquisition, the Company
acquired and began selling the products in the Pro-Tec Product Lines. The
Pro-Tec Product Lines consists of sharps disposal containers which are used by
health care providers for safe disposal of used "sharps," such as hypodermic
needles, scalpels, blades, lancets, and suture needles. These products are
available in a variety of sizes and configurations to suit both the
hospital-based and office-based healthcare market segments. All of the products
in the Pro-Tec Product Lines are manufactured and shipped by outside
contractors.
NEW PRODUCTS
In September 1997, the Company began marketing a device known as an
aortic punch, a product which is used by cardiovascular surgeons in performing
bypass procedures. The device has several unique patented features which
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enable the surgeon to more easily perforate the aorta prior to connecting a new
blood vessel. The Company estimates that the worldwide market for this product
is approximately $7 million. The Company has begun domestic distribution of this
product through manufacturers' representatives. Due to the product being
launched late in the year and the relatively long sales cycle, sales of the
aortic punch contributed less than 1% to the Company's revenues during 1997.
Also in the fourth quarter, the Company introduced a product called
"Sed-Control," which can be used in conjunction with the Company's dispettes to
verify the accuracy of the test. This product has met with very limited success
due, in the Company's opinion, to its relatively short shelf life, the lack of
regulatory requirements to utilize such a control, and heavy price competition
from other suppliers of such controls. The Company does not anticipate that this
product will generate substantial revenues in the future.
INDIA JOINT VENTURE
In January 1997, the Company entered into a new joint venture to
manufacture hypodermic needles, syringes and other 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 manages the operations,
with all partners contributing to the marketing of the products. Production
began in November 1997 of lancet wires, also called lancet needles, which prior
to being manufactured in-house, were the most costly component in the lancets
marketed by the Company. It is anticipated that certain other disposable medical
products will be manufactured in the facility by the end of 1998.
BRAZIL JOINT VENTURE
In May 1997, the Company acquired a 51% interest in its exclusive
distribution in Sao Paulo, Brazil. The Company plans to expand the venture's
existing suture manufacturing capacity, and begin producing its new, synthetic
absorbable sutures in Brazil. Eventually the Brazil Joint Venture will export
sutures to many of the Company's international markets. Currently, Brazil has a
staff of 11 engaged primarily in suture production, and markets via tenders and
a network of several independent sales representatives. Techsynt operates in a
5,000 square foot leased facility in Sao Paulo, Brazil.
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 domestic 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 doctors' offices, dentists' 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 line
of general and specialty surgical products to selected markets 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 parts of the worldwide suture market will be enhanced.
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In the third quarter of 1997, the Company refocused its international
marketing strategy to limit its product offerings to higher margin products and
regions. As a result, the Company reduced its standard suture product line to
include only approximately 250 catalog codes (down from approximately 750) and
intends to de-emphasize and even abandon certain international markets. In
connection with this new strategy, in December 1997, the Company wrote-off
approximately $3,030,000 worth of inventory consisting of these discontinued
catalog codes. See "Management's Discussion and Analysis of Operations."
While the Ulster Product Lines and the Pro-Tec Product Lines are
currently marketed entirely in the United States, the Company intends to launch
certain of these products internationally in 1998 and 1999.
The Company currently has a domestic staff of five employees engaged in
direct sales, telemarketing and direct mail promotion of general surgical suture
products and bone wax products worldwide, as well as providing marketing support
to the Company's specialty and general suture distributors. In addition, the
Company has a four person sales staff and a team of eight manufacturer's
representatives responsible for selling all the Company's products in the United
States.
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 South Africa, 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. Customers of the Ulster
Product Lines primarily include large medical and laboratory product
distributors, as well as mail order diabetic supply houses.
RESEARCH AND DEVELOPMENT ACTIVITIES
During 1996, the Company's research and development efforts were
focused on finalizing its FDA submission for a braided 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
released its braided synthetic absorbable suture product to the human market in
April of 1997. See "Government Regulations." The current Research and
Development activities of the Company are focused on the development of a
monofilament synthetic absorbable suture, the new products to be manufactured by
the India Joint Venture, and ongoing improvements to the Company's product line.
The Company does not expect to expend significant funds on research and
development activities in 1998.
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 conduced 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
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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 either delivered
to subcontractors for sterilization, or, in the case of synthetic absorbable and
certain other sutures sterilized in-house. After sterilization, the products are
returned to the production department 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 bone wax entails the preparation of the beeswax-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 products in the Pro-Tec Product Lines
are produced, and shipped directly to the Company's customers, by contract
manufacturers utilizing the Company's molds. 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."
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.
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 distributor of such products in the United States. The
Company's supply agreement with Korea Techma, Inc., relating to the automatic
single-stick lancet sold under the "Gentle-let 1" tradename, also entitles the
Company to act as such supplier's exclusive distributor in the United States.
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.
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The products in the Pro-Tec Product Line are all molded by outside
contract manufacturers, who also ship the products directly to the Company's
customers which saves the Company shipping and warehousing expense. The Company
uses three primary vendors for molding, and holds title to all of its molds.
COMPETITION
For the past 40 years, the global suture market has been dominated by a
small number of companies, primarily Ethicon, Inc. ("Ethicon"), a wholly-owned
subsidiary of Johnson & Johnson, Inc., and Sherwood Davis & Geck. 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 and they are beginning to gain market share.
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 250 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, Davis & Geck and
USSC. The Company believes that its ability to remain a low-cost producer of
general and specialty surgical suture products in certain international markets
and its focus on the dental and veterinary surgical suture markets, as well as
certain specialty niches 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
Company, Owen Mumford, Ltd., Gainor Medical U.S.A., Inc. and Can-Am Care
Corporation. LP Italiana SpA and Polymedco are considered the Company's only
competitors 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. However, the Company's competitors in this area are
larger, better capitalized and maintain larger sales forces than the Company and
are therefore formidable competitors.
With respect to the Pro-Tec Product Lines, the Company has essentially
three major competitors: Sage Products, Inc., Graphic Controls, Inc. and
Becton-Dickinson, Inc. The Company believes that this market is influenced
primarily by price and complacency. The fact that these products are often
physically attached to walls and fixtures, there is sometimes resistence to
switching among competing brands. The Company believes that its ability to
provide a low-priced product, combined with a nearly identical customer base for
its Ulster Product Lines, will enable it to effectively compete in this market.
However, the Company's competitors in this area are larger, better capitalized
and maintain larger sales forces than the Company and are therefore formidable
competitors.
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 and 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
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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
sixteen 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.
Commencing on June 14, 1998, all medical devices imported into Europe
must bear the CE mark. To begin affixing the CE mark to its products, a company
must have implemented a quality management system in accordance with ISO 9001
Quality Standard requirements and have its products approved by an appropriate
Notified Body. While less than 5% of the Company's revenues are generated in
Europe, the Company sees potential for growth in this market, as well as other
benefits of ISO approval. Accordingly, the Company is currently in the process
of formal ISO third-party registration of its quality system and is also
preparing for submission the necessary technical dossiers for the relevant
products to be CE marked.
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.
In connection with the Pro-Tec Acquisition, the Company acquired
several patents and trademarks related to the sharps containers and Pro-ject
needle holder. 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 violates the proprietary rights of others,
it is possible that such infringement or violation has occurred or may occur. In
the event that any 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.
Notwithstanding the foregoing paragraph, Owen Mumford Ltd. ("Owen
Mumford"), one of the Company's competitors, filed a complaint in the United
States District Court for the Eastern District of Virginia, Richmond Division on
April 29, 1998 and served a summons and complaint on the Company on June 1,
1998, alleging that the one of the Company's products, the "Gentle-Let 1"
infringes on a patent owned by Owen Mumford. The complaint seeks damages
adequate to compensate Owen Mumford for the alleged patent infringement, as well
as costs and expenses. The Company intends to vigorously defend itself in this
proceeding. See "Business of the Company -- Legal Proceedings."
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 and the
Pro-Tec Acquisition, the Company acquired all rights to the trademarks and
tradenames used in connection with the sale of the products in those 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 13, 1998, the Company worldwide had 201 employees (including
67 contract employees and 134 full time employees), of which 177 were engaged in
production, 2 in development activities, 11 in sales and marketing
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and 11 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.
DESCRIPTION OF PROPERTY
On July 1, 1996, the Company relocated its principal 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 in good condition, 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.
The Company currently leases a 5,000 square foot warehouse and office
facility in Sanford, Florida at a rent equal to $2,600 per month from which it
sells its products in the Pro-Tec Product Lines. Such lease expires in March,
2001. Management believes that such facility is in good condition, is suitable
and adequate for the Company's current and proposed use thereof and is
adequately covered by insurance.
See "Description of the 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.
See "Description of the Business -- Brazil Joint Venture" for details
on the leased properties occupied by these entities.
LEGAL PROCEEDINGS
On April 29, 1998, Owen Mumford, one of the Company's competitors,
filed a complaint in the United States District Court for the Eastern District
of Virginia, Richmond Division, alleging that the one of the Company's products,
the "Gentle-Let 1" infringes on a patent owned by Owen Mumford. The summons and
complaint was served on the Company on June 1, 1998. The complaint seeks
unspecified damages adequate to compensate Owen Mumford for the alleged patent
infringement, as well as costs and expenses. The Company intends to vigorously
defend itself in this proceeding.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF THE COMPANY
Set forth below is information concerning stock ownership of all
persons known by the Company to own beneficially 5% or more of the outstanding
shares of Common Stock of the Company, based on information provided to the
Company, each Director of the Company, the Named Executive Officer and all
Executive Officers and Directors of the Company as a group as of the Record
Date:
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Address of Nature and Amount of
Beneficial Owner Beneficial Ownership (1) Percentage of Class
---------------- ------------------------ -------------------
John H. Robinson 927,500(2) 25.7%
RJH Enterprises
260 Townsend Street, 2nd Floor
San Francisco, CA 94107
Robert L. Priddy 493,800(3) 14.9%
3435 Kingsboro Road #1601
Atlanta, GA 30326
Robert S. Huffstodt 99,932(4) 3.1%
Lukens Medical Corporation
3820 Academy Parkway North NE
Albuquerque, NM 87109
John P. Holmes 119,500(5) 3.7%
John P. Homes & Company, Inc.
P.O. Box 428
Shelter Island Heights, NY 11965
All officers and directors as a group 1,665,907(6) 42.9%
(6 persons)
</TABLE>
(1) Unless otherwise indicated below, the persons in the above table have sole
voting and investment power with respect to shares of Common Stock
beneficially owned by them.
(2) Includes immediately exercisable warrants to purchase 450,000 shares of
Common Stock. Includes currently exercisable options to purchase 6,500
shares of Common Stock.
(3) Includes immediately exercisable warrants to purchase 50,000 shares of
Common Stock and currently exercisable options to purchase 106,500 shares of
Common Stock.
(4) Includes options exercisable within 60 days to purchase 91,875 shares of
Common Stock.
(5) Includes immediately exercisable options to purchase 50,000 shares of Common
Stock. The shares of Common Stock are owned by John P. Holmes & Company,
Inc., a company controlled by Mr. Holmes.
(6) See footnotes 2 through 5 hereof.
CERTAIN TRANSACTIONS
On April 13, 1995, the Company entered into an agreement with John H.
Robinson, a director of the Company, whereby Mr. Robinson (i) loaned $400,000 to
the Company (the "April Loan"), (ii) agreed to purchase, at the Company's
request at any time prior to March 31, 1996, up to $500,000 of the Lukens Common
Stock at the market price at the time of such investment, and (iii) 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. Proceeds of the April Loan were used to reduce the
Company's outstanding indebtedness under its line of credit with its lending
bank by $350,000 and the remainder was used for general corporate purposes. On
September 11, 1995, Mr. Robinson loaned the Company an additional $250,000 to
partially finance the payoff of certain capitalized leases in respect of
equipment (the "Buyout
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<PAGE>
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 Company's acquisition of
three product lines from Ulster Scientific, Inc. (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 Company's line of credit with its
lending bank. 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.
As of March 1, 1996, the Company entered into a consulting agreement
with John H. Robinson, a director of the Company. Such consulting agreement has
a term of one year and thereafter automatically renews for additional one-year
periods unless previously canceled by either party. Mr. Robinson is entitled to
receive approximately $50,000 per year pursuant to the terms of such consulting
agreement. Such consulting agreement is terminable by either party at any time
after the first year upon 60 days' prior written notice. Mr. Robinson's
consulting agreement is still in effect, but will be terminated as of the
Effective Date.
On February 28, 1997, the Company entered into an agreement with John
H. Robinson and Robert L. Priddy, each a director and substantial stockholder of
the Company, whereby Messrs. Robinson and Priddy loaned the Company an aggregate
of $1,000,000. Such loans bear interest at the rate of 10% per annum, are
repayable on or before January 1, 1999 and are subordinated to the Line of
Credit. In connection therewith, Messrs. Robinson and Priddy were each issued
warrants to purchase 15,000 shares of Common Stock at an exercise price of $6.25
per share, and warrants to purchase an additional 35,000 shares of Common Stock
at $6.25 per share.
MARKET INFORMATION REGARDING LUKENS COMMON STOCK
Lukens Common Stock has been quoted on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") system under the symbol "LUKN"
since May 6, 1992. The Common Stock has also been listed on the Pacific Stock
Exchange under the symbol "LKN" since May 6, 1992.
The following table sets forth the range of high and low bid prices for
the Common Stock for the periods indicated, as reported by NASDAQ, the principal
system or exchange on which such securities are quoted or traded. The quotations
represent "inter-dealer" prices, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
High ($) Low ($) High ($) Low ($)
-------- ------- -------- -------
Quarter ended Quarter ended
March 31, 1997 8 3/4 4 1/2 March 31, 1996 3 11/16 1 7/16
Quarter ended Quarter ended
June 30, 1997 6 3/4 5 1/2 June 30, 1996 3 5/16 2 5/8
Quarter ended Quarter ended
September 30, 1997 6 1/8 3 3/4 September 30, 1996 3 9/16 2 9/16
Quarter ended Quarter ended
December 31, 1997 5 1/4 1 1/2 December 31, 1996 4 9/16 3
Fiscal Quarter Ending
March 31, 1998 3 3/8 1 5/8
Fiscal Quarter Ending
June 30, 1998 3 9/16 2 1/2
- -------------
</TABLE>
As of July 30, 1998, there were approximately 83 holders of record of
the Company's Common Stock.
On July 30, 1998, the closing bid and asked prices of the Common Stock
were $3 and $3 1/4, respectively.
LUKENS DIVIDEND POLICY
The Company has never paid a cash dividend on its capital stock. The
Company's loan agreement with its bank contains restrictions on the payment of
dividends.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF LUKENS' FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Proxy Statement and the Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1998 attached hereto as Annex E.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1997 ("1997") COMPARED TO
FISCAL YEAR ENDED DECEMBER 31, 1996 ("1996").
Sales increased 5% to approximately $8.6 million during 1997 from
approximately $8.2 million during 1996, primarily as a result of the Pro-Tec
Acquisition. Domestic sales of sutures primarily in the dental and veterinary
market in 1997 were approximately even with sales in 1996. Anticipated sales
growth in the veterinary market as a result of the introduction of the
monofilament synthetic absorbable suture was not realized in 1997 due to
production problems experienced by the Company's supplier of suture material.
The Company believes that these supply problems have been remedied. The
Company's export sales in 1997 and 1996 totaled $1,651,451 and $2,295,066,
respectively, which represents 19% and 28% of total sales in each of those
years, respectively.
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<PAGE>
The Company's gross margins decreased slightly, from 29% in 1996 to 28%
in 1997. Gross Margins for 1997 were negatively impacted by a repricing of
inventory at December 31, 1997. Such repricing is reflected in the Audited
Financial Statements as an inventory cost reduction totaling approximately
$772,000. The Company expects that gross margins in its most rapidly growing
product line, lancets, will improve in the second quarter of 1998 due to
in-house manufacturing of needles (the most expensive component) at its new
facility in Cochin, India. The Company also expects overall margins to increase
in 1998 as the suture sales mix shifts from the lower priced international
markets to the more lucrative OEM domestic markets, and due partially to the
addition of the Pro-Tec Product Lines which typically carry a higher gross
margin than the Company has experienced historically.
Selling expenses increased 51% in 1997 from $716,042 in 1996, to
$1,087,171, as a result of increases in the number of employees required to sell
and service the Pro-Tec and Ulster Product Lines, increased marketing expenses
relating to the Ulster Product Lines, such as convention and literature
expenditures, and charges for uncollected commissions and an increase in the
reserve for uncollectible accounts receivable.
General and administrative expenses increased approximately 33% to
$1,286,938 in 1997 compared to $965,180 in 1996, due mainly to the amortization
of the costs incurred in connection with the Pro-Tec Acquisition and the
development costs related to the synthetic absorbable suture.
Research and development expenses decreased approximately 35%, to
$70,386 in 1997 compared to approximately $108,594 in 1996, due primarily to the
finalization of the synthetic absorbable suture development project. The Company
does not expect to expend significant funds on research and development
activities in 1998.
During 1996 and most of 1997, the Company saw the international suture
market as a significant growth area for the Company. A number of markets,
including the Middle East, India, South Africa and Brazil, expressed serious
interest in the Company's cardiovascular suture line (the "Cardio Line"), and
its new synthetic absorbable suture in development at that time. Also, in late
1996, the Company was approached by a new U.S. venture which was interested in a
broad line of both products as well. Significant stocking orders were placed for
the products in these lines in early 1997. In February 1997, the Company
received FDA approval for the synthetic absorbable suture, and began actively
marketing this new line.
By late 1997, several new facts became apparent to the Company,
including: (i) international customers of the Cardio Line were unable to meet
their sales goals with respect to the products, (ii) reorders were not meeting
the Company's expectations and (iii) several customers in India and South Africa
were actually returning products to the Company. In addition, the synthetic
absorbable suture, due to the high cost of new materials, had a market price
that was too high for many export markets. The large U.S. customer for both
suture lines was unable to fulfill its initial commitments to the Company, and
their large initial purchase order had been canceled. By December 31, 1997 the
Company determined that most of the Cardio Line inventory should be written off.
While the synthetic absorbable suture had not met with widespread acceptance or
success internationally, it had been well accepted in certain markets, including
the domestic dental and veterinary markets. As a result, the Company's revenue
expectations from these two product lines internationally have been scaled back
significantly.
Concurrently with events surrounding the Company's Cardio Line, in the
third quarter of 1997, the Company also decided to refocus its international
marketing strategy to limit its product offerings to higher margin products and
regions. Historically, the Company carried a very large product line and
attempted to sell into numerous international markets, many of which were
unprofitable. By revising its international marketing strategy, the Company
hoped to increase its profitability. As a result, the Company reduced its
standard suture product line to include only approximately 250 catalog codes
(down from approximately 750) and intended to de-emphasize and even abandon
certain international markets. As a result of the foregoing, in December 1997
the Company wrote off approximately $3,030,000 of inventory consisting of
discontinued catalog codes and expired inventory, which included approximately
$300,000 of inventory relating to the Company's "Sed-Control" product. The
resulting aggregate inventory write-off and repricing in December 1997 was equal
to approximately $4,100,000 (the "Inventory Writeoff"). As a result of the
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<PAGE>
Inventory Writeoff, and increased expenses described above, the Company
experienced an operating loss of approximately $3,400,000 for the year ended
December 31, 1997.
Despite the foregoing, the overall volume for the Company's suture
products has continued to increase in 1998 due to successes in other markets
with its other suture products. The Company's joint venture in India, because it
does not produce sutures, was and is unaffected by the Company's refocused
international strategy for these lines. The Company's joint venture in Brazil
was and is also relatively unaffected due to the fact that while the Brazil
joint venture does produce suture products, the Cardio Line is very limited in
scope and had no significant related inventory. Additionally, the products
produced by the Brazil joint venture are targeted to different markets than
those that the Company determined to exit.
Interest income was $5,000 in 1997 compared to $6,000 in 1996. Interest
expense increased to approximately $433,000 in 1997 from approximately $198,000
in 1996 due primarily to the additional debt incurred relating to the India and
Brazil Joint Ventures, and the Pro-Tec Acquisition.
As result of the Inventory Writeoff, increased expenses and the other
income adjustments referred to above, the Company experienced a net loss of
$3,768,018 for the year ended December 31, 1997 compared to a net profit of
$463,481 for the year ended December 31, 1996. Without giving effect to the
Inventory Writeoff, the Company experienced a net profit of $334,262 for the
year ended December 31, 1997.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Sales increased approximately $255,000 or 11% for the quarter ended
March 31, 1998, compared to the quarter ended March 31, 1997 due mainly to
revenue generated from the product lines acquired with Pro-Tec Containers, Inc.
in May 1997 (the "Acquisition"), and due to increases in lancet sales.
The gross margin percentage increased due to cost reductions resulting
from the manufacture of certain raw materials in India, and the generally higher
margins in the Pro-Tec line. The first quarter generated 39% margins compared to
32% last year.
General and Administrative expenses increased $134,000 to $352,000 for
the 1998 quarter, versus $228,000 for the 1997 quarter. The majority of this
increase was a result of increased amortization expenses relating to the various
acquisitions in 1997, and the addition of staff in Brazil. Sales and Marketing
expenses were approximately the same for the 1998 and 1997 quarters, and R&D
increased $5,000 to $17,000 for the 1998 quarter, versus $12,000 for the 1997
quarter. The increase in R&D expenses reflects the cost of the Company's focus
on obtaining ISO Certification in 1998.
As a result of the foregoing, Income from Operations increased 142%, or
$132,000, to $439,000 for the 1998 quarter versus Income from Operations of
$307,000 for the same quarter in 1997.
Interest expense increased $69,000 from $53,500 in 1997 to $122,000 in
1998 due to an increase in net borrowings to finance the Acquisition in May
1997, and the investment in the Brazil joint venture in September 1997.
As a result of the foregoing, the Company achieved a net profit for the
quarter of $316,000, or $.10 per share, for 1998, compared to a net profit of
$253,000, or $.08 per share, in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund the working
capital requirements created by its sales growth and to make acquisitions. At
March 31, 1998, the Company had cash and cash equivalents of $53,882 and working
capital of $488,660.
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<PAGE>
Bank Financing. As of December 31, 1997 and March 31, 1998, the Company
had drawn all of its $1,750,000 working capital portion of its line of credit
with its lending bank (the "Line of Credit"). The Line of Credit also includes
an additional $1,250,000 commitment for the issuance of standby and commercial
letters of credit. On December 31, 1997 and March 31, 1998, approximately
$882,000 and $360,000, respectively, in letters of credit were outstanding under
this letter of credit commitment. The Line of Credit matures and expires on
August 30, 1998 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.
As of December 31, 1997 and March 31, 1998, the Company had
approximately $142,000 and $48,426, respectively, outstanding under a working
capital line of credit (the "SBA L/C Facility") with the U.S. Small Business
Administration ("SBA"), which provided working capital for foreign sales up to
the lesser of (a) $600,000 or (b) 80% of the face amount of negotiated letters
of credit issued for the benefit of the Company and delivered to the lender. It
is the Company's understanding that due to the fact that the majority of the
letters of credit received by the Company from its international customers did
not meet the criteria set forth by the SBA, combined with various other factors,
including the existence of technical financial covenant defaults under the Line
of Credit as a result of the Inventory Writeoff, the SBA declined to renew this
line for 1998 and all outstanding amounts are required to be repaid as each
outstanding letter of credit is drawn upon.
At the same time, during December 1997 and the first quarter of 1998,
the Company has experienced increased sales of certain products, requiring it to
significantly increase its purchases of raw materials necessary to fill such
orders. Due to the decreased liquidity caused by losing the SBA L/C Facility, as
well as the increased outlays for raw materials, the Company has recently
experienced a shortage of working capital. As a result, the Company has recently
experienced difficulties financing its sales growth and has failed to timely pay
certain amounts due under certain term loans granted to the Company by its
lending bank in connection with the Line of Credit. During the quarter ended
March 31, 1998, the Company was still in technical default of certain financial
covenants and in payment default under certain of its term loans with its
lending bank. In April 1998, the Company cured its payment default under the
term loans and, subject to certain conditions, including, without limitation,
the closing of the Merger with Medisys, its lending bank amended certain of the
financial covenants so that the Company is no longer in default under any of its
lines of credit. No assurance can be given that the Company's lending bank will
not hereafter reinstate the old financial covenants and thereby causing the
Company to once again be in default under its Line of Credit.
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 5
to Notes to Consolidated Financial Statements.
Stockholder Loans. On February 28, 1997, the Company entered into an
agreement with John H. Robinson and Robert L. Priddy, each a director and
substantial stockholder of the Company, whereby Messrs. Robinson and Priddy
loaned the Company an aggregate of $1,000,000. Such loans bear interest at the
rate of 10% per annum, are repayable on or before January 1, 1999 and are
subordinated to the Line of Credit. 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 warrants to purchase an additional
35,000 shares of Common Stock at $6.00 per share. See "Item 12. Certain
Relationships and Related Transactions."
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.
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<PAGE>
Investment by Medisys. In March and April of 1998, Medisys purchased an
aggregate of 75,000 shares of Common Stock from the Company for $4.00 per share
in cash in private transactions with 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 and during 1997 sales were nominal.
Acquisition of the Pro-Tec Product Lines. For a description of the
consideration paid and payable by the Company in connection with the Pro-Tec
Acquisition, including, without limitation, the Common Stock issued in
connection therewith, see Note 15 to Notes to Consolidated Financial Statements
and the Company's Current Report of Form 8-K filed in connection with the
Pro-Tec Acquisition.
Pro-Tec Stock Price Guarantee. In connection with the Pro-Tec
Acquisition, the Company agreed to guarantee the value of the Common Stock
issued to the former owner pursuant to such acquisition for a period of six
months from the effective date of the Registration Statement on Form S-3 which
was filed by the Company to register the resale of such shares. As a result of
the decline in the price to the Lukens Common Stock during such period (and
taking into account certain other adjustments), the Company owes the former
owner of Pro-Tec approximately $300,000, which amount is payable either by the
issuance of shares of the Lukens Common Stock or a one-year promissory note. The
Company and such individual are currently negotiating to extend the term of the
payment of this amount. No agreement, however, has yet been finalized and there
can be no assurance given that any such agreement will be reached.
Net Operating Loss Carryforwards. As of December 31, 1997, the Company
had net operating loss carryforwards ("NOLs") of approximately $12,975,000 which
will expire from 1998 through 2010. The deductibility of portion 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 10 of Notes to Consolidated Financial Statements.
Year 2000 Disclosure. The Company believes that its operations will not
be materially disrupted by any problems associated with the "Year 2000" syndrome
after January 1, 2000; however, there can no assurances in this regard.
INFORMATION REGARDING MEDISYS AND MERGER SUB
Medisys PLC, a Scottish public limited company ("Medisys"), is a
medical technology company providing products, through its divisions and
subsidiaries, to the point of care environment, at present focused on two
markets -- the point of care and over the counter diagnostics market and the
market for on-site disposal of biohazardous medical waste. Merger Sub is a
Delaware corporation recently organized in connection with the Merger. Merger
Sub has not conducted any business to date, other than incidental to its
organization and in connection with the Merger. Merger Sub will not have any
assets or liabilities (other than those arising under the Merger Agreement or in
connection with the Merger) or engage in any activities other than those
incident to its formation and capitalization and the Merger. As of the date of
this Proxy Statement, all the authorized capital stock of Merger Sub is owned by
Medisys. Medisys' and Merger Sub's principal executive offices are located at
Walmar House, 288-292 Regent Street, London W1R SH8 England, (011)
44-171-436-3353. As of the Record Date, Medisys owned 132,500 shares of Lukens
Common Stock and neither Merger Sub nor any of their affiliates owned any shares
of Lukens Common Stock.
FINANCIAL INFORMATION
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<PAGE>
The Company's consolidated audited financial statements for the years
ended December 31, 1997 and 1996 and the unaudited financial statements for the
three month period ended March 31, 1998 and 1997 are included as part of this
Proxy Statement.
FEES AND EXPENSES
The Merger Agreement provides that whether or not the Merger is
consummated, all costs and expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby shall be paid by the party
incurring such expenses, whether or not the Merger is consummated except as
expressly provided in the Merger Agreement and except that the filing fee in
connection with the filing of this Proxy Statement with the SEC and the expenses
incurred in connection with printing and mailing this Proxy Statement shall be
shared equally by Lukens and Medisys.
OTHER MATTERS
As of the time of preparation of this Proxy Statement, the Board of
Directors knows of no other matters that will be acted on at the Special Meeting
other than the approval and adoption of the Merger Agreement and the Merger. If
any other matters are presented for action at the Special Meeting or at any
adjournment or postponement thereof, it is intended that the proxies will be
voted with respect thereto in accordance with the best judgment and in the
discretion of the persons named as proxies in the accompanying proxy card. All
documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date hereof and prior to the date of the
Special Meeting shall be deemed to be incorporated by reference herein.
1998 ANNUAL MEETING OF STOCKHOLDERS
The Company does not plan to hold an annual meeting of stockholders
during 1998 unless the Merger is not consummated. If the Merger is not
consummated, stockholder proposals previously received by the Secretary of the
Company on or before November 30, 1997 will be considered for inclusion in the
proxy materials for the Company's 1998 Annual Meeting of Stockholders.
INDEPENDENT CERTIFIED ACCOUNTANTS
Lukens' independent public accountants for the fiscal year ended
December 31, 1997, and for the current fiscal year are Neff and Company LLP. It
is not anticipated that representatives of Neff and Company LLP will be present
at the Special Meeting.
----------------------------------------
Robert S. Huffstodt, President and Chief
Executive Officer
August ___, 1998
STOCKHOLDERS WHO DO NOT EXPECT TO BE PERSONALLY PRESENT AT THE MEETING AND WHO
WISH TO HAVE THEIR SHARES VOTED ARE REQUESTED TO DATE AND SIGN THE ENCLOSED
PROXY CARD AND RETURN IT TO CONTINENTAL STOCK TRANSFER & TRUST COMPANY, THE
COMPANY'S TRANSFER AGENT.
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<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets for the years ended
December 31, 1997 and 1996 F-2
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 F-7
Notes to Consolidated Financial Statements as of December 31, 1997 F-9
Consolidated Balance Sheets for the quarter ended March 31, 1998
(unaudited) and December 31, 1997 F-31
Consolidated Statements of Operations for the three months
ended March 31, 1998 (unaudited) F-32
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 F-33
Notes to Consolidated Financial Statements as of March 31, 1998 F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
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, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
Albuquerque, New Mexico
March 27, 1998
F-1
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 11) $ 74,048 878,090
Accounts receivable, net of allowance of
$40,000 in 1997 and $5,790 in 1996
(Notes 5 and 6) 1,836,542 1,901,947
Inventory (Notes 2, 5, 6, and 14) 5,105,900 5,565,210
Prepaid expenses 127,080 34,290
-----------------------------
Total current assets 7,143,570 8,379,537
Fixed assets, net (Notes 3, 5,
6 and 8) 3,599,150 2,062,842
Intangible assets, net of accumulated amortization
of $1,283,569 and $966,065 in 1997 and 1996,
respectively (Notes 4 and 15) 3,001,139 1,098,487
Other assets 85,754 261,294
-----------------------------
Total assets $13,829,613 11,802,160
=============================
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,864,832 1,406,243
Accrued liabilities 138,016 62,139
Current maturities of long-term debt
(Notes 5 and 6) 5,146,950 2,002,191
Current maturities of obligations under
capital leases (Note 8) 146,893 39,825
------------------------------
Total current liabilities 7,296,691 3,510,398
Long-term debt, excluding current maturities
(Notes 5, 6 and 11) 73,483 796,446
Stockholder payable and accrued interest
(Notes 7 and 11) 2,290,991 1,157,408
Obligations under capital leases, excluding
current maturities (Note 8) 266,256 59,378
------------------------------
Total liabilities 9,927,421 5,523,630
------------------------------
Commitments and contingencies (Notes 5, 8, 13, 15, and 16)
Minority interests 129,531 -
------------------------------
Stockholders' equity (Notes 5 and 9):
Common stock $.01 par value, authorized
20,000,000 shares; issued and outstanding
3,043,359 shares in 1997 and 2,731,988 shares
in 1996 30,434 27,320
Additional paid-in capital 18,526,035 17,213,952
Accumulated deficit (14,730,760) (10,962,742)
Foreign currency translation adjustments (53,048) -
------------------------------
Total stockholders' equity 3,772,661 6,278,530
------------------------------
Total liabilities and stockholders' equity $ 13,829,613 11,802,160
==============================
</TABLE>
F-3
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net sales (Note 12) $ 8,618,863 8,178,576
Cost of sales (Note 14) 5,469,327 5,496,534
Inventory cost reduction 770,000 300,000
Product restructuring charge (Note 14) 3,332,280 -
---------------------------------
Gross profit (loss) (952,744) 2,382,042
---------------------------------
Selling expenses 1,087,171 716,042
General and administrative expenses 1,286,938 965,180
Research and development expenses 70,386 108,594
---------------------------------
Total operating expenses 2,444,495 1,789,816
---------------------------------
Earnings (loss) from operations (3,397,239) 592,226
---------------------------------
Other income (expense):
Interest income 5,236 6,578
Interest expense (433,463) (197,566)
Minority interests' share of loss 25,994 -
Other, net 31,454 62,243
---------------------------------
Total other expense, net (370,779) (128,745)
---------------------------------
Earnings (loss) before income taxes (3,768,018) 463,481
Income tax expense (Note 10) - -
---------------------------------
Net earnings (loss) $ (3,768,018) 463,481
=================================
Basic net earnings (loss) per share $ (1.24) .17
=================================
Dilutive net earnings (loss) per share $ (1.24) .15
=================================
Weighted average number of common shares
outstanding - basic 3,043,359 2,677,698
=================================
Weighted average number of common shares
outstanding - dilutive 3,043,359 3,068,113
=================================
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK
(NOTES 9 AND 15) ADDITIONAL
----------------------------- PAID-IN
SHARES AMOUNT CAPITAL
<S> <C> <C> <C>
Balance, December 31, 1995 2,611,418 $ 26,115 16,938,696
Exercise of options for common
stock 120,570 1,205 275,256
Net earnings (loss) - - -
-------------------------------------------
Balance December 31, 1996 2,731,988 27,320 17,213,952
Exercise of options for common
stock 111,371 1,114 478,103
Issuance of common stock for
business acquisition 200,000 2,000 833,980
Net earnings (loss) - - -
Foreign currency translation
adjustments - - -
-------------------------------------------
Balance, December 31, 1997 3,043,359 $ 30,434 18,526,035
===========================================
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
FOREIGN
CURRENCY
ACCUMULATED TRANSLATION
DEFICIT ADJUSTMENTS TOTAL
<S> <C> <C> <C>
$(11,426,223) - 5,538,588
- - 276,461
463,481 - 463,481
-----------------------------------------------
(10,962,742) - 6,278,530
- - 479,217
- - 835,980
(3,768,018) (3,768,018)
- (53,048) (53,048)
-----------------------------------------------
$(14,730,760) (53,048) 3,772,661
===============================================
</TABLE>
F-6
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows from operations:
Net earnings (loss) $(3,768,018) 463,481
Adjustments to reconcile net earnings
to cash flows applied to operating activities:
Minority interest in net loss (25,994) -
Depreciation 398,943 262,941
Amortization of intangible assets 317,504 169,563
Decrease in inventory valuation allowance - 250,000
Loss on disposal of fixed assets - 9,855
Accrued interest due stockholder 133,583 79,024
Changes in current assets and liabilities:
Accounts receivable 245,235 (632,736)
Inventory 472,310 (1,966,159)
Prepaid expenses (92,305) (10,834)
Other assets 4,667 (176,579)
Accounts payable 385,025 741,163
Accrued liabilities 62,634 (20,916)
-----------------------------
Net cash applied to operating activities (1,866,416) (831,197)
-----------------------------
Cash flows from investing activities:
Purchase of equipment (1,311,378) (561,910)
Purchase of intangible assets (876,626) (785,377)
Proceeds from disposal of equipment 26,417 -
Proceeds from joint venture formation,
net of cash transferred 155,525 -
Business acquisitions, net of cash purchased (224,916) -
-----------------------------
Net cash flows applied to
investing activities (2,230,978) (1,347,287)
-----------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock
and equivalents 479,217 276,461
Borrowings on long-term debt 5,174,575 2,621,155
Principal payments on long-term debt and
capital leases (3,360,440) (280,091)
Borrowings from major stockholders 1,000,000 400,000
-----------------------------
Net cash flows provided by
financing activities 3,293,352 3,017,525
-----------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net increase (decrease) in cash and cash
equivalents (804,042) 839,041
Cash and cash equivalents at beginning of year 878,090 39,049
---------------------------------
Cash and cash equivalents at end of year $ 74,048 878,090
=================================
Supplemental disclosures:
Cash paid for interest $ 274,767 113,532
=================================
Production equipment acquired with capital
leases $ 375,484 63,095
=================================
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-8
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activities. 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.
In addition to its facility in Albuquerque, New Mexico which includes the
operations of Lukens Medical Corporation and its wholly owned subsidiary ProTec,
Inc., the Company's operations include the following:
Lukens Medical Products Limited, a 90 percent owned joint venture in
Cochin, India that serves primarily as a manufacturing facility.
Techsynt-Lukens Industrial, Commercial, Import and Export Limited, a 51
percent owned joint venture in Sao Paolo, Brazil, that manufactures and
sells the Company's products.
Somar-Lukens S.A de C.V., a 50 percent owned joint venture in Piedras
Negras, Mexico that is not yet active and as of December 31, 1997, had
no assets or operations.
The Company utilizes contract manufacturing facilities in Piedras Negras and
Ciudad Juarez, Mexico for certain suture products. These facilities are operated
by contractors and are not owned by the Company.
Principles of Consolidation. The consolidated financial statements include the
accounts of Lukens Medical Corporation and its wholly-owned subsidiary and
majority owned joint ventures. 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 bank's
name. The Company considers all highly liquid financial instruments with
original maturities of three months or less to be cash equivalents.
F-9
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Inventory. Inventory, which consists principally of the Company's products,
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, non compete agreements, goodwill and 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. The Company
evaluates its intangible assets annually to determine potential impairment that
may have been caused due to changing circumstances or events by comparing the
carrying value to the undiscounted future net cash flows of related assets. No
impairment losses have been recognized in the periods presented. They are being
amortized using the straight-line method over periods of 3 to 10 years.
Capitalization of Interest. Interest is capitalized in connection with the
construction and start-up of major facilities. The capitalized interest is
recorded as part of the asset to which it relates and is amortized over the
asset's estimated useful life. In 1997, $80,828 of interest was capitalized. No
interest was capitalized in 1996.
Income Taxes. The Company accounts for its income taxes in accordance with
Financial Accounting Standards Statement No. 109, Accounting for Income Taxes
(SFAS 109). SFAS 109 requires a company to recognize deferred tax liabilities
and assets for the expected future tax consequences of events that have been
recognized in a company's financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax basis of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. The Company has provided a valuation
allowance to offset the benefit of any net operating loss carryforwards or
deductible temporary differences.
F-10
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Translation of Foreign Currencies. The translation of foreign currencies into
U.S. dollars is performed for balance sheet accounts using current exchange
rates in effect at the balance sheet date and for revenue and expense accounts
using an average exchange rate for the period. The gains or losses resulting
from translation are included in shareholders' equity. The functional currency
of operations in India and Brazil is the local currency - the functional
currency of the operations in Mexico is the US dollar, which is also the
currency of the books of record.
Net Sales. Sales are recorded at the time products are shipped, net of sales
returns and allowances.
Research and Development Expenses. Research and development costs are expensed
as incurred.
Long-Lived Assets. Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of (SFAS 121), was adopted as of January 1, 1996. SFAS 121
standardized the accounting practices for the recognition and measurement of
impairment losses on certain long-lived assets. The adoption of SFAS 121 had no
effect on the results of operations or financial position.
Effect of New Accounting Pronouncements. Effective January 1, 1996, the Company
adopted SFAS No. 123, Accounting for Stock-Based Compensation. The Company
adopted this pronouncement by making the required pro forma note disclosure
only. Accordingly, the adoption of SFAS No. 123 did not impact the Company's
results of operation or financial condition.
Earnings Per Share. Effective for the year ended December 31, 1997, the Company
adopted SFAS 128, Earnings Per Share. In adopting this pronouncement, the
Company computed the earnings (loss) per share on the basis of the weighted
average number of common shares outstanding during the year and included the
effect of potential common stock to the extent they are dilutive. This
pronouncement was adopted for both 1997 and 1996, however, there was no impact
on the earnings per share previously reported for 1996.
F-11
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Net loss $ (3,768,018) - -
------------------------------------------------
Loss to common stockholders-
basic and diluted loss per share $ 3,768,018 3,043,359 (1.24)
================================================
</TABLE>
The warrants and options described in Note 9 and 15 were not included in
potential common stock as the effect of conversion would be antidilutive.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Net earnings $ 463,481
------------
Basic EPS 463,481 2,677,698 .17
Effect of dilutive options and warrants - 390,415 -
------------------------------------------------
Diluted EPS $ 463,481 3,068,113 .15
================================================
</TABLE>
Warrants and options described in Note 9 and 15 to purchase 964,227 shares of
common stock were not included in potential common stock as the offset of
conversion would be antidilutive.
The Company uses the fair value of goods or services received or the fair value
of the options or warrants issued, whichever is more reliably measurable, to
determine the expense to record for options or warrants issued to non-employees.
Such amounts were not material and not recorded in 1996 or 1997.
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 1996
financial statements to conform to the 1997 presentation.
F-12
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 2. INVENTORY
Inventory consists of the following components at December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Raw materials $ 1,938,343 2,767,214
Work-in-process 1,972,124 1,419,685
Finished goods 1,261,603 1,444,481
Less reserves (66,170) (66,170)
$ 5,105,900 5,565,210
=============================
</TABLE>
NOTE 3. FIXED ASSETS
Fixed assets owned or held under capital lease (see Note 8) consist of the
following at December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Building $ 899,762 -
Leasehold improvements 227,112 172,677
Production equipment 3,951,117 3,018,600
Office equipment 286,461 229,646
Construction in progress 198,075 -
-----------------------------
5,562,527 3,420,923
Less accumulated depreciation 1,963,377 1,358,081
-----------------------------
$ 3,599,150 2,062,842
=============================
</TABLE>
Production equipment valued at $807,543 and $776,553, respectively, was not
being utilized in 1996 or 1997 and as of December 31, 1997, was in Piedras
Negras, Mexico in anticipation of the start up of a joint venture (See Note 15).
F-13
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 4. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1997:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Suture regulatory approvals $ 963,448 920,089
Ulster Scientific non-compete
patents and trademarks 642,069 642,069
ProTec patents and goodwill 1,296,968 -
Deferred start-up costs 867,892 20,868
Other 514,331 481,526
-----------------------------
Total 4,284,708 2,064,552
Accumulated amortization (1,283,569) (966,065)
-----------------------------
$ 3,001,139 1,098,487
=============================
</TABLE>
NOTE 5. BANK FINANCING INSTRUMENTS
At December 31, 1997, 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) $1,750,000 or (b) the sum of 80
percent of eligible accounts receivable (as defined in the agreement) plus
the lesser of 40 percent of qualified inventory. Interest is payable
monthly on the amount drawn at the Bank's corporate base rate (the Bank's
prime rate) plus .75 percent. At December 31, 1997, there was $1,750,000
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 $1,250,000 at any one time. At
December 31, 1997, there was $634,127 of Bankers' acceptances and
commercial letters of credit and $124,577 in standby letters of credit
outstanding under this line. Additionally, under a separate letter of
credit, there was a $360,000 letter of credit relating to the purchase of
the India facility.
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, 1997, there was $114,018
outstanding under this agreement.
F-14
<PAGE>
NOTE 5. BANK FINANCING INSTRUMENTS (CONTINUED)
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, 1997, there was $135,221
outstanding under this agreement.
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. At December 31, 1997, there was $68,268
outstanding under this agreement.
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. At December 31, 1997, there was $613,575
outstanding under this agreement.
On August 31, 1997, the Company obtained a bank term loan for funding of
general operations in the amount of $1,000,000, interest plus principal
payable in equal monthly installments of $21,011, at the bank's corporate
rate plus .75 percent. At December 31, 1997, there was $972,099 outstanding
under this agreement.
On November 27, 1997, the Company obtained a bank term loan for payment of
expired letters-of-credit in the amount of $184,087 interest plus principal
due on March 27, 1998, at the bank's corporate rate plus 1.5 percent. At
December 31, 1997, there was $141,958 outstanding under this agreement.
At December 31, 1997, these bank credit instruments had covenants which
provided, among other things, for: the maintenance of tangible net worth of the
corporate affiliates on a consolidated basis at any time to be less than
$6,800,000, a minimum current ratio, as defined in the agreement, of 2:1;
aggregate debt to consolidated stockholders' equity of not greater than 1:1 and
fixed charges coverage not less than 1:3. 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.
As of December 31, 1997, the Company was in arrears on its bank notes payable
and did not meet the financial ratios required. The bank has not granted a
waiver for any default by the Company; as a result, the notes payable have been
classified as current.
F-15
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 6. LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Bank Debt:
Outstanding letter-of-credit payable to NationsBank,
N.A. interest is accrued at the corporate base rate
plus .75% (9.25% at December 31, 1997), maturing
August 30, 1998 $ 634,127 796,838
Outstanding line-of-credit payable to NationsBank,
N.A. interest is accrued at the corporate base rate
plus .75% (9.25% at December 31, 1997), maturing
August 30,1998 1,750,000 966,102
Various notes payable to NationsBank, N.A. interest is
accrued at the base corporate rate (8.5% at December 31,
1997) plus 1% to 1.5%, maturing between March
1998 and November 2003. 2,045,138 952,074
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, 1997), maturing July 7, 1998, secured
by equipment purchased with the proceeds
from the note $ 20,973 83,623
Note payable to Kerala State Industrial Corporation,
due in monthly principal installments of $15,000,
plus interest due quarterly at an annual rate of 15.5%,
maturing March 1999 secured by a standby letter of
credit with NationsBank, N.A. 240,000 -
Notes payable to the sole stockholder of ProTec for
acquisition of ProTec Containers, Inc., terms to be
finalized (Note 15) 454,163 -
Other bank notes 76,032 -
---------------------------------
Total long-term debt 5,220,433 2,798,637
Current maturities of long-term debt 5,146,950 2,002,191
---------------------------------
Long-term debt, excluding current maturities $ 73,483 796,446
=================================
</TABLE>
F-16
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 6. LONG-TERM DEBT (CONTINUED)
The NationsBank, N.A. debt 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.
Future scheduled debt payments at December 31 are:
<TABLE>
<S> <C>
1998 $ 5,146,950
1999 73,483
-----------
$ 5,220,433
===========
</TABLE>
NOTE 7. 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 9).
In September 1995, the Company received $250,000 from the stockholder for
repayment of various capital leases. The note is due October 1999, including all
interest, accrued at 10 percent.
In March 1996, the Company received $400,000 from the stockholder for use in the
Ulster acquisition. The note is due September 2000, including all interest,
accrued at 10 percent.
In March, May and June 1997, the Company received a total of $1,000,000 from two
major stockholders to fund expansion of the recently acquired India Facility,
expansion of capacity for synthetic absorbable sutures and for the acquisition
of ProTec Containers, Inc. The notes are due May 1998 bearing interest at 10%.
Each major stockholder also received warrants for 50,000 shares of common stock.
These warrants are exercisable at $6.25 per share (Note 9). Subsequent to year
end these notes were extended to January 1999.
F-17
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 8. LEASES
The Company has five capital lease obligations for production equipment. At
December 31, 1997 and 1996, the Company had $501,992 and $126,508, respectively,
recorded as production equipment under capital leases with related accumulated
depreciation of $42,120 and $4,206, respectively (see Note 3).
The present value of future minimum capital lease payments as of December 31,
1997 follows:
<TABLE>
<S> <C>
1998 $ 190,530
1999 157,186
2000 92,152
2001 59,805
----------
Total minimum lease payments 499,673
Less amount representing interest
(at rates ranging from 8% to 16%) 86,524
Present value of net minimum capital
lease payments 413,149
Current maturities of obligations under
capital leases 146,893
Obligations under capital leases, ex-
cluding current maturities $ 266,256
==========
</TABLE>
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, 1997, are as follows:
<TABLE>
<S> <C> <C>
Year ending December 31:
1998 $ 125,748
1999 128,953
2000 132,253
2001 86,925
------------
Total minimum payments required $ 473,879
============
</TABLE>
Total rental expense for operating leases during 1997 and 1996 was $147,807 and
$111,787, respectively.
F-18
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 9. STOCK WARRANTS AND OPTIONS
Warrants for Common Stock
The following warrants are outstanding at December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE DATE DATE OF
COVERED BY WARRANTS PRICE EXERCISABLE EXPIRATION
<S> <C> <C> <C> <C>
500,000 6.00 Presently May 6, 1998
65,000 4.50 Presently June 11, 1999
400,000 1.10 Presently April 13, 2000
30,000 6.25 Presently March 1, 2002
70,000 6.25 Presently May 1, 2002
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.
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 623,508
and 243,223 at December 31, 1997 and 1996, respectively. As of December 31, 1997
and 1996, an additional 104,800 and 108,000, respectively, of options were
granted under various other plans. The weighted average remaining life of
employee options is six years. The weighted average remaining life of
non-employee options is four years. The Company has filed a registration
statement for its stock option plans.
F-19
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 9. STOCK WARRANTS AND OPTIONS (CONTINUED)
A summary of the common stock options for employees for the year ended December
31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE OPTIONS
OPTIONS PRICE EXERCISABLE
<S> <C> <C> <C> <C>
Balance, December 31, 1995 316,305 2.310
Granted 82,800 3.500
Expired (135,112) 2.395
Exercised (20,570) 1.954
----------
Balance, December 31, 1996 243,423 2.710 82,425
-----------------==================
Granted 164,600 5.780
Expired (41,144) 4.539
Exercised (43,371) 2.089
---------------------------
Balance, December 31, 1997 323,508 4.125 108,400
=============================================
</TABLE>
A summary of the common stock options for non-employees for the year ended
December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE OPTIONS
OPTIONS PRICE EXERCISABLE
<S> <C> <C>
Balance, December 31, 1995 167,837 2.650
Granted 103,000 5.167
Expired (63,037) 2.375
Exercised (100,000) 2.650
---------
Balance, December 31, 1996 107,800 5.220 33,000
-----------------==================
Granted 300,000 4.000
Exercised (3,000) 3.500
--------------------------
Balance, December 31, 1997 404,800 4.331 171,600
============================================
</TABLE>
On February 5, 1998, the Company granted additional options under the 1992 plan
to purchase 19,200 shares at an exercise price of $4.00 per share.
F-20
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 9. 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 are presented below:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ---------------------------
AS AS
REPORTED PROFORMA REPORTED PROFORMA
<S> <C> <C> <C> <C>
Net income (loss) $ (3,768,018) (4,533,645) 463,481 267,225
Basic earnings (loss) per share (1.24) (1.49) .17 .10
Diluted earnings (loss) per share (1.24) (1.49) .15 .09
</TABLE>
The calculation model used to determine the stocked based compensation cost
included in the above proforma was the straight line method with graded vesting
compensation calculations. The calculation uses the 5 year Treasury Bill rate,
an expected life of three years and an 82 percent volitity rate. No dividends
were used in the calculation.
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 10. INCOME TAXES
At December 31, 1997 and 1996, the Company had deferred tax assets amounting to
approximately $5,100,000 and $4,200,000, respectively. The deferred tax assets
consist primarily of the tax benefit of net operating loss carryforwards and
temporary differences in depreciation and are fully offset by a valuation
allowance of the same amount.
The net change in the valuation allowance for deferred tax assets was an
increase of approximately $900,000 in 1997 and did not change materially for
1996. The net change for 1997 is primarily due to the recording of the increase
of net operating loss carryforwards.
Recoveries for income taxes differs from the amount of income tax recoveries
determined by applying the applicable U.S. statutory Federal income tax rate to
the pretax loss as a result of the increase in the valuation allowance to offset
the increase in the deferred tax assets.
There is no income tax payable at December 31, 1996, because of the usage of net
operating loss carryforwards.
F-21
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 10. INCOME TAXES (CONTINUED)
The net operating loss and credit for increasing research activities
carryforwards as of December 31, 1997, 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
<S> <C> <C> <C> <C>
1999 $ 2,537,000 - 122,000 3,800
2000 - 1,930,000 656,000 37,200
2001 2,400,000 1,835,000 739,000 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 -
2007 - 26,000 9,000 -
2008 - 88,000 30,000 -
2009 - 2,760,000 938,000 -
2017 - 2,400,000 816,000 -
-------------------------------------------------------------------------------
$ 6,893,000 12,975,000 4,742,000 105,000
===============================================================================
</TABLE>
The capital loss carryforwards of approximately $271,000, tax effect of
$105,000, expire in 1998.
The deduction of federal net operating loss carryforwards is limited to
approximately $3,962,000 as of December 31, 1997. This limitation is based on an
annual limitation of $460,000 plus available carryover of $654,000 and losses
incurred subsequent to 1992 of $5,248,000. In addition, should the sale of the
Company discussed in Note 16 occur, there may be additional limitations.
NOTE 11. 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.
F-22
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 stockholder payable is estimated using discounted cash flow analysis,
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
The carrying amounts and fair values of the Company's financial instruments are:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
------ -----
<S> <C> <C>
Cash and cash equivalents $ 74,078 $ 74,078
Long-term debt, including current
maturities $ 5,220,433 $ 5,220,433
Stockholder payable and accrued interest $ 2,290,991 $ 2,198,846
</TABLE>
NOTE 12. GEOGRAPHIC SEGMENT REPORTING
The Company sells its products throughout the world. The Company's export sales
from U.S. operations for 1997 and 1996 totaled $1,651,451 and $2,295,066,
respectively which represent 21 percent and 28 percent of total sales in each of
those years. Accounts receivable related to these sales is $878,000 and
$1,033,000 at December 31, 1997 and 1996, respectively.
Geographic information for the year ended December 31, 1997, is presented in the
following table. Transfers between geographic area are accounted for at amounts
that are generally above cost and consistent with rules and regulations of
governing tax authorities. Such transfers are eliminated in the consolidated
financial statements. Operating income by geographic segment does not include an
allocation of general corporate expenses which are included in United States
operations. Identifiable assets are those that can be directly associated with a
particular geographic area and include intangible assets.
<TABLE>
<S> <C>
Customer sales:
Brazil $ 87,330
India -
Mexico -
USA 8,531,533
Eliminations -
---------------
Consolidated $ 8,618,863
===============
</TABLE>
F-23
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 12. GEOGRAPHIC SEGMENT REPORTING (CONTINUED)
<TABLE>
<S> <C>
Intercompany sales
Brazil $ --
India 3,362
Mexico --
USA 134,105
Eliminations (137,467)
--------------
Consolidated $ --
==============
Loss before taxes:
Brazil $ (48,226)
India (35,055)
Mexico --
USA (3,674,679)
Eliminations (10,058)
--------------
Consolidated $ (3,768,018)
==============
Assets:
Brazil $ 436,105
India 1,601,084
Mexico 2,381,085
USA 9,564,445
Eliminations (153,106)
--------------
Consolidated $ 13,829,613
==============
</TABLE>
The Company's worldwide business is subject to risks of currency fluctuations,
governmental actions and other governmental proceedings abroad. The Company does
not regard these risks as a deterrent to further expansion of its methods of
operations abroad. However, the Company closely reviews its methods of
operations, particularly in less developed countries, and adopts strategies
responsive to changing economic and political conditions.
NOTE 13. 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.
F-24
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
The Company has been notified by a competitor asserting that it is in violation
of a certain patent which relates to the single-stick lancet product. The
Company believes it is indemnified under an agreement with a supplier and its
agreement with Ulster Scientific, Inc. for the purchase of the Ulster product
lines. Management intends to vigorously contest the competitor's assertion and
cannot estimate the potential liability, if any, at this time.
Consulting Agreement. Effective March 1, 1996, the Company entered into a one
year consulting agreement, which can be extended annually, 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 1997 and 1996, there were no Company
profit sharing contributions. Company matching contributions and administrative
expenses for 1997 and 1996 were approximately $36,000 and $24,500, respectively.
NOTE 14. PRODUCT LINE RESTRUCTURING AND INVENTORY
REDUCTION
During the fourth quarter of 1997, the Company implemented a new strategy of
focusing its marketing efforts for sutures mainly on domestic accounts (See Note
18). This new strategy lead to a review of the product lines manufactured by the
Company and inventories held by the Company in certain cases for more than three
years. These inventories had been purchased or manufactured to service a
clientele that failed to grow, thereby putting the value of such inventories in
question. After attempting with limited success, to sell these inventories at
any price below the costs necessary is some cases to finish the product, the
Company elected to write off the items in question as of December 31, 1997. The
resultant product line restructuring charge was $2,855,012.
F-25
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 14. PRODUCT LINE RESTRUCTURING AND INVENTORY
REDUCTION (CONTINUED)
Also in 1997, the Company attempted to launch a new product into the diagnostic
market. This effort was unsuccessful. The costs of the product purchased for his
effort amounting to $150,268 was written off. Certain international markets for
sutures were abandoned and the related receivables aggregating to $327,000 were
written off as part of the product line restructuring.
During 1997 and 1996, the Company experienced reductions in its cost 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 $770,000 in 1997 and $300,000 in 1996.
NOTE 15. ACQUISITIONS AND JOINT VENTURES
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, and assumed $320,000 in
supplier liabilities for a total purchase price of $568,000. The Company also
agreed to terms on a consulting and royalty contract with payments of 2 percent
or more of certain Ulster sales over eight years and with minimum payments of
$90,000 per year for the next five years. The Company assigned no value to this
contract in recording the purchase. In addition, the Company agreed to issue
warrants to the seller to purchase 200,000 shares of common stock at $3.00 per
share expiring in eight years. No value was assigned to these warrants in
recording the purchase, 150,000 of which are contingent upon future product
sales. The Company acquired, in addition to inventory and equipment, patents,
trademarks, and other intangible assets. The intangibles purchased totaled
$490,000 related to a non compete agreement, patents, and trademarks. All
intangibles are amortized over eight years.
On May 12, 1997, the Company acquired 100 percent of the stock of ProTec
Containers, Inc. a Florida corporation. The acquisition was accounted for under
the purchase method. ProTec is a manufacturer of containers for the disposal of
used medical "sharps", such as hypodermic needles. The Company paid $250,000 in
cash to the owner of the ProTec for manufacturing molds, and issued 200,000
shares of its common stock, valued at $835,980 and recorded liabilities totaling
approximately $515,328 in exchange for all outstanding shares of ProTec. All
intangibles are amortized over ten years.
F-26
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 15. ACQUISITIONS AND JOINT VENTURES (CONTINUED)
In connection with the ProTec Acquisition, the Company agreed to guarantee the
value of the common sock issued to the former owner pursuant to such acquisition
for a period of six months from the effective date of the Registration Statement
on Form S-3 which was filed by the Company to register the resale of such
shares. As a result of the decline in the price to the Lukens Common Stock
during such period (and taking into account certain other adjustments), the
Company owes the former owner of ProTec approximately $300,000, which amount is
payable either by the issuance of shares of the Lukens Common Stock or a
one-year promissory note. The amount was recorded by reducing the value of the
common stock and recording the liability as a one year note payable (see Note
6).
As a result of the acquisition of ProTec, the Company had the following non-cash
activity:
<TABLE>
<S> <C>
Assets acquired:
Accounts receivable, net $ 179,830
Inventory 13,000
Fixed assets 77,854
Intangible assets 1,164,091
Other 9,051
-----------
1,443,826
Liabilities assumed:
Accounts payable and accrued liabilities (86,807)
Notes payable (30,795)
------------
(117,602)
Notes payable issued (515,328)
Value of common stock issued (835,980)
------------
Cash acquired $ (25,084)
=============
</TABLE>
F-27
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 15. ACQUISITIONS AND JOINT VENTURES (CONTINUED)
The proforma results of operations for the year ended December 31, 1997 and
1996, as though the companies had been combined at the beginning of that period
is as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net sales $ 9,035,443 9,289,455
===========================
Net earnings (loss) $ (3,698,478) 648,923
===========================
Weighted average number of common and
common equivalent shares outstanding:
Basic $ 2,996,612 2,877,698
===========================
Dilutive $ 2,996,612 3,268,113
===========================
Net earnings (loss) per common and
common equivalent share:
Basic $ (1.23) .23
===========================
Dilutive $ (1.23) .20
===========================
</TABLE>
In 1996, the Company formed a joint venture (Somar Lukens) with Serral, S.A de
C.V., a Mexican Corporation, to produce needles. The joint venture is an equal
partnership, with each partner retaining ownership of the equipment it provides
and purchasing the products produced. As of December 31, 1997, the venture was
still in the process of setting up the equipment and configuring the production
process. As of December 31, 1997, the Company had not contributed any capital to
the joint venture.
In May 1997, the Company entered into another joint venture with two individuals
in Brazil to manufacture and market sutures into international markets. The
Company owns 51 percent of the venture. The venture assumed the suture
operations of a pre-existing Brazilian company, Medical Express Ltda. Under the
terms of the joint venture, the Company agreed to purchase and sell inventory to
the joint venture at fully-loaded manufacturing cost plus 25 percent and not to
sell products purchased from the joint venture in Brazil. In addition, the
Company may not transfer its interest in the joint venture without allowing the
other shareholders the option of purchasing it. The new venture did not become
operational until October 1, 1997. As of December 31, 1997, the Company had
invested $125,000 in the joint venture.
F-28
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 15. ACQUISITIONS AND JOINT VENTURES (CONTINUED)
On January 9, 1997, the Company became the majority shareholder in a new joint
manufacturing venture based in Cochin, India. Under the joint venture agreement,
the Company was required to contribute $800,000 in capital and may not transfer
its interest in the joint venture without allowing the other shareholders the
option of purchasing it. The venture, which manufactures syringes, hypodermic
needles, and components for other Company products, acquired the basic equipment
required for the process, as well as a 22,000 square-foot facility and began
operations in November 1997. The venture will market the products through Lukens
and the two minority shareholders, who are all current distribution partners of
Lukens, in various parts of the world. As of December 31, 1997, the Company
owned 90 percent of the joint venture and had invested $940,000.
NOTE 16. SUBSEQUENT EVENT
On February 20, 1998, the Company announced that it was negotiating the sale of
the Company to an unnamed third party. The proposal most recently received by
the Company contemplates a merger pursuant to which existing shareholders of
Lukens would receive approximately $4.00 in cash for each share of Lukens Common
Stock. No definitive terms have, as yet, been agreed upon and the proposal is,
and any other matters are subject to further review by both boards, the
completion of due diligence reviews and the negotiation and execution of
definitive agreements. No assurance can be given that the current negotiations
will result in any transaction or as to the ultimate terms or timing of any such
transaction.
NOTE 17. LIQUIDITY
The Company produced a net loss in 1997. At December 31, 1997, current
liabilities exceed current assets, the Company is in arrears on its note
payments to the bank and has violated its debt covenants. The bank has not
granted a waiver on any default by the Company. However, the bank has stated
that as long as the Company adheres to the payment plan submitted, no action
will be taken. Total long-term debt to the bank and a major stockholder has
increased over 1996 levels. Some of these borrowings have been used to acquire a
subsidiary and to fund the start up of joint ventures causing an increase in
intangible and other assets. The Company's capacity to meet its obligations is
dependent upon several factors, such as returning to profitability, developing
adequate liquidity, adhering to debt covenants and required payments, possible
debt restructuring or sale (see Note 16).
F-29
<PAGE>
LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1997
NOTE 17. LIQUIDITY (CONTINUED)
In 1997, the Company implemented a major strategic shift in its marketing
approach regarding its largest product line, sutures. This shift, away from
lower priced markets where the Company had been successful in securing new
business to a focus on certain domestic accounts, was a result of the Company's
desire to improve margins, reduce inventory requirements, and provide a more
consistent order flow. While the Company intends to utilize its Brazilian
facility to continue to service selected international customers, many
unprofitable markets will be abandoned. This strategy led to a significant
write-off of inventory at the end of 1997.
In 1997, the Company also expanded its product lines further with the
acquisition of ProTec Containers, Inc., and brought its facility in Cochin,
India on-line for the manufacture of certain key raw materials. These actions
provide an opportunity to increase revenues and overall margins. Cash flow
projections by management anticipate more abundant cash becoming available in
May 1998.
While the Company has been successful in increasing its orders in the new areas
of focus, and has been successful in producing certain raw materials at a lower
cost, there can be no assurance that the Company efforts will result in
profitability from operations consistently in the future. Additionally, the
Company's write-off of inventory makes the expansion of its credit lines
unlikely in the near term, and the financing of continued internal growth and
acquisitions difficult.
F-30
<PAGE>
LUKENS MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED) AUDITED
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
---------------- -----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $53,882 $74,048
Accounts Receivable, net of allowance for doubtful $2,262,518 $1,836,542
accounts of $40,000 as of December 31,1997 and
$40,00 as of March 31,1998
Inventory $5,333,559 $5,105,900
Prepaid Expenses $138,846 $127,080
---------------- -----------------
TOTAL CURRENT ASSETS $7,788,805 $7,143,570
Land, building and equipment, net of accumulated $3,537,047 $3,599,150
depreciation of $1,963,377as of December 31,1997
and $2,069,927 as of March 31,1998
Intangible assets and Investments in Joint Ventures, $2,899,224 $3,001,139
net of amortization of $1,283,569 as of December 31,1997
and $1,385,484 as of March 31,1998
Other assets $85,754 $85,754
================ =================
TOTAL ASSETS $14,310,830 $13,829,613
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,953,128 $1,864,832
Accrued liabilities $134,783 $138,016
Current maturities of long term debt $6,148,257 $5,146,950
Current maturities of obligations under capital leases $146,893 $146,893
---------------- -----------------
TOTAL CURRENT LIABILITIES $8,383,061 $7,296,691
Long-term debt, excluding current maturities $58,483 $73,483
Stockholder Payable $1,233,075 $2,290,991
Obligations under cap leases, excl current maturities $223,027 $266,256
---------------- -----------------
TOTAL LIABILITIES $9,897,646 $9,927,421
Minority interest $129,531 $129,531
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized $30,934 $30,434
20,000,000 shares: issued and outstanding
3,093,359 shares as of December 31,1997and 3,300,130
as of March 31,1998.
Additional paid-in capital $18,725,535 $18,526,035
Accumulated Deficit ($14,414,215) ($14,730,760)
Foreign Currency Adjustment ($58,601) ($53,048)
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY $4,283,653 $3,772,661
================ =================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,310,830 $13,829,613
================ =================
</TABLE>
F-31
<PAGE>
LUKENS MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
MARCH 31,
1998 1997
-------------- ---------------
<S> <C> <C>
SALES $2,658,933 $2,403,939
Cost of sales $1,624,062 $1,638,284
-------------- ---------------
GROSS PROFIT $1,034,871 $765,655
-------------- ---------------
Selling expenses $227,004 $228,374
General and administrative expenses $351,808 $218,758
Research and development expenses $17,098 $12,020
-------------- ---------------
TOTAL OPERATING EXPENSES $595,910 $459,152
============== ===============
EARNINGS FROM OPERATIONS $438,961 $306,503
-------------- ---------------
OTHER (EXPENSE) INCOME:
Interest income ($50) ($1,860)
Interest expense $122,466 $53,466
Other, net $0 $1,500
-------------- ---------------
TOTAL OTHER (EXPENSE) INCOME $122,416 $53,106
-------------- --------------
EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEMS $316,545 $253,397
Income tax expense $0 $0
-------------- ---------------
NET EARNINGS (LOSS) $316,545 $253,397
============== ===============
Basic net earnings (loss) per share $0.10 $0.09
Dilutive net earnings (loss) per share $0.10 $0.08
Weighted average number of common
shares outstanding - basic 3,093,359 2,843,659
Weighted average number of common
and common equivalent shares
outstanding - dilutive 3,300,130 3,315,737
============== ===============
</TABLE>
F-32
<PAGE>
LUKENS MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1998 1997
----------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
NET EARNINGS (LOSS) $316,545 $253,397
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO CASH
PROVIDED (USED) BY OPERATING ACTIVITIES:
Depreciation $106,550 $82,309
Amortization of intangible assets $101,915 $37,049
CHANGES IN CURRENT ASSETS AND LIABILITIES:
Accounts receivable ($425,976) ($218,117)
Inventory ($227,659) $38,337
Prepaids ($11,766) ($74,849)
Accounts payable $113,296 ($13,786)
Accrued liabilities ($3,233) $165,534
Change in other assets $0 ($83,606)
----------------- -------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES ($30,328) $186,268
----------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment ($50,000) ($31,547)
Investment in Joint ventures $0 ($22,913)
Purchase of intangible assets $0 ($583,689)
----------------- -------------
NET CASH USED IN INVESTING ACTIVITIES ($50,000) ($638,149)
----------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long term debt & obligations under capital $0 ($239,470)
leases
Principal payments on long term debt & obligations under ($139,838) ($25,783)
capital leases
Proceeds from the issuance of common stock and equivalents $200,000 $13,154
----------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $60,162 ($252,099)
----------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ($20,166) ($703,980)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD $74,048 $878,090
================= =============
CASH AND CASH EQUIVALENTS AT END OF PERIOD $53,882 $174,110
================= =============
</TABLE>
F-33
<PAGE>
LUKENS MEDICAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1998
(unaudited)
(1) Summary of Significant Accounting Policies
The Company's principal business activity is the manufacture and sale
of disposable surgical products. The Company's main product lines are
surgical sutures, lancets, sharps containers, and diagnostic products.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB and therefore do not
include all information and footnote disclosure necessary for a full
presentation of financial position, results of operations, and cash
flows. The information furnished, in the opinion of management,
reflects all adjustments necessary to present fairly the results of
operations of the Company for the three-month period ended March 31,
1998 and 1997. The accounting policies followed by the Company are set
forth in note (1) of Notes to the Company's Consolidated Financial
Statements in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997 (the "1997 Form 10-K") filed with the
Securities and Exchange Commission. The results of operations of
interim periods are not necessarily indicative of results which may be
expected for any other interim period or for the year as a whole.
(2) Inventory
Inventory consists of the following components at:
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
------------ -----------
<S> <C> <C>
Raw Materials $2,127,718 $1,938,343
Work-in-Process 1,950,637 1,972,124
Finished Goods 1,321,374 1,261,603
Inventory Reserve (66,170) (66,170)
---------- -----------
$5,333,559 $5,105,900
========== ==========
</TABLE>
F-34
<PAGE>
(3) Income Taxes
The net operating loss and credit for increasing research activities
carryforwards as of December 31, 1997, expire as follows:
<TABLE>
<CAPTION>
Approximate Increasing Research
Net Operating Activities Book/Tax
Loss Carryforward Credits
----------------- -------
State Loss Federal Loss
Amount Amount Tax Effect Tax Effect
<S> <C> <C> <C> <C>
1999 $2,537,000 $ --- $ 122,000 $ 3,800
2000 --- 1,930,000 656,000 37,200
2001 2,400,000 1,835,000 739,000 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 ---
2007 --- 26,000 9,000 ---
2008 --- 88,000 30,000 ---
2009 --- 2,760,000 938,000
2017 --- 2,400,000 816,000 ---
----------------------------------------------------------------------------------
$6,893,000 $12,975,000 $4,742,000 $105,000
========== =========== ========== ========
</TABLE>
The capital loss carryforwards of approximately $271,000, tax effect of
$105,000, expire in 1998.
The deduction of federal net operating loss carryforwards is limited to
approximately $3,962,000 as of December 31, 1997. This limitation is based on an
annual limitation of $460,000 plus available carryover of $654,000 and losses
incurred subsequent to 1992 of $5,248,000. In addition, should the sale of the
Company occur (See "Liquidity and Capital Resources"), there may be additional
limitations.
(4) Pending Litigation
Owen Mumford Ltd. ("Owen Mumford"), one of the Company's competitors,
filed a complaint in the United States District Court for the Eastern
District of Virginia, Richmond Division on April 29, 1998 and served a
summons and complaint on the Company on June 1, 1998, alleging that the
one of the Company's products, the "Gentle-Let 1" infringes on a patent
owned by Owen Mumford. The complaint seeks damages adequate to
compensate Owen Mumford for the alleged patent infringement, as well as
costs and expenses. The Company intends to vigorously defend itself in
this proceeding. The matter is currently in the discovery phase.
(5) Status of Default Under Credit Facility
During the quarter ended March 31, 1998, the Company was in technical
default of certain financial covenants and in payment default under
certain of its term loans with its lending bank. In April 1998, the
Company cured its payment default under the term loans and its lending
bank amended certain of the financial covenants so that the Company is
no longer in default under any of its lines of credit.
F-35
<PAGE>
ANNEX A
AGREEMENT AND PLAN
OF MERGER
DATED AS OF
APRIL 28, 1998
AMONG
MEDISYS PLC
LMC ACQUISITION CORP.
AND
LUKENS MEDICAL CORPORATION
<PAGE>
TABLE OF CONTENTS
ARTICLE I. THE MERGER.........................................................1
Section 1.1. The Merger..............................................1
Section 1.2. Effective Date of the Merger............................1
ARTICLE II. SURVIVING CORPORATION..............................................1
Section 2.1. Certificate of Incorporation............................1
Section 2.2. By-Laws.................................................2
Section 2.3. Board of Directors; Officers............................2
Section 2.4. Effects of Merger.......................................2
ARTICLE III. CONVERSION OF SHARES; OTHER SECURITIES...........................2
Section 3.1. Merger Consideration....................................2
ARTICLE IV. PAYMENT PROCEDURES; MECHANICS OF THE MERGER.......................3
Section 4.1. Payment Procedures......................................3
Section 4.2. Dissenting Shares.......................................4
Section 4.3. Stock Options...........................................5
Section 4.4. Stockholders' Meetings..................................5
Section 4.5. Closing of the Company's Transfer Books.................6
Section 4.6. Assistance in Consummation of Merger....................6
Section 4.7. Closing.................................................6
<PAGE>
ARTICLE V. REPRESENTAIONS AND WARRANTIES OF PARENT............................6
Section 5.1. Organization and Qualification..........................6
Section 5.2. Authority Relative to this Agreement....................6
Section 5.3. Parent Action...........................................7
Section 5.4. Financial Advisor.......................................7
Section 5.5. Information.............................................7
Section 5.6. Financing...............................................8
Section 5.7. Litigation..............................................8
ARTICLE VI. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.....................8
Section 6.1. Organization and Qualification..........................8
Section 6.2. Capitalization..........................................8
Section 6.3. Subsidiaries............................................9
Section 6.4. Authority Relative to this Agreement....................9
Section 6.5. Reports and Financial Statements.......................10
Section 6.6. Absence of Certain Changes or Events...................11
Section 6.7. Litigation.............................................11
Section 6.8. Employee Benefit Plans.................................12
Section 6.9. Labor Matters..........................................14
Section 6.10. Company Action.........................................14
Section 6.11. Compliance with Applicable Laws........................15
Section 6.12. Liabilities............................................15
Section 6.13. Taxes..................................................15
<PAGE>
Section 6.14. Certain Agreements.....................................15
Section 6.15. Patents, Trademarks, Etc...............................16
Section 6.16. No Material Adverse Effect.............................16
Section 6.17. Products Liability.....................................17
Section 6.18. Environmental Matters..................................17
Section 6.19. Title to Property......................................18
Section 6.20. Absence of Certain Business Practices..................19
Section 6.21. Financial Advisor .....................................19
ARTICLE VII. REPRESENTATIONS AND WARRANTIES REGARDING SUB....................19
Section 7.1. Organization...........................................19
Section 7.2. Capitalization.........................................19
Section 7.3. Authority Relative to this Agreement...................19
ARTICLE VIII. CONDUCT OF BUSINESS PENDING THE MERGER.........................20
Section 8.1. Conduct of Business by the Company Pending the Merger..20
ARTICLE IX. ADDITIONAL AGREEMENTS............................................21
Section 9.1. Access and Information.................................21
Section 9.2. Proxy Statement........................................22
Section 9.3. Employee Matters.......................................22
Section 9.4. Indemnification........................................23
Section 9.5. Additional Agreements..................................24
Section 9.6. Alternative Proposals..................................24
Section 9.7. Advice of Changes; SEC Filings.........................25
<PAGE>
Section 9.8. Restructuring of Merger................................25
Section 9.9. Cancellation of Warrants; Repayment of Loans from
Affiliates...........................................25
Section 9.10. Agreement of Principal Stockholders....................26
Section 9.11 Fairness Opinion.......................................26
ARTICLE X. CONDITIONS PRECEDENT..............................................26
Section 10.1. Conditions to Each Party's Obligation to Effect the
Merger...............................................26
Section 10.2. Conditions to Obligation of the Company to Effect
the Merger...........................................27
Section 10.3. Conditions to Obligations of Parent and Sub to
Effect the Merger....................................27
ARTICLE XI. TERMINATION, AMENDMENT AND WAIVER................................28
Section 11.1. Termination by Mutual Consent..........................28
Section 11.2 Termination by Either Parent or the Company............28
Section 11.3. Termination by the Company.............................29
Section 11.4. Termination by the Parent..............................29
Section 11.5. Effect of Termination and Abandonment..................30
ARTICLE XII. GENERAL PROVISIONS..............................................31
Section 12.1. Non-Survival of Representations, Warranties and
Agreements...........................................31
Section 12.2. Notices................................................31
Section 12.3. Fees and Expenses......................................32
Section 12.4. Publicity..............................................32
Section 12.5. Specific Performance...................................32
Section 12.6. Assignment; Binding Effect.............................33
Section 12.7. Entire Agreement.......................................33
<PAGE>
Section 12.8. Amendment..............................................33
Section 12.9. Governing Law..........................................33
Section 12.10. Counterparts..........................................33
Section 12.11. Headings and Table of Contents........................33
Section 12.12. Interpretation.......................................33
Section 12.13. Waivers..............................................34
Section 12.14. Severability.........................................34
Section 12.15. Subsidiaries.........................................34
Section 12.16. United States Dollars; Exchange Rates................34
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of April 28,
1998, by and among Medisys PLC, a Scottish public limited company ("Parent"),
LMC Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of
Parent ("Sub"), and Lukens Medical Corporation, a Delaware corporation (the
"Company"):
W I T N E S S E T H:
WHEREAS, Parent and the Company desire to effect a business combination by
means of the merger of Sub with and into the Company (the "Merger"); and
WHEREAS, the Boards of Directors of Parent, Sub and the Company have
approved the Merger, upon the terms and subject to the conditions set forth
herein;
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein the parties hereto
agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions hereof, on the
Effective Date (as defined in Section 1.2), Sub shall be merged into the Company
and the separate existence of Sub shall thereupon cease, and the Company, as the
corporation surviving the Merger (the "Surviving Corporation"), shall by virtue
of the Merger continue its corporate existence under the laws of the State of
Delaware.
1.2 Effective Date of the Merger. Subject to the provisions of this
Agreement, a certificate of merger (the "Certificate of Merger") in such form as
is required by the relevant provisions of the Delaware General Corporation Law
(the "DGCL") shall be duly prepared, executed and acknowledged by the Surviving
Corporation and thereafter delivered to the Secretary of State of the State of
Delaware for filing on the date of the Closing (as defined in Section 4.1(c)).
The Merger shall become effective (the "Effective Date") upon the filing of the
Certificate of Merger or at such time thereafter as is provided in such
Certificate of Merger.
ARTICLE II
SURVIVING CORPORATION
2.1 Certificate of Incorporation. The Certificate of Incorporation of Sub
shall be the Certificate of Incorporation of the Surviving Corporation after the
Effective Date, and thereafter may be amended in accordance with its terms and
as provided by law and this Agreement.
<PAGE>
2.2 By-Laws. The By-laws of Sub as in effect on the Effective Date shall be
the By-laws of the Surviving Corporation, and thereafter may be amended in
accordance with its terms and as provided by law and this Agreement.
2.3 Board of Directors; Officers. The directors of Sub immediately prior to
the Effective Date shall be the directors of the Surviving Corporation, and the
officers of the Company immediately prior to the Effective Date shall be the
officers of the Surviving Corporation, in each case until their respective
successors are duly elected and qualified.
2.4 Effects of Merger. The Merger shall have the effects set forth in
Section 259 of the DGCL.
ARTICLE III
CONVERSION OF SHARES; OTHER SECURITIES
3.1 Merger Consideration. On the Effective Date, by virtue of the Merger
and without any action on the part of any holder of any shares of Common Stock,
par value $.01 per share, of the Company ("Company Common Stock"):
(a) All shares of Company Common Stock which are held by the Company
or any subsidiary of the Company, and any shares of Company Common Stock owned
by Parent, Sub or any other subsidiary of Parent, shall be canceled.
(b) Each remaining outstanding share of Company Common Stock, other
than the Dissenting Shares (as defined in Section 4.2), shall be converted into
and represent the right to receive $4.00 in cash (the "Merger Consideration") in
accordance with Section 4.1.
(c) Each issued and outstanding share of capital stock of Sub shall be
converted into and become one fully paid and nonassessable share of common stock
of the Surviving Corporation.
In the event of any stock dividend, stock split, reclassification,
recapitalization, combination or exchange of shares with respect to, or rights
issued in respect of, Company Common Stock after the date hereof, the Merger
Consideration shall be adjusted accordingly.
2
<PAGE>
ARTICLE IV
PAYMENT PROCEDURES; MECHANICS OF THE MERGER
4.1 Payment Procedures.
(a) Prior to the Effective Date, Parent shall select a Payment Agent,
which shall be Parent's Transfer Agent or such other person or persons
designated by Parent, to act as Payment Agent for the Merger (the "Payment
Agent").
(b) Promptly after the Effective Date, Parent shall instruct the
Payment Agent to mail to each holder of a certificate or certificates evidencing
shares of Company Common Stock (other than Dissenting Shares) ("Certificates")
(i) a letter of transmittal (which shall include a Substitute Form W-9 and shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of such Certificates to the
Payment Agent) and (ii) instructions to effect the surrender of the Certificates
in exchange for the Merger Consideration. Each holder of Company Common Stock,
upon surrender to the Payment Agent of such holder's Certificates with the
letter of transmittal, duly executed, and such other customary documents as may
be required pursuant to such instructions, shall be paid the amount of cash to
which such holder is entitled, pursuant to this Agreement, as payment of the
Merger Consideration (without any interest accrued thereon). Until so
surrendered, each Certificate shall after the Effective Date represent for all
purposes only the right to receive the Merger Consideration. In the event any
Certificate shall have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the person claiming such Certificate to be lost,
stolen or destroyed and, if required by the Surviving Corporation, the posting
by such person of a bond in such reasonable amount as the Surviving Corporation
may direct as indemnity against any claim that may be made against it with
respect to such Certificate, the Payment Agent will deliver in exchange for such
lost, stolen or destroyed Certificate the Merger Consideration payable in
respect thereof pursuant to this Agreement.
(c) At the Closing of the transactions contemplated by this Agreement
(the "Closing), Parent shall deposit in trust with the Payment Agent, for the
ratable benefit of the holders of Company Common Stock (other than Dissenting
Shares), the appropriate amount of cash to which such holders are entitled
pursuant to this Agreement as payment of the Merger Consideration (the "Payment
Fund"). The Payment Agent shall, pursuant to irrevocable instructions, make the
payments to the holders of the Company Common Stock as set forth in this
Agreement.
(d) If any delivery of the Merger Consideration is to be made to a
person other than the registered holder of the Certificates surrendered in
exchange therefor, it shall be a condition to such delivery that the Certificate
so surrendered shall be properly endorsed or be otherwise in proper form for
transfer and that the person requesting such delivery shall (i) pay to the
Payment Agent any transfer or other taxes required as a result of delivery to a
3
<PAGE>
person other than the registered holder or (ii) establish to the satisfaction of
the Payment Agent that such tax has been paid or is not payable.
(e) Any portion of the Payment Fund that remains undistributed to the
holders of Company Common Stock as of the first anniversary of the Effective
Date shall be delivered to Parent upon demand, and any holder of Company Common
Stock who has not theretofore complied with the exchange requirements of this
Section shall have no further claim upon the Payment Agent and shall thereafter
look only to Parent for payment of the Merger Consideration.
(f) If a Certificate has not been surrendered prior to the date on
which any receipt of Merger Consideration would otherwise escheat to or become
the property of any governmental agency, such Certificate shall, to the extent
permitted by applicable law, be deemed to be canceled and no Merger
Consideration, money or other property will be due to the holder thereof.
(g) The Payment Agent shall invest cash in the Payment Fund in
obligations of or guaranteed by the United States of America with remaining
maturities not exceeding 180 days, in commercial paper obligations receiving the
highest rating from either Moody's Investors Services, Inc. or Standard & Poor's
Corporation, or in certificates of deposit or banker's acceptances of commercial
banks with capital exceeding $500 million (collectively, "Permitted
Investments"). The maturities of Permitted Investments shall be such as to
permit the Payment Agent to make prompt payment to former stockholders of the
Company entitled thereto as contemplated by this Section. Any interest and other
income resulting from such investments shall be paid to Parent or as Parent may
otherwise direct.
4.2 Dissenting Shares.
(a) Notwithstanding any other provision of this Agreement to the
contrary, shares of Company Common Stock that are outstanding immediately prior
to the Effective Date and which are held by holders who shall have not voted in
favor of the Merger or consented thereto in writing and who shall have demanded
properly in writing appraisal for such shares in accordance with Section 262 of
the DGCL and who shall not have withdrawn such demand or otherwise have
forfeited appraisal rights (collectively, the "Dissenting Shares") shall not be
converted into or represent the right to receive the Merger Consideration. Such
holders shall be entitled to receive payment of the appraised value of such
shares, except that all Dissenting Shares held by holders who shall have failed
to perfect or who effectively shall have withdrawn or lost their rights to
appraisal of such shares under such Section 262 shall thereupon be deemed to
have been converted into and to have become exchangeable, as of the Effective
Date, for the right to receive, without any interest thereon, the Merger
Consideration, upon surrender of the Certificates evidencing such shares.
(b) The Company shall give Parent (i) prompt notice of any demands for
appraisal received by the Company, withdrawals of such demands, and any other
instruments
4
<PAGE>
served pursuant to the DGCL and received by the Company and (ii) the opportunity
to direct all negotiations and proceedings with respect to demands for appraisal
under the DGCL. The Company shall not, except with the prior written consent of
Parent, make any payment with respect to any demands for appraisal, or offer to
settle, or settle, any such demands.
4.3 Stock Options.
(a) The Company's stock option plan, which is attached to Section 4.3
of the Company Disclosure Schedule (as defined in Section 6.1) (the "Option
Plan"), and each option to acquire shares of Company Common Stock outstanding
immediately prior to the Effective Date thereunder, whether vested or unvested
(each, an "Option" and collectively, the "Options"), shall be assumed by Parent
at the Effective Date, and each such Option shall become an option to purchase a
number of ordinary shares of Parent, par value 1p (a "Substitute Option"), equal
to the number of shares of Company Common Stock subject to such Option
multiplied by the Option Exchange Ratio (as defined below). The per share
exercise price for each Substitute Option shall be the current exercise price
per share of Company Common Stock divided by the Option Exchange Ratio, and each
Substitute Option otherwise shall after the Effective Date be subject to all of
the other terms and conditions of the original Option to which it relates. Prior
to the Effective Date, the Company shall take such additional actions as are
reasonably necessary under the applicable agreements and Option Plan to provide
that each outstanding Option shall, from and after the Effective Date, represent
only the right to purchase, upon exercise, ordinary shares of Parent and Parent
shall take such additional actions as are reasonable and necessary under
applicable law in order to effect the issuance of such Substitute Options to
such holders. Except as set forth in Section 4.3 of the Company Disclosure
Schedule, the vesting of no Option shall be accelerated by reason of the Merger
unless the agreement or arrangement under which it was granted or by which it is
otherwise governed specifically provides for such acceleration. For avoidance of
doubt, it is the intention of Parent and the Company that the Substitute Options
be identical in all respects to the Options (except for the number and type of
shares for which they shall be exercisable and the exercise price thereof) and
that, without limitation, (i) all terms of the plans under which such Options
were issued and (ii) all policies set forth in Section 4.3 of the Company
Disclosure Schedule, shall apply thereto from and after the Effective Date.
(b) For purposes of this Agreement, the term "Option Exchange Ratio"
shall mean the ratio of (x) $4.00 to (y) the U.S. dollar equivalent of the
average of the middle-market closing price per share of the Parent ordinary
shares on the Alternative Investment Market of the London Stock Exchange, as
shown in the "London Stock Exchange Daily Official List," for each of the ten
trading days ending two trading days prior to the Effective Date.
4.4 Stockholders' Meetings. (a) The Company shall take all action
necessary, in accordance with applicable law and its Certificate of
Incorporation and By-laws, to convene a special meeting of the holders of
Company Common Stock (the "Company Meeting") as promptly as practicable for the
purpose of considering and taking action upon this Agreement. Subject solely to
its fiduciary duties, the Board of Directors of the Company will recommend
5
<PAGE>
that holders of Company Common Stock vote in favor of and approve the Merger and
the adoption of the Agreement at the Company Meeting. At the Company Meeting,
all of the shares of Company Common Stock then owned by Parent, Sub, or any
other subsidiary of Parent, or with respect to which Parent, Sub, or any other
subsidiary of Parent holds the power to direct the voting, will be voted in
favor of approval of the Merger and adoption of this Agreement.
(b) Parent shall take all action necessary, in accordance with
applicable law, stock exchange rules and its Memorandum and Articles of
Association, to convene an extraordinary meeting of the holders of its ordinary
shares to approve this Agreement, the Merger and the related issuance of
securities of Parent, to the extent approval is required and sought by Parent.
Subject solely to its fiduciary duties, the Board of Directors of Parent will
recommend that holders of its ordinary shares vote in favor of the matters put
before them.
4.5 Closing of the Company's Transfer Books. At the Effective Date, the
stock transfer books of the Company shall be closed and no transfer of shares of
Company Common Stock shall be made thereafter. In the event that, after the
Effective Date, Certificates are presented to the Surviving Corporation, they
shall be canceled and exchanged for the Merger Consideration as provided in
Sections 3.1 (b) and 4.1.
4.6 Assistance in Consummation of the Merger. Each of Parent, Sub and the
Company shall provide all commercially reasonable assistance to, and shall
cooperate with, each other to bring about the consummation of the Merger as soon
as possible in accordance with the terms and conditions of this Agreement.
Parent shall cause Sub to perform all of its obligations in connection with this
Agreement.
4.7 Closing. The Closing shall take place (i) at the offices of Brock
Silverstein McAuliffe LLC, One Citicorp Center, 153 East 53rd Street, 56th
floor, New York, New York 10022, at 10:00am, New York City time, on the earlier
of (A) August 14, 1998 or (B) the day which is no later than two business days
after the day on which the last of the conditions set forth in Article X is
fulfilled or waived and the meeting of Parent's Shareholders with respect to the
Merger and related financing has been held or (ii) at such other time and place
as Parent and the Company shall agree in writing.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company as follows:
5.1 Organization and Qualification. Parent is a public limited company duly
incorporated, validly existing and in good standing under the laws of Scotland
and has the corporate power to carry on its business as it is now being
conducted or currently proposed to be conducted.
6
<PAGE>
5.2 Authority Relative to this Agreement. Parent has the corporate
authority to enter into this Agreement and, subject to the satisfaction of the
conditions contained herein, to carry out its obligations hereunder. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by Parent's Board of
Directors. The Agreement constitutes a valid and binding obligation of Parent
enforceable in accordance with its terms except as enforcement may be limited by
bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights generally and except that the availability of equitable
remedies, including specific performance, is subject to the discretion of the
court before which any proceeding therefor may be brought. Except for the
requisite approval of the holders of the Parent ordinary shares of the
transactions contemplated hereby and related financing, no other corporate
proceedings on the part of Parent are necessary to authorize the Agreement and
the transactions contemplated hereby. Parent is not subject to or obligated
under (i) any memorandum, articles of association, indenture or other loan
document provision or (ii) any other contract, license, franchise, permit,
order, decree, concession, lease, instrument, judgment, statute, law, ordinance,
rule or regulation applicable to Parent or any of its subsidiaries or their
respective properties or assets, which would be breached or violated, or under
which there would be a default (with or without notice or lapse of time, or
both), or under which there would arise a right of termination, cancellation,
modification or acceleration of any obligation or the loss of a material
benefit, by its executing and carrying out this Agreement other than those
which, either singly or in the aggregate, has not had, or would not reasonably
be expected to have, a material adverse effect on the Parent's ability to
consummate the transactions contemplated hereby, including the Merger. Except as
required in connection, or in compliance, with the provisions of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), the Securities Act of
1933, as amended (the "Securities Act"), and the corporation, securities or blue
sky laws or regulations of the various states or any rules or regulations of the
London Stock Exchange applicable to Parent, no filing or registration with, or
authorization, consent or approval of, any public body or authority is necessary
for the consummation by Parent of the Merger or the other transactions
contemplated by this Agreement other than filings, registrations,
authorizations, consents or approvals the failure of which to make or obtain has
not had, or would not reasonably be expected to have a material adverse effect
on Parent's ability to consummate the transactions contemplated hereby,
including the Merger.
5.3 Parent Action. The Board of Directors of Parent (at a meeting duly
called and held) has by the requisite vote of all directors present determined
that the Agreement is advisable and in the best interests of Parent and its
stockholders.
5.4 Financial Advisor. Parent represents and warrants that, except for
Henry Ansbacher & Co. Limited and any other underwriter, broker, finder or
investment banker to be engaged in the normal course of business for the
offering of Parent's securities, no broker, finder or investment banker is
entitled to any brokerage or finder's fee or investment banking fee in
connection with the Merger and the related financing based upon arrangements
made by or on behalf of Parent.
7
<PAGE>
5.5 Information. As of the date of this Agreement, Parent does not know of
any facts or circumstances which currently or with the passage of time
constitute a breach of the representations or warranties made by the Company
herein. To its knowledge, Parent has been furnished with and been given access
by the Company to considerable information about the Company and its business as
it has requested. The Company acknowledges that the foregoing shall not in any
way limit Parent's ability to terminate this Agreement pursuant to Section 11.4.
5.6 Financing. Based upon preliminary discussions with its proposed sources
of financing, Parent has a good faith belief that it will be able to raise the
funds necessary to consummate the transactions contemplated hereby.
5.7 Litigation. There is no suit, action, claim, arbitration or proceeding
pending or, to the knowledge of Parent, threatened against Parent seeking to
prevent or challenge the transactions contemplated by this Agreement. Parent is
not subject to any judgment, decree, injunction, rule or order of any court,
governmental department, commission, agency, instrumentality, or arbitrator
outstanding against Parent having, or which would reasonably be expected to
have, either alone or in the aggregate, a material adverse effect on Parent's
ability to consummate the transactions hereby.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub as follows:
6.1 Organization and Qualification. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has the corporate power to carry on its business as it is now
being conducted. The Company is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or held under lease or the nature of its activities makes
such qualification necessary, except where the failure to be so qualified will
not have a material adverse effect on the business, properties, prospects,
assets, condition (financial or otherwise), liabilities or results of operations
of the Company and its Subsidiaries taken as a whole (a "Company Material
Adverse Effect"). Complete and correct copies as of the date hereof of the
Certificate of Incorporation and By-laws of the Company and each of its
Subsidiaries are attached to Section 6.1 of the disclosure schedule delivered by
the Company to Parent prior to execution and delivery of this Agreement (the
"Company Disclosure Schedule"). The Certificate of Incorporation and By-laws of
the Company are in full force and effect. The Company is not in violation of any
provision of its Certificate of Incorporation or By-laws.
6.2 Capitalization. The authorized capital stock of the Company consists of
20,000,000 shares of Company Common Stock, $.01 par value and 1,000,000 shares
of preferred stock, $.01 par value (the "Preferred Stock"). As of March 31,
1998, 3,093,359 shares of Company Common Stock were validly issued and
outstanding, fully paid and nonassessable,
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there were no shares of Preferred Stock issued and outstanding and (except for
issuances upon the exercise of outstanding options) there have been no changes
in such numbers of shares through the date hereof. As of the date hereof, there
are no bonds, debentures, notes or other indebtedness having the right to vote
on any matters on which the Company's shareholders may vote issued or
outstanding. Except as set forth in Section 6.2 of the Company Disclosure
Schedule, there are no options, warrants, calls or other rights, agreements or
commitments presently outstanding obligating the Company to issue, deliver or
sell shares of its capital stock or debt securities, or obligating the Company
to grant, extend or enter into any such option, warrant, call or other such
right, agreement or commitment. After the Effective Date, subject to Section
4.3, the Surviving Corporation will have no obligation to issue, transfer or
sell any shares of capital stock of the Company or the Surviving Corporation
pursuant to any Company Employee Benefit Plan (as defined in Section 6.8).
6.3 Subsidiaries. The only Subsidiaries of the Company are disclosed in
Section 6.3 of the Company Disclosure Schedule. Each Subsidiary of the Company
is a corporation duly incorporated, validly existing and in good standing under
the laws of its jurisdiction of incorporation and has the corporate power to
carry on its business as it is now being conducted. Each Subsidiary of the
Company is duly qualified as a foreign corporation to do business, and is in
good standing, in each jurisdiction where the character of its properties owned
or held under lease or the nature of its activities makes such qualification
necessary except where the failure to be so qualified, when taken together with
all such failures, has not had, or would not reasonably be expected to have a
material adverse effect on the business, properties, assets, condition
(financial or otherwise), liabilities or results of operations of such
Subsidiary. Section 6.3 of the Company Disclosure Schedule contains, with
respect to each Subsidiary of the Company, its name and jurisdiction of
incorporation and, with respect to each Subsidiary that is not wholly owned, the
number of issued and outstanding shares of capital stock and the number of
shares of capital stock owned by the Company or a Subsidiary. All the
outstanding shares of capital stock of each Subsidiary of the Company are
validly issued, fully paid and nonassessable, and those owned by the Company or
by a Subsidiary of the Company are owned free and clear of any liens, claims or
encumbrances. Except as set forth in Section 6.3 of the Company Disclosure
Schedule, there are no existing options, warrants, calls or other rights,
agreements or commitments of any character relating to the issued or unissued
capital stock or other securities of any of the Subsidiaries of the Company.
Except as set forth in Section 6.3 of the Company Disclosure Schedule, the
Company does not directly or indirectly own any interest in any other
corporation, partnership, joint venture or other business association or entity.
6.4 Authority Relative to this Agreement. The Company has the corporate
power to enter into this Agreement and to carry out its obligations hereunder.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by the Company's
Board of Directors. This Agreement constitutes a valid and binding obligation of
the Company enforceable in accordance with its terms except as enforcement may
be limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally and except that the availability of
equitable remedies,
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including specific performance, is subject to the discretion of the court before
which any proceeding therefor may be brought. Except for the approval of the
holders of a majority of the shares of Company Common Stock, no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
and the transactions contemplated hereby. Except as set forth in Section 6.4 of
the Company Disclosure Schedule, the Company is not subject to or obligated
under (i) any charter, by-law, indenture or other loan document provision or
(ii) any other contract, license, franchise, permit, order, decree, concession,
lease, instrument, judgment, statute, law, ordinance, rule or regulation
applicable to the Company or any of its Subsidiaries or their respective
properties or assets which would be breached or violated, or under which there
would be a default (with or without notice or lapse of time, or both), or under
which there would arise a right of termination, cancellation, modification or
acceleration of any obligation or the loss of a material benefit, by its
executing and carrying out this Agreement. Except as disclosed in Section 6.4 of
the Company Disclosure Schedule or, with respect to the Merger or the
transactions contemplated thereby, in connection, or in compliance, with the
provisions of the Securities Act, the Exchange Act, and the corporation,
securities or blue sky laws or regulations of the various states, no filing or
registration with, or authorization, consent or approval of, any public body or
authority is necessary for the consummation by the Company of the Merger or the
other transactions contemplated hereby, other than filings, registrations,
authorizations, consents or approvals the failure of which to make or obtain has
not had, or would not reasonably be expected to have, a Company Material Adverse
Effect or prevent the consummation of the transactions contemplated hereby,
including the Merger.
6.5 Reports and Financial Statements.
(a) The Company has previously furnished Parent with true and complete
copies of its (i) Annual Report to Stockholders and Annual Reports on Form 10-K
for the fiscal years ended December 31, 1995, December 31, 1996 and December 31,
1997 as filed with the Securities and Exchange Commission (the "Commission"),
(ii) proxy statements related to all meetings of its shareholders (whether
annual or special) since January 1, 1996 and (iii) the other reports (including
Forms 10-Q and 8-K) or registration statements set forth in Section 6.5 of the
Company Disclosure Schedule which have been filed by the Company with the
Commission since January 1, 1995, except for preliminary material (in the case
of clauses (ii) and (iii) above) and except for registration statements on Form
S-8 relating to employee benefit plans, which are all the documents that the
Company was required to file with the Commission since that date (clauses (i)
through (iii) being referred to herein collectively, together with all financial
statements (including footnotes), exhibits, schedules thereto and documents
incorporated by reference therein, as the "Company SEC Reports"). As of their
respective filing dates, the Company SEC Reports complied as to form in all
material respects with the requirements of the Securities Act or the Exchange
Act, as the case may be, and the rules and regulations of the Commission
thereunder applicable to such Company SEC Reports. As of their respective filing
dates, the Company SEC Reports did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. None of the Company's subsidiaries is
required to file any forms, reports or other documents
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with the Commission. The consolidated financial statements of the Company
included in the Company SEC Reports, including any forms, reports or other
documents filed with the Commission by the Company subsequent to the date
hereof, (i) comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the
Commission with respect thereto; (ii) have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods presented (except as may be indicated therein or in the
notes thereto) or in the case of unaudited statements, as permitted for
presentation in quarterly reports on Form 10-Q; (iii) present fairly, in all
material respects, the financial position of the Company and its Subsidiaries as
at the dates thereof and the results of their operations and cash flow for the
periods then ended, subject in the case of interim financial statements to
normal year-end adjustments; and (iv) are in all material respects, prepared in
accordance with the books of account and records of the Company and its
Subsidiaries.
(b) The Company has (i) delivered to Parent true and complete copies
of all material correspondence between the Commission and the Company or its
legal counsel, accountants or other advisors since January 1, 1995 except for
cover letters transmitting SEC reports, and (ii) disclosed to Parent in writing
the content of all material discussions between the Commission and the Company
or its legal counsel, accountants or other advisors concerning the adequacy of
form of any SEC Report filed with the Commission since January 1, 1995. The
Company is not aware of any issues raised by the Commission with respect to any
of the SEC Reports, other than those disclosed to Parent pursuant to clause (i)
or (ii) of this Section 6.5(b).
6.6 Absence of Certain Changes or Events. Since December 31, 1997, except
as set forth on Section 6.6 of the Company Disclosure Schedule, the Company and
its Subsidiaries have conducted their businesses in the ordinary course,
consistent with past practice, and since such date, there has not been (i) any
transaction, commitment, dispute or other event or condition (financial or
otherwise) of any character (whether or not in the ordinary course of business)
individually or in the aggregate that has had, or would reasonably be expected
to have, a Company Material Adverse Effect; (ii) any damage, destruction or
loss, whether or not covered by insurance, which has had, or would reasonably be
expected to have, a Company Material Adverse Effect; (iii) any entry into any
commitment or transaction material to the Company and its Subsidiaries taken as
a whole (including, without limitation, any borrowing or sale of assets) except
in the ordinary course of business consistent with past practice; (iv) any
declaration, setting aside or payment of any dividend or distribution (whether
in cash, stock or property) with respect to its capital stock; (v) any material
change in its accounting principles, practices or methods or revaluation of the
Company's assets; (vi) any repurchase or redemption with respect to its capital
stock; (vii) any split, combination or reclassification of any of the Company's
capital stock or the issuance or authorization of any issuance of any other
securities in respect of, in lieu of or in substitution for, shares of the
Company's capital stock except as set forth in Section 6.6 of the Company
Disclosure Schedule; (viii) any grant of or any amendment of the terms of any
option to purchase shares of capital stock of the Company; (ix) any granting by
the Company or any of its Subsidiaries to any director, officer or employee of
the Company or any of its Subsidiaries of (A) any increase in compensation
(other than in the case of employees in the
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ordinary course of business consistent with past practice) or (B) any increase
in severance or termination pay; (x) any entry by the Company or any of its
Subsidiaries into any employment, severance, bonus or termination agreement with
any director, officer or employee of the Company or any of its Subsidiaries; or
(xi) any agreement (whether or not in writing), arrangement or understanding to
do any of the foregoing.
6.7 Litigation. Except as described in the SEC Reports and in Section 6.7
of the Company Disclosure Schedule, there is no suit, action, claim, arbitration
or proceeding pending or, to the knowledge of the Company, threatened against
the Company or any of its Subsidiaries which, either alone or in the aggregate,
has had or would reasonably be expected to have a Company Material Adverse
Effect or a material adverse effect on the Company's ability to consummate the
transactions contemplated hereby, nor is there any judgment, decree, injunction,
rule or order of any court, governmental department, commission, agency,
instrumentality or arbitrator outstanding against the Company or any of its
Subsidiaries having, or which would reasonably be expected to have, either alone
or in the aggregate, a Company Material Adverse Effect or a material adverse
effect on the Company's ability to consummate the transactions contemplated
hereby.
6.8 Employee Benefit Plans.
(a) Section 6.8 of the Company Disclosure Schedule hereto sets forth a
list of all "employee benefit plans", as defined in Section 3(3) of the United
States Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and all other material employee benefit arrangements or payroll practices,
including, without limitation, any such arrangements or payroll practices
providing severance pay, sick leave, vacation pay, salary continuation for
disability, retirement benefits, deferred compensation, bonus pay, incentive
pay, stock options (including those held by Directors, employees, and
consultants), hospitalization insurance, medical insurance, life insurance,
scholarships or tuition reimbursements, that are maintained by the Company, any
Subsidiary of the Company or any Company ERISA Affiliate (as defined below) or
to which the Company, any Subsidiary of the Company or any Company ERISA
Affiliate is obligated to contribute thereunder for current or former employees,
independent contractors, consultants and leased employees of the Company, any
Subsidiary of the Company or any Company ERISA Affiliate (the "Company Employee
Benefit Plans").
(b) None of the Company Employee Benefit Plans is a "multiemployer
plan", as defined in Section 4001(a)(3) of ERISA (a "Multiemployer Plan"), and
neither the Company nor any Company ERISA Affiliate presently maintains such a
plan. None of the Company, any Subsidiary or Company ERISA Affiliate (subject to
the knowledge of the Company, in the case of any Subsidiary or Company ERISA
Affiliate acquired by the Company, for periods prior to such acquisition), has
withdrawn in a complete or partial withdrawal from any Multiemployer Plan, nor
has any of them incurred any material liability due to the termination or
reorganization of such a Multiemployer Plan.
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(c) No Company Benefit Plan nor the Company has incurred any material
liability or penalty under Section 4975 of the Internal Revenue Code, as amended
(the "Code") or Section 502(i) of ERISA.
(d) Except as set forth in Section 6.8 (d) of the Company Disclosure
Schedule, the Company does not maintain or contribute to any plan or arrangement
which provides or has any liability to provide life insurance or medical or
other employee welfare benefits to any employee or former employee upon his
retirement or termination of employment, and the Company has never represented,
promised or contracted (whether in oral or written form) to any employee or
former employee that such benefits would be provided.
(e) The execution of, and performance of the transactions contemplated
in, this Agreement will not, either alone or upon the occurrence of subsequent
events, result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution, increase in
benefits or obligation to fund benefits with respect to any employee. The only
severance agreements or severance policies applicable to the Company or its
Subsidiaries in the event of a change of control of the Company are the
agreements and policies specifically referred to in Section 6.8 of the Company
Disclosure Schedule (and, in the case of such agreements, the form of which is
attached to the Company Disclosure Schedule). Each executive officer of the
Company (as such term is defined in Rule 3b-7 under the Exchange Act) and each
of the individuals identified on Section 6.8(e) of the Company Disclosure
Schedule is a party to a non-competition agreement with the Company or a
Significant Subsidiary, as the case may be, and copies of the forms of such
non-competition agreements are attached to Section 6.8 of the Company Disclosure
Schedule.
(f) None of the Company Employee Benefit Plans is a "single employer
plan", as defined in Section 4001(a)(15) of ERISA, that is subject to Title IV
of ERISA, and neither the Company nor any Company ERISA Affiliate presently
maintains such a plan. None of the Company, any of its Subsidiaries or any ERISA
Affiliate has any material liability under Section 4062 of ERISA to the Pension
Benefit Guaranty Corporation or to a trustee appointed under Section 4042 of
ERISA. None of the Company, any Subsidiary, or any Company ERISA Affiliate
(subject to the knowledge of the Company, in the case of any Subsidiary or
Company ERISA Affiliate acquired by the Company, for periods prior to such
acquisition) has engaged in any transaction described in Section 4069 of ERISA.
(g) Each Company Employee Benefit Plan that is intended to qualify
under Section 401 of the Code, and each trust maintained pursuant thereto, has
been determined to be exempt from federal income taxation under Section 501 of
the Code by the IRS, and, to the Company's knowledge, nothing has occurred with
respect to the operation or organization of any such Company Employee Benefit
Plan and there have been no amendments to any such Company Employee Benefit Plan
that would cause the loss of such qualification or exemption or the imposition
of any material liability, penalty or tax under ERISA or the Code.
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(h) All contributions (including all employer contributions and
employee salary reduction contributions) required to have been made under any of
the Company Employee Benefit Plans to any funds or trusts established thereunder
or in connection therewith have been made by the due date thereof and no
contributions have been made to the Company Employee Benefit Plans that would be
considered non-deductible under the Code.
(i) There has been no violation of ERISA or the Code with respect to
the filing of applicable reports, documents and notices regarding the Company
Employee Benefit Plans with the Secretary of Labor or the Secretary of the
Treasury or the furnishing of required reports, documents or notices to the
participants or beneficiaries of the Company Employee Benefit Plans.
(j) True, correct and complete copies of the following documents, with
respect to each of the Company Benefit Plans, have been delivered or made
available to the Parent by the Company: (i) all plans and related trust
documents and any other instruments or contracts under which the Company
Employee Benefit Plans are operated, and amendments thereto; (ii) the Forms 5500
for the past three years and (iii) summary plan descriptions.
(k) There are no pending actions, claims or lawsuits which have been
asserted, instituted or, to the Company's knowledge, threatened, against the
Company Employee Benefit Plans, the assets of any of the trusts under such plans
or the plan sponsor or the plan administrator, or, to the Company's knowledge,
against any fiduciary of the Company Employee Benefit Plans with respect to the
operation of such plans (other than routine benefit claims).
(l) The Company Employee Benefit Plans have been maintained, in all
material respects, in accordance with their terms and with all provisions of
ERISA and the Code (including rules and regulations thereunder) and other
applicable federal and state laws and regulations.
(m) For purposes of this Agreement, "Company ERISA Affiliate" means
any business or entity which is a member of the same "controlled group of
corporations," under "common control" or an "affiliated service group" with an
entity within the meanings of Sections 414(b), (c) or (m) of the Code, or
required to be aggregated with the entity under Section 414(o) of the Code, or
is under "common control" with the entity, within the meaning of Section
4001(a)(14) of ERISA, or any regulations promulgated or proposed under any of
the foregoing Sections.
6.9 Labor Matters. Neither the Company nor any of its Subsidiaries is a
party to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization. There is no
unfair labor practice or labor arbitration proceeding pending or, to the
knowledge of the Company, threatened against the Company or its Subsidiaries
relating to their business. To the best knowledge of the Company, there are no
organizational efforts with respect to the formation of a collective bargaining
unit presently being made or threatened involving employees of the Company or
any of its
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Subsidiaries. There is no labor strike, material slowdown or material work
stoppage or lockout actually pending or, to the best knowledge of the Company,
threatened against or affecting the Company or its Subsidiaries and neither the
Company nor any Subsidiary has experienced any strike, material slowdown or
material work stoppage or lockout.
6.10 Company Action. The Board of Directors of the Company (at a meeting
duly called and held) has by the requisite vote of all directors present (a)
determined that the Merger is advisable and fair and in the best interests of
the Company and its shareholders, (b) approved the Merger in accordance with the
provisions of Section 251 of the DGCL, (c) recommended the approval of this
Agreement and the Merger by the holders of the Company Common Stock and directed
that the Merger be submitted for consideration by the Company's shareholders at
the Company Meeting.
6.11 Compliance with Applicable Laws. The Company and each of its
Subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all courts, administrative agencies or commissions or other
governmental authorities or instrumentalities, domestic or foreign (each, a
"Governmental Entity"), material to and necessary to conduct the business of the
Company or such Subsidiary, as the case may be (the "Company Permits"). The
Company and its Subsidiaries are in compliance in all material respects with the
terms of the Company Permits, and the Company and each of its Subsidiaries are
in compliance in all material respects with all laws, ordinances and regulations
of any Governmental Entity. Except as disclosed in Section 6.11 of the Company
Disclosure Schedule, no investigation or review by any Governmental Entity, with
respect to the Company or any of its Subsidiaries is pending, or to the
knowledge of the Company, threatened.
6.12 Liabilities. Since December 31, 1997, neither the Company nor any of
its Subsidiaries has incurred any material liabilities or obligations (absolute,
accrued, contingent or otherwise) of the type that is required to be disclosed
in the Company SEC Reports (including the financial statements contained
therein), except for (i) accounts payable incurred in the ordinary course of
business not in excess of $250,000, (ii) liabilities of the same nature as those
reflected on the financial statements to the Company SEC Reports (including the
footnotes thereto) incurred in the ordinary course of business in accordance
with past practice (iii) liabilities under or required to be incurred under this
Agreement and (iv) liabilities under Company Material Contracts (as hereafter
defined). To the best knowledge of the Company, as of the date of this
Agreement, there was no basis for any claim or liability of any nature against
the Company or its Subsidiaries, whether absolute, accrued, contingent or
otherwise, which has had, or would reasonably be expected to have, a Company
Material Adverse Effect, other than as reflected in the Company SEC Reports
(including the financial statements thereto).
6.13 Taxes. (a) For the purposes of this Agreement, the term "Tax" shall
include all Federal, state, local and foreign income, profits, franchise, gross
receipts, payroll, sales, employment, use, property, withholding, excise and
other taxes, duties and assessments of any nature whatsoever together with all
interest, penalties and additions imposed with respect to such amounts. Each of
the Company and its Subsidiaries has filed all Tax returns required to be
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filed by any of them and has paid (or the Company has paid on its behalf), or
has set up an adequate reserve for the payment of, all Taxes required to be paid
in respect of the periods covered by such returns. The information contained in
such Tax returns is true and complete in all material respects. Neither the
Company nor any Subsidiary of the Company is delinquent in the payment of any
Tax, assessment or governmental charge. Except as disclosed in Section 6.13 of
the Company Disclosure Schedule, no deficiencies for any taxes have been
proposed, asserted or assessed against the Company or any of its Subsidiaries
that have not been finally settled or paid in full, and no requests for waivers
of the time to assess any such Tax are pending.
6.14 Certain Agreements. Except as set forth on Section 6.14 of the Company
Disclosure Schedule, neither the Company nor any of its Subsidiaries, nor, to
the best knowledge of the Company, any other party thereto, is in breach of or
default under any material agreement, contract or commitment to which the
Company or any of its Subsidiaries is a party (each, a "Company Material
Contract"), nor has the Company or any Subsidiary received in writing any claim
or threat of such breach or default, in any case in such a manner as would
permit any other party to cancel or terminate the same or would permit any other
party to collect material damages from the Company or any of its Subsidiaries
thereunder. All of the Company Material Contracts are in full force and effect.
True and complete copies of the Company Material Contracts have been provided to
Parent by the Company. Except as set forth on Section 6.14 of the Company
Disclosure Schedule, neither the Company nor any of its Subsidiaries is party to
any agreement containing any provision or covenant limiting in any material
respect the ability of the Company or any Subsidiary to (i) sell any products or
services of any other person, (ii) engage in any line of business, or (iii)
compete with or to obtain products or services from any person or limiting the
ability of any person to provide products or services to the Company or any
Subsidiary.
6.15 Patents, Trademarks, Etc.
(a) The Company and its Subsidiaries own or are licensed or otherwise
possess legally enforceable rights to use all patents, trademarks, trade names,
service marks, trade secrets, copyrights and licenses, all applications for and
registrations of such patents, trademarks, trade names, service marks, trade
secrets, copyrights and licenses, and all processes, formulae, methods,
schematics, technology, know-how, tangible or intangible proprietary information
or material that are necessary to conduct the business of the Company and its
Subsidiaries as currently conducted (the "Intellectual Property Rights");
(b) Neither the Company nor any of its Subsidiaries is or will be as a
result of the execution and delivery of this Agreement or the performance of its
obligations under this Agreement, in breach of any license, sublicense or other
agreement relating to the Intellectual Property Rights or any license,
sublicense or other agreement pursuant to which the Company or any of its
Subsidiaries is authorized to use any third party patents, trademarks or
copyrights, in the manufacture of, incorporated in, or form a part of any
product of the Company or any of its Subsidiaries.
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(c) To the Company's knowledge, all patents, registered trademarks,
service marks and copyrights held by the Company or any of its Subsidiaries
which the Company considers to be material to its business are valid and
enforceable and except as set forth on Section 6.15 of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries (i) has been sued in
any suit, action or proceeding which involves a claim of infringement of any
patent, trademark, service or mark or copyright or the violation of any trade
secret or other proprietary right of any third party; or (ii) has any knowledge
that the manufacturing, importation, marketing, licensing, sale, offer for sale,
or use of any of its products infringes any patent, trademark, service mark,
copyright, trade secret or other proprietary right of any third party.
6.16 No Material Adverse Effect. Except as otherwise disclosed herein, in
the Company SEC Reports, in the Company Disclosure Schedule or Section 6.16 of
the Company Disclosure Schedule, the Company is not aware of any fact which,
alone or together with another fact, which has had, or would reasonably be
expected to have, a Company Material Adverse Effect.
6.17 Products Liability.
(a) There is no notice, demand, claim, action, suit, inquiry, hearing,
proceeding, notice of violation or investigation of a civil, criminal or
administrative nature before any court or governmental or other regulatory or
administrative agency, commission or authority against or involving any product,
substance or material (collectively, "Product") or class of claims or lawsuits
involving the same or similar Product produced, distributed or sold by or on
behalf of the Company which is pending or, to the knowledge of Company,
threatened, resulting from an alleged defect in design, manufacture, materials
or workmanship of any Product produced, distributed or sold by or on behalf of
the Company, or any alleged failure to warn, or from any breach of implied
warranties or representations, and there has not been any Occurrence (as defined
below) that is material to the business of the Company or any of its
subsidiaries taken as a whole;
(b) For purposes of this Section 6.17, the term "Occurrence" shall
mean any accident, happening or event which was caused or allegedly caused by
any alleged hazard or alleged defect in manufacture, design, materials or
workmanship including, without limitation, any alleged failure to warn or any
breach of express or implied warranties or representations with respect to, or
any such accident, happening or event otherwise involving, a Product (including
any parts or components) manufactured, produced, distributed or sold by or on
behalf of the Company which is likely to result in a claim or loss.
6.18 Environmental Matters.
(a) The operations of the Company and its Subsidiaries are, and in the
past have been, in compliance in all material respects with all applicable laws,
regulations and other requirements of governmental or regulatory authorities or
duties under the common law
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relating to toxic or hazardous substances, wastes, pollution or to the
protection of human health, safety, or the environment (collectively,
"Environmental Laws") and have obtained and maintained in effect all material
licenses, permits and other authorizations or registrations (collectively
"Environmental Permits") required under all Environmental Laws and are, and in
the past have been, in compliance with all such Environmental Permits in all
material respects.
(b) Neither the Company nor any Subsidiary has performed or suffered
any act which would reasonably be expected to give rise to, or has otherwise
incurred, liability to any person (governmental or other) under the United
States Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), or any other Environmental Laws, as amended, nor has the Company or
any Subsidiary received written notice of any such liability or any claim
therefor or submitted notice pursuant to Section 103 of CERCLA to any
governmental agency with respect to any of its assets.
(c) No hazardous substance, hazardous waste, contaminant, pollutant or
toxic substance (as such terms are defined in any applicable Environmental Law
and collectively referred to herein as "Hazardous Materials") has been released,
placed or dumped by the Company or any of its Subsidiaries or by action of any
of them otherwise come to be located on, at, beneath or near any of the assets
or properties owned or leased by the Company or any of its Subsidiaries or any
surface waters or groundwaters thereon or thereunder.
(d) Neither the Company nor any of its Subsidiaries owns or operates,
and has never owned or operated, aboveground or underground storage tanks
containing a regulated substance, as such term is defined in Subchapter IX of
the Resource Conservation and Recovery Act, 42 U.S.C. ss. 6991 et seq., as
amended, or a surface impoundment, lagoon, landfill, PCB containing electrical
equipment or asbestos containing materials.
(e) With respect to any or all of the real properties owned or leased
by the Company or any of its Subsidiaries to the knowledge of the Company, (i)
there are no, nor have there been in the past, asbestos-containing materials,
urea formaldehyde insulation, polychlorinated biphenyls or lead-based paints
present at any such properties; and (ii) there are no wetlands (as defined under
any Environmental Law) located on any such properties, nor have any been
drained, filled or otherwise altered.
(f) None of the real properties owned or leased by the Company or any
of its Subsidiaries (i) has been used or is now used for the generation,
transportation, storage, handling, treatment or disposal of any Hazardous
Materials in violation of applicable Environmental Laws or (ii) is identified on
a federal, state or local listing of sites which require or might require
environmental cleanup.
(g) There are no ongoing investigations or negotiations, pending or
threatened, or administrative, judicial or regulatory proceedings, or consent
decrees or other agreements in effect that relate to environmental conditions
in, on, under, about or related to the
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Company or any of its Subsidiaries, any of their operations or the real
properties owned or leased by them.
(h) Neither the Company nor any of its Subsidiaries is subject to
reporting requirements under the federal Emergency Planning and Community
Right-to-Know Act, 42 U.S.C. ss. 11001 et seq., or analogous state statues and
related regulations, all as amended.
(i) Notwithstanding the foregoing, the Company makes no representation
or warranty with respect to any buildings in which the Company leases office
space, the common areas of such buildings, the land upon which such buildings
are situated, or the premises in such buildings leased by the Company (except
with respect to the Company's personal property located therein).
6.19 Title to Property.
(a) Except as set forth in Section 6.19 of the Company Disclosure
Schedule, the Company and its Subsidiaries have good and marketable title, or
valid leasehold rights in the case of leased property, to all real property and
all personal property purported to be owned or leased by them, free and clear of
all material liens, security interests, claims, encumbrances and charges,
excluding (i) liens for fees, taxes, levies, imposts, duties or governmental
charges of any kind which are not yet delinquent or are being contested in good
faith by appropriate proceedings which suspend the collection thereof, (ii)
liens for mechanics, materialmen, laborers, employees, suppliers or other liens
arising by operation of law for sums which are not yet delinquent or are being
contested in good faith by appropriate proceedings, (iii) liens created in the
ordinary course of business in connection with the leasing or financing of
office, computer and related equipment and supplies, (iv) easements and similar
encumbrances ordinarily created for fuller utilization and enjoyment of
property, and (v) liens or defects in title or leasehold rights that, in the
aggregate, do not and will not have a Company Material Adverse Effect;
(b) Consummation of the Merger will not result in any breach of or
constitute a default (or an event with which notice or lapse of time or both
would constitute a default) under, or give to others any rights of termination
or cancellation of, or require the consent of others under, any lease in which
the Company or its Subsidiaries is a lessee.
6.20 Absence Of Certain Business Practices. During the past five years,
none of the Company's officers, employees or, to the Company's knowledge,
agents, nor, to the Company's knowledge, any other person acting on behalf of
any of them or the Company, has, directly or indirectly, given or agreed to give
any improper gift or similar benefit to any customer, supplier, governmental
employee or other person.
6.21 Financial Advisor. Except for the financial advisor that will deliver
the Fairness Opinion (as defined in Section 9.11 hereof), no broker, finder or
investment banker is
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entitled to any brokerage or finder's fee or investment banking fee in
connection with the Merger based upon arrangements made by or on behalf of the
Company.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES REGARDING SUB
Parent and Sub jointly and severally represent and warrant to the Company as
follows:
7.1 Organization. Sub is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware. Sub has not
engaged in any business since it was incorporated other than in connection with
its organization and the transactions contemplated by this Agreement.
7.2 Capitalization. The authorized capital stock of Sub consists of 1,000
shares of Common Stock, par value $.01 per share, 100 shares of which are
validly issued and outstanding, fully paid and nonassessable and are owned
directly or indirectly by Parent free and clear of all liens, claims and
encumbrances.
7.3 Authority Relative to this Agreement. Sub has the corporate power to
enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by its Board of
Directors and sole shareholder, and no other corporate proceedings on the part
of Sub are necessary to authorize this Agreement and the transactions
contemplated hereby. Except as referred to herein or in connection, or in
compliance, with the provisions of the Securities Act, the Exchange Act and the
environmental, corporation, securities or blue sky laws or regulations of the
various states, no filing or registration with, or authorization, consent or
approval of, any public body or authority is necessary for the consummation by
Sub of the Merger or the transactions contemplated by this Agreement, other than
filings, registrations, authorizations, consents or approvals the failure to
make or obtain would not prevent the consummation of the transactions
contemplated hereby.
ARTICLE VIII
CONDUCT OF BUSINESS PENDING THE MERGER
8.1 Conduct of Business by the Company Pending the Merger. Prior to the
Effective Date, unless Parent shall otherwise agree in writing:
(i) The Company shall, and shall cause its Subsidiaries to, carry on
their respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, and shall, and shall
cause its Subsidiaries to, use their commercially reasonable efforts to preserve
intact their present business organizations and preserve their relationships
with customers, suppliers and others having business dealings with
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them to the end that their goodwill and on going businesses shall be unimpaired
at the Effective Date. The Company shall, and shall cause its Subsidiaries to,
(a) maintain insurance coverages and its books, accounts and records in the
usual manner consistent with prior practices; (b) comply in all material
respects with all laws, ordinances and regulations of Governmental Entities
applicable to the Company and its subsidiaries; and (c) maintain and keep its
properties and equipment in good repair, working order and condition in
accordance with past practice, ordinary wear and tear excepted; and (d) perform
in all material respects its obligations under all material contracts and
commitments to which it is a party or by which it is bound;
(ii) The Company shall not and shall not propose to (A) sell or pledge
or agree to sell or pledge any capital stock owned by it in any of its
Subsidiaries (subject to the fiduciary duties of the Company's Board of
Directors), (B) amend its Certificate of Incorporation or By-laws, (C) split,
combine or reclassify its outstanding capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or in
substitution for shares of capital stock of the Company, or declare, set aside
or pay any dividend or other distribution payable in cash, stock or property, or
(D) directly or indirectly redeem, purchase or otherwise acquire or agree to
redeem, purchase or otherwise acquire any shares of Company capital stock;
(iii) Subject to the fiduciary duties of the Company's Board of
Directors, the Company shall not, nor shall it permit any of its Subsidiaries
to, without the consent of Parent which shall not be unreasonably withheld (A)
issue, deliver or sell or agree to issue, deliver or sell any additional shares
of, or rights of any kind to acquire any shares of, its capital stock of any
class, any indebtedness having the right to vote on which the Company's
shareholders may vote or any option, rights or warrants to acquire, or
securities convertible into, shares of capital stock other than issuances of
Company Common Stock pursuant to employment agreements as in effect on the date
hereof, the exercise of stock options outstanding on the date hereof or granted
prior to the Effective Date under automatic grants under the Company's Employee
Stock Option Plan; (B) acquire, lease or dispose or agree to acquire, lease or
dispose of any capital assets or any other assets other than in the ordinary
course of business consistent with past practice; (C) incur additional
indebtedness or encumber or grant a security interest in any asset or enter into
any other material transaction other than in each case in the ordinary course of
business consistent with past practice; (D) acquire or agree to acquire by
merging or consolidating with, or by purchasing a substantial equity interest
in, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof; or (E) enter
into any contract, agreement, commitment or arrangement with respect to any of
the foregoing;
(iv) The Company shall not, nor shall it permit any of its
Subsidiaries to, except as required to comply with applicable law, enter into
any new (or amend any existing) Company Benefit Plan or any new (or amend any
existing) employment, severance or consulting agreement, grant any general
increase in the compensation of directors, officers or employees (including any
such increase pursuant to any bonus, pension, profit-sharing or other plan or
commitment) or grant any increase in the compensation payable or to become
payable to
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any director, officer or employee, except in any of the foregoing cases in
accordance with pre-existing contractual provisions or in the ordinary course of
business consistent with past practice; and
(v) The Company shall not, nor shall it permit any of its Subsidiaries
to, make any investments in non-investment grade securities
ARTICLE IX
ADDITIONAL AGREEMENTS
9.1 Access and Information. The Company and its Subsidiaries shall afford
Parent and to its accountants, counsel and other representatives, upon
reasonable advance notice, reasonable access during normal business hours (and
at such other times as the parties may mutually agree) throughout the period
prior to the Effective Date to all of their properties, books, contracts,
commitments, records and personnel and, during such period, the Company shall
furnish promptly to the Parent (i) a copy of each report, schedule and other
document filed or received by it or its Subsidiaries pursuant to the
requirements of federal or state securities laws, and (ii) all other information
concerning the Company's or its Subsidiaries' business, properties and personnel
as the Parent may request. Each of the Company and Parent shall hold, and shall
cause their respective Affiliates, employees and agents to hold, in confidence
all information provided to the other pursuant to the terms hereof, in
connection with the transactions contemplated hereby or otherwise provided on a
confidential basis.
9.2 Proxy Statement. Parent and the Company shall cooperate and promptly
prepare, and the Company shall file with the Commission as soon as practicable,
a proxy statement with respect to the Company Meeting (the "Proxy Statement"),
which shall comply as to form in all material respects with the applicable
provisions of the Exchange Act and the rules and regulations thereunder. The
Company shall use all reasonable efforts, and Parent will cooperate with the
Company, to have the Proxy Statement cleared by the Commission as promptly as
practicable. The Company shall, as promptly as practicable, provide copies of
any written comments received from the Commission with respect to the Proxy
Statement to Parent and advise Parent of any oral comments with respect to the
Proxy Statement received from the Commission. Parent agrees that none of the
information supplied or to be supplied by Parent for inclusion or incorporation
by reference in the Proxy Statement and each amendment or supplement thereto, at
the time of mailing thereof and at the time of the Company Meeting, will contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The Company agrees
that none of the information supplied or to be supplied by the Company for
inclusion or incorporation by reference in the Proxy Statement and each
amendment or supplement thereto, at the time of mailing thereof and at the time
of the Company Meeting, will contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. For purposes of the
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foregoing, it is understood and agreed that information concerning or related to
Parent will be deemed to have been supplied by Parent and information concerning
or related to the Company and the Company Meeting shall be deemed to have been
supplied by the Company. The Company will provide Parent with a reasonable
opportunity to review any amendment or supplement to the Proxy Statement prior
to filing such with the Commission, and will provide Parent with a copy of all
such filings made with the Commission. No amendment or supplement to the Proxy
Statement shall be made without the approval of Parent, which approval shall not
be unreasonably withheld or delayed.
9.3 Employee Matters. As of the Effective Date, the employees of the
Company and each Subsidiary shall continue employment with the Surviving
Corporation and the Subsidiaries, respectively, in the same positions and at the
same level of wages and/or salary and without having incurred a termination of
employment or separation from service; provided, however, except as may be
specifically required by applicable law or any contract, the Surviving
Corporation and the Subsidiaries shall not be obligated to continue any
employment relationship with any employee for any specific period of time.
Except as otherwise provided by Section 4.3 hereof, as of the Effective Date,
the Surviving Corporation shall be the sponsor of the Company Employee Benefit
Plans sponsored by the Company immediately prior to the Effective Date, and
Parent shall cause the Surviving Corporation and the Subsidiaries to satisfy all
obligations and liabilities under such Company Employee Benefit Plans. To the
extent any employee benefit plan, program or policy of the Parent or its
affiliates is made available to the employees of the Surviving Corporation or
its Subsidiaries: (i) service with the Company and the Subsidiaries by any
employee prior to the Effective Date shall be credited for eligibility and
vesting purposes under such plan, program or policy, but not for benefit accrual
purposes, and (ii) with respect to any welfare benefit plans to which such
employees may become eligible, Parent shall cause such plans to provide credit
for any co-payments or deductibles by such employees and waive all pre-existing
condition exclusions and waiting periods, other than limitations or waiting
periods that have not been satisfied under any welfare plans maintained by the
Company and the Subsidiaries for their employees prior to the Effective Date.
9.4 Indemnification.
(a) The Company shall indemnify, defend and hold harmless, and after
the Effective Date, the Surviving Corporation shall indemnify, defend and hold
harmless the officers, directors and employees of the Company and its
subsidiaries who were such at any time prior to the Effective Date (the
"Indemnified Parties") from and against all losses, expenses, claims, damages or
liabilities ("Losses") arising out of the transactions contemplated by this
Agreement occurring before the Effective Date to the fullest extent permitted or
required under applicable law, including without limitation the advancement of
expenses; provided, however, that such indemnification shall not be available
with respect to Losses arising out of the failure of the Company to obtain the
Fairness Opinion. Parent agrees that all rights to indemnification existing in
favor of the directors, officers or employees of the Company as provided in the
Company's Certificate of Incorporation or By-Laws, as in effect as of the date
hereof, with respect to matters occurring through the Effective Date, shall
survive the Merger and shall
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continue in full force and effect for a period of not less than three years from
the Effective Date. Parent agrees to cause the Surviving Corporation to maintain
in effect for not less than three years after the Effective Date the current
policies of directors' and officers' liability insurance maintained by the
Company with respect to matters occurring on or prior to the Effective Date;
provided, however, that the Surviving Corporation may substitute therefor
policies of at least the same coverage (with carriers comparable to the
Company's existing carriers) containing terms and conditions which are no less
advantageous to the Indemnified Parties; provided, further, that Parent shall
not be required in order to maintain or procure such coverage to pay an annual
premium in excess of 150% of the current annual premium paid by the Company for
its existing coverage (the "Cap"); and provided, further, that if equivalent
coverage cannot be obtained, or can be obtained only by paying an annual premium
in excess of the Cap, Parent shall only be required to obtain as much coverage
as can be obtained by paying an annual premium equal to the Cap.
(b) In the event that any action, suit, proceeding or investigation
relating hereto or to the transactions contemplated by this Agreement is
commenced by a person or entity who or which is not a party to this Agreement,
whether before or after the Effective Date, the parties hereto agree to
cooperate and use their respective reasonable efforts to defend against and
respond thereto.
9.5 Additional Agreements.
(a) Subject to the terms and conditions herein provided, each of the
parties hereto agrees to use all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, including using all
reasonable efforts to obtain all necessary waivers, consents and approvals as
may be necessary or advisable to consummate the merger, to effect all necessary
registrations and filings (including, but not limited to, filings with all
applicable Governmental Entities) and to lift any injunction to the Merger (and,
in such case, to proceed with the Merger as expeditiously as possible).
(b) In case at any time after the Effective Date any further action is
necessary or desirable to carry out the purposes of this Agreement, the proper
officers and/or directors of Parent, the Company and the Surviving Corporation
shall take all such commercially reasonable and necessary action.
9.6 Alternative Proposals. Prior to the Effective Date, the Company agrees
(a) that neither it nor any of its Subsidiaries shall, and it shall direct and
use its best efforts to cause it and its Subsidiaries' officers, directors,
employees, agents and representatives (including, without limitation, any
investment banker, attorney or accountant retained by it or
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any of its Subsidiaries) not to, initiate, solicit or encourage, directly or
indirectly, any inquiries or the making or implementation of any proposal or
offer (including, without limitation, any proposal or offer to its stockholders)
with respect to a merger, acquisition, consolidation or similar transaction
involving, or any purchase of all or substantially all of the assets or any
equity securities of, the Company or any of its Subsidiaries (any such proposal
or offer being hereinafter referred to as an "Alternative Proposal") or engage
in any negotiations concerning, or provide any confidential information or data
to, or have any discussions with, any person relating to an Alternative
Proposal, or release any third party from any obligations under any existing
standstill agreement or arrangement relating to any Alternative Proposal, or
otherwise facilitate any effort or attempt to make or implement an Alternative
Proposal; (b) that it will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing, and it will take the necessary
steps to inform the individuals or entities referred to above of the obligations
undertaken in this Section 9.6; and (c) that it will notify Parent immediately
if any such inquiries or proposals are received by, any such information is
requested from, or any such negotiations or discussions are sought to be
initiated or continued with, it or any of its Subsidiaries: provided, however,
that nothing contained in this Section 9.6 shall prohibit the Board of Directors
of the Company from (i) furnishing information to or entering into discussions
or negotiations with, any person or entity that makes an unsolicited bona fide
proposal to acquire the Company pursuant to a merger, consolidation, share
exchange, purchase of a substantial portion of assets, business combination or
other similar transaction, if, and only to the extent that, (A) the Board of
Directors of the Company determines in good faith (after consultation with and
based on advice of its outside legal counsel) that such action is required for
the Board of Directors to comply with its fiduciary duties to stockholders
imposed by law, (B) prior to furnishing such information to, or entering into
discussions or negotiations with, such person or entity, (i) the Company
provides written notice to Parent to the effect that it is furnishing
information to, or entering into discussions or negotiations with, such person
or entity and (ii) the Company and such person or entity enter into an
appropriate confidentiality agreement with respect to information to be supplied
by the Company and (C) the Company keeps Parent promptly informed of the status
and all material terms and conditions of any such discussions or negotiations
(including identities of parties) and, if any such proposal or inquiry is in
writing, furnishes a copy of such proposal or inquiry to Parent as soon as
practicable after the receipt thereof; and (ii) to the extent applicable,
complying with Rule 14e-2 promulgated under the Exchange Act with regard to an
Alternative Proposal. Nothing in this Section 9.6 shall (x) permit the Company
to terminate this Agreement (except as specifically provided in Article XI
hereof), (y) permit the Company to enter into any agreement with respect to an
Alternative Proposal during the term of this Agreement (it being agreed that
during the term of this Agreement, the Company shall not enter into any
agreement with any person that provides for, or in any way facilitates, an
Alternative Proposal (other than a confidentiality agreement in customary
form)), or (z) affect any other obligation of the Company under this Agreement.
9.7 Advice of Changes; SEC Filings. The Company shall confer on a regular
basis with Parent on operational matters. The Company shall promptly advise
Parent orally and in writing of any change or event that has had, or could
reasonably be expected to have, a
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Company Material Adverse Effect. The Company shall promptly provide to Parent
(and its counsel) copies of all filings made by such party with the Commission
or any other state or federal Governmental Entity in connection with this
Agreement and the transactions contemplated hereby.
9.8 Restructuring of Merger. Upon the mutual agreement of Parent and the
Company, the Merger shall be restructured in the form of a forward subsidiary
merger of the Company into Sub, with Sub being the surviving corporation, or as
a merger of the Company into Parent, with Parent being the surviving
corporation. In such event, this Agreement shall be deemed appropriately
modified to reflect such form of merger.
9.9 Cancellation of Warrants; Repayment of Loans from Affiliates. On the
Effective Date, and without any further action by the holders thereof (a)
warrants to purchase 400,000 shares of Company Common Stock held by Mr. John
Robinson and warrants to purchase 50,000 shares of Company Common Stock held by
Mr. Peter Lordi shall be canceled and the holders thereof shall thereafter have
the right to payment in cash equal to $400,000 and $50,000, respectively, in
exchange therefor, which payment shall be made by the Surviving Corporation
promptly after the Effective Date and (b) the loans by Mr. Robinson and Mr.
Robert L. Priddy to the Company in the original principal amounts of $1,700,000
and $500,000, respectively, shall be converted into the right to (i) the cash
payment to Mr. Robinson of $1,200,000 plus all accrued and unpaid interest on
his loan and the issuance to Mr. Robinson by Parent of Parent ordinary shares,
par value 1p per share, having a value equal to $500,000 and (ii) the cash
payment to Mr. Priddy of all accrued and unpaid interest on his loan and the
issuance to Mr. Priddy by Parent of Parent ordinary shares having a value equal
to $500,000, which payments and issuances shall be made promptly after the
Effective Date and (c) the 300,000 options outstanding to Mr. Priddy shall be
canceled at Closing. For purposes of determining the value of the Parent
ordinary shares hereunder, each Parent ordinary share shall have a value equal
to the average of the middle market closing price for the Parent ordinary shares
on the Alternative Investment Market of the London Stock Exchange, as shown in
"The London Stock Exchange Daily Official List" on each of the ten trading days
ending two days prior to the Effective Date. Prior to the issuance of such
Parent ordinary shares, each of Messrs. Robinson and Priddy shall enter into a
subscription with Parent in form reasonably satisfactory to Parent, which will
provide, among other things, that the Parent ordinary shares to be issued
hereunder may not be sold, assigned, pledged or otherwise transferred for a
period of six months from the date of issuance.
9.10 Agreement of Principal Stockholders. Each of Messrs. Priddy and
Robinson and Mr. John Holmes (collectively, the "Stockholders") agrees that from
and after the date hereof until August 31, 1998, or such earlier date as this
Agreement shall be terminated (a) he shall not pledge, hypothecate or otherwise
transfer his shares of Company Common Stock in any manner and (b) he shall vote
all of his shares of Company Common Stock in favor of the Merger (and against
any Alternative Proposal). Nothing contained in this Section 9.10 shall be
construed to prevent any of the Stockholders, when acting in their capacities as
directors of the Company, from exercising their fiduciary duties as directors in
accordance with applicable law.
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9.11 Fairness Opinion. The Company shall use its commercially reasonable
efforts to engage an investment bank reasonably acceptable to Parent promptly
after the date of this Agreement for the purpose of delivering a written opinion
to the effect that, as of the date of this Agreement, the Merger Consideration
is fair to the holders of Company Common Stock from a financial point of view
(the "Fairness Opinion"). The Company shall engage such investment bank to
deliver the Fairness Opinion within three weeks of the date of this Agreement
(the "Fairness Opinion Period"). The fees and commissions payable to the
Company's financial advisor in connection with its services to the Company shall
be reasonably acceptable to Parent. The Company take all commercially reasonable
steps to facilitate the delivery of the Fairness Opinion and shall use its
commercially reasonable efforts to cooperate with the investment bank and supply
all information reasonably requested on a timely basis. Any failure by the
Company's investment bank to deliver the Fairness Opinion for any reason other
than the adequacy of the value of the Merger Consideration shall be deemed to be
a breach of this covenant by the Company.
ARTICLE X
CONDITIONS PRECEDENT
10.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Date of the following conditions:
(a) This Agreement and the Merger shall have been approved and adopted
by the requisite vote of the holders of the Company Common Stock.
(b) No preliminary or permanent injunction or other order by any
federal or state court in the United States of competent jurisdiction which
prevents the consummation of the Merger shall have been issued and remain in
effect (each party agreeing to use its reasonable efforts to have any such
injunction lifted).
10.2 Conditions to Obligation of the Company to Effect the Merger. The
obligation of the Company to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Date of the following conditions,
unless waived by the Company:
(a) The Parent and Sub shall have performed in all material respects
their agreements contained in this Agreement required to be performed on or
prior to the Effective Date, and the representations and warranties of Parent
and Sub contained in this Agreement shall be true in all material respects when
made and on and as of the Effective Date as if made on and as of such date
(except to the extent they relate to a particular date), except as expressly
contemplated or permitted by this Agreement, and the Company shall have received
a certificate of the President or Chief Executive Officer or a Vice President of
Parent and Sub to that effect.
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(b) Parent and Sub shall have furnished the Company with a certified
copy of the resolutions adopted by their respective directors approving the
terms, execution and delivery of this Agreement, the Merger contemplated hereby,
and Parent's and Sub's performance hereunder, together with a certificate of
incumbency of Parent and Sub, executed by their respective President or a
Vice-President, and Secretary, which lists the officers and specimen signatures
of the officers who have executed this Agreement and all other documents and
instruments contemplated by this Agreement on behalf of Parent and Sub.
(c) The Company shall have received an opinion of Parent's and Sub's
legal counsel, dated as of the Closing Date, as to the matters set forth on
Exhibit 10.2(c) attached hereto, addressed to the Company.
10.3 Conditions to Obligations of Parent and Sub to Effect the Merger. The
obligations of Parent and Sub to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Date of the additional following
conditions, unless waived by Parent:
(a) The Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior to
the Effective Date, and the representations and warranties of the Company
contained in this Agreement shall be true when made and on and as of the
Effective Date as if made on and as of such date (except to the extent they
relate to a particular date), except as expressly contemplated or permitted by
this Agreement, and Parent and Sub shall have received a certificate of the
President or Chief Executive Officer or a Vice President of the Company to that
effect.
(b) From the date of this Agreement through the Effective Date, there
shall not have occurred any change, individually or together with other changes,
that has had, or would reasonably be expected to have, a material adverse change
in the financial condition, business, results of operations or prospects of the
Company and its Subsidiaries, taken as a whole.
(c) The number of shares of Company Common Stock for which written
demand for appraisal has been properly made pursuant to Section 262 of the DCGL
shall not have exceeded 5% of the total number of shares of Company Common Stock
outstanding immediately prior to the Effective Date.
(d) The Company shall have furnished Parent and Sub with a certified
copy of the resolutions adopted by the Company's directors and stockholders
approving the terms, execution and delivery of this Agreement, the Merger
contemplated hereby, and the Company's performance hereunder, together with a
certificate of incumbency of the Company, executed by its President or a
Vice-President, and its Secretary, which lists the officers and specimen
signatures of the officers who have executed this Agreement and all other
documents and instruments contemplated by this Agreement on behalf of the
Company.
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(e) Parent and Sub shall have received an opinion of the Company's
legal counsel, dated as of the Closing Date, as to the matters set forth on
Exhibit 10.3(e) attached hereto, addressed to Parent and Sub.
ARTICLE XI
TERMINATION, AMENDMENT AND WAIVER
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Date, before or
after the approval of this Agreement by the stockholders of the Company, by the
mutual consent of Parent and the Company.
11.2 Termination by Either Parent or the Company. This Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either Parent or the Company if (a) the Merger shall not have been
consummated by August 31, 1998, or (b)the approval of the Company's stockholders
required by Section 10.1(a) shall not have been obtained at a meeting duly
convened therefor or at any adjournment or postponement thereof, or (c) a United
States federal or state court of competent jurisdiction or United States federal
or state governmental, regulatory or administrative agency or commission shall
have issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement and such order, decree, ruling or other action shall have become
final and non-appealable; provided, that the party seeking to terminate this
Agreement pursuant to this clause (c) shall have used all reasonable efforts to
remove such injunction, order or decree; and provided, in the case of a
termination pursuant to clause (a) above, that the terminating party shall not
have breached in any material respect its obligations under this Agreement in
any manner that shall have proximately contributed to the failure to consummate
the Merger.
11.3 Termination by the Company. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Date, before or after
the adoption and approval by the stockholders of the Company referred to in
Section 10.1(a), by action of the Board of Directors of the Company and written
notice to Parent, if (a) in the exercise of its fiduciary duties to its
stockholders imposed by law, the Board of Directors of the Company determines
that such termination is required by reason of an Alternative Proposal being
made, or (b) there has been a material breach by Parent or Sub of any
representation or warranty contained in this Agreement, or (c) there has been a
material breach of any of the covenants or agreements set forth in this
Agreement on the part of Parent, which breach is not curable or, if curable, is
not cured within 30 days after written notice of such breach is given by the
Company to Parent. Notwithstanding anything contained in this Agreement to the
contrary, the Company shall have the right to terminate this Agreement and
abandon the Merger (A) during the Fairness Opinion Period if the Company
receives a written opinion from the investment bank retained pursuant to Section
9.11 to the effect that the Merger Consideration is not fair from a financial
point of view to the holders of the Company Common Stock, or on the last day of
the Fairness Opinion Period
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if the Fairness Opinion has not been delivered, or (B) at any time after June
30, 1998, if, within five (5) days after the written request by the Company
after such date, Parent does not furnish to the Company a written letter
addressed to the Company from Henry Ansbacher & Co. Limited and/or other
reputable investment banks capable of providing such financing confirming their
firm commitment to provide the financing required in connection with the
transactions contemplated hereby for the payment of all amounts due hereunder or
related hereto (including fees and expenses of its financial advisors and legal
counsel).
11.4 Termination by Parent. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Date, by action of the Board
of Directors of Parent and written notice to the Company, if (a) the Board of
Directors of the Company shall have withdrawn or modified in a manner adverse to
Parent its approval or recommendation of this Agreement or the Merger or shall
have recommended an Alternative Proposal to the Company's stockholders, or (b)
there has been a material breach by the Company of any representation or
warranty contained in this Agreement, or (c) there has been a material breach by
the Company of any of the covenants or agreements set forth in this Agreement,
which breach is not curable or, if curable, is not cured within 30 days after
written notice of such breach is given by Parent to the Company, or (d) a change
or changes having the effect specified in Section 10.3(b) shall have occurred.
Notwithstanding the foregoing, this Agreement may be terminated by Parent and
the Merger may be abandoned (A) at any time prior to May 15, 1998, by action of
the Board of Directors of Parent and written notice to the Company, if Parent
concludes as a result of Parent's legal, business and financial due diligence
review of the Company, that (i) the Company's business, properties, assets,
condition (financial or otherwise), liabilities or operations are not
satisfactory, or (ii) the Company is in material breach of any representation or
warranty made in this Agreement, or (B) during the Fairness Opinion Period if
the Company receives a written opinion from the investment bank retained
pursuant to Section 9.11 to the effect that the Merger consideration is not fair
from a financial point of view to the holders of the Company Common Stock, or
within two business days after the termination of the Fairness Opinion Period if
the Company shall not have obtained the Fairness Opinion, or (C) before June 30,
1998 if Parent shall have failed to obtain the irrevocable undertaking from
holders of a majority of Parent's ordinary shares to vote in favor of the
resolutions necessary to effect the Merger and the related financing or (D)
prior to June 30, 1998 if Parent and Sub shall not have obtained a firm
commitment from Henry Ansbacher & Co. Limited and/or other reputable investment
banks capable of providing such financing to provide the financing required in
connection with the transactions contemplated hereby for the payment of all
amounts due hereunder or related hereto (including fees and expenses of its
financial advisors and legal counsel) on terms satisfactory to Parent in its
sole discretion.
11.5 Effect of Termination and Abandonment.
(a) In the event that (x) any person shall have made an Alternative
Proposal and thereafter this Agreement is terminated either by the Company
pursuant to Section 11.3(a) or by either Parent or the Company pursuant to
Section 11.2(b), (y) the Board of Directors of the Company shall have withdrawn
or modified in a manner adverse to Parent its
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approval or recommendation of this Agreement or the Merger or shall have
recommended an Alternative Proposal to the Company stockholders and Parent shall
have terminated this Agreement pursuant to Section 11.4(a) or (z) any person
shall have made an Alternative Proposal and thereafter this Agreement is
terminated for any reason other than those set forth in clauses (x) or (y) above
and within 12 months thereafter any Alternative Proposal shall have been
consummated with the third party who made such Alternative Proposal, then the
Company shall promptly, but in no event later than two days after such
termination or consummation with respect to clause (z), pay Parent a fee of
$500,000 (the "Termination Fee"), which amount shall be payable by wire transfer
of same day funds. Notwithstanding anything to the contrary contained herein,
Parent shall only be entitled to be paid the Termination Fee in the event that
at the time of the termination of this Agreement Parent is not in material
breach of any of the representations, warranties or covenants set forth in this
Agreement. The Company acknowledges that the agreements contained in this
Section 11.5(a) are an integral part of the transactions contemplated in this
Agreement, and that, without these agreements, Parent and Sub would not enter
into this Agreement; accordingly, if the Company fails to promptly pay the
amount due pursuant to this Section 11.5(a), and, in order to obtain such
payment, Parent or Sub commences a suit which results in a judgment against the
Company for the fee set forth in this Section 11.5(a), the Company shall pay to
Parent its costs and expenses (including attorneys' fees) in connection with
such suit, together with interest on the amount of the fee at the rate of 12%
per annum from the date such payment should have been made.
(b) In the event of termination of this Agreement and the abandonment
of the Merger pursuant to this Article XI, all obligations of the parties hereto
shall terminate, except the obligations of the parties pursuant to this Section
11.5 and Section 12.3 and except for the provisions of Sections 12.5, 12.6,
12.7, 12.9, 12.11, 12.12 and 12.14. Moreover, in the event of termination of
this Agreement pursuant to Section 11.2, 11.3 or 11.4, nothing herein shall
prejudice the ability of the non-breaching party from seeking damages from any
other party for any breach of this Agreement, including without limitation,
attorneys' fees and the right to pursue any remedy at law or in equity; provided
that following termination of this Agreement upon the occurrence of any of the
events described in clauses (x), (y) or (z) of Section 11.5(a), and provided
that the Termination Fee payable pursuant to Section 11.5 shall after such
termination be paid, neither Parent nor Sub shall (i) have any rights whatsoever
in respect of or in connection with the representations, warranties or covenants
of the Company, (ii) assert or pursue in any manner, directly or indirectly, any
claim or cause of action based in whole or in part upon alleged tortious or
other interference with rights under this Agreement against any entity or person
submitting an Alternative Proposal or (iii) assert or pursue in any manner,
directly or indirectly, any claim or cause of action against the Company or any
of its officers or directors based in whole or in part upon its or their
receipt, consideration, recommendation, or approval of an Alternative Proposal.
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ARTICLE XII
GENERAL PROVISIONS
12.1 Non-Survival of Representations, Warranties and Agreements. All
representations and warranties set forth in this Agreement shall terminate at
the Effective Date. All covenants and agreements set forth in this Agreement and
any instrument delivered pursuant to this Agreement shall survive in accordance
with their terms.
12.2 Notices. All notices or other communications under this Agreement
shall be in writing and shall be given (and shall be deemed to have been duly
given upon receipt) by delivery in person, by facsimile or other standard form
of telecommunications, overnight courier or by registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
If to the Company:
Lukens Medical Corporation
3820 Academy Parkway North NE
Albuquerque, New Mexico 87109
Attention: Robert Huffstodt, President
and Chief Executive Officer
Facsimile: (505) 342-9735
With a copy to:
Golenbock, Eiseman, Assor & Bell
437 Madison Avenue, 35th Floor
New York, New York 10022
Attention: Andrew M. Singer, Esq.
Facsimile: (212)754-0330
If to Parent or Sub:
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Medisys PLC
Walmar House
288-292 Regent Street
London W1R SH8 England
Attention: Brian Timmons
Facsimile: (011) 171-436-5303
With a copy to:
Brock Silverstein McAuliffe LLC
One Citicorp Center
153 East 53rd Street, 56th Floor
New York, New York 10022
Attention: David Robbins, Esq.
Facsimile: (212) 371-5500
or to such other address as any party may have furnished to the other parties in
writing in accordance with this Section.
12.3 Fees and Expenses. Whether or not the Merger is consummated, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated by this Agreement shall be paid by the party incurring such
expenses, whether or not the Merger is consummated except as expressly provided
herein and except that (a) the filing fee in connection with the filing of the
Proxy Statement with the Commission and (b) the expenses incurred in connection
with printing and mailing the Proxy Statement, shall be shared equally by the
Company and Parent.
12.4 Publicity. So long as this Agreement is in effect, Parent, Sub and the
Company agree to consult with each other in issuing any press release or
otherwise making any public statement with respect to the transactions
contemplated by this Agreement, and none of them shall issue any press release
or make any public statement prior to such consultation, except as may be
required by law or by obligations pursuant to the rules of any listing agreement
with any national securities exchange, NASDAQ, the Alternative Investment Market
of the London Stock Exchange, or other regulatory body or association. The
commencement of litigation relating to this Agreement or the transactions
contemplated hereby or any proceedings in connection therewith shall not be
deemed a violation of this Section 12.4.
12.5 Specific Performance. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions or other appropriate equitable relief (in addition to other remedies
at law), without the requirement to post bond or security to prevent breaches of
this Agreement and to enforce specifically the terms and provisions hereof in
any
33
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court of the United States or any state having jurisdiction, this being in
addition to any other remedy to which they are entitled at law or in equity.
12.6 Assignment; Binding Effect. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties; provided, however, Parent and Sub may
assign their rights, but not their obligations, under this Agreement to any of
their respective direct or indirect wholly owned subsidiaries. Subject to the
preceding sentence, this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
Notwithstanding anything contained in this Agreement to the contrary, nothing in
this Agreement, expressed or implied, is intended to confer on any person other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement;
provided that the Indemnified Parties shall be third-party beneficiaries of
Parent's agreement contained in Section 9.4 hereof.
12.7 Entire Agreement. This Agreement, the Exhibits, the Company Disclosure
Schedule and any documents delivered by the parties in connection herewith and
therewith constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings
among the parties with respect thereto. No addition to or modification of any
provision of this Agreement shall be binding upon any party hereto unless made
in writing and signed by all parties hereto.
12.8 Amendment. This Agreement may be amended by the parties hereto, by
action taken by their respective Boards of Directors, at any time before or
after approval of matters presented in connection with the Merger by the
stockholders of the Company and the Parent, but after any such stockholder
approval, no amendment shall be made which by law requires the further approval
of stockholders without obtaining such further approval. This Agreement may not
be amended except by an instrument in writing signed on behalf of each of the
parties hereto.
12.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to its rules
of conflict of laws.
12.10 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
12.11 Headings and Table of Contents. Headings of the Articles and Sections
of this Agreement and the Table of Contents are for the convenience of the
parties only, and shall be given no substantive or interpretive effect
whatsoever.
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12.12 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
12.13 Waivers. At any time prior to the Effective Date, the parties hereto,
by or pursuant to action taken by their respective Boards of Directors, may (i)
extend the time for the performance of any of the obligations or other acts of
the other parties hereto, (ii) waive any inaccuracies in the representations and
warranties contained herein or in any documents delivered pursuant hereto and
(iii) waive compliance with any of the agreements or conditions contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid if set forth in an instrument in writing signed on behalf
of such party. Except as provided in this Agreement, no action taken pursuant to
this Agreement, including, without limitation, any investigation by or on behalf
of any party, shall be deemed to constitute a waiver by the party taking such
action of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
12.14 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
12.15 Subsidiaries. As used in this Agreement, the word "Subsidiary" when
used with respect to any party means any corporation or other organization,
whether incorporated or unincorporated, of which such party directly or
indirectly owns or controls at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of the
board of directors or others performing similar functions with respect to such
corporation or other organization, or any organization of which such party is a
general partner.
12.16 United States Dollars; Exchange Rates. (a) As used in this Agreement,
unless otherwise indicated, "$" shall mean U.S. dollars; and (b) to the extent
that the calculation of foreign currency exchange rates is required hereby,
reference shall be made to the appropriate rates set forth in "The Wall Street
Journal" for the applicable date.
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IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be signed by their respective officers thereunder duly authorized all as of
the date first written above.
MEDISYS PLC
By: /s/ Brian P. Timmons
-------------------------
Name: Brian P. Timmons
Title: Vice President
LMC ACQUISITION CORP.
By: /s/ Brian P. Timmons
-------------------------
Name: Brian P. Timmons
Title: Vice President
LUKENS MEDICAL CORPORATION
By: /s/ Robert S. Huffstodt
--------------------------
Name: Robert S. Huffstodt
Title: President
Agreed and Accepted
with Respect to Sections 9.9 and 9.10
/s/ John Robinson
- ----------------------
John Robinson
/s/ Robert L. Priddy
- ----------------------
Robert L. Priddy
/s/ John Holmes
- ----------------------
John Holmes
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Exhibit 10.2(e)
Form of Opinion of Counsel to Parent and Sub (to be split between US and UK
counsel)
1. Parent is a public limited company duly incorporated, validly existing and in
good standing under the laws of Scotland and has the corporate power to carry on
its business as it is now being conducted or currently proposed to be conducted.
2. Sub is a corporation duly incorporated, validly existing and in good standing
under the laws of the State of Delaware.
3. Parent has the corporate authority to enter into the Merger Agreement and to
carry out its obligations hereunder. The execution and delivery of the Merger
Agreement and the consummation of the transactions contemplated thereby have
been duly authorized by Parent's Board of Directors. No other corporate
proceedings on the part of Parent are necessary to authorize the Merger
Agreement and the transactions contemplated thereby.
4. Sub has the corporate power to enter into the Merger Agreement and to carry
out its obligations thereunder. The execution and delivery of the Merger
Agreement and the consummation of the transactions contemplated thereby have
been duly authorized by Sub's Board of Directors and sole shareholder, and no
other corporate proceedings on the part of Sub are necessary to authorize this
Agreement and the transactions contemplated hereby.
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<PAGE>
Exhibit 10.3(e)
Form of Opinion of Counsel to the Company
1. The Company is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware and has the corporate power to
carry on its business as it is now being conducted.
2. The authorized capital stock of the Company consists of 20,000,000 shares of
Company Common Stock, par value $.01 per share and 1,000,000 shares of preferred
stock, par value $.01 per share.
3. Each Subsidiary of the Company incorporated in the United States is a
corporation duly incorporated, validly existing and in good standing under the
laws of its jurisdiction of incorporation and has the corporate power to carry
on its business as it is now being conducted.
4. The Company has the corporate power to enter into the Merger Agreement and to
carry out its obligations thereunder. The execution and delivery of the Merger
Agreement and the consummation of the transactions contemplated thereby have
been duly authorized by the Company's Board of Directors. No other corporate
proceedings on the part of the Company are necessary to authorize the Merger
Agreement and the transactions contemplated thereby.
5. The Board of Directors of the Company (at a meeting duly called and held) has
by the requisite vote of all directors present approved the Merger in accordance
with the provisions of Sections 251 of the DGCL.
6. A majority of the Company's stockholders have approved the Merger Agreement
and the Merger at a meeting duly called and held for such purpose.
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Annex B
SANDS BROTHERS & CO., LTD.
INVESTMENT BANKERS
MEMBER NYSE
90 PARK AVENUE, NEW YORK, N.Y. 10016
(212) 697-5200 Toll Free (800) 866-6116 Fax (212)697-1096
May 15, 1998
The Board of Directors
Lukens Medical Corporation
3820 Academy Parkway North N.E.
Albuquerque, NM 87109
Gentlemen:
You have requested our opinion as investment bankers as to whether the
consideration to be received the shareholders of Lukens Medical Corporation
("Lukens" or the "Company") in connection with the proposed acquisition (the
"Transaction") of the Company by Medisys PLC ("Medisys"), as described in the
Agreement and Plan of Merger Dated as of April 28, 1998 among Medisys PLC, LMC
Acquisition Corp. and Lukens Medical Corporation (the "Agreement"), is fair to
the Company's shareholders from a financial point of view.
In the ordinary course of its business, Sands Brothers & Co., Ltd. ("Sands
Brothers") is regularly engaged in the valuation and pricing of businesses and
their securities and in advising corporate securities issuers on related
matters.
In arriving at our opinion, Sands Brothers has:
(1) reviewed the Agreement and discussed with the Company's management the
terms of the Agreement;
(2) reviewed the board minutes of the Company with respect to the
Transaction;
(3) reviewed certain financial and other data with respect to Lukens
provided by the Company, including audited financial statements for the
years 1996 and 1997 and certain other relevant financial and operating
data of Lukens.
(4) reviewed financial projections furnished to us by the Company,
including, among other things, the capital structure, sales, net
income, cash flow, capital requirements and other data of Lukens we
deemed relevant;
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(5) reviewed the pro-forma effects of the Transaction on Lukens' forecasted
business plan;
(6) reviewed and analyzed the valuation of companies in the medical
products industry that we deemed comparable;
(7) compared the purchase price of Lukens from a financial point of view
with the recent public market statistics of certain other publicly
traded companies deemed comparable;
(8) compared the financial terms of the Transaction contemplated by the
Agreement with the financial terms, to the extent publicly available,
of other similar transactions deemed to be comparable in whole or in
part;
(9) reviewed the historical market prices of the Company's common stock and
compared the trading history with that of certain companies we deemed
comparable; and
(10) conducted such other studies, analyses, inquiries and examinations and
considered such other financial, economic and market data as we deemed
appropriate.
We have relied upon the accuracy and completeness of the financial and other
information we used in arriving at our opinion without independent verification.
In arriving at our opinion, we have not obtained any evaluations or appraisals
of the assets of the Company. Our opinion is necessarily based upon information
and conditions as they exist and can be evaluated as of the date of this letter.
We note, in rendering this opinion, that Sands Brothers will receive a usual and
customary fee for rendering this opinion.
Based upon and subject to the foregoing, we are of the opinion that a purchase
price of $4.00 in cash per common share for Lukens Medical Corporation is fair
compensation to the Company's shareholders from a financial point of view. Sands
Brothers understand that this opinion will be reproduced in full in any proxy
statement mailed to shareholders of the Company and hereby gives its consent to
such use.
Sincerely,
Sands Brothers & Co., Ltd.
/s/ Alan M. Bluestine
-------------------------------
By: Alan M. Bluestine,
Managing Director
Corporate Finance
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Annex C
DELAWARE GENERAL CORPORATION LAW
TITLE 8
ss. 262 APPRAISAL RIGHTS. -- (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to ss. 228 of this title shall be entitled to an appraisal by the Court
of Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss. 251 (other than a merger effected pursuant to ss.251(g)
of this title), ss.252, ss.254, ss.257, ss.258, ss.263 or ss.264 of this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or consolidation,
were either (i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or (ii) held of record by more
than 2,000 holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the vote of the
stockholders of the surviving corporation as provided in subsection (f) of ss.
251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares of any
class or series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant to
ss.ss. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:
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a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts thereof) or
depository receipts at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares of fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under ss. 253 of this title is not owned
by the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record date
for such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall include
in such notice a copy of this section. Each stockholder electing to demand the
appraisal of his shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of his
shares. Such demand will be sufficient if it reasonably informs the corporation
of the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A
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stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to
ss. 228 or ss. 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within twenty days after the date
of mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given; provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding
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<PAGE>
the foregoing, at any time within 60 days after the effective date of the merger
or consolidation, any stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any
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<PAGE>
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted his certificates of stock to the Register
in Chancery, if such is required, may participate fully in all proceedings until
it is finally determined that he is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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<PAGE>
Annex D
NEFF & COMPANY LLP
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Lukens Medical Corporation
Albuquerque, NM 87109
We consent to the incorporation in the Proxy Statement Pursuant to Section 14(a)
of our report dated March 27, 1998, to the consolidated financial statements of
Lukens Medical Corporation for the year ended December 31, 1997.
/s/ Neff and Company LLP
Albuquerque, New Mexico
July 21, 1998
<PAGE>
LUKENS MEDICAL CORPORATION
3820 Academy Parkway North, NE
Albuquerque, New Mexico 87109
------------------
PROXY
For Special Meeting of Stockholders to be held on September 23, 1998
------------------
This Proxy is solicited on behalf of the Board of Directors.
The undersigned hereby appoints Robert S. Huffstodt and Robert L. Priddy
as Proxies, each with the power of substitution, and hereby authorizes each of
them to represent and to vote, as designated below, all the shares of common
stock of Lukens Medical Corporation held of record by the undersigned on July
30, 1998 at the Special Meeting of Stockholders to be held on, 1998, or any
adjournment or postponement thereof.
1. TO APPROVE AND ADOPT THE AGREEMENT AND PLAN OF MERGER DATED AS OF APRIL
28, 1998, AMONG LUKENS MEDICAL CORPORATION, MEDISYS PLC AND LMC
ACQUISITION CORP. AND THE MERGER PROVIDED FOR THEREIN.
|_| FOR |_| AGAINST |_| ABSTAIN
2. TO CONSIDER AND ACT UPON ANY OTHER BUSINESS AS MAY COME BEFORE THE
SPECIAL MEETING OF STOCKHOLDERS OR ANY ADJOURNMENT OR POSTPONEMENT
THEREOF.
PLEASEMARK, SIGN, DATE AND RETURN THIS PROXY TO
CONTINENTAL STOCK TRANSFER & TRUST COMPANY, THE
COMPANY'S TRANSFER AGENT.
(over)
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder. (IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1 and in the discretion of the named proxies with respect
to any other matter that may properly come before the meeting or any adjournment
or postponement thereof.)
----------------------------------------
Signature
----------------------------------------
Signature, if held jointly
Dated _______________, 1998
Please date and sign exactly as name
appears on your stock certificate. Joint
owners should each sign personally.
Trustees, custodians, executors and others
signing in a representative capacity
should indicate the capacity in which they
sign.
