<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 15, 1998
ENDOCARE, INC.
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(Exact name of registrant as specified in charter)
Delaware 0-27212 33-0618093
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
7 Studebaker, Irvine, California 92618
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(Address of principal executive offices) (Zip Code)
(949) 595-4770
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(Registrant's telephone number including area code)
NOT APPLICABLE
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(Former name or former address, if changed since last report.)
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ITEM 5. OTHER EVENTS.
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Sale of Common Stock
--------------------
Endocare, Inc., a Delaware corporation (the "Company") has received
private placement funding commitments to purchase an aggregate of 2 million
newly issued shares of the Company's Common Stock at $3.50 per share, for total
aggregate sale proceeds to the Company of $7 million. Pursuant to these
commitments, on April 16, 1998 the Company sold an initial 821,428 shares of its
Common Stock at $3.50 per share, and received aggregate proceeds of
approximately $2.9 million from such sale. The balance of the commitments to
purchase 1,178,572 shares at $3.50 per share, for aggregate sale proceeds of
approximately $4.1 million, will be completed if and when, prior to October 15,
1998, the public trading price per share of the Company's Common Stock reaches
$3.50 and a predetermined minimum number of shares trade at such price. The
Company has agreed to use its best efforts to register for resale under the
Securities Act of 1933, as amended, no later than May 15, 1998, all shares of
Common Stock to be purchased in the private placement.
The purchasers in the private placement consist of funds managed by
institutional fund managers, including (i) The Kaufmann Fund, Inc., (ii) the
Pequot Private Equity Fund, L.P. and its affiliate, the private investment
vehicles of Dawson Samberg Capital Management, Inc. and (iii) funds managed by
Technology Funding, Inc. The purchase commitments are set forth in three Common
Stock Purchase Agreements entered into between the Company and such funds, each
of which is filed as an exhibit to this report and incorporated herein by
reference. The agreements specify all of the terms of the purchase commitments,
including the number of shares and time period in which the Company's Common
Stock must publicly trade at $3.50 per share in order to trigger the remaining
$4.1 million purchase, as well as other conditions to the private placement and
related obligations of the Company.
Line of Credit
--------------
On March 24, 1998, the Company entered into a one year, $1 million
revolving line of credit with Silicon Valley Bank. The credit agreement allows
the Company to borrow up to $1 million at any time during such one year period
for general working capital. Borrowings bear interest at a rate of Prime plus
one percent, must be repaid by March 23, 1999 and are secured by a lien on all
assets of the Company, other than intellectual property rights. Specific details
concerning the line of credit, including covenants of the Company for the
benefit of the lender, requirements to borrowing and repayment and other matters
are set forth in the Loan and Security Agreement filed as an exhibit to this
report and incorporated herein by reference.
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 Common Stock Purchase Agreement dated April 15, 1998 between
the Company and The Kaufmann Fund, Inc.
10.2 Common Stock Purchase Agreement dated April 15, 1998 between
the Company and Technology Funding, Inc.
10.3 Common Stock Purchase Agreement dated April 22, 1998 among the
Company, Pequot Private Equity Fund, L.P. and Pequot Offshore
Private Equity Fund, Inc.
10.4 Loan and Security Agreement dated March 24, 1998 between the
Company and Silicon Valley Bank
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: April 22, 1998
ENDOCARE, INC.
By: /s/ Paul W. Mikus
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Paul W. Mikus
President and Chief Executive Officer
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 Common Stock Purchase Agreement dated April 15, 1998 between
the Company and The Kaufmann Fund, Inc.
10.2 Common Stock Purchase Agreement dated April 15, 1998 between
the Company and Technology Funding, Inc.
10.3 Common Stock Purchase Agreement dated April 22, 1998 among the
Company, Pequot Private Equity Fund, L.P. and Pequot Offshore
Private Equity Fund, Inc.
10.4 Loan and Security Agreement dated March 24, 1998 between the
Company and Silicon Valley Bank
<PAGE> 1
ENDOCARE, INC.
COMMON STOCK PURCHASE AGREEMENT
April 15, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Purchase and Sale of Stock.................................................. 1
1.1 Closings............................................................. 1
2. Representations and Warranties of the Company............................... 1
2.1 Organization, Good Standing and Qualification........................ 1
2.2 Authorization........................................................ 1
2.3 Valid Issuance of Common Stock....................................... 2
2.4 Governmental Consents................................................ 2
2.5 Compliance with Instruments and Law.................................. 2
2.6 SEC Documents; Financial Statements.................................. 2
2.7 Absence of Certain Developments...................................... 3
2.8 Intellectual Property................................................ 3
2.9 Capitalization....................................................... 3
2.10 Litigation........................................................... 4
3. Representations and Warranties of Investor.................................. 4
3.1 Authorization........................................................ 4
3.2 Purchase Entirely for Own Account.................................... 4
3.3 Disclosure of Information............................................ 4
3.4 Investment Experience................................................ 4
3.5 Accredited Investor.................................................. 4
3.6 Restricted Securities................................................ 4
3.7 Legend............................................................... 5
3.8 Risk Factors......................................................... 5
4. Conditions of Investor's Obligations at Closing............................. 5
4.1 Representations and Warranties....................................... 5
4.2 Performance.......................................................... 5
4.3 Qualifications....................................................... 5
4.4 Proceedings and Documents............................................ 5
5. Conditions of the Company's Obligations at Closing.......................... 6
5.1 Representations and Warranties....................................... 6
5.2 Payment of Purchase Price............................................ 6
5.3 Qualifications....................................................... 6
6. Affirmative Covenants of the Company........................................ 6
6.1 Financial Information................................................ 6
6.2 Registration Requirements............................................ 6
6.3 Indemnification and Contribution..................................... 8
7. Miscellaneous............................................................... 10
7.1 Survival of Warranties............................................... 10
</TABLE>
i.
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<TABLE>
<S> <C>
7.2 Successors and Assigns............................................... 11
7.3 Governing Law........................................................ 11
7.4 Counterparts......................................................... 11
7.5 Titles and Subtitles................................................. 11
7.6 Notices.............................................................. 11
7.7 Expenses; Attorneys' Fees............................................ 11
7.8 Amendments and Waivers............................................... 11
7.9 Severability......................................................... 11
7.10 Entire Agreement..................................................... 11
</TABLE>
EXHIBIT A - RISK FACTORS
ii.
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COMMON STOCK PURCHASE AGREEMENT
THIS COMMON STOCK PURCHASE AGREEMENT (this "Agreement") is made
as of the 15th day of April 1998 by and between ENDOcare, Inc., a Delaware
corporation (the "Company"), and The Kaufmann Fund, Inc. ("Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock. Subject to the terms and
conditions of this Agreement, Investor agrees to purchase, and the Company
agrees to sell and issue to Investor, 1,000,000 shares of the Company's Common
Stock (the "Shares") at a price of $3.50 per share.
1.1 Closings. The purchase and sale of 750,000 of the Shares
shall take place on April 15, 1998, and the purchase and sale of the remaining
250,000 of the Shares shall take place on the same day that Pequot Private
Equity Fund, L.P. and Pequot Offshore Private Equity Fund, Inc. (collectively,
"Pequot") purchase the number of newly issued shares of Common Stock of the
Company they are required to purchase pursuant to the Common Stock Purchase
Agreement dated on or around the date hereof between the Company and Pequot,
such that, after giving effect to Pequot's purchase, Investor's purchase of the
250,000 Shares will not cause Investor to own more than 25% of the outstanding
Common Stock of the Company. The purchase and sale of the initial 750,000 Shares
and the purchase and sale of the remaining 250,000 Shares is each referred to as
a "Closing." At each Closing the Company shall deliver to Investor a certificate
representing the Shares purchased against payment of the purchase price therefor
by wire transfer.
2. Representations and Warranties of the Company. The Company
hereby represents and warrants to Investor that:
2.1 Organization, Good Standing and Qualification. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. The Company has all requisite corporate power and
authority to carry on its business as now conducted. The Company is duly
qualified to transact business and is in good standing in each jurisdiction in
which the failure to so qualify would have a material adverse effect on its
business or properties.
2.2 Authorization. The Company has the corporate power and
authority to execute, deliver and perform this Agreement, and to consummate the
transactions contemplated hereby and to issue, sell, and deliver to Investor the
Shares pursuant to the terms of this Agreement. All corporate action on the part
of the Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the performance of all
obligations of the Company hereunder, and the authorization, issuance (or
reservation for issuance), sale and delivery of the Common Stock being sold
hereunder has been taken or will be taken prior to the Closing, and this
Agreement constitutes the valid and legally binding obligation of the Company,
enforceable in accordance with its respective terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally, (b) as
limited by laws
1.
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relating to the availability of specific performance, injunctive relief, or
other equitable remedies and (c) as to those provisions of Section 6.3 relating
to indemnity or contribution.
2.3 Valid Issuance of Common Stock. The Shares being purchased by
Investor hereunder, when issued, sold and delivered in accordance with the terms
of this Agreement for the consideration expressed herein, will be duly and
validly issued, fully paid, and nonassessable, and will be free of restrictions
on transfer other than restrictions on transfer under this Agreement and under
applicable state and federal securities laws. The issuance and delivery of the
Shares is not subject to preemptive, co-sale, right of first refusal or any
other similar rights of the stockholders of the Company or any liens or
encumbrances created by the Company. The Company has not granted any
registration rights with respect to its securities other than the registration
rights set forth (i) herein, (ii) in two Common Stock Purchase Agreements (the
"Other Purchase Agreements") dated on or about the date hereof, one between the
Company and Technology Funding, Inc. and the other, between the Company and
Pequot for the purchase of approximately 142,857 and 857,142 shares of Common
Stock, respectively, and (iii) in the Common Stock Purchase Agreement dated
January 21, 1997 among the Company and the purchasers named therein (the
"January 1997 Agreement"). The Company's Common Stock is quoted on the Nasdaq
Small Cap Market.
2.4 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except for the filing of a Form D and any other
filings required be made under the laws of the state in which the Investor
resides, which will be made as required by such laws and the filing of a
registration statement and all amendments thereto with the SEC as contemplated
by this Agreement.
2.5 Compliance with Instruments and Law. To the best of the
Company's knowledge, the Company is not in violation or default in any material
respect of any provision of its Certificate of Incorporation as currently in
effect and as amended or restated through the date hereof, or its Bylaws, or in
any material respect of any instrument, judgment, order, writ, decree or
contract to which it is a party or by which it is bound, or of any provision of
any federal or state statute, rule or regulation applicable to the Company. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby will not result in any such violation or be
in conflict with or constitute, with or without the passage of time and giving
of notice, either a default under any such provision, instrument, judgment,
order, writ, decree or contract or an event that results in the creation of any
lien, charge or encumbrance upon any assets of the Company or the suspension,
revocation, impairment, forfeiture, or nonrenewal of any material permit,
license, authorization, or approval applicable to the Company, its business or
operations or its assets or properties.
2.6 SEC Documents; Financial Statements. The Company has filed
each statement, annual, quarterly and other report, registration statement and
definitive proxy statement with the U.S. Securities and Exchange Commission
("SEC") that the Company has been required to file since January 1, 1996 ("SEC
Documents"). As of their respective filing dates, none of the SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact
2.
<PAGE> 6
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances in which they were made, not misleading. The
financial statements of the Company included in the SEC Documents (the
"Financial Statements") comply as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles consistently applied (except as may be indicated
in the notes thereto or, in the case of unaudited statements, as permitted by
the SEC) and fairly present the financial position of the Company at the dates
thereof and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal, recurring audit
adjustments). There has been no change in the Company's accounting policies
except as may be described in the notes to the Financial Statements. Except as
disclosed in the SEC Documents filed through the date hereof, the Company has
not incurred any liabilities of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise, that, individually
or in the aggregate, would have a material adverse effect on the assets,
liabilities, business, financial condition, results of operations or prospects
of the Company other than liabilities under or contemplated by this Agreement.
2.7 Absence of Certain Developments. Since December 31, 1997,
there has been no (a) material adverse change in the condition, financial or
otherwise, of the Company or of the Company's assets, liabilities, properties,
business or operations, (b) declaration, setting aside or payment of any
dividend or other distribution with respect to the capital stock of the Company,
or (c) loss, destruction or damage to any property of the Company, whether or
not insured, which has or may have a material adverse effect on the Company.
2.8 Intellectual Property. Except as set forth in the SEC
Documents, the Company owns or possesses adequate rights to use all material
patents, patent rights, inventions, trade secrets and know-how described or
referred to in the SEC Documents as owned or used by it or that are necessary in
all material respects for the conduct of its business as presently conducted as
described in the SEC Documents. Except as set forth in the SEC Documents, the
Company has not received any notice of, nor has any knowledge of, any
infringement of or conflict with asserted rights of others with respect to any
patent, patent right, invention, trade secret or know-how that, individually or
in the aggregate, if the subject of an unfavorable decision ruling or finding,
would have a material adverse effect on the business, properties, financial
condition or results or operations of the Company.
2.9 Capitalization. All of the Company's outstanding shares of
capital stock have been duly authorized and validly issued and are fully paid
and nonassessable, have been issued in compliance with all Federal and state
securities laws, and were not issued in violation of or subject to any
preemptive right or other rights to subscribe for or purchase securities. The
authorized capital stock of the Company consists of 20,000,000 shares of Common
Stock of which 8,386,167 shares are outstanding as of the date hereof. Except as
set forth in the Other Purchase Agreements and the SEC Documents, there are no
outstanding options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell shares of the Company's capital
stock or any such options, rights, convertible securities or obligations.
3.
<PAGE> 7
2.10 Litigation. Except as set forth in the SEC Documents, there
is no pending or, to the Company's knowledge, threatened action, suit or other
proceeding before any court, governmental body or authority, or arbitration to
which the Company is a party or to which its property or assets are subject,
which, if it resulted in an unfavorable decision ruling or finding, would have a
material adverse effect on the business, properties, financial condition or
results or operations of the Company.
3. Representations and Warranties of Investor. Investor hereby
represents and warrants that:
3.1 Authorization. Investor has full power and authority to enter
into this Agreement and such agreement constitutes its valid and legally binding
obligation, enforceable in accordance with its terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally, (b) as
limited by laws relating to the availability of specific performance, injunctive
relief, or other equitable remedies and (c) as to those provisions of Section
6.3 relating to indemnity or contribution.
3.2 Purchase Entirely for Own Account. This Agreement is made
with Investor in reliance upon Investor's representation to the Company, which
by Investor's execution of this Agreement Investor hereby confirms, that the
Shares to be received by Investor will be acquired for investment for Investor's
own account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that Investor has no present intention of
selling, granting any participation in, or otherwise distributing the same. By
executing this Agreement, Investor further represents that Investor does not
have any contract, undertaking, agreement or arrangement with any person to
sell, transfer or grant participations to such person or to any third person,
with respect to any of the Shares.
3.3 Disclosure of Information. Investor has received all the
information it considers necessary or appropriate for deciding whether to
purchase the Shares. Investor further represents that it has had an opportunity
to ask questions and receive answers from the Company regarding the terms and
conditions of the offering of the Shares and the business, properties, prospects
and financial condition of the Company.
3.4 Investment Experience. Investor is an investor in securities
of companies in the development stage and acknowledges that it is able to fend
for itself, can bear the economic risk of its investment, and has such knowledge
and experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Shares. Investor also represents
it has not been organized for the purpose of acquiring the Shares.
3.5 Accredited Investor. Investor and each of its partners are
"accredited investors" within the meaning of SEC Rule 501 of Regulation D, as
presently in effect.
3.6 Restricted Securities. Investor understands that the Shares
it is purchasing are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under
4.
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such laws and applicable regulations such securities may be resold without
registration under the Securities Act of 1933, as amended (the "Securities
Act"), only in certain limited circumstances. In this connection, Investor
represents that it is familiar with Rule 144 promulgated under the Securities
Act ("Rule 144"), as presently in effect, and understands the resale limitations
imposed thereby and by the Securities Act.
3.7 Legend. It is understood that the certificates evidencing the
Shares may bear the following legend:
"These securities have not been registered under the Securities
Act of 1933, as amended. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with respect
to the securities under such Act or an opinion of counsel satisfactory to the
Company that such registration is not required or unless sold pursuant to Rule
144 of such Act."
3.8 Risk Factors. Investor understands that its purchase of the
Shares involves a high degree of risk and that the Company has given no
assurance, or made any representation or warranty, as to the future value of the
Shares or future performance of the Company. Some of the risks inherent in an
investment in the Shares are set forth in Exhibit A hereto, which Investor
acknowledges it has read and understands.
4. Conditions of Investor's Obligations at Closing. The
obligations of Investor under Section 1 of this Agreement are subject to the
fulfillment on or before each Closing of each of the following conditions, the
waiver of which shall not be effective against Investor unless consented in
writing thereto:
4.1 Representations and Warranties. The representations and
warranties of the Company contained in Section 2 shall be true in all material
respects on and as of the Closing with the same effect as though such
representations and warranties had been made on and as of the date of such
Closing.
4.2 Performance. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Closing.
4.3 Qualifications. All authorizations, approvals, or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Shares pursuant to this Agreement shall be duly obtained and effective as of
the Closing.
4.4 Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to Investor's special counsel, and they shall have received all such
counterpart original and certified or other copies of such documents as they may
reasonably request.
5.
<PAGE> 9
5. Conditions of the Company's Obligations at Closing. The
obligations of the Company to Investor under this Agreement are subject to the
fulfillment on or before each Closing of each of the following conditions by
Investor:
5.1 Representations and Warranties. The representations and
warranties of Investor contained in Section 3 shall be true in all material
respects on and as of the Closing with the same effect as though such
representations and warranties had been made on and as of the Closing.
5.2 Payment of Purchase Price. Investor shall have delivered the
purchase price specified in Section 1.
5.3 Qualifications. All authorizations, approvals, or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Shares pursuant to this Agreement shall be duly obtained and effective as of
the Closing.
6. Affirmative Covenants of the Company. The Company hereby
covenants and agrees as follows:
6.1 Financial Information. The Company will mail the following
reports to Investor until Investor transfers, assigns or sells more than fifty
percent (50%) of the Shares purchased by it pursuant to this Agreement;
(a) Within one hundred (100) days after the end of each
fiscal year, a copy of its Annual Report on Form 10-K; and
(b) Within fifty-five (55) days after the end of the
first, second and third quarterly accounting periods of each fiscal year of the
Company, a copy of its Quarterly Report on Form 10-Q.
6.2 Registration Requirements.
(a) The Company shall use its best efforts to prepare and
file a Registration Statement (the "Registration Statement") with the SEC under
the Securities Act to register the resale by Investor of the Shares and, if
requested by Investor, any other shares of Common Stock of the Company held by
Investor as of the date hereof that are not already covered by a registration
statement (collectively, the "Registrable Shares") within twenty-one (21)
business days of the Closing. The Company acknowledges that it has received all
information from Investor necessary to register such shares. Investor agrees to
furnish promptly to the Company in writing all information required from time to
time to be disclosed in order to make the information previously furnished to
the Company by Investor not misleading.
(b) The Company shall pay all Registration Expenses (as
defined below) in connection with any registration, qualification or compliance
hereunder, and Investor shall pay all Selling Expenses (as defined below) and
other expenses that are not Registration Expenses
6.
<PAGE> 10
relating to the Shares to be resold by Investor. "Registration Expenses" shall
mean all expenses, except for Selling Expenses, incurred by the Company in
complying with the registration provisions set forth herein, including, without
limitation, all registration, qualification and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel for the Company, blue sky fees
and expenses and the expense of any special audits incident to or required in
connection with any such registration. Selling Expenses shall mean selling
commissions, underwriting fees and stock transfer taxes applicable to the
Registrable Shares and all fees and disbursements of counsel for Investor.
(c) In the case of the registration effected by the
Company pursuant to these registration provisions, the Company will use its best
efforts to: (i) keep such registration effective until the earlier of (A) such
date as all of the Registrable Shares have been resold or (B) such time as all
of the Registrable Shares held by Investor can be sold within a given three
(3)-month period without compliance with the registration requirements of the
Securities Act pursuant to Rule 144; (ii) prepare and file with the SEC such
amendments and supplements to the Registration Statement and the prospectus used
in connection with the Registration Statement as may be necessary to comply with
the provisions of the Securities Act with respect to the disposition of all
Registrable Shares covered by the Registration Statement; (iii) furnish such
number of prospectuses and other documents incident thereto, including any
amendment of or supplement to the prospectus, as Investor from time to time may
reasonably request; (iv) cause all Registrable Shares registered as described
herein to be listed on each securities exchange and quoted on each quotation
service on which similar securities issued by the Company are then listed or
quoted; (v) provide a transfer agent and registrar for all Shares registered
pursuant to the Registration Statement and a CUSIP number for all such Shares;
(vi) otherwise use its best efforts promptly to comply with all applicable rules
and regulations of the SEC; (vii) file the documents required of the Company and
otherwise use its best efforts promptly to obtain, if applicable, and maintain
requisite blue sky clearance in (A) all jurisdictions in which any of the
Registrable Shares are originally sold and (B) all other states specified in
writing by Investor, provided as to clause (B), however, that the Company shall
not be required to qualify to do business or consent to service of process in
any state in which it is not now so qualified or has not so consented; (viii)
enter into an underwriting agreement having customary terms and conditions if
requested by Investor in connection with the sale of the Shares; (ix) cooperate
in a normal "due diligence" investigation by Investor or by underwriters acting
on behalf of Investor in connection with the sale of the Registrable Shares; (x)
with respect to the initial filing of the Registration Statement, as of the date
of declaration of effectiveness, each post effective amendment thereto or any
underwritten offering thereunder, obtain opinions of counsel to the Company as
provided in an underwriting agreement applicable to the sale of the Shares or if
there is no underwriters, in the form of Exhibit D the January 1997 Agreement;
and (xi), in the case of an underwritten offering under the Registration
Statement only, obtain a "cold comfort" letter from the Company's independent
certified public accountants, addressed to Investor and, if applicable, an
underwriter. The Company shall use its best efforts to qualify for use of Form
S-3 under the Securities Act to register the resale of the Registrable Shares
and to maintain such qualification during the periods described in clause (i)
above. The Company hereby agrees that, notwithstanding any provisions to the
contrary in the January 1997 Agreement, it will use its best efforts to keep the
Registration Statement on Form S-3 filed previously to register for resale the
shares of Common Stock of the Company acquired by Investor pursuant to such
purchase agreement (the "Prior Shares") effective until the earlier of
7.
<PAGE> 11
(i) the date all of the Prior Shares have been sold or (ii) such time as all of
the Prior Shares held by Investor can be sold within a given three (3)-month
period without compliance with the registration requirements of the Securities
Act pursuant to Rule 144.
(d) With a view to making available to Investor the
benefits of Rule 144 and any other rule or regulation of the SEC that may at any
time permit Investor to sell Shares to the public without registration or
pursuant to registration, the Company covenants and agrees to: (i) make and keep
public information available, as those terms are understood and defined in Rule
144, until such date as all of the Registrable Shares shall have been resold;
(ii) file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"); and (iii) furnish to Investor upon request, as long as
Investor owns any Registrable Shares, (A) a written statement by the Company
that it has complied with the reporting requirements of the Exchange Act, (B) a
copy of the most recent annual or quarterly report of the Company, and (C) such
other information as may be reasonably requested in order to avail Investor of
any rule or regulation of the SEC that permits the selling of any such
Registrable Shares without registration.
(e) At any time the Company may refuse to permit Investor
to resell any Registrable Shares pursuant to the Registration Statement;
provided, however, that in order to exercise this right at any time, the Company
must deliver a certificate in writing to Investor to the effect that suspension
of the sale of shares under the Registration Statement, until such time as the
Company can make an appropriate filing with the SEC, is necessary because a sale
pursuant to the Registration Statement, in its then-current form, could
constitute a violation of the Federal securities laws. In such an event, the
Company shall use its best efforts to amend the Registration Statement if
necessary and take all other actions necessary to allow such sale under the
Federal securities laws, and shall notify Investor promptly after it has
determined that such sale has become permissible under the Federal securities
laws. Notwithstanding the foregoing, the Company shall not under any
circumstances be entitled to exercise its right to suspend sales under the
Registration Statement more than two (2) times in any twelve (12)-month period,
and the period during which the Registration Statement may be withdrawn shall
not exceed thirty (30) days; provided, however, that if the Company is required
to amend the Registration Statement and the Company does not qualify for Form
S-3, the period during which the Registration Statement may be withdrawn shall
be increased by fifty (50) days if upon filing such amendment the SEC advised
the Company that it intends to review the amendment. Investor hereby covenants
and agrees that it will not sell any Shares pursuant to the Registration
Statement during the periods the Registration Statement is suspended or
withdrawn as set forth in this Section.
6.3 Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless
Investor from and against any losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) to which Investor may become subject (under
the Securities Act or otherwise) insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of, or are
based upon, any untrue statement of a material fact contained in the
Registration Statement, on the effective date thereof, or arise out of any
failure by the Company to fulfill any undertaking included in the Registration
Statement, and the Company will, as incurred, reimburse Investor for
8.
<PAGE> 12
any legal or other expenses reasonably incurred in investigating, defending or
preparing to defend any such action, proceeding or claim; provided, however,
that the Company shall not be liable in any such case to the extent that such
loss, claim, damage or liability arises out of, or is based upon (i) an untrue
statement made in the Registration Statement in reliance upon and in conformity
with written information furnished to the Company by or on behalf of Investor
specifically for use in preparation of the Registration Statement, (ii) the
failure of Investor to comply with the covenants and agreements contained in
Section 6.2 hereof, or (iii) any untrue statement in any Prospectus that is
corrected in any subsequent Prospectus that was delivered to Investor prior to
the pertinent sale or sales by Investor. The Company will reimburse Investor for
any legal or other expenses reasonably incurred in investigating, defending or
preparing to defend any such action, proceeding or claim notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the obligations under this Section and the possibility that such payments might
later be held to be improper, provided, that (i) to the extent any such payment
is ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
(b) Investor agrees to indemnify and hold harmless the
Company from and against any losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) to which the Company may become subject
(under the Securities Act or otherwise) insofar as such losses, claims, damages
or liabilities (or actions or proceedings in respect thereof) arise out of, or
are based upon (i) an untrue statement made in the Registration Statement in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of Investor specifically for use in preparation of the
Registration Statement, provided, however, that Investor shall not be liable in
any such case for any untrue statement included in any Prospectus which
statement has been corrected, in writing, by Investor and delivered to the
Company before the sale from which such loss occurred, (ii) the failure of
Investor to comply with the covenants and agreements contained in Section 6.2
hereof, or (iii) any untrue statement in any Prospectus that is corrected in any
subsequent Prospectus that was delivered to Investor prior to the pertinent sale
or sales by Investor. Investor will reimburse the Company for any legal or other
expenses reasonably incurred in investigating, defending or preparing to defend
any such action, proceeding or claim notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the obligations under
this Section and the possibility that such payments might later be held to be
improper, provided, that (i) to the extent any such payment is ultimately held
to be improper, the persons receiving such payments shall promptly refund them
and (ii) such persons shall provide to Investor, upon request, reasonable
assurances of their ability to effect any refund, when and if due.
(c) Promptly after receipt by any indemnified person of a
notice of a claim or the beginning of any action in respect of which indemnity
to be sought against an indemnifying person pursuant to this Section 6.3, such
indemnified person shall notify the indemnifying person in writing of such claim
or of the commencement of such action, and, subject to the provisions
hereinafter stated, in case any such action shall be brought against an
indemnified person and the indemnifying person shall have been notified thereof,
the indemnifying person shall be entitled to participate therein, and, to the
extent that it shall wish, to assume the defense thereof, with counsel
reasonably satisfactory to the indemnified person. After notice from the
indemnifying
9.
<PAGE> 13
person to such indemnified person of the indemnifying person's election to
assume the defense thereof, the indemnifying person shall not be liable to such
indemnified person for any legal expenses subsequently incurred by such
indemnified person in connection with the defense thereof; provided, however,
that if there exists or shall exist a conflict of interest that would make it
inappropriate in the reasonable judgment of the indemnified person for the same
counsel to represent both the indemnified person and such indemnifying person or
any affiliate or associate thereof, the indemnified person shall be entitled to
retain its own counsel at the expense of such indemnifying person.
(d) If the indemnification provided for in this Section
6.3 is unavailable to or insufficient to hold harmless an indemnified party
under subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as result of such losses, claims, damages, or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
the relative fault of the Company on the one hand and Investor on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or labilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand or
Investor on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and Investor agree that it would not be just and equitable if
contribution pursuant to this subsection (d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to above in this subsection (d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, or liabilities (or actions in respect thereof) referred to
above in this subsection (d) shall not be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), Investor shall not be required to contribute
any amount in excess of the amount by which the amount received by Investor from
the sale of the Shares to which such loss relates exceeds the amount of any
damages which such Investor has otherwise been required to pay by reason of
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
(e) The obligations of the Company and Investor under this
Section 6.3 shall be in addition to any liability which the Company and Investor
may otherwise have and shall extend, upon the same terms and conditions, to each
person, if any, who controls the Company or Investor within the meaning of the
Securities Act.
7. Miscellaneous.
7.1 Survival of Warranties. The warranties, representations and
covenants of the Company and Investor contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing.
10.
<PAGE> 14
7.2 Successors and Assigns. Except as otherwise provided herein,
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Shares). Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
7.3 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
7.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.5 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
7.6 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
7.7 Expenses; Attorneys' Fees. The Company and Investor shall
each pay all of its own costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement. If any
action at law or in equity is necessary to enforce or interpret the terms of
this Agreement or the Certificate, the prevailing party shall be entitled to
reasonable attorney's fees, costs and necessary disbursements in addition to any
other relief to which such party may be entitled.
7.8 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Investor.
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon each holder of any securities purchased under this Agreement at the
time outstanding, each future holder of all such securities, and the Company.
7.9 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
7.10 Entire Agreement. This Agreement and the documents referred
to herein constitute the entire agreement among the parties and no party shall
be liable or bound to any other
11.
<PAGE> 15
party in any manner by any warranties, representations, or covenants except as
specifically set forth herein or therein.
[Signature Page Follows]
<PAGE> 16
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.
"COMPANY"
ENDOCARE, INC.
By: /s/ PAUL W. MIKUS
---------------------------------------
Paul W. Mikus, President and Chief
Executive Officer
Address: 7 Studebaker
Irvine, California 92618
"INVESTOR"
THE KAUFMANN FUND, INC.
By: /s/ HANS P. UTSCH
---------------------------------------
Name: Hans P. Utsch
--------------------------------
Title: President
--------------------------------
Address: 140 E. 45th Street, 43rd Floor
New York, New York 10017
13.
<PAGE> 17
EXHIBIT A
RISK FACTORS
An investment in the Shares involves a high degree of risk. The
Investor should carefully review the following risk factors as well as the other
available information regarding the Company. Information regarding the Company,
including the information set forth below, contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are intended
to be covered by the safe harbors created thereby. Forward-looking statements
include statements regarding the Company's development of new products, its
ability to market and sell existing products and obtain regulatory approvals,
the trends in the markets served by the Company and the Company's ability to
meet its liquidity requirements. The Investor is cautioned that all
forward-looking statements are subject to risks and uncertainties, including,
without limitation, the risks outlined in this section.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
The Company has a limited history of operations as an independent
operating entity. Since its inception, the Company has engaged primarily in
research and development, and the Company has minimal experience in
manufacturing, marketing and selling its products in commercial quantities.
Additionally, the Company has incurred annual operating losses since its
inception, and expects to continue to incur operating losses as new products
will require substantial development, clinical, regulatory, manufacturing and
other expenditures. As of December 31, 1997, the Company's accumulated deficit
was approximately $5.4 million. There can be no assurance that the Company will
successfully develop or commercialize its current or future products, that the
Company will achieve significant revenues from sales, or that the Company will
achieve or sustain profitability in the future. Additionally, successful
completion of the Company's development program and its transition to attaining
profitable operations is dependent upon achieving a level of revenues adequate
to support the Company's cost structure and obtaining additional financing
adequate to fulfill its research and development activities to continue
refinement of existing products and to develop and commercialize new products.
DECLINING SALES OF EXISTING PRODUCTS; UNCERTAIN MARKET ACCEPTANCE OF
THE COMPANY'S NEW PRODUCTS
Sales of certain of the Company's existing products, including
Prolase(R) and Diolase(TM), have declined and are expected to continue to
decline over the next few years. Certain of the Company's products, including
its CRYOcare Systems, which were introduced in the second quarter of 1996, are
in the early stages of development or market introduction. There can be no
assurance that any of the Company's products will be accepted by potential
customers. The Company's ability to successfully market its CRYOcare System is
dependent upon acceptance of cryosurgical procedures in the United States and
certain international markets. Although cryosurgery has existed for many years,
cryosurgery has not been widely accepted due to cost, competing products and
limited reimbursement by third party payers. The acceptance of cryosurgery by
the general population also may be affected adversely by its price, concerns
relating
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<PAGE> 18
to its safety and efficacy, the accepted effectiveness of alternative methods of
correcting urological disorders and lack of reimbursement from third party
payers. Medicare does not currently reimburse for cryosurgical ablation of the
prostate, one of the approved uses of the Company's eight probe CRYOcare System.
In addition, any future reported adverse events or other unfavorable publicity
involving patient outcomes from the use of cryosurgery, whether from the
Company's products or the products of the Company's competitors, could adversely
affect acceptance and reimbursement for cryosurgery. Emerging new technologies
and procedures to treat cancer, prostate enlargement and other prostate
disorders also may adversely affect the market acceptance of cryosurgery. There
can be no assurance that the Company's CRYOcare Systems will gain any
significant degree of market acceptance among physicians, patients and health
care payers.
UNCERTAINTY OF PRODUCT DEVELOPMENT; RISKS RELATED TO CLINICAL TRIALS
The Company's growth is substantially dependent upon its
continued ability to successfully develop, commercialize and market new
products. The Company's future products are in varying stages of development.
There can be no assurance that the Company will be successful in developing and
commercializing new products that achieve market acceptance or that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products. There can be no
assurance that the Company's products in development will prove to be safe and
effective in clinical trials under applicable regulatory guidelines, and
clinical trials may identify significant technical or other obstacles that must
be overcome prior to obtaining necessary regulatory or reimbursement approvals.
Even if a product overcomes these obstacles, the Company's products will not be
used unless they present an attractive alternative to other treatments and the
clinical benefits to the patient and cost savings achieved through use of the
Company's products outweigh the cost of such products. The Company believes that
recommendations and endorsements of physicians and patients and reimbursement by
health care payers will be essential for market acceptance of its products, and
there can be no assurance that any such recommendations, endorsements or
reimbursements will be obtained. Failure of the Company to successfully develop,
commercialize and market new products or the failure of the Company's products
to achieve significant market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON BOSTON SCIENTIFIC; DISPUTE WITH BOSTON SCIENTIFIC; LIMITED
SALES AND MARKETING EXPERIENCE
The Company has only limited experience marketing and selling its
products, and does not have experience marketing and selling its products in
commercial quantities. In November 1996, the Company entered into an eight year
exclusive distribution agreement whereby Boston Scientific Corporation ("Boston
Scientific") agreed to market and distribute the Company's CRYOcare Systems
worldwide in the field of urology. The Company is currently in a dispute with
Boston Scientific regarding Boston Scientific's performance under the terms of
the agreement. The Company has notified Boston Scientific that the Company
believes Boston Scientific has failed to perform adequately under its agreement
with the Company, but neither party has initiated arbitration or other
proceedings in connection with the dispute. The agreement with Boston
15.
<PAGE> 19
Scientific requires that any proceedings in connection with the dispute be
conducted through arbitration, and that the party who does not prevail in the
arbitration pay the legal fees and expenses of the prevailing party. In the
event the dispute with Boston Scientific escalates to arbitration, the Company
could incur significant legal fees and expenses and, if the Company does not
prevail, it may additionally have to pay the legal fees and expenses of Boston
Scientific.
A result of the dispute with Boston Scientific, whether or not it
proceeds to arbitration, may be the termination of the agreement with Boston
Scientific. In that case the Company would have to market and distribute its
CRYOcare System for urological applications on its own or enter into an
agreement with a third party or parties to market and distribute these products,
either on an exclusive basis or in conjunction with others. There is no
assurance that in the event the Boston Scientific agreement is terminated, the
Company can successfully market and distribute these products on its own or that
it could find third parties to effectively market or distribute these products.
As an alternative to termination of the Boston Scientific agreement, Boston
Scientific and the Company may resolve their dispute by renegotiating the terms
of the agreement. There is no assurance whether such renegotiation would result
in an agreement whose terms are more favorable to the Company than those in the
current agreement or whether, as a result of such renegotiation, Boston
Scientific's performance would be improved.
Currently, sales of the CRYOcare System for urological
applications are dependent on the marketing efforts of Boston Scientific, and,
if the agreement with Boston Scientific remains in place, future sales of the
CRYOcare System for urological applications will continue to be dependent on the
marketing efforts of Boston Scientific. The Company derives a majority of its
revenues from the sales of CRYOcare Systems and expects that sales of CRYOcare
Systems will continue to constitute a significant portion of net sales for the
foreseeable future. Accordingly, any factor adversely affecting the sales of
CRYOcare Systems would have a material adverse effect on the Company's business,
financial condition and results of its operations. The current distributorship
agreement requires Boston Scientific to purchase a minimum number of products,
however, if and when there were a lack of sales as a result of unforeseen
regulatory or clinical circumstances relating to a product or failure of the
Company to deliver products in a timely manner, the minimum purchase
requirements can be renegotiated. If the Boston Scientific agreement is
renegotiated, this provision may remain in the agreement, or, a provision
similar to this may be a part of any other agreement that is entered into with
another distributor other than Boston Scientific.
Currently, Medicare does not provide reimbursement for
cryosurgical ablation of the prostate, one of the approved uses of the Company's
eight probe CRYOcare System. The Company believes that to become and remain
competitive, it will need to continue to develop third party distribution
channels and/or a substantial direct sales force for its new and other products.
Establishing marketing and sales capabilities sufficient to support sales in
commercial quantities will require significant resources, and there can be no
assurance that the Company will be able to recruit and retain direct sales
personnel, or that the Company will succeed in establishing and maintaining any
third party distribution channels, or that the Company's future sales and
marketing efforts will succeed at all. In addition, under the current
distribution agreement, Boston Scientific has a right of first refusal to match
any offer received by the Company from a third party to purchase the assets
related to the CRYOcare System for urological applications, and a right to buy
16.
<PAGE> 20
the assets and technology related to the CRYOcare System for urological
applications at purchase dates of twenty-four, thirty-six and forty-eight months
after the date that Medicare provides reimbursement for cryosurgical ablation of
the prostate, for a purchase price of 1.7, 1.5 and 1.3 times net sales for the
product for the preceding twelve months, but not less than $40 million, $50
million and $60 million, respectively. This buyout provision may have the impact
of creating a theoretical cap on the value of the CRYOcare System for urological
applications and, indirectly, the market value of the Company. If the Boston
Scientific agreement is renegotiated, this provision may remain in the
agreement, or, a provision similar to this may be a part of any other agreement
that is entered into with another distributor other than Boston Scientific.
PRIOR RELIANCE ON MEDSTONE; NEED FOR ADDITIONAL FINANCING
The Company operated as a division or wholly owned subsidiary of
Medstone from its commencement of operations until January 1996 and relied upon
Medstone for financial support and for assistance with personnel management and
financial administration. The Company anticipates that its need for working
capital through the end of 1998 should be satisfied with existing working
capital and a $1 million bank line of credit and the current private placement
of Common Stock, both of which are expected to close by the end of March 1998.
There is no assurance, however, that the line of credit and private placement
currently being negotiated will be consummated, or if they are, whether they
will be consummated at lesser amounts than anticipated. Insofar as the Company
may elect to undertake or accelerate significant research and development
projects for new products or may pursue corporate acquisitions, it may require
additional outside financing prior to such time. The Company expects that to
meet its long-term needs it will need to raise substantial additional funds
through the sale of its equity securities, the incurrence of indebtedness or
through funds derived through entering into collaborative arrangements with
third parties. Any additional equity financing may be dilutive to shareholders,
and debt financing, if available, may involve restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may require
the Company to relinquish rights to certain of its technologies, products or
marketing territories. The failure of the Company to raise capital when needed
could have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION; RAPID TECHNOLOGICAL AND INDUSTRY CHANGE
The Company competes in an established field of surgical device
manufacturers, and the competition in this field is intense. Many of the
Company's competitors are significantly larger than the Company and have greater
financial, technical, research, marketing, sales, distribution and other
resources than the Company. Additionally, the Company believes there will be
intense price competition for products developed in the Company's markets. There
can be no assurance that the Company's competitors will not succeed in
developing or marketing technologies and products, including drug-based
treatments, that are more effective or commercially attractive than any that are
being developed or marketed by the Company, or that such competitors will not
succeed in obtaining regulatory approval, introducing or commercializing any
such products prior to the Company. Such developments could have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, there can be no assurance that, even if the Company is able
to compete successfully, it would do so in a profitable manner. The medical
17.
<PAGE> 21
device industry generally, and the urological disease treatment market in
particular, are characterized by rapid technological change, changing customer
needs, and frequent new product introductions. The Company's future success will
depend upon its ability to develop and introduce new cost effective products in
a timely manner. There can be no assurance that the Company's products will not
be rendered obsolete as a result of future innovations.
LIMITED MANUFACTURING EXPERIENCE
The Company has limited experience in producing its products in
commercial quantities. Manufacturers often encounter difficulties in scaling up
production of new products, including problems involving production yields,
quality control and assurance, component supply and shortages of qualified
personnel. The Company's failure to overcome these manufacturing problems could
materially adversely affect the Company's business, financial condition and
results of operations. The Company uses a combination of internal manufacturing
capacity and third party manufacturers in its manufacturing efforts. Most of the
Company's purchased components and processes are available from more than one
vendor. However, certain components and processes are currently available from
or performed by a single vendor. Any supply interruption from a single source
vendor would have a material adverse effect on the Company's ability to
manufacture its products until a new source of supply was qualified and, as a
result, could have a material adverse effect on the Company's business,
financial condition and results of operations. Further, the ability of third
party manufacturing sources to deliver components or finished goods will affect
the Company's ability to commercialize its products, and the Company's
dependence on third party sources may adversely affect the Company's profit
margins. Additionally, the Company's success will depend in part upon its
ability to manufacture its products in compliance with the FDA's Good
Manufacturing Practices ("GMP") regulations and other regulatory requirements,
in sufficient quantities and on a timely basis, while maintaining product
quality and acceptable manufacturing costs. Failure to increase production
volumes in a timely or cost effective manner or to maintain compliance with GMP
or other regulatory requirements could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL
The Company's future success depends to a significant degree upon
the continued service of key technical and senior management personnel,
including Paul W. Mikus, the President of the Company, none of whom is bound by
an employment agreement or covered by an insurance policy of which the Company
is the beneficiary. The Company's future success also depends on its continuing
ability to attract, retain and motivate highly qualified technical, managerial
and sales personnel. The inability to retain or attract qualified personnel
could have a material adverse effect upon the Company's business, financial
condition and results of operations.
GOVERNMENT REGULATION
Governmental regulations in the United States and other countries
are a significant factor affecting the research and development, manufacture and
marketing of the Company's products. In the United States, the United States
Food and Drug Administration ("FDA") has broad authority under the Federal Food,
Drug and Cosmetic Act and the Public Health Service Act
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<PAGE> 22
to regulate the distribution, manufacture and sale of medical devices. Foreign
sales of drugs and medical devices are subject to foreign governmental
regulation and restrictions which vary from country to country. The process of
obtaining FDA and other required regulatory approvals is lengthy and expensive.
There can be no assurance that the Company will be able to obtain necessary
approvals for clinical testing or for manufacturing or marketing of its
products. Failure to comply with applicable regulatory approvals can, among
other things, result in fines, suspension of regulatory approvals, product
recalls, operating restrictions and criminal prosecution. In addition,
governmental regulation may be established which could prevent, delay, modify or
rescind regulatory approval of the Company's products. There can be no assurance
that any such position by the FDA, or change of position by the FDA, would not
adversely impact the Company's business, financial condition or results of
operations. Regulatory approvals, if granted, may include significant
limitations on the indicated uses for which the Company's products may be
marketed. In addition, to obtain such approvals, the FDA and foreign regulatory
authorities may impose numerous other requirements on the Company. FDA
enforcement policy strictly prohibits the marketing of approved medical devices
for unapproved uses. In addition, product approvals can be withdrawn for failure
to comply with regulatory standards or the occurrence of unforeseen problems
following initial marketing. There can be no assurance that the Company will be
able to obtain regulatory approvals for its products on a timely basis or at
all, and delays in receipt of or failure to receive such approvals, the loss of
previously obtained approvals, or failure to comply with existing or future
regulatory requirements would have a material adverse effect on the Company's
business, financial condition and results of operations.
UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT
In the United States, health care providers, such as hospitals
and physicians, that purchase medical devices such as the Company's products,
generally rely on third party payers, principally Federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of the
cost of medical procedures involving the Company's products. Currently, Medicare
does not reimburse for cryosurgical ablation of the prostate, one of the
approved uses of the Company's eight probe CRYOcare System. Without such
reimbursement, market acceptance and use of the product will be limited and may
adversely affect the Company's revenues from sales of the product. There can be
no assurance that the cost of medical procedures involving the Company's
products will be reimbursed by Medicare or other governmental, insurance or
third party payers. In addition, the Company anticipates that in a prospective
payment system, such as the DRG system utilized by Medicare, and in many managed
care systems used by private health care payers, the cost of the Company's
products will be incorporated into the overall cost of the procedure and that
there will be no separate, additional reimbursement for the Company's products.
Separate reimbursement for the Company's products is not expected to be
available in the United States and there can be no assurance that reimbursement
for the Company's products will be available in international markets under
either governmental or private reimbursement systems. Furthermore, the Company
could be adversely affected by changes in reimbursement policies of governmental
or private health care payers, particularly to the extent any such changes
affect reimbursement for procedures in which the Company's products are used.
Failure by physicians, hospitals and other users of the Company's products to
obtain sufficient reimbursement from health care payers for procedures involving
the Company's products, or adverse changes in governmental and private third
party payers' policies toward reimbursement for such procedures,
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could have a material adverse effect on the Company's business, financial
condition and results of operations.
RISKS RELATED TO ACQUISITIONS
As part of its strategy to develop and market its products, the
Company may acquire a business or businesses that the Company believes might
enhance and speed up the development of its products through clinical trials,
such as a surgical center or related company that would use the Company's
products in clinical applications. There is no assurance, however, that the
Company will be able to identify suitable acquisition candidates, or, if it
identifies such candidates, that it would be able to consummate the acquisition
of such candidates. Furthermore, there is no assurance that if the Company
acquires a suitable acquisition candidate, the Company will be able to
effectively integrate the operations of the company acquired into the operations
of the Company, or effectively utilize the company acquired to develop and
market the Company's products. The failure to integrate an acquired company into
the operations of the Company may cause a drain on the financial and managerial
resources of the Company, and thereby materially adversely effect the financial
results of operations of the Company.
PRODUCT LIABILITY AND RECALL RISKS
The manufacture and sale of medical products entails significant
risk of product liability claims or product recalls. There can be no assurance
that the Company's existing insurance coverage limits are adequate to protect
the Company from any liabilities it might incur in connection with the clinical
trials or sales of its products. In addition, the Company may require increased
product liability coverage as its products are commercialized. Such insurance is
expensive and in the future may not be available on acceptable terms, if at all.
A successful product liability claim or series of claims brought against the
Company in excess of its insurance coverage, or a recall of the Company's
products, could have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTY RELATED TO HEALTH CARE REFORM
Political, economic and regulatory influences are subjecting the
health care industry in the United States to fundamental change. The Company
anticipates that Congress, state legislatures and the private sector will
continue to review and assess alternative health care delivery and payment
systems. Potential approaches that have been considered include mandated basic
health care benefits, controls on health care spending through limitations on
the growth of private purchasing groups, price controls and other fundamental
changes to the health care delivery system. Legislative debate is expected to
continue in the future, and market forces are expected to demand reduced costs.
The Company cannot predict what impact the adoption of any Federal or state
health care reform measures, future private sector reform or market forces may
have on its business.
20.
<PAGE> 24
DEPENDENCE ON PATENT AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to
secure and protect intellectual property rights relating to its technology.
While the Company believes that the protection of patents or licenses is
important to its business, it also relies on trade secrets, know-how and
continuing technological innovation to maintain its competitive position. No
assurance can be given that the Company's patent applications will be approved,
that the Company will develop any additional proprietary products that are
patentable and/or that any issued patents will provide the Company with a
competitive edge or will not be challenged by any third parties. No assurance
can be given that the Company's processes or products will not infringe patents
or proprietary rights of others or that any license required would be made
available under any such patents or proprietary rights, on terms acceptable to
the Company or at all. From time to time, the Company has received
correspondence alleging infringement of proprietary rights of third parties. No
assurance can be given that any relevant claims of third parties would not be
upheld as valid and enforceable, and therefore that the Company could be
prevented from practicing the subject matter claimed or would be required to
obtain licenses from the owners of any such proprietary rights to avoid
infringement. The Company seeks to preserve the confidentiality of its
technology by entering into confidentiality agreements with its employees,
consultants, customers, and key vendors and by other means. No assurance can be
given, however, that these measures will prevent the unauthorized disclosure or
use of such technology.
LIQUIDITY
The Company Common Stock began trading on the Nasdaq SmallCap
Market on February 28, 1997. Between February 20, 1996 and February 28, 1997,
the Common Stock traded on the Nasdaq electronic bulletin board. As a result,
the Common Stock has a limited trading history. If the Company is unable to
maintain the standards for quotation on the Nasdaq Small Cap Market, the ability
of investors to resell their shares after registration with the Securities and
Exchange Commission may be limited. In addition, the Company's securities may be
subjected to so-called "penny stock" rules that impose additional sales practice
and market making requirements on broker-dealers who sell and/or make a market
in such securities. This could affect the ability or willingness of
broker-dealers to sell and/or make a market in the Company's securities and the
ability of holders of the Company's securities to sell their securities in the
secondary market. There can be no assurance regarding the price at which the
Company Common Stock will trade. The market prices for securities of emerging
companies have historically been highly volatile. Future announcements
concerning the Company or its competitors, including the Company's operating
results, technological innovations or new commercial products, corporate
collaborations, government regulations, developments concerning proprietary
rights, litigation or public concern as to safety of the Company's products, as
well as investor perception of the Company and industry and general economic and
market conditions, may have a significant impact on the market price of the
Company's Common Stock. In addition, the stock market is subject to price and
volume fluctuations that affect the market prices for companies in general and
small capitalization, high technology companies in particular, and are often
unrelated to their operating performance.
21.
<PAGE> 25
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION
Future sales of Common Stock (including shares issued upon the
exercise of outstanding options and warrants) could materially adversely affect
the market price of the Common Stock. Such sales also might make it more
difficult for the Company to sell equity securities or equity-related securities
in the future at a time and price that the Company would deem appropriate. As of
February 28, 1998, the Company had 8,379,396 shares of Common Stock outstanding,
all of which may be freely traded. In addition, as of February 28, 1998 warrants
to purchase 382,497 shares of Common Stock were outstanding. Also, as of
February 28, 1998 stock options to purchase 1,866,480 shares of Common Stock had
been granted under the Company's stock option plans, subject to various vesting
schedules. Stock options to purchase an additional 233,520 shares of Common
Stock may be issued by the Company from time to time under such option plans and
up to 250,000 shares of Common Stock may be purchased under the Company's
Employee Stock Purchase Plan. An aggregate of 2,000,000 shares of Common Stock
may be issued under the Company's 1995 Stock Plan, 150,000 shares of Common
Stock may be issued under the Company's 1995 Director Option Plan and up to
250,000 shares of Common Stock may be issued under the Company's Employee Stock
Purchase Plan. The Company anticipates receiving shareholder approval to amend
and restate the 1995 Stock Plan to increase the number of shares reserved for
issuance thereunder by 1,000,000 shares. Exercise of these options or warrants
may result in substantial dilution to investors. In addition, the Company has
granted certain shareholders and warrantholders piggyback registration rights
with respect to 357,497 shares of Common Stock.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS; POSSIBLE NEGATIVE EFFECT
ON STOCK PRICE
Certain provisions of the Company's Certificate of Incorporation
and the Bylaws may have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Company's Common Stock.
For example, certain of these provisions allow the Company to issue Preferred
Stock without any vote or further action by the shareholders, eliminate the
ability of shareholders to act by written consent without a meeting and
eliminate cumulative voting in the election of directors. These provisions may
make it more difficult for shareholders to take certain corporate actions and
may have the effect of delaying or preventing a change in control of the
Company.
22.
<PAGE> 1
ENDOCARE, INC.
COMMON STOCK PURCHASE AGREEMENT
April 15, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Purchase and Sale of Stock.................................................. 1
1.1 Closing.............................................................. 1
2. Representations and Warranties of the Company............................... 1
2.1 Organization, Good Standing and Qualification........................ 1
2.2 Authorization........................................................ 1
2.3 Valid Issuance of Common Stock....................................... 2
2.4 Governmental Consents................................................ 2
2.5 Compliance with Instruments and Law.................................. 2
2.6 SEC Documents; Financial Statements.................................. 3
2.7 Absence of Certain Developments...................................... 3
2.8 Intellectual Property................................................ 3
2.9 Capitalization....................................................... 3
2.10 Litigation........................................................... 4
3. Representations and Warranties of Investor.................................. 4
3.1 Authorization........................................................ 4
3.2 Purchase Entirely for Own Account.................................... 4
3.3 Disclosure of Information............................................ 4
3.4 Investment Experience................................................ 4
3.5 Accredited Investor.................................................. 4
3.6 Restricted Securities................................................ 5
3.7 Legend............................................................... 5
3.8 Risk Factors......................................................... 5
4. Conditions of Investor's Obligations at Closing............................. 5
4.1 Representations and Warranties....................................... 5
4.2 Performance.......................................................... 5
4.3 Qualifications....................................................... 5
4.4 Proceedings and Documents............................................ 5
5. Conditions of the Company's Obligations at Closing.......................... 6
5.1 Representations and Warranties....................................... 6
5.2 Payment of Purchase Price............................................ 6
5.3 Qualifications....................................................... 6
6. Affirmative Covenants of the Company........................................ 6
6.1 Financial Information................................................ 6
6.2 Registration Requirements............................................ 6
6.3 Indemnification and Contribution..................................... 8
7. Miscellaneous............................................................... 10
7.1 Survival of Warranties............................................... 10
</TABLE>
i.
<PAGE> 3
<TABLE>
<S> <C>
7.2 Successors and Assigns............................................... 10
7.3 Governing Law........................................................ 11
7.4 Counterparts......................................................... 11
7.5 Titles and Subtitles................................................. 11
7.6 Notices.............................................................. 11
7.7 Expenses; Attorneys' Fees............................................ 11
7.8 Amendments and Waivers............................................... 11
7.9 Severability......................................................... 11
7.10 Entire Agreement..................................................... 11
</TABLE>
EXHIBIT A -- Risk Factors
ii.
<PAGE> 4
COMMON STOCK PURCHASE AGREEMENT
THIS COMMON STOCK PURCHASE AGREEMENT (this "Agreement") is made
as of the 15th day of April 1998 by and between ENDOcare, Inc., a Delaware
corporation (the "Company"), and Technology Funding Inc., a California
corporation ("Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock. Subject to the terms and
conditions of this Agreement, Investor agrees to cause certain investment funds
managed by Investor (the "Funds") to purchase, and the Company agrees to sell
and issue to such Funds, an aggregate of 142,857 shares of the Company's Common
Stock (the "Shares") at a price of $3.50 per share. Any agreement herein that is
binding on Investor shall be equally binding upon the Funds, and Investor
represents and warrants that by executing this Agreement it intends to so bind
the Funds and has full power and authority to do so.
1.1 Closing. The purchase and sale of 71,428 of the Shares shall
take place on April 16, 1998, and the purchase and sale of the remaining 71,429
of the Shares shall take place on the same day that Pequot Private Equity Fund,
L.P. and Pequot Offshore Private Equity Fund, Inc. (collectively, "Pequot")
purchase the number of newly issued shares of Common Stock of the Company they
are required to purchase pursuant to the Common Stock Purchase Agreement dated
on or around the date hereof between the Company and Pequot. The initial
purchase and sale of 71,428 of the Shares and the subsequent purchase and sale
of the 71,429 of the Shares are each referred to as a "Closing." At each Closing
the Company shall deliver to Investor certificates in the name of the Funds
designated by Investor representing the Shares purchased , against payment of
the purchase price therefor by wire transfer.
2. Representations and Warranties of the Company. The Company
hereby represents and warrants to Investor that:
2.1 Organization, Good Standing and Qualification. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. The Company has all requisite corporate power and
authority to carry on its business as now conducted. The Company is duly
qualified to transact business and is in good standing in each jurisdiction in
which the failure to so qualify would have a material adverse effect on its
business or properties.
2.2 Authorization. The Company has the corporate power and
authority to execute, deliver and perform this Agreement, and to consummate the
transactions contemplated hereby and to issue, sell, and deliver to Investor the
Shares pursuant to the terms of this Agreement. All corporate action on the part
of the Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the performance of all
obligations of the Company hereunder, and the authorization, issuance (or
reservation for issuance), sale and delivery of the Common Stock being sold
hereunder has been taken or will be taken prior to the Closing, and this
Agreement constitutes the valid and legally
<PAGE> 5
binding obligation of the Company, enforceable in accordance with its respective
terms, except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (b) as limited by laws relating to
the availability of specific performance, injunctive relief, or other equitable
remedies, and (c) as to those provisions of Section 6.3 relating to indemnity or
contribution.
2.3 Valid Issuance of Common Stock. The Shares being purchased by
Investor hereunder, when issued, sold and delivered in accordance with the terms
of this Agreement for the consideration expressed herein, will be duly and
validly issued, fully paid, and nonassessable, and will be free of restrictions
on transfer other than restrictions on transfer under this Agreement and under
applicable state and federal securities laws. The issuance and delivery of the
Shares is not subject to preemptive, co-sale, right of first refusal or any
other similar rights of the stockholders of the Company or any liens or
encumbrances created by the Company. The Company has not granted any
registration rights with respect to its securities other than the registration
rights set forth (i) herein, (ii) in two Common Stock Purchase Agreements (the
"Other Purchase Agreements") dated on or about the date hereof, one between the
Company and Pequot and the other, between the Company and The Kaufmann Fund,
Inc. for the purchase of approximately 857,143 and 1,000,000 shares of Common
Stock, respectively, and (iii) in the Common Stock Purchase Agreement dated
January 21, 1997 among the Company and the purchasers named therein (the
"January 1997 Agreement"). The Company's Common Stock is quoted on the Nasdaq
Small Cap Market.
2.4 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except for the filing of a Form D and any other
filings required be made under the laws of the state in which the investor
resides, which will be made as required by such laws and the filing of a
registration statement and all amendments thereto with the SEC as contemplated
by this Agreement.
2.5 Compliance with Instruments and Law. To the best of the
Company's knowledge, the Company is not in violation or default in any material
respect of any provision of its Certificate of Incorporation as currently in
effect and as amended or restated through the date hereof, or its Bylaws, or in
any material respect of any instrument, judgment, order, writ, decree or
contract to which it is a party or by which it is bound, or of any provision of
any federal or state statute, rule or regulation applicable to the Company. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby will not result in any such violation or be
in conflict with or constitute, with or without the passage of time and giving
of notice, either a default under any such provision, instrument, judgment,
order, writ, decree or contract or an event that results in the creation of any
lien, charge or encumbrance upon any assets of the Company or the suspension,
revocation, impairment, forfeiture, or nonrenewal of any material permit,
license, authorization, or approval applicable to the Company, its business or
operations or its assets or properties.
2.
<PAGE> 6
2.6 SEC Documents; Financial Statements. The Company has filed
each statement, annual, quarterly and other report, registration statement and
definitive proxy statement with the U.S. Securities and Exchange Commission
("SEC") that the Company has been required to file since January 1, 1996 ("SEC
Documents"). As of their respective filing dates, none of the SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances in which they were made, not misleading.
The financial statements of the Company included in the SEC Documents (the
"Financial Statements") comply as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles consistently applied (except as may be indicated
in the notes thereto or, in the case of unaudited statements, as permitted by
the SEC) and fairly present the financial position of the Company at the dates
thereof and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal, recurring audit
adjustments). There has been no change in the Company's accounting policies
except as may be described in the notes to the Financial Statements. Except as
disclosed in the SEC Documents filed through the date hereof, the Company has
not incurred any liabilities of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise, that, individually
or in the aggregate, would have a material adverse effect on the assets,
liabilities, business, financial condition, results of operations or prospects
of the Company other than liabilities under or contemplated by this Agreement.
2.7 Absence of Certain Developments. Since December 31, 1997,
there has been no (a) material adverse change in the condition, financial or
otherwise, of the Company or of the Company's assets, liabilities, properties,
business or operations, (b) declaration, setting aside or payment of any
dividend or other distribution with respect to the capital stock of the Company,
or (c) loss, destruction or damage to any property of the Company, whether or
not insured, which has or may have a material adverse effect on the Company.
2.8 Intellectual Property. Except as set forth in the SEC
Documents, the Company owns or possesses adequate rights to use all material
patents, patent rights, inventions, trade secrets and know-how described or
referred to in the SEC Documents as owned or used by it or that are necessary in
all material respects for the conduct of its business as presently conducted as
described in the SEC Documents. Except as set forth in the SEC Documents, the
Company has not received any notice of, nor has any knowledge of, any
infringement of or conflict with asserted rights of others with respect to any
patent, patent right, invention, trade secret or know-how that, individually or
in the aggregate, if the subject of an unfavorable decision ruling or finding,
would have a material adverse effect on the business, properties, financial
condition or results or operations of the Company.
2.9 Capitalization. All of the Company's outstanding shares of
capital stock have been duly authorized and validly issued and are fully paid
and nonassessable, have been issued in compliance with all Federal and state
securities laws, and were not issued in violation of or subject to any
preemptive right or other rights to subscribe for or purchase securities. The
authorized capital stock of the Company consists of 20,000,000 shares of Common
Stock of which 8,386,167 shares are outstanding as of the date hereof. Except as
set forth in the Other Purchase
3.
<PAGE> 7
Agreements and the SEC Documents, there are no outstanding options to purchase,
or any preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell shares of the Company's capital stock or any such options, rights,
convertible securities or obligations.
2.10 Litigation. Except as set forth in the SEC Documents, there
is no pending or, to the Company's knowledge, threatened action, suit or other
proceeding before any court, governmental body or authority, or arbitration to
which the Company is a party or to which its property or assets are subject,
which, if it resulted in an unfavorable decision ruling or finding, would have a
material adverse effect on the business, properties, financial condition or
results or operations of the Company.
3. Representations and Warranties of Investor. Investor hereby
represents and warrants that:
3.1 Authorization. Investor has full power and authority to enter
into this Agreement and such agreement constitutes its valid and legally binding
obligation, enforceable in accordance with its terms.
3.2 Purchase Entirely for Own Account. This Agreement is made
with Investor in reliance upon Investor's representation to the Company, which
by Investor's execution of this Agreement Investor hereby confirms, that the
Shares to be received by Investor will be acquired for investment for Investor's
own account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that Investor has no present intention of
selling, granting any participation in, or otherwise distributing the same. By
executing this Agreement, Investor further represents that Investor does not
have any contract, undertaking, agreement or arrangement with any person to
sell, transfer or grant participations to such person or to any third person,
with respect to any of the Shares.
3.3 Disclosure of Information. Investor has received all the
information it considers necessary or appropriate for deciding whether to
purchase the Shares. Investor further represents that it has had an opportunity
to ask questions and receive answers from the Company regarding the terms and
conditions of the offering of the Shares and the business, properties, prospects
and financial condition of the Company.
3.4 Investment Experience. Investor is an investor in securities
of companies in the development stage and acknowledges that it is able to fend
for itself, can bear the economic risk of its investment, and has such knowledge
and experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Shares. Investor also represents
it has not been organized for the purpose of acquiring the Shares.
3.5 Accredited Investor. Investor and each of its partners are
"accredited investors" within the meaning of SEC Rule 501 of Regulation D, as
presently in effect.
4.
<PAGE> 8
3.6 Restricted Securities. Investor understands that the Shares
it is purchasing are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act, only in certain limited circumstances. In this connection, Investor
represents that it is familiar with SEC Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the Act.
3.7 Legend. It is understood that the certificates evidencing the
Shares may bear the following legend:
"These securities have not been registered under the Securities
Act of 1933, as amended. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with respect
to the securities under such Act or an opinion of counsel satisfactory to the
Company that such registration is not required or unless sold pursuant to Rule
144 of such Act."
3.8 Risk Factors. Investor understands that its purchase of the
Shares involves a high degree of risk and that the Company has given no
assurance, or made any representation or warranty, as to the future value of the
Shares or future performance of the Company. Some of the risks inherent in an
investment in the Shares are set forth in Exhibit A hereto, which Investor
acknowledges it has read and understands.
4. Conditions of Investor's Obligations at Closing. The
obligations of Investor under Section 1 of this Agreement are subject to the
fulfillment on or before each Closing of each of the following conditions, the
waiver of which shall not be effective against Investor unless consented in
writing thereto:
4.1 Representations and Warranties. The representations and
warranties of the Company contained in Section 2 shall be true in all material
respects on and as of the Closing with the same effect as though such
representations and warranties had been made on and as of the date of such
Closing.
4.2 Performance. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Closing.
4.3 Qualifications. All authorizations, approvals, or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Shares pursuant to this Agreement shall be duly obtained and effective as of
the Closing.
4.4 Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to Investor's special counsel, and they shall
5.
<PAGE> 9
have received all such counterpart original and certified or other copies of
such documents as they may reasonably request.
5. Conditions of the Company's Obligations at Closing. The
obligations of the Company to Investor under this Agreement are subject to the
fulfillment on or before each Closing of each of the following conditions by
Investor:
5.1 Representations and Warranties. The representations and
warranties of Investor contained in Section 3 shall be true in all material
respects on and as of the Closing with the same effect as though such
representations and warranties had been made on and as of the Closing.
5.2 Payment of Purchase Price. Investor shall have delivered the
purchase price specified in Section 1.
5.3 Qualifications. All authorizations, approvals, or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Shares pursuant to this Agreement shall be duly obtained and effective as of
the Closing.
6. Affirmative Covenants of the Company. The Company hereby
covenants and agrees as follows:
6.1 Financial Information. The Company will mail the following
reports to Investor until Investor transfers, assigns or sells more than fifty
percent (50%) of the Shares purchased by it pursuant to this Agreement;
(a) Within one hundred (100) days after the end of each
fiscal year, a copy of its Annual Report on Form 10-K; and
(b) Within fifty-five (55) days after the end of the
first, second and third quarterly accounting periods of each fiscal year of the
Company, a copy of its Quarterly Report on Form 10-Q.
6.2 Registration Requirements.
(a) The Company shall use its best efforts to prepare and
file a Registration Statement (the "Registration Statement") with the SEC under
the Securities Act within twenty-one (21) business days of the Closing to
register the resale by Investor of the Shares. The Company acknowledges that it
has received all information from Investor necessary to register such shares.
Investor agrees to furnish promptly to the Company in writing all information
required from time to time to be disclosed in order to make the information
previously furnished to the Company by Investor not misleading.
(b) The Company shall pay all Registration Expenses (as
defined below) in connection with any registration, qualification or compliance
hereunder, and Investor shall pay
6.
<PAGE> 10
all Selling Expenses (as defined below) and other expenses that are not
Registration Expenses relating to the Shares to be resold by Investor.
"Registration Expenses" shall mean all expenses, except for Selling Expenses,
incurred by the Company in complying with the registration provisions set forth
herein, including, without limitation, all registration, qualification and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for the Company, blue sky fees and expenses and the expense of any special
audits incident to or required in connection with any such registration. Selling
Expenses shall mean selling commissions, underwriting fees and stock transfer
taxes applicable to the Shares and all fees and disbursements of counsel for
Investor.
(c) In the case of the registration effected by the
Company pursuant to these registration provisions, the Company will use its best
efforts to: (i) keep such registration effective until the earlier of (A) such
date as all of the Shares have been resold or (B) such time as all of the Shares
held by Investor can be sold within a given three (3)-month period without
compliance with the registration requirements of the Securities Act pursuant to
Rule 144; (ii) prepare and file with the SEC such amendments and supplements to
the Registration Statement and the prospectus used in connection with the
Registration Statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all Shares covered by the
Registration Statement; (iii) furnish such number of prospectuses and other
documents incident thereto, including any amendment of or supplement to the
prospectus, as Investor from time to time may reasonably request; (iv) cause all
Shares registered as described herein to be listed on each securities exchange
and quoted on each quotation service on which similar securities issued by the
Company are then listed or quoted; (v) provide a transfer agent and registrar
for all Shares registered pursuant to the Registration Statement and a CUSIP
number for all such Shares; (vi) otherwise use its best efforts promptly to
comply with all applicable rules and regulations of the SEC; (vii) file the
documents required of the Company and otherwise use its best efforts promptly to
obtain, if applicable, and maintain requisite blue sky clearance in (A) all
jurisdictions in which any of the Shares are originally sold and (B) all other
states specified in writing by Investor, provided as to clause (B), however,
that the Company shall not be required to qualify to do business or consent to
service of process in any state in which it is not now so qualified or has not
so consented; (viii) enter into an underwriting agreement having customary terms
and conditions if requested by Investor in connection with the sale of the
Shares; (ix) cooperate in a normal "due diligence" investigation by Investor or
by underwriters acting on behalf of Investor in connection with the sale of the
Shares; (x) with respect to the initial filing of the Registration Statement, as
of the date of declaration of effectiveness, each post effective amendment
thereto or any underwritten offering thereunder, obtain opinions of counsel to
the Company as provided in an underwriting agreement applicable to the sale of
the Shares or if there is no underwriters, in the form of Exhibit D to the
January 1997 Agreement; and (xi), in the case of an underwritten offering under
the Registration Statement only, obtain a "cold comfort" letter from the
Company's independent certified public accountants, addressed to Investor and,
if applicable, an underwriter. The Company shall use its best efforts to qualify
for use of Form S-3 under the Securities Act to register the resale of the
Shares and to maintain such qualification during the periods described in clause
(i) above.
(d) With a view to making available to Investor the
benefits of Rule 144 promulgated under the Securities Act ("Rule 144") and any
other rule or regulation of the SEC that may at any time permit Investor to sell
Shares to the public without registration or pursuant to
7.
<PAGE> 11
registration, the Company covenants and agrees to: (i) make and keep public
information available, as those terms are understood and defined in Rule 144,
until the earlier of (A) the second anniversary of the Closing Date or (B) such
date as all of the Shares shall have been resold; (ii) file with the SEC in a
timely manner all reports and other documents required of the Company under the
Exchange Act; and (iii) furnish to Investor upon request, as long as Investor
owns any Shares, (A) a written statement by the Company that it has complied
with the reporting requirements of the Exchange Act, (B) a copy of the most
recent annual or quarterly report of the Company, and (C) such other information
as may be reasonably requested in order to avail Investor of any rule or
regulation of the SEC that permits the selling of any such Shares without
registration.
(e) At any time the Company may refuse to permit Investor
to resell any Shares pursuant to the Registration Statement; provided, however,
that in order to exercise this right at any time, the Company must deliver a
certificate in writing to Investor to the effect that suspension of the sale of
shares under the Registration Statement, until such time as the Company can make
an appropriate filing with the SEC, is necessary because a sale pursuant to the
Registration Statement, in its then-current form, could constitute a violation
of the Federal securities laws. In such an event, the Company shall use its best
efforts to amend the Registration Statement if necessary and take all other
actions necessary to allow such sale under the Federal securities laws, and
shall notify Investor promptly after it has determined that such sale has become
permissible under the Federal securities laws. Notwithstanding the foregoing,
the Company shall not under any circumstances be entitled to exercise its right
to suspend sales under the Registration Statement more than two (2) times in any
twelve (12)-month period, and the period during which the Registration Statement
may be withdrawn shall not exceed thirty (30) days; provided, however, that if
the Company is required to amend the Registration Statement and the Company does
not qualify for Form S-3, the period during which the Registration Statement may
be withdrawn shall be increased by fifty (50) days if upon filing such amendment
the SEC advised the Company that it intends to review the amendment. Investor
hereby covenants and agrees that it will not sell any Shares pursuant to the
Registration Statement during the periods the Registration Statement is
suspended or withdrawn as set forth in this Section.
6.3 Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless
Investor from and against any losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) to which Investor may become subject (under
the Securities Act or otherwise) insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of, or are
based upon, any untrue statement of a material fact contained in the
Registration Statement, on the effective date thereof, or arise out of any
failure by the Company to fulfill any undertaking included in the Registration
Statement, and the Company will, as incurred, reimburse Investor for any legal
or other expenses reasonably incurred in investigating, defending or preparing
to defend any such action, proceeding or claim; provided, however, that the
Company shall not be liable in any such case to the extent that such loss,
claim, damage or liability arises out of, or is based upon (i) an untrue
statement made in the Registration Statement in reliance upon and in conformity
with written information furnished to the Company by or on behalf of Investor
specifically for use in preparation of the Registration Statement, (ii) the
failure of Investor to comply with the covenants and agreements contained in
Section 6.2 hereof, or (iii) any untrue statement in any Prospectus that
8.
<PAGE> 12
is corrected in any subsequent Prospectus that was delivered to Investor prior
to the pertinent sale or sales by Investor. The Company will reimburse Investor
for any legal or other expenses reasonably incurred in investigating, defending
or preparing to defend any such action, proceeding or claim notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the obligations under this Section and the possibility that such payments might
later be held to be improper, provided, that (i) to the extent any such payment
is ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
(b) Investor agrees to indemnify and hold harmless the
Company from and against any losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) to which the Company may become subject
(under the Securities Act or otherwise) insofar as such losses, claims, damages
or liabilities (or actions or proceedings in respect thereof) arise out of, or
are based upon (i) an untrue statement made in the Registration Statement in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of Investor specifically for use in preparation of the
Registration Statement, provided, however, that Investor shall not be liable in
any such case for any untrue statement included in any Prospectus which
statement has been corrected, in writing, by Investor and delivered to the
Company before the sale from which such loss occurred, (ii) the failure of
Investor to comply with the covenants and agreements contained in Section 6.2
hereof, or (iii) any untrue statement in any Prospectus that is corrected in any
subsequent Prospectus that was delivered to Investor prior to the pertinent sale
or sales by Investor. Investor will reimburse the Company for any legal or other
expenses reasonably incurred in investigating, defending or preparing to defend
any such action, proceeding or claim notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the obligations under
this Section and the possibility that such payments might later be held to be
improper, provided, that (i) to the extent any such payment is ultimately held
to be improper, the persons receiving such payments shall promptly refund them
and (ii) such persons shall provide to Investor, upon request, reasonable
assurances of their ability to effect any refund, when and if due.
(c) Promptly after receipt by any indemnified person of a
notice of a claim or the beginning of any action in respect of which indemnity
to be sought against an indemnifying person pursuant to this Section 6.3, such
indemnified person shall notify the indemnifying person in writing of such claim
or of the commencement of such action, and, subject to the provisions
hereinafter stated, in case any such action shall be brought against an
indemnified person and the indemnifying person shall have been notified thereof,
the indemnifying person shall be entitled to participate therein, and, to the
extent that it shall wish, to assume the defense thereof, with counsel
reasonably satisfactory to the indemnified person. After notice from the
indemnifying person to such indemnified person of the indemnifying person's
election to assume the defense thereof, the indemnifying person shall not be
liable to such indemnified person for any legal expenses subsequently incurred
by such indemnified person in connection with the defense thereof; provided,
however, that if there exists or shall exist a conflict of interest that would
make it inappropriate in the reasonable judgment of the indemnified person for
the same counsel to represent both the indemnified person and such indemnifying
person or any affiliate or associate
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<PAGE> 13
thereof, the indemnified person shall be entitled to retain its own counsel at
the expense of such indemnifying person.
(d) If the indemnification provided for in this Section
6.3 is unavailable to or insufficient to hold harmless an indemnified party
under subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as result of such losses, claims, damages, or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
the relative fault of the Company on the one hand and Investor on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or labilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand or
Investor on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and Investor agree that it would not be just and equitable if
contribution pursuant to this subsection (d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to above in this subsection (d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, or liabilities (or actions in respect thereof) referred to
above in this subsection (d) shall not be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), Investor shall not be required to contribute
any amount in excess of the amount by which the amount received by Investor from
the sale of the Shares to which such loss relates exceeds the amount of any
damages which such Investor has otherwise been required to pay by reason of
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
(e) The obligations of the Company and Investor under this
Section 6.3 shall be in addition to any liability which the Company and Investor
may otherwise have and shall extend, upon the same terms and conditions, to each
person, if any, who controls the Company or Investor within the meaning of the
Act.
7. Miscellaneous.
7.1 Survival of Warranties. The warranties, representations and
covenants of the Company and Investor contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing.
7.2 Successors and Assigns. Except as otherwise provided herein,
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Shares). Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto
10.
<PAGE> 14
or their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
7.3 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
7.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.5 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
7.6 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
7.7 Expenses; Attorneys' Fees. The Company and Investor shall
each pay all of its own costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement. If any
action at law or in equity is necessary to enforce or interpret the terms of
this Agreement or the Certificate, the prevailing party shall be entitled to
reasonable attorney's fees, costs and necessary disbursements in addition to any
other relief to which such party may be entitled.
7.8 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Investor.
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon each holder of any securities purchased under this Agreement at the
time outstanding, each future holder of all such securities, and the Company.
7.9 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
7.10 Entire Agreement. This Agreement and the documents referred
to herein constitute the entire agreement among the parties and no party shall
be liable or bound to any other party in any manner by any warranties,
representations, or covenants except as specifically set forth herein or
therein.
11.
<PAGE> 15
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.
"COMPANY"
ENDOCARE, INC.
By: /s/ PAUL W. MIKUS
-----------------------------------
Paul W. Mikus, President and Chief
Executive Officer
Address: 7 Studebaker
Irvine, California 92618
"INVESTOR"
TECHNOLOGY FUNDING, INC.
By: /s/ PETER BERNARDONI
------------------------------------
Name: Peter Bernardoni
-----------------------------
Title: Vice President
-----------------------------
Address: 2000 Alameda de las Pulgas
San Mateo, California 94403
12.
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EXHIBIT A
RISK FACTORS
An investment in the Shares involves a high degree of risk. The
Investor should carefully review the following risk factors as well as the other
available information regarding the Company. Information regarding the Company,
including the information set forth below, contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are intended
to be covered by the safe harbors created thereby. Forward-looking statements
include statements regarding the Company's development of new products, its
ability to market and sell existing products and obtain regulatory approvals,
the trends in the markets served by the Company and the Company's ability to
meet its liquidity requirements. The Investor is cautioned that all
forward-looking statements are subject to risks and uncertainties, including,
without limitation, the risks outlined in this section.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
The Company has a limited history of operations as an independent
operating entity. Since its inception, the Company has engaged primarily in
research and development, and the Company has minimal experience in
manufacturing, marketing and selling its products in commercial quantities.
Additionally, the Company has incurred annual operating losses since its
inception, and expects to continue to incur operating losses as new products
will require substantial development, clinical, regulatory, manufacturing and
other expenditures. As of December 31, 1997, the Company's accumulated deficit
was approximately $5.4 million. There can be no assurance that the Company will
successfully develop or commercialize its current or future products, that the
Company will achieve significant revenues from sales, or that the Company will
achieve or sustain profitability in the future. Additionally, successful
completion of the Company's development program and its transition to attaining
profitable operations is dependent upon achieving a level of revenues adequate
to support the Company's cost structure and obtaining additional financing
adequate to fulfill its research and development activities to continue
refinement of existing products and to develop and commercialize new products.
DECLINING SALES OF EXISTING PRODUCTS; UNCERTAIN MARKET ACCEPTANCE OF
THE COMPANY'S NEW PRODUCTS
Sales of certain of the Company's existing products, including
Prolase(R) and Diolase(TM), have declined and are expected to continue to
decline over the next few years. Certain of the Company's products, including
its CRYOcare Systems, which were introduced in the second quarter of 1996, are
in the early stages of development or market introduction. There can be no
assurance that any of the Company's products will be accepted by potential
customers. The Company's ability to successfully market its CRYOcare System is
dependent upon acceptance of cryosurgical procedures in the United States and
certain international markets. Although cryosurgery has existed for many years,
cryosurgery has not been widely accepted due to cost, competing products and
limited reimbursement by third party payers. The acceptance of cryosurgery by
the general population also may be affected adversely by its price, concerns
relating
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to its safety and efficacy, the accepted effectiveness of alternative methods of
correcting urological disorders and lack of reimbursement from third party
payers. Medicare does not currently reimburse for cryosurgical ablation of the
prostate, one of the approved uses of the Company's eight probe CRYOcare System.
In addition, any future reported adverse events or other unfavorable publicity
involving patient outcomes from the use of cryosurgery, whether from the
Company's products or the products of the Company's competitors, could adversely
affect acceptance and reimbursement for cryosurgery. Emerging new technologies
and procedures to treat cancer, prostate enlargement and other prostate
disorders also may adversely affect the market acceptance of cryosurgery. There
can be no assurance that the Company's CRYOcare Systems will gain any
significant degree of market acceptance among physicians, patients and health
care payers.
UNCERTAINTY OF PRODUCT DEVELOPMENT; RISKS RELATED TO CLINICAL TRIALS
The Company's growth is substantially dependent upon its
continued ability to successfully develop, commercialize and market new
products. The Company's future products are in varying stages of development.
There can be no assurance that the Company will be successful in developing and
commercializing new products that achieve market acceptance or that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products. There can be no
assurance that the Company's products in development will prove to be safe and
effective in clinical trials under applicable regulatory guidelines, and
clinical trials may identify significant technical or other obstacles that must
be overcome prior to obtaining necessary regulatory or reimbursement approvals.
Even if a product overcomes these obstacles, the Company's products will not be
used unless they present an attractive alternative to other treatments and the
clinical benefits to the patient and cost savings achieved through use of the
Company's products outweigh the cost of such products. The Company believes that
recommendations and endorsements of physicians and patients and reimbursement by
health care payers will be essential for market acceptance of its products, and
there can be no assurance that any such recommendations, endorsements or
reimbursements will be obtained. Failure of the Company to successfully develop,
commercialize and market new products or the failure of the Company's products
to achieve significant market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON BOSTON SCIENTIFIC; DISPUTE WITH BOSTON SCIENTIFIC; LIMITED
SALES AND MARKETING EXPERIENCE
The Company has only limited experience marketing and selling its
products, and does not have experience marketing and selling its products in
commercial quantities. In November 1996, the Company entered into an eight year
exclusive distribution agreement whereby Boston Scientific Corporation ("Boston
Scientific") agreed to market and distribute the Company's CRYOcare Systems
worldwide in the field of urology. The Company is currently in a dispute with
Boston Scientific regarding Boston Scientific's performance under the terms of
the agreement. The Company has notified Boston Scientific that the Company
believes Boston Scientific has failed to perform adequately under its agreement
with the Company, but neither party has initiated arbitration or other
proceedings in connection with the dispute. The agreement with Boston
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<PAGE> 18
Scientific requires that any proceedings in connection with the dispute be
conducted through arbitration, and that the party who does not prevail in the
arbitration pay the legal fees and expenses of the prevailing party. In the
event the dispute with Boston Scientific escalates to arbitration, the Company
could incur significant legal fees and expenses and, if the Company does not
prevail, it may additionally have to pay the legal fees and expenses of Boston
Scientific.
A result of the dispute with Boston Scientific, whether or not it
proceeds to arbitration, may be the termination of the agreement with Boston
Scientific. In that case the Company would have to market and distribute its
CRYOcare System for urological applications on its own or enter into an
agreement with a third party or parties to market and distribute these products,
either on an exclusive basis or in conjunction with others. There is no
assurance that in the event the Boston Scientific agreement is terminated, the
Company can successfully market and distribute these products on its own or that
it could find third parties to effectively market or distribute these products.
As an alternative to termination of the Boston Scientific agreement, Boston
Scientific and the Company may resolve their dispute by renegotiating the terms
of the agreement. There is no assurance whether such renegotiation would result
in an agreement whose terms are more favorable to the Company than those in the
current agreement or whether, as a result of such renegotiation, Boston
Scientific's performance would be improved.
Currently, sales of the CRYOcare System for urological
applications are dependent on the marketing efforts of Boston Scientific, and,
if the agreement with Boston Scientific remains in place, future sales of the
CRYOcare System for urological applications will continue to be dependent on the
marketing efforts of Boston Scientific. The Company derives a majority of its
revenues from the sales of CRYOcare Systems and expects that sales of CRYOcare
Systems will continue to constitute a significant portion of net sales for the
foreseeable future. Accordingly, any factor adversely affecting the sales of
CRYOcare Systems would have a material adverse effect on the Company's business,
financial condition and results of its operations. The current distributorship
agreement requires Boston Scientific to purchase a minimum number of products,
however, if and when there were a lack of sales as a result of unforeseen
regulatory or clinical circumstances relating to a product or failure of the
Company to deliver products in a timely manner, the minimum purchase
requirements can be renegotiated. If the Boston Scientific agreement is
renegotiated, this provision may remain in the agreement, or, a provision
similar to this may be a part of any other agreement that is entered into with
another distributor other than Boston Scientific.
Currently, Medicare does not provide reimbursement for
cryosurgical ablation of the prostate, one of the approved uses of the Company's
eight probe CRYOcare System. The Company believes that to become and remain
competitive, it will need to continue to develop third party distribution
channels and/or a substantial direct sales force for its new and other products.
Establishing marketing and sales capabilities sufficient to support sales in
commercial quantities will require significant resources, and there can be no
assurance that the Company will be able to recruit and retain direct sales
personnel, or that the Company will succeed in establishing and maintaining any
third party distribution channels, or that the Company's future sales and
marketing efforts will succeed at all. In addition, under the current
distribution agreement, Boston Scientific has a right of first refusal to match
any offer received by the Company from a third party to purchase the assets
related to the CRYOcare System for urological applications, and a right to buy
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<PAGE> 19
the assets and technology related to the CRYOcare System for urological
applications at purchase dates of twenty-four, thirty-six and forty-eight months
after the date that Medicare provides reimbursement for cryosurgical ablation of
the prostate, for a purchase price of 1.7, 1.5 and 1.3 times net sales for the
product for the preceding twelve months, but not less than $40 million, $50
million and $60 million, respectively. This buyout provision may have the impact
of creating a theoretical cap on the value of the CRYOcare System for urological
applications and, indirectly, the market value of the Company. If the Boston
Scientific agreement is renegotiated, this provision may remain in the
agreement, or, a provision similar to this may be a part of any other agreement
that is entered into with another distributor other than Boston Scientific.
PRIOR RELIANCE ON MEDSTONE; NEED FOR ADDITIONAL FINANCING
The Company operated as a division or wholly owned subsidiary of
Medstone from its commencement of operations until January 1996 and relied upon
Medstone for financial support and for assistance with personnel management and
financial administration. The Company anticipates that its need for working
capital through the end of 1998 should be satisfied with existing working
capital and a $1 million bank line of credit and the current private placement
of Common Stock, both of which are expected to close by the end of March 1998.
There is no assurance, however, that the line of credit and private placement
currently being negotiated will be consummated, or if they are, whether they
will be consummated at lesser amounts than anticipated. Insofar as the Company
may elect to undertake or accelerate significant research and development
projects for new products or may pursue corporate acquisitions, it may require
additional outside financing prior to such time. The Company expects that to
meet its long-term needs it will need to raise substantial additional funds
through the sale of its equity securities, the incurrence of indebtedness or
through funds derived through entering into collaborative arrangements with
third parties. Any additional equity financing may be dilutive to shareholders,
and debt financing, if available, may involve restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may require
the Company to relinquish rights to certain of its technologies, products or
marketing territories. The failure of the Company to raise capital when needed
could have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION; RAPID TECHNOLOGICAL AND INDUSTRY CHANGE
The Company competes in an established field of surgical device
manufacturers, and the competition in this field is intense. Many of the
Company's competitors are significantly larger than the Company and have greater
financial, technical, research, marketing, sales, distribution and other
resources than the Company. Additionally, the Company believes there will be
intense price competition for products developed in the Company's markets. There
can be no assurance that the Company's competitors will not succeed in
developing or marketing technologies and products, including drug-based
treatments, that are more effective or commercially attractive than any that are
being developed or marketed by the Company, or that such competitors will not
succeed in obtaining regulatory approval, introducing or commercializing any
such products prior to the Company. Such developments could have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, there can be no assurance that, even if the Company is able
to compete successfully, it would do so in a profitable manner. The medical
16.
<PAGE> 20
device industry generally, and the urological disease treatment market in
particular, are characterized by rapid technological change, changing customer
needs, and frequent new product introductions. The Company's future success will
depend upon its ability to develop and introduce new cost effective products in
a timely manner. There can be no assurance that the Company's products will not
be rendered obsolete as a result of future innovations.
LIMITED MANUFACTURING EXPERIENCE
The Company has limited experience in producing its products in
commercial quantities. Manufacturers often encounter difficulties in scaling up
production of new products, including problems involving production yields,
quality control and assurance, component supply and shortages of qualified
personnel. The Company's failure to overcome these manufacturing problems could
materially adversely affect the Company's business, financial condition and
results of operations. The Company uses a combination of internal manufacturing
capacity and third party manufacturers in its manufacturing efforts. Most of the
Company's purchased components and processes are available from more than one
vendor. However, certain components and processes are currently available from
or performed by a single vendor. Any supply interruption from a single source
vendor would have a material adverse effect on the Company's ability to
manufacture its products until a new source of supply was qualified and, as a
result, could have a material adverse effect on the Company's business,
financial condition and results of operations. Further, the ability of third
party manufacturing sources to deliver components or finished goods will affect
the Company's ability to commercialize its products, and the Company's
dependence on third party sources may adversely affect the Company's profit
margins. Additionally, the Company's success will depend in part upon its
ability to manufacture its products in compliance with the FDA's Good
Manufacturing Practices ("GMP") regulations and other regulatory requirements,
in sufficient quantities and on a timely basis, while maintaining product
quality and acceptable manufacturing costs. Failure to increase production
volumes in a timely or cost effective manner or to maintain compliance with GMP
or other regulatory requirements could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL
The Company's future success depends to a significant degree upon
the continued service of key technical and senior management personnel,
including Paul W. Mikus, the President of the Company, none of whom is bound by
an employment agreement or covered by an insurance policy of which the Company
is the beneficiary. The Company's future success also depends on its continuing
ability to attract, retain and motivate highly qualified technical, managerial
and sales personnel. The inability to retain or attract qualified personnel
could have a material adverse effect upon the Company's business, financial
condition and results of operations.
GOVERNMENT REGULATION
Governmental regulations in the United States and other countries
are a significant factor affecting the research and development, manufacture and
marketing of the Company's products. In the United States, the United States
Food and Drug Administration ("FDA") has broad authority under the Federal Food,
Drug and Cosmetic Act and the Public Health Service Act
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to regulate the distribution, manufacture and sale of medical devices. Foreign
sales of drugs and medical devices are subject to foreign governmental
regulation and restrictions which vary from country to country. The process of
obtaining FDA and other required regulatory approvals is lengthy and expensive.
There can be no assurance that the Company will be able to obtain necessary
approvals for clinical testing or for manufacturing or marketing of its
products. Failure to comply with applicable regulatory approvals can, among
other things, result in fines, suspension of regulatory approvals, product
recalls, operating restrictions and criminal prosecution. In addition,
governmental regulation may be established which could prevent, delay, modify or
rescind regulatory approval of the Company's products. There can be no assurance
that any such position by the FDA, or change of position by the FDA, would not
adversely impact the Company's business, financial condition or results of
operations. Regulatory approvals, if granted, may include significant
limitations on the indicated uses for which the Company's products may be
marketed. In addition, to obtain such approvals, the FDA and foreign regulatory
authorities may impose numerous other requirements on the Company. FDA
enforcement policy strictly prohibits the marketing of approved medical devices
for unapproved uses. In addition, product approvals can be withdrawn for failure
to comply with regulatory standards or the occurrence of unforeseen problems
following initial marketing. There can be no assurance that the Company will be
able to obtain regulatory approvals for its products on a timely basis or at
all, and delays in receipt of or failure to receive such approvals, the loss of
previously obtained approvals, or failure to comply with existing or future
regulatory requirements would have a material adverse effect on the Company's
business, financial condition and results of operations.
UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT
In the United States, health care providers, such as hospitals
and physicians, that purchase medical devices such as the Company's products,
generally rely on third party payers, principally Federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of the
cost of medical procedures involving the Company's products. Currently, Medicare
does not reimburse for cryosurgical ablation of the prostate, one of the
approved uses of the Company's eight probe CRYOcare System. Without such
reimbursement, market acceptance and use of the product will be limited and may
adversely affect the Company's revenues from sales of the product. There can be
no assurance that the cost of medical procedures involving the Company's
products will be reimbursed by Medicare or other governmental, insurance or
third party payers. In addition, the Company anticipates that in a prospective
payment system, such as the DRG system utilized by Medicare, and in many managed
care systems used by private health care payers, the cost of the Company's
products will be incorporated into the overall cost of the procedure and that
there will be no separate, additional reimbursement for the Company's products.
Separate reimbursement for the Company's products is not expected to be
available in the United States and there can be no assurance that reimbursement
for the Company's products will be available in international markets under
either governmental or private reimbursement systems. Furthermore, the Company
could be adversely affected by changes in reimbursement policies of governmental
or private health care payers, particularly to the extent any such changes
affect reimbursement for procedures in which the Company's products are used.
Failure by physicians, hospitals and other users of the Company's products to
obtain sufficient reimbursement from health care payers for procedures involving
the Company's products, or adverse changes in governmental and private third
party payers' policies toward reimbursement for such procedures,
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could have a material adverse effect on the Company's business, financial
condition and results of operations.
RISKS RELATED TO ACQUISITIONS
As part of its strategy to develop and market its products, the
Company may acquire a business or businesses that the Company believes might
enhance and speed up the development of its products through clinical trials,
such as a surgical center or related company that would use the Company's
products in clinical applications. There is no assurance, however, that the
Company will be able to identify suitable acquisition candidates, or, if it
identifies such candidates, that it would be able to consummate the acquisition
of such candidates. Furthermore, there is no assurance that if the Company
acquires a suitable acquisition candidate, the Company will be able to
effectively integrate the operations of the company acquired into the operations
of the Company, or effectively utilize the company acquired to develop and
market the Company's products. The failure to integrate an acquired company into
the operations of the Company may cause a drain on the financial and managerial
resources of the Company, and thereby materially adversely effect the financial
results of operations of the Company.
PRODUCT LIABILITY AND RECALL RISKS
The manufacture and sale of medical products entails significant
risk of product liability claims or product recalls. There can be no assurance
that the Company's existing insurance coverage limits are adequate to protect
the Company from any liabilities it might incur in connection with the clinical
trials or sales of its products. In addition, the Company may require increased
product liability coverage as its products are commercialized. Such insurance is
expensive and in the future may not be available on acceptable terms, if at all.
A successful product liability claim or series of claims brought against the
Company in excess of its insurance coverage, or a recall of the Company's
products, could have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTY RELATED TO HEALTH CARE REFORM
Political, economic and regulatory influences are subjecting the
health care industry in the United States to fundamental change. The Company
anticipates that Congress, state legislatures and the private sector will
continue to review and assess alternative health care delivery and payment
systems. Potential approaches that have been considered include mandated basic
health care benefits, controls on health care spending through limitations on
the growth of private purchasing groups, price controls and other fundamental
changes to the health care delivery system. Legislative debate is expected to
continue in the future, and market forces are expected to demand reduced costs.
The Company cannot predict what impact the adoption of any Federal or state
health care reform measures, future private sector reform or market forces may
have on its business.
19.
<PAGE> 23
DEPENDENCE ON PATENT AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to
secure and protect intellectual property rights relating to its technology.
While the Company believes that the protection of patents or licenses is
important to its business, it also relies on trade secrets, know-how and
continuing technological innovation to maintain its competitive position. No
assurance can be given that the Company's patent applications will be approved,
that the Company will develop any additional proprietary products that are
patentable and/or that any issued patents will provide the Company with a
competitive edge or will not be challenged by any third parties. No assurance
can be given that the Company's processes or products will not infringe patents
or proprietary rights of others or that any license required would be made
available under any such patents or proprietary rights, on terms acceptable to
the Company or at all. From time to time, the Company has received
correspondence alleging infringement of proprietary rights of third parties. No
assurance can be given that any relevant claims of third parties would not be
upheld as valid and enforceable, and therefore that the Company could be
prevented from practicing the subject matter claimed or would be required to
obtain licenses from the owners of any such proprietary rights to avoid
infringement. The Company seeks to preserve the confidentiality of its
technology by entering into confidentiality agreements with its employees,
consultants, customers, and key vendors and by other means. No assurance can be
given, however, that these measures will prevent the unauthorized disclosure or
use of such technology.
LIQUIDITY
The Company Common Stock began trading on the Nasdaq Small Cap
Market on February 28, 1997. Between February 20, 1996 and February 28, 1997,
the Common Stock traded on the Nasdaq electronic bulletin board. As a result,
the Common Stock has a limited trading history. If the Company is unable to
maintain the standards for quotation on the Nasdaq Small Cap Market, the ability
of investors to resell their shares after registration with the Securities and
Exchange Commission may be limited. In addition, the Company's securities may be
subjected to so-called "penny stock" rules that impose additional sales practice
and market making requirements on broker-dealers who sell and/or make a market
in such securities. This could affect the ability or willingness of
broker-dealers to sell and/or make a market in the Company's securities and the
ability of holders of the Company's securities to sell their securities in the
secondary market. There can be no assurance regarding the price at which the
Company Common Stock will trade. The market prices for securities of emerging
companies have historically been highly volatile. Future announcements
concerning the Company or its competitors, including the Company's operating
results, technological innovations or new commercial products, corporate
collaborations, government regulations, developments concerning proprietary
rights, litigation or public concern as to safety of the Company's products, as
well as investor perception of the Company and industry and general economic and
market conditions, may have a significant impact on the market price of the
Company's Common Stock. In addition, the stock market is subject to price and
volume fluctuations that affect the market prices for companies in general and
small capitalization, high technology companies in particular, and are often
unrelated to their operating performance.
20.
<PAGE> 24
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION
Future sales of Common Stock (including shares issued upon the
exercise of outstanding options and warrants) could materially adversely affect
the market price of the Common Stock. Such sales also might make it more
difficult for the Company to sell equity securities or equity-related securities
in the future at a time and price that the Company would deem appropriate. As of
February 28, 1998, the Company had 8,379,396 shares of Common Stock outstanding,
all of which may be freely traded. In addition, as of February 28, 1998 warrants
to purchase 382,497 shares of Common Stock were outstanding. Also, as of
February 28, 1998 stock options to purchase 1,866,480 shares of Common Stock had
been granted under the Company's stock option plans, subject to various vesting
schedules. Stock options to purchase an additional 233,520 shares of Common
Stock may be issued by the Company from time to time under such option plans and
up to 250,000 shares of Common Stock may be purchased under the Company's
Employee Stock Purchase Plan. An aggregate of 2,000,000 shares of Common Stock
may be issued under the Company's 1995 Stock Plan, 150,000 shares of Common
Stock may be issued under the Company's 1995 Director Option Plan and up to
250,000 shares of Common Stock may be issued under the Company's Employee Stock
Purchase Plan. The Company anticipates receiving shareholder approval to amend
and restate the 1995 Stock Plan to increase the number of shares reserved for
issuance thereunder by 1,000,000 shares. Exercise of these options or warrants
may result in substantial dilution to investors. In addition, the Company has
granted certain shareholders and warrantholders piggyback registration rights
with respect to 357,497 shares of Common Stock.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS; POSSIBLE NEGATIVE EFFECT
ON STOCK PRICE
Certain provisions of the Company's Certificate of Incorporation
and the Bylaws may have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Company's Common Stock.
For example, certain of these provisions allow the Company to issue Preferred
Stock without any vote or further action by the shareholders, eliminate the
ability of shareholders to act by written consent without a meeting and
eliminate cumulative voting in the election of directors. These provisions may
make it more difficult for shareholders to take certain corporate actions and
may have the effect of delaying or preventing a change in control of the
Company.
21.
<PAGE> 1
ENDOCARE, INC.
COMMON STOCK PURCHASE AGREEMENT
April 22, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Purchase and Sale of Stock.................................................. 1
1.1 Closing.............................................................. 1
2. Representations and Warranties of the Company............................... 1
2.1 Organization, Good Standing and Qualification........................ 1
2.2 Authorization........................................................ 1
2.3 Valid Issuance of Common Stock....................................... 2
2.4 Governmental Consents................................................ 2
2.5 Compliance with Instruments and Law.................................. 2
2.6 SEC Documents; Financial Statements.................................. 2
2.7 Absence of Certain Developments...................................... 3
2.8 Intellectual Property................................................ 3
2.9 Capitalization....................................................... 3
2.10 Litigation........................................................... 4
3. Representations and Warranties of Investors................................. 4
3.1 Authorization........................................................ 4
3.2 Purchase Entirely for Own Account.................................... 4
3.3 Disclosure of Information............................................ 4
3.4 Investment Experience................................................ 4
3.5 Accredited Investors................................................. 4
3.6 Restricted Securities................................................ 4
3.7 Legend............................................................... 5
3.8 Risk Factors......................................................... 5
4. Conditions of Investors' Obligations at Closing............................. 5
4.1 Representations and Warranties....................................... 5
4.2 Performance.......................................................... 5
4.3 Qualifications....................................................... 5
4.4 Proceedings and Documents............................................ 5
5. Conditions of the Company's Obligations at Closing.......................... 6
5.1 Representations and Warranties....................................... 6
5.2 Payment of Purchase Price............................................ 6
5.3 Qualifications....................................................... 6
6. Affirmative Covenants of the Company........................................ 6
6.1 Financial Information................................................ 6
6.2 Registration Requirements............................................ 6
6.3 Indemnification and Contribution..................................... 8
7. Miscellaneous............................................................... 10
7.1 Term of Agreement.................................................... 10
</TABLE>
i.
<PAGE> 3
<TABLE>
<S> <C>
7.2 Consistent Terms..................................................... 11
7.3 Survival of Warranties............................................... 11
7.4 Successors and Assigns............................................... 11
7.5 Governing Law........................................................ 11
7.6 Counterparts......................................................... 11
7.7 Titles and Subtitles................................................. 11
7.8 Notices.............................................................. 11
7.9 Expenses; Attorneys' Fees............................................ 11
7.10 Brokerage and Finders Fees........................................... 12
7.11 Amendments and Waivers............................................... 12
7.12 Severability......................................................... 12
7.13 Entire Agreement..................................................... 12
</TABLE>
EXHIBIT A -- Risk Factors
ii.
<PAGE> 4
COMMON STOCK PURCHASE AGREEMENT
THIS COMMON STOCK PURCHASE AGREEMENT (this "Agreement") is made
as of the 22nd day of April 1998 by and among ENDOcare, Inc., a Delaware
corporation (the "Company"), and Pequot Private Equity Fund, L.P. and Pequot
Offshore Private Equity Fund, Inc.
("Investors").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock. Subject to the terms and
conditions of this Agreement, each Investor agrees to purchase at the Closing,
and the Company agrees to sell and issue to each Investor at the Closing, the
number of shares of the Company's Common Stock (the "Shares") at a price of
$3.50 per share set forth next to each Investor's name immediately below:
Pequot Private Equity Fund, L.P. 760,817 Shares
Pequot Offshore Private Equity Fund, Inc. 96,326 Shares
1.1 Closing. The purchase and sale of the Shares (the "Closing")
shall take place on the business day following the date on which, when the
trades on such date are aggregated with trades on the two preceding trading
days, a cumulative total of 25,000 shares of the Company's Common Stock have
traded at a price of at least $3.50 per share as reported on the Nasdaq Small
Cap Market, regardless of whether there have been reported trades on such three
trading days of less than $3.50 per share. At the Closing the Company shall
deliver to Investors a certificate representing the Shares against payment of
the purchase price therefor by wire transfer.
2. Representations and Warranties of the Company. The Company
hereby represents and warrants to Investors that:
2.1 Organization, Good Standing and Qualification. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. The Company has all requisite corporate power and
authority to carry on its business as now conducted. The Company is duly
qualified to transact business and is in good standing in each jurisdiction in
which the failure to so qualify would have a material adverse effect on its
business or properties.
2.2 Authorization. The Company has the corporate power and
authority to execute, deliver and perform this Agreement, and to consummate the
transactions contemplated hereby and to issue, sell, and deliver to Investors
the Shares pursuant to the terms of this Agreement. All corporate action on the
part of the Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the performance of all
obligations of the Company hereunder, and the authorization, issuance (or
reservation for issuance), sale and delivery of the Common Stock being sold
hereunder has been taken or will be taken prior to the Closing, and this
Agreement constitutes the valid and legally binding obligation of the Company,
enforceable in accordance with its respective terms, except
<PAGE> 5
(a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium,
and other laws of general application affecting enforcement of creditors' rights
generally, (b) as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies, and (c) as to those
provisions of Section 6.3 relating to indemnity or contribution.
2.3 Valid Issuance of Common Stock. The Shares being purchased by
Investors hereunder, when issued, sold and delivered in accordance with the
terms of this Agreement for the consideration expressed herein, will be duly and
validly issued, fully paid, and nonassessable, and will be free of restrictions
on transfer other than restrictions on transfer under this Agreement and under
applicable state and federal securities laws. The issuance and delivery of the
Shares is not subject to preemptive, co-sale, right of first refusal or any
other similar rights of the stockholders of the Company or any liens or
encumbrances created by the Company. The Company has not granted any
registration rights with respect to its securities other than the registration
rights set forth (i) herein, (ii) in two Common Stock Purchase Agreements (the
"Other Purchase Agreements") dated on or about the date hereof, one between the
Company and Technology Funding and the other, between the Company and The
Kaufmann Fund, Inc. for the purchase of approximately 142,857 and 1,000,000
shares of Common Stock, respectively, and (iii) in the Common Stock Purchase
Agreement dated January 21, 1997 among the Company and the purchasers named
therein (the "January 1997 Agreement"). The Company's Common Stock is quoted on
the Nasdaq Small Cap Market.
2.4 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except for the filing of a Form D and any other
filings required be made under the laws of the state in which the investor
resides, which will be made as required by such laws and the filing of a
registration statement and all amendments thereto with the SEC as contemplated
by this Agreement.
2.5 Compliance with Instruments and Law. To the best of the
Company's knowledge, the Company is not in violation or default in any material
respect of any provision of its Certificate of Incorporation as currently in
effect and as amended or restated through the date hereof, or its Bylaws, or in
any material respect of any instrument, judgment, order, writ, decree or
contract to which it is a party or by which it is bound, or of any provision of
any federal or state statute, rule or regulation applicable to the Company. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby will not result in any such violation or be
in conflict with or constitute, with or without the passage of time and giving
of notice, either a default under any such provision, instrument, judgment,
order, writ, decree or contract or an event that results in the creation of any
lien, charge or encumbrance upon any assets of the Company or the suspension,
revocation, impairment, forfeiture, or nonrenewal of any material permit,
license, authorization, or approval applicable to the Company, its business or
operations or its assets or properties.
2.6 SEC Documents; Financial Statements. The Company has filed
each statement, annual, quarterly and other report, registration statement and
definitive proxy statement with the U.S. Securities and Exchange Commission
("SEC") that the Company has been required
2.
<PAGE> 6
to file since January 1, 1996 ("SEC Documents"). As of their respective filing
dates, none of the SEC Documents contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances in
which they were made, not misleading. The financial statements of the Company
included in the SEC Documents (the "Financial Statements") comply as to form in
all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles
consistently applied (except as may be indicated in the notes thereto or, in the
case of unaudited statements, as permitted by the SEC) and fairly present the
financial position of the Company at the dates thereof and the results of
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal, recurring audit adjustments). There has been no
change in the Company's accounting policies except as may be described in the
notes to the Financial Statements. Except as disclosed in the SEC Documents
filed through the date hereof, the Company has not incurred any liabilities of
any kind whatsoever, whether accrued, contingent, absolute, determined,
determinable or otherwise, that, individually or in the aggregate, would have a
material adverse effect on the assets, liabilities, business, financial
condition, results of operations or prospects of the Company other than
liabilities under or contemplated by this Agreement.
2.7 Absence of Certain Developments. Since December 31, 1997,
there has been no (a) material adverse change in the condition, financial or
otherwise, of the Company or of the Company's assets, liabilities, properties,
business or operations, (b) declaration, setting aside or payment of any
dividend or other distribution with respect to the capital stock of the Company,
or (c) loss, destruction or damage to any property of the Company, whether or
not insured, which has or may have a material adverse effect on the Company.
2.8 Intellectual Property. Except as set forth in the SEC
Documents, the Company owns or possesses adequate rights to use all material
patents, patent rights, inventions, trade secrets and know-how described or
referred to in the SEC Documents as owned or used by it or that are necessary in
all material respects for the conduct of its business as presently conducted as
described in the SEC Documents. Except as set forth in the SEC Documents, the
Company has not received any notice of, nor has any knowledge of, any
infringement of or conflict with asserted rights of others with respect to any
patent, patent right, invention, trade secret or know-how that, individually or
in the aggregate, if the subject of an unfavorable decision ruling or finding,
would have a material adverse effect on the business, properties, financial
condition or results of operations of the Company.
2.9 Capitalization. All of the Company's outstanding shares of
capital stock have been duly authorized and validly issued and are fully paid
and nonassessable, have been issued in compliance with all Federal and state
securities laws, and were not issued in violation of or subject to any
preemptive right or other rights to subscribe for or purchase securities. The
authorized capital stock of the Company consists of 20,000,000 shares of Common
Stock of which 9,207,596 shares are outstanding as of the date hereof. Except as
set forth in the Other Purchase Agreements and the SEC Documents, there are no
outstanding options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations
3.
<PAGE> 7
convertible into, or any contracts or commitments to issue or sell shares of the
Company's capital stock or any such options, rights, convertible securities or
obligations.
2.10 Litigation. Except as set forth in the SEC Documents, there
is no pending or, to the Company's knowledge, threatened action, suit or other
proceeding before any court, governmental body or authority, or arbitration to
which the Company is a party or to which its property or assets are subject,
which, if it resulted in an unfavorable decision ruling or finding, would have a
material adverse effect on the business, properties, financial condition or
results or operations of the Company.
3. Representations and Warranties of Investors. Investors hereby
represent and warrant that:
3.1 Authorization. Investors have full power and authority to
enter into this Agreement and such agreement constitutes its valid and legally
binding obligation, enforceable in accordance with its terms.
3.2 Purchase Entirely for Own Account. This Agreement is made
with Investors in reliance upon Investors' representation to the Company, which
by Investors' execution of this Agreement Investors hereby confirm, that the
Shares to be received by Investors will be acquired for investment for
Investors' own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and that Investors have no present
intention of selling, granting any participation in, or otherwise distributing
the same. By executing this Agreement, Investors further represent that
Investors do not have any contract, undertaking, agreement or arrangement with
any person to sell, transfer or grant participations to such person or to any
third person, with respect to any of the Shares.
3.3 Disclosure of Information. Investors have received all the
information they consider necessary or appropriate for deciding whether to
purchase the Shares. Investors further represent that they have had an
opportunity to ask questions and receive answers from the Company regarding the
terms and conditions of the offering of the Shares and the business, properties,
prospects and financial condition of the Company. The foregoing does not,
however, limit the representations and warranties of the Company in Section 2 or
the rights of Investors to rely thereon.
3.4 Investment Experience. Investors are investors in securities
of companies in the development stage and acknowledge that they are able to fend
for themselves, can bear the economic risk of their investment, and have such
knowledge and experience in financial or business matters that they are capable
of evaluating the merits and risks of the investment in the Shares. Investors
also represent they have not been organized for the purpose of acquiring the
Shares.
3.5 Accredited Investors. Investors are "accredited investors"
within the meaning of SEC Rule 501 of Regulation D, as presently in effect.
3.6 Restricted Securities. Investors understand that the Shares
they are purchasing are characterized as "restricted securities" under the
federal securities laws inasmuch
4.
<PAGE> 8
as they are being acquired from the Company in a transaction not involving a
public offering and that under such laws and applicable regulations such
securities may be resold without registration under the Securities Act of 1933,
as amended (the "Securities Act"), only in certain limited circumstances. In
this connection, Investors represent that they are familiar with SEC Rule 144,
as presently in effect, and understand the resale limitations imposed thereby
and by the Securities Act.
3.7 Legend. It is understood that the certificates evidencing the
Shares may bear the following legend:
"These securities have not been registered under the Securities
Act of 1933, as amended. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with respect
to the securities under such Act or an opinion of counsel satisfactory to the
Company that such registration is not required or unless sold pursuant to Rule
144 of such Act."
3.8 Risk Factors. Investors understand that their purchase of the
Shares involves a high degree of risk and that the Company has given no
assurance, or made any representation or warranty, as to the future value of the
Shares or future performance of the Company. Some of the risks inherent in an
investment in the Shares are set forth in Exhibit A hereto, which Investors
acknowledge they have read and understand.
4. Conditions of Investors' Obligations at Closing. The
obligations of Investors under Section 1 of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions, the
waiver of which shall not be effective against Investors unless consented in
writing thereto:
4.1 Representations and Warranties. The representations and
warranties of the Company contained in Section 2 shall be true in all material
respects on and as of the Closing with the same effect as though such
representations and warranties had been made on and as of the date of such
Closing.
4.2 Performance. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Closing.
4.3 Qualifications. All authorizations, approvals, or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Shares pursuant to this Agreement shall be duly obtained and effective as of
the Closing.
4.4 Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to Investors' counsel, and they shall have received all such
counterpart original and certified or other copies of such documents as they may
reasonably request.
5.
<PAGE> 9
5. Conditions of the Company's Obligations at Closing. The
obligations of the Company to Investors under this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions by
Investors:
5.1 Representations and Warranties. The representations and
warranties of Investors contained in Section 3 shall be true in all material
respects on and as of the Closing with the same effect as though such
representations and warranties had been made on and as of the Closing.
5.2 Payment of Purchase Price. Investors shall have delivered the
purchase price specified in Section 1.
5.3 Qualifications. All authorizations, approvals, or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Shares pursuant to this Agreement shall be duly obtained by the Company and
effective as of the Closing.
6. Affirmative Covenants of the Company. The Company hereby
covenants and agrees as follows:
6.1 Financial Information. The Company will mail the following
reports to Investors until Investors transfer, assign or sell more than fifty
percent (50%) of the Shares purchased by it pursuant to this Agreement;
(a) Within one hundred (100) days after the end of each
fiscal year, a copy of its Annual Report on Form 10-K; and
(b) Within fifty-five (55) days after the end of the
first, second and third quarterly accounting periods of each fiscal year of the
Company, a copy of its Quarterly Report on Form 10-Q.
6.2 Registration Requirements.
(a) The Company shall use its best efforts to prepare and
file a Registration Statement (the "Registration Statement") with the SEC under
the Securities Act within twenty-one (21) business days of the Closing to
register the resale by Investors of the Shares. The Company acknowledges that it
has received all information from Investors necessary to register such shares.
Investors agree to furnish promptly to the Company in writing all information
required from time to time to be disclosed in order to make the information
previously furnished to the Company by Investors not misleading.
(b) The Company shall pay all Registration Expenses (as
defined below) in connection with any registration, qualification or compliance
hereunder, and Investors shall pay all Selling Expenses (as defined below) and
other expenses that are not Registration Expenses relating to the Shares to be
resold by Investors. "Registration Expenses" shall mean all expenses, except for
Selling Expenses, incurred in complying with the registration provisions set
forth herein,
6.
<PAGE> 10
including, without limitation, all registration, qualification and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for the
Company, blue sky fees and expenses and the expense of any special audits
incident to or required in connection with any such registration. Selling
Expenses shall mean selling commissions, underwriting fees and stock transfer
taxes applicable to the Shares and all fees and disbursements of counsel for
Investors.
(c) In the case of the registration effected by the
Company pursuant to these registration provisions, the Company will use its best
efforts to: (i) keep such registration effective until the earlier of (A) such
date as all of the Shares have been resold or (B) such time as all of the Shares
held by Investors can be sold within a given three (3)-month period without
compliance with the registration requirements of the Securities Act pursuant to
Rule 144; (ii) prepare and file with the SEC such amendments and supplements to
the Registration Statement and the prospectus used in connection with the
Registration Statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all Shares covered by the
Registration Statement; (iii) furnish such number of prospectuses and other
documents incident thereto, including any amendment of or supplement to the
prospectus, as Investors from time to time may reasonably request; (iv) cause
all Shares registered as described herein to be listed on each securities
exchange and quoted on each quotation service on which similar securities issued
by the Company are then listed or quoted; (v) provide a transfer agent and
registrar for all Shares registered pursuant to the Registration Statement and a
CUSIP number for all such Shares; (vi) otherwise use its best efforts promptly
to comply with all applicable rules and regulations of the SEC; (vii) file the
documents required of the Company and otherwise use its best efforts promptly to
obtain, if applicable, and maintain requisite blue sky clearance in (A) all
jurisdictions in which any of the Shares are originally sold and (B) all other
states specified in writing by Investors, provided as to clause (B), however,
that the Company shall not be required to qualify to do business or consent to
service of process in any state in which it is not now so qualified or has not
so consented; (viii) enter into an underwriting agreement having customary terms
and conditions if requested by Investors in connection with the sale of the
Shares; (ix) cooperate in a normal "due diligence" investigation by Investors or
by underwriters acting on behalf of Investors in connection with the sale of the
Shares; (x) with respect to the initial filing of the Registration Statement, as
of the date of declaration of effectiveness, each post effective amendment
thereto or any underwritten offering thereunder, obtain opinions of counsel to
the Company as provided in an underwriting agreement applicable to the sale of
the Shares or if there is no underwriters, in the form of Exhibit D to the
January 1997 Agreement; and (xi), in the case of an underwritten offering under
the Registration Statement only, obtain a "cold comfort" letter from the
Company's independent certified public accountants, addressed to Investors and,
if applicable, an underwriter. The Company shall use its best efforts to qualify
for use of Form S-3 under the Securities Act to register the resale of the
Shares and to maintain such qualification during the periods described in clause
(i) above.
(d) With a view to making available to Investors the
benefits of Rule 144 promulgated under the Securities Act ("Rule 144") and any
other rule or regulation of the SEC that may at any time permit Investors to
sell Shares to the public without registration or pursuant to registration, the
Company covenants and agrees to: (i) make and keep public information available,
as those terms are understood and defined in Rule 144, until such date as all of
the Shares shall have been resold; (ii) file with the SEC in a timely manner all
reports and other
7.
<PAGE> 11
documents required of the Company under the Exchange Act; and (iii) furnish to
Investors upon request, as long as Investors own any Shares, (A) a written
statement by the Company that it has complied with the reporting requirements of
the Exchange Act, (B) a copy of the most recent annual or quarterly report of
the Company, and (C) such other information as may be reasonably requested in
order to avail Investors of any rule or regulation of the SEC that permits the
selling of any such Shares without registration.
(e) At any time the Company may refuse to permit Investors
to resell any Shares pursuant to the Registration Statement; provided, however,
that in order to exercise this right at any time, the Company must deliver a
certificate in writing to Investors to the effect that suspension of the sale of
shares under the Registration Statement, until such time as the Company can make
an appropriate filing with the SEC, is necessary because a sale pursuant to the
Registration Statement, in its then-current form, could constitute a violation
of the Federal securities laws. In such an event, the Company shall use its best
efforts to amend the Registration Statement if necessary and take all other
actions necessary to allow such sale under the Federal securities laws, and
shall notify Investors promptly after it has determined that such sale has
become permissible under the Federal securities laws. Notwithstanding the
foregoing, the Company shall not under any circumstances be entitled to exercise
its right to suspend sales under the Registration Statement more than two (2)
times in any twelve (12)-month period, and the period during which the
Registration Statement may be withdrawn shall not exceed thirty (30) days;
provided, however, that if the Company is required to amend the Registration
Statement and the Company does not qualify for Form S-3, the period during which
the Registration Statement may be withdrawn shall be increased by fifty (50)
days if upon filing such amendment the SEC advised the Company that it intends
to review the amendment. Investors hereby covenant and agree that they will not
sell any Shares pursuant to the Registration Statement during the periods the
Registration Statement is suspended or withdrawn as set forth in this Section.
6.3 Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless
Investors from and against any losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) to which Investors may become subject
(under the Securities Act or otherwise) insofar as such losses, claims, damages
or liabilities (or actions or proceedings in respect thereof) arise out of, or
are based upon, any untrue statement of a material fact contained in the
Registration Statement or omission to state in the Registration Statement a
material fact, the absence of which would be misleading, on the effective date
thereof, or arise out of any failure by the Company to fulfill any undertaking
included in the Registration Statement and the Company will, as incurred,
reimburse Investors for any legal or other expenses reasonably incurred in
investigating, defending or preparing to defend any such action, proceeding or
claim; provided, however, that the Company shall not be liable in any such case
to the extent that such loss, claim, damage or liability arises out of, or is
based upon (i) an untrue statement made in the Registration Statement in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of Investors specifically for use in preparation of the
Registration Statement, (ii) the failure of Investors to comply with the
covenants and agreements contained in Section 6.2 hereof, or (iii) any untrue
statement in any Prospectus that is corrected in any subsequent Prospectus that
was delivered to Investors prior to the pertinent sale or sales by Investors.
The Company will reimburse Investors
8.
<PAGE> 12
for any legal or other expenses reasonably incurred in investigating, defending
or preparing to defend any such action, proceeding or claim notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the obligations under this Section and the possibility that such payments might
later be held to be improper, provided, that (i) to the extent any such payment
is ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
(b) Investors agree to indemnify and hold harmless the
Company from and against any losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) to which the Company may become subject
(under the Securities Act or otherwise) insofar as such losses, claims, damages
or liabilities (or actions or proceedings in respect thereof) arise out of, or
are based upon (i) an untrue statement of material fact made, or omission to
state a material fact the absence of which would be misleading, in the
Registration Statement in reliance upon and in conformity with written
information furnished to the Company by or on behalf of Investors specifically
for use in preparation of the Registration Statement, provided, however, that
Investors shall not be liable in any such case for any untrue statement included
in any Prospectus which statement has been corrected, in writing, by Investors
and delivered to the Company before the sale from which such loss occurred, (ii)
the failure of Investors to comply with the covenants and agreements contained
in Section 6.2(a) and 6.2(e) hereof, or (iii) any untrue statement in any
Prospectus that is corrected in any subsequent Prospectus that was delivered to
Investors prior to the pertinent sale or sales by Investors. Investors will
reimburse the Company for any legal or other expenses reasonably incurred in
investigating, defending or preparing to defend any such action, proceeding or
claim notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the obligations under this Section and the
possibility that such payments might later be held to be improper, provided,
that (i) to the extent any such payment is ultimately held to be improper, the
persons receiving such payments shall promptly refund them and (ii) such persons
shall provide to Investors, upon request, reasonable assurances of their ability
to effect any refund, when and if due. Notwithstanding the provisions of this
subsection (b), Investors shall not be required to indemnify or pay the expenses
of the Company in connection therewith in excess of the amount received by
Investors from the sale of the Shares to which such loss relates.
(c) Promptly after receipt by any indemnified person of a
notice of a claim or the beginning of any action in respect of which indemnity
to be sought against an indemnifying person pursuant to this Section 6.3, such
indemnified person shall notify the indemnifying person in writing of such claim
or of the commencement of such action, and, subject to the provisions
hereinafter stated, in case any such action shall be brought against an
indemnified person and the indemnifying person shall have been notified thereof,
the indemnifying person shall be entitled to participate therein, and, to the
extent that it shall wish, to assume the defense thereof, with counsel
reasonably satisfactory to the indemnified person. After notice from the
indemnifying person to such indemnified person of the indemnifying person's
election to assume the defense thereof, the indemnifying person shall not be
liable to such indemnified person for any legal expenses subsequently incurred
by such indemnified person in connection with the defense thereof; provided,
however, that if there exists or shall exist a conflict of interest that would
make it inappropriate in the reasonable judgment of the indemnified person for
the same counsel to
9.
<PAGE> 13
represent both the indemnified person and such indemnifying person or any
affiliate or associate thereof, the indemnified person shall be entitled to
retain its own counsel at the expense of such indemnifying person.
(d) If the indemnification provided for in this Section
6.3 is unavailable to or insufficient to hold harmless an indemnified party
under subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as result of such losses, claims, damages, or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
the relative fault of the Company on the one hand and Investors on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand or
Investors on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and Investors agree that it would not be just and equitable if
contribution pursuant to this subsection (d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to above in this subsection (d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, or liabilities (or actions in respect thereof) referred to
above in this subsection (d) shall not be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), Investors shall not be required to contribute
any amount in excess of the amount by which the amount received by Investors
from the sale of the Shares to which such loss relates exceeds the amount of any
damages which such Investors have otherwise been required to pay by reason of
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
(e) The obligations of the Company and Investors under
this Section 6.3 shall be in addition to any liability which the Company and
Investors may otherwise have and shall extend, upon the same terms and
conditions, to each person, if any, who controls the Company or Investors within
the meaning of the Act.
7. Miscellaneous.
7.1 Term of Agreement. If the purchase and sale of the Shares
pursuant to this Agreement has not been consummated by October 15, 1998, this
Agreement shall terminate in its entirety and be of no further force and effect.
If the purchase and sale of the Shares pursuant to this Agreement is consummated
on or before October 15, 1998, this Agreement shall survive until the
obligations hereunder have been performed in full or the beneficiaries of such
obligations have waived the requirement that they be fulfilled.
10.
<PAGE> 14
7.2 Consistent Terms. If the Other Purchase Agreements (including
any amendments or modifications thereto), or any other agreements entered into
by the Company prior to October 15, 1998 for the sale for cash of the Company's
Common Stock to an investor (other than a sale to an entity which, in connection
therewith, will agree to provide marketing, product development, supplies or
similar support to the Company, such as in a corporate partnering or similar
arrangement), contain terms more favorable to the purchasers named therein then
the terms of this Agreement are to the Investors, Investors shall promptly be
notified of and offered those more favorable terms in writing.
7.3 Survival of Warranties. The warranties, representations and
covenants of the Company and Investors contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing.
7.4 Successors and Assigns. Except as otherwise provided herein,
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Shares). Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
7.5 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
7.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.7 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
7.8 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
7.9 Expenses; Attorneys' Fees. The Company and Investors shall
each pay all of their own costs and expenses incurred with respect to the
negotiation, execution, delivery and performance of this Agreement, except that
the Company shall pay up to $10,000 of the fees of Wilson, Sonsini, et al.
incurred by Investors in performing a due diligence investigation of the
Company's intellectual property rights promptly following the Company's receipt
of an invoice therefor. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement or the Certificate, the
prevailing party shall be entitled to reasonable attorney's fees,
11.
<PAGE> 15
costs and necessary disbursements in addition to any other relief to which such
party may be entitled.
7.10 Brokerage and Finders Fees. Each of the parties hereto
represents and warrants to the other that such party has made no arrangement for
the payment of any brokerage commissions or finders fees in connection with the
transactions contemplated by this Agreement and is not otherwise obligated to
pay any such fee or commission.
7.11 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Investors.
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon each holder of any securities purchased under this Agreement at the
time outstanding, each future holder of all such securities, and the Company.
7.12 Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
7.13 Entire Agreement. This Agreement and the documents referred
to herein constitute the entire agreement among the parties and no party shall
be liable or bound to any other party in any manner by any warranties,
representations, or covenants except as specifically set forth herein or
therein.
[Signature Page Follows]
12.
<PAGE> 16
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.
"COMPANY"
ENDOCARE, INC.
By: /s/ PAUL W. MIKUS
------------------------------------
Paul W. Mikus, President and Chief
Executive Officer
Address: 7 Studebaker
Irvine, California 92618
"INVESTORS"
PEQUOT PRIVATE EQUITY FUND, L.P.
By: Dawson Samberg Capital Management,
Inc.
----------------------------------
Name of Investment Manager
By: /s/ AMIEL M. PERETZ
----------------------------------
Authorized Signature
Amiel M. Peretz
----------------------------------
Printed Name
Chief Financial Officer
----------------------------------
Title
13.
<PAGE> 17
PEQUOT OFFSHORE PRIVATE EQUITY
FUND, INC.
By: Dawson Samberg Capital Management,
Inc.
----------------------------------
Name of Investment Manager
By: /s/ AMIEL M. PERETZ
----------------------------------
Authorized Signature
Amiel M. Peretz
----------------------------------
Printed Name
Chief Financial Officer
----------------------------------
Title
Address: 354 Pequot Avenue
P.O. Box 760
Southport, Connecticut 06490
14.
<PAGE> 18
EXHIBIT A
RISK FACTORS
An investment in the Shares involves a high degree of risk. The
Investors should carefully review the following risk factors as well as the
other available information regarding the Company. Information regarding the
Company, including the information set forth below, contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are intended to be covered by the safe harbors created thereby. Forward-looking
statements include statements regarding the Company's development of new
products, its ability to market and sell existing products and obtain regulatory
approvals, the trends in the markets served by the Company and the Company's
ability to meet its liquidity requirements. The Investors are cautioned that all
forward-looking statements are subject to risks and uncertainties, including,
without limitation, the risks outlined in this section.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
The Company has a limited history of operations as an independent
operating entity. Since its inception, the Company has engaged primarily in
research and development, and the Company has minimal experience in
manufacturing, marketing and selling its products in commercial quantities.
Additionally, the Company has incurred annual operating losses since its
inception, and expects to continue to incur operating losses as new products
will require substantial development, clinical, regulatory, manufacturing and
other expenditures. As of December 31, 1997, the Company's accumulated deficit
was approximately $5.4 million. There can be no assurance that the Company will
successfully develop or commercialize its current or future products, that the
Company will achieve significant revenues from sales, or that the Company will
achieve or sustain profitability in the future. Additionally, successful
completion of the Company's development program and its transition to attaining
profitable operations is dependent upon achieving a level of revenues adequate
to support the Company's cost structure and obtaining additional financing
adequate to fulfill its research and development activities to continue
refinement of existing products and to develop and commercialize new products.
DECLINING SALES OF EXISTING PRODUCTS; UNCERTAIN MARKET ACCEPTANCE OF
THE COMPANY'S NEW PRODUCTS
Sales of certain of the Company's existing products, including
Prolase(R) and Diolase(TM), have declined and are expected to continue to
decline over the next few years. Certain of the Company's products, including
its CRYOcare Systems, which were introduced in the second quarter of 1996, are
in the early stages of development or market introduction. There can be no
assurance that any of the Company's products will be accepted by potential
customers. The Company's ability to successfully market its CRYOcare System is
dependent upon acceptance of cryosurgical procedures in the United States and
certain international markets. Although cryosurgery has existed for many years,
cryosurgery has not been widely accepted due to cost, competing products and
limited reimbursement by third party payers. The acceptance of cryosurgery by
the general population also may be affected adversely by its price, concerns
relating
15.
<PAGE> 19
to its safety and efficacy, the accepted effectiveness of alternative methods of
correcting urological disorders and lack of reimbursement from third party
payers. Medicare does not currently reimburse for cryosurgical ablation of the
prostate, one of the approved uses of the Company's eight probe CRYOcare System.
In addition, any future reported adverse events or other unfavorable publicity
involving patient outcomes from the use of cryosurgery, whether from the
Company's products or the products of the Company's competitors, could adversely
affect acceptance and reimbursement for cryosurgery. Emerging new technologies
and procedures to treat cancer, prostate enlargement and other prostate
disorders also may adversely affect the market acceptance of cryosurgery. There
can be no assurance that the Company's CRYOcare Systems will gain any
significant degree of market acceptance among physicians, patients and health
care payers.
UNCERTAINTY OF PRODUCT DEVELOPMENT; RISKS RELATED TO CLINICAL TRIALS
The Company's growth is substantially dependent upon its
continued ability to successfully develop, commercialize and market new
products. The Company's future products are in varying stages of development.
There can be no assurance that the Company will be successful in developing and
commercializing new products that achieve market acceptance or that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products. There can be no
assurance that the Company's products in development will prove to be safe and
effective in clinical trials under applicable regulatory guidelines, and
clinical trials may identify significant technical or other obstacles that must
be overcome prior to obtaining necessary regulatory or reimbursement approvals.
Even if a product overcomes these obstacles, the Company's products will not be
used unless they present an attractive alternative to other treatments and the
clinical benefits to the patient and cost savings achieved through use of the
Company's products outweigh the cost of such products. The Company believes that
recommendations and endorsements of physicians and patients and reimbursement by
health care payers will be essential for market acceptance of its products, and
there can be no assurance that any such recommendations, endorsements or
reimbursements will be obtained. Failure of the Company to successfully develop,
commercialize and market new products or the failure of the Company's products
to achieve significant market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON BOSTON SCIENTIFIC; DISPUTE WITH BOSTON SCIENTIFIC; LIMITED
SALES AND MARKETING EXPERIENCE
The Company has only limited experience marketing and selling its
products, and does not have experience marketing and selling its products in
commercial quantities. In November 1996, the Company entered into an eight year
exclusive distribution agreement whereby Boston Scientific Corporation ("Boston
Scientific") agreed to market and distribute the Company's CRYOcare Systems
worldwide in the field of urology. The Company is currently in a dispute with
Boston Scientific regarding Boston Scientific's performance under the terms of
the agreement. The Company has notified Boston Scientific that the Company
believes Boston Scientific has failed to perform adequately under its agreement
with the Company, but neither party has initiated arbitration or other
proceedings in connection with the dispute. The agreement with Boston
16.
<PAGE> 20
Scientific requires that any proceedings in connection with the dispute be
conducted through arbitration, and that the party who does not prevail in the
arbitration pay the legal fees and expenses of the prevailing party. In the
event the dispute with Boston Scientific escalates to arbitration, the Company
could incur significant legal fees and expenses and, if the Company does not
prevail, it may additionally have to pay the legal fees and expenses of Boston
Scientific.
A result of the dispute with Boston Scientific, whether or not it
proceeds to arbitration, may be the termination of the agreement with Boston
Scientific. In that case the Company would have to market and distribute its
CRYOcare System for urological applications on its own or enter into an
agreement with a third party or parties to market and distribute these products,
either on an exclusive basis or in conjunction with others. There is no
assurance that in the event the Boston Scientific agreement is terminated, the
Company can successfully market and distribute these products on its own or that
it could find third parties to effectively market or distribute these products.
As an alternative to termination of the Boston Scientific agreement, Boston
Scientific and the Company may resolve their dispute by renegotiating the terms
of the agreement. There is no assurance whether such renegotiation would result
in an agreement whose terms are more favorable to the Company than those in the
current agreement or whether, as a result of such renegotiation, Boston
Scientific's performance would be improved.
Currently, sales of the CRYOcare System for urological
applications are dependent on the marketing efforts of Boston Scientific, and,
if the agreement with Boston Scientific remains in place, future sales of the
CRYOcare System for urological applications will continue to be dependent on the
marketing efforts of Boston Scientific. The Company derives a majority of its
revenues from the sales of CRYOcare Systems and expects that sales of CRYOcare
Systems will continue to constitute a significant portion of net sales for the
foreseeable future. Accordingly, any factor adversely affecting the sales of
CRYOcare Systems would have a material adverse effect on the Company's business,
financial condition and results of its operations. The current distributorship
agreement requires Boston Scientific to purchase a minimum number of products,
however, if and when there were a lack of sales as a result of unforeseen
regulatory or clinical circumstances relating to a product or failure of the
Company to deliver products in a timely manner, the minimum purchase
requirements can be renegotiated. If the Boston Scientific agreement is
renegotiated, this provision may remain in the agreement, or, a provision
similar to this may be a part of any other agreement that is entered into with
another distributor other than Boston Scientific.
Currently, Medicare does not provide reimbursement for
cryosurgical ablation of the prostate, one of the approved uses of the Company's
eight probe CRYOcare System. The Company believes that to become and remain
competitive, it will need to continue to develop third party distribution
channels and/or a substantial direct sales force for its new and other products.
Establishing marketing and sales capabilities sufficient to support sales in
commercial quantities will require significant resources, and there can be no
assurance that the Company will be able to recruit and retain direct sales
personnel, or that the Company will succeed in establishing and maintaining any
third party distribution channels, or that the Company's future sales and
marketing efforts will succeed at all. In addition, under the current
distribution agreement, Boston Scientific has a right of first refusal to match
any offer received by the Company from a third party to purchase the assets
related to the CRYOcare System for urological applications, and a right to buy
17.
<PAGE> 21
the assets and technology related to the CRYOcare System for urological
applications at purchase dates of twenty-four, thirty-six and forty-eight months
after the date that Medicare provides reimbursement for cryosurgical ablation of
the prostate, for a purchase price of 1.7, 1.5 and 1.3 times net sales for the
product for the preceding twelve months, but not less than $40 million, $50
million and $60 million, respectively. This buyout provision may have the impact
of creating a theoretical cap on the value of the CRYOcare System for urological
applications and, indirectly, the market value of the Company. If the Boston
Scientific agreement is renegotiated, this provision may remain in the
agreement, or, a provision similar to this may be a part of any other agreement
that is entered into with another distributor other than Boston Scientific.
PRIOR RELIANCE ON MEDSTONE; NEED FOR ADDITIONAL FINANCING
The Company operated as a division or wholly owned subsidiary of
Medstone from its commencement of operations until January 1996 and relied upon
Medstone for financial support and for assistance with personnel management and
financial administration. The Company anticipates that its need for working
capital through the end of 1998 should be satisfied with existing working
capital and a $1 million bank line of credit and the current private placement
of Common Stock, both of which are expected to close by the end of March 1998.
There is no assurance, however, that the line of credit and private placement
currently being negotiated will be consummated, or if they are, whether they
will be consummated at lesser amounts than anticipated. Insofar as the Company
may elect to undertake or accelerate significant research and development
projects for new products or may pursue corporate acquisitions, it may require
additional outside financing prior to such time. The Company expects that to
meet its long-term needs it will need to raise substantial additional funds
through the sale of its equity securities, the incurrence of indebtedness or
through funds derived through entering into collaborative arrangements with
third parties. Any additional equity financing may be dilutive to shareholders,
and debt financing, if available, may involve restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may require
the Company to relinquish rights to certain of its technologies, products or
marketing territories. The failure of the Company to raise capital when needed
could have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION; RAPID TECHNOLOGICAL AND INDUSTRY CHANGE
The Company competes in an established field of surgical device
manufacturers, and the competition in this field is intense. Many of the
Company's competitors are significantly larger than the Company and have greater
financial, technical, research, marketing, sales, distribution and other
resources than the Company. Additionally, the Company believes there will be
intense price competition for products developed in the Company's markets. There
can be no assurance that the Company's competitors will not succeed in
developing or marketing technologies and products, including drug-based
treatments, that are more effective or commercially attractive than any that are
being developed or marketed by the Company, or that such competitors will not
succeed in obtaining regulatory approval, introducing or commercializing any
such products prior to the Company. Such developments could have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, there can be no assurance that, even if the Company is able
to compete successfully, it would do so in a profitable manner. The medical
18.
<PAGE> 22
device industry generally, and the urological disease treatment market in
particular, are characterized by rapid technological change, changing customer
needs, and frequent new product introductions. The Company's future success will
depend upon its ability to develop and introduce new cost effective products in
a timely manner. There can be no assurance that the Company's products will not
be rendered obsolete as a result of future innovations.
LIMITED MANUFACTURING EXPERIENCE
The Company has limited experience in producing its products in
commercial quantities. Manufacturers often encounter difficulties in scaling up
production of new products, including problems involving production yields,
quality control and assurance, component supply and shortages of qualified
personnel. The Company's failure to overcome these manufacturing problems could
materially adversely affect the Company's business, financial condition and
results of operations. The Company uses a combination of internal manufacturing
capacity and third party manufacturers in its manufacturing efforts. Most of the
Company's purchased components and processes are available from more than one
vendor. However, certain components and processes are currently available from
or performed by a single vendor. Any supply interruption from a single source
vendor would have a material adverse effect on the Company's ability to
manufacture its products until a new source of supply was qualified and, as a
result, could have a material adverse effect on the Company's business,
financial condition and results of operations. Further, the ability of third
party manufacturing sources to deliver components or finished goods will affect
the Company's ability to commercialize its products, and the Company's
dependence on third party sources may adversely affect the Company's profit
margins. Additionally, the Company's success will depend in part upon its
ability to manufacture its products in compliance with the FDA's Good
Manufacturing Practices ("GMP") regulations and other regulatory requirements,
in sufficient quantities and on a timely basis, while maintaining product
quality and acceptable manufacturing costs. Failure to increase production
volumes in a timely or cost effective manner or to maintain compliance with GMP
or other regulatory requirements could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL
The Company's future success depends to a significant degree upon
the continued service of key technical and senior management personnel,
including Paul W. Mikus, the President of the Company, none of whom is bound by
an employment agreement or covered by an insurance policy of which the Company
is the beneficiary. The Company's future success also depends on its continuing
ability to attract, retain and motivate highly qualified technical, managerial
and sales personnel. The inability to retain or attract qualified personnel
could have a material adverse effect upon the Company's business, financial
condition and results of operations.
GOVERNMENT REGULATION
Governmental regulations in the United States and other countries
are a significant factor affecting the research and development, manufacture and
marketing of the Company's products. In the United States, the United States
Food and Drug Administration ("FDA") has broad authority under the Federal Food,
Drug and Cosmetic Act and the Public Health Service Act
19.
<PAGE> 23
to regulate the distribution, manufacture and sale of medical devices. Foreign
sales of drugs and medical devices are subject to foreign governmental
regulation and restrictions which vary from country to country. The process of
obtaining FDA and other required regulatory approvals is lengthy and expensive.
There can be no assurance that the Company will be able to obtain necessary
approvals for clinical testing or for manufacturing or marketing of its
products. Failure to comply with applicable regulatory approvals can, among
other things, result in fines, suspension of regulatory approvals, product
recalls, operating restrictions and criminal prosecution. In addition,
governmental regulation may be established which could prevent, delay, modify or
rescind regulatory approval of the Company's products. There can be no assurance
that any such position by the FDA, or change of position by the FDA, would not
adversely impact the Company's business, financial condition or results of
operations. Regulatory approvals, if granted, may include significant
limitations on the indicated uses for which the Company's products may be
marketed. In addition, to obtain such approvals, the FDA and foreign regulatory
authorities may impose numerous other requirements on the Company. FDA
enforcement policy strictly prohibits the marketing of approved medical devices
for unapproved uses. In addition, product approvals can be withdrawn for failure
to comply with regulatory standards or the occurrence of unforeseen problems
following initial marketing. There can be no assurance that the Company will be
able to obtain regulatory approvals for its products on a timely basis or at
all, and delays in receipt of or failure to receive such approvals, the loss of
previously obtained approvals, or failure to comply with existing or future
regulatory requirements would have a material adverse effect on the Company's
business, financial condition and results of operations.
UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT
In the United States, health care providers, such as hospitals
and physicians, that purchase medical devices such as the Company's products,
generally rely on third party payers, principally Federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of the
cost of medical procedures involving the Company's products. Currently, Medicare
does not reimburse for cryosurgical ablation of the prostate, one of the
approved uses of the Company's eight probe CRYOcare System. Without such
reimbursement, market acceptance and use of the product will be limited and may
adversely affect the Company's revenues from sales of the product. There can be
no assurance that the cost of medical procedures involving the Company's
products will be reimbursed by Medicare or other governmental, insurance or
third party payers. In addition, the Company anticipates that in a prospective
payment system, such as the DRG system utilized by Medicare, and in many managed
care systems used by private health care payers, the cost of the Company's
products will be incorporated into the overall cost of the procedure and that
there will be no separate, additional reimbursement for the Company's products.
Separate reimbursement for the Company's products is not expected to be
available in the United States and there can be no assurance that reimbursement
for the Company's products will be available in international markets under
either governmental or private reimbursement systems. Furthermore, the Company
could be adversely affected by changes in reimbursement policies of governmental
or private health care payers, particularly to the extent any such changes
affect reimbursement for procedures in which the Company's products are used.
Failure by physicians, hospitals and other users of the Company's products to
obtain sufficient reimbursement from health care payers for procedures involving
the Company's products, or adverse changes in governmental and private third
party payers' policies toward reimbursement for such procedures,
20.
<PAGE> 24
could have a material adverse effect on the Company's business, financial
condition and results of operations.
RISKS RELATED TO ACQUISITIONS
As part of its strategy to develop and market its products, the
Company may acquire a business or businesses that the Company believes might
enhance and speed up the development of its products through clinical trials,
such as a surgical center or related company that would use the Company's
products in clinical applications. There is no assurance, however, that the
Company will be able to identify suitable acquisition candidates, or, if it
identifies such candidates, that it would be able to consummate the acquisition
of such candidates. Furthermore, there is no assurance that if the Company
acquires a suitable acquisition candidate, the Company will be able to
effectively integrate the operations of the company acquired into the operations
of the Company, or effectively utilize the company acquired to develop and
market the Company's products. The failure to integrate an acquired company into
the operations of the Company may cause a drain on the financial and managerial
resources of the Company, and thereby materially adversely effect the financial
results of operations of the Company.
PRODUCT LIABILITY AND RECALL RISKS
The manufacture and sale of medical products entails significant
risk of product liability claims or product recalls. There can be no assurance
that the Company's existing insurance coverage limits are adequate to protect
the Company from any liabilities it might incur in connection with the clinical
trials or sales of its products. In addition, the Company may require increased
product liability coverage as its products are commercialized. Such insurance is
expensive and in the future may not be available on acceptable terms, if at all.
A successful product liability claim or series of claims brought against the
Company in excess of its insurance coverage, or a recall of the Company's
products, could have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTY RELATED TO HEALTH CARE REFORM
Political, economic and regulatory influences are subjecting the
health care industry in the United States to fundamental change. The Company
anticipates that Congress, state legislatures and the private sector will
continue to review and assess alternative health care delivery and payment
systems. Potential approaches that have been considered include mandated basic
health care benefits, controls on health care spending through limitations on
the growth of private purchasing groups, price controls and other fundamental
changes to the health care delivery system. Legislative debate is expected to
continue in the future, and market forces are expected to demand reduced costs.
The Company cannot predict what impact the adoption of any Federal or state
health care reform measures, future private sector reform or market forces may
have on its business.
21.
<PAGE> 25
DEPENDENCE ON PATENT AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to
secure and protect intellectual property rights relating to its technology.
While the Company believes that the protection of patents or licenses is
important to its business, it also relies on trade secrets, know-how and
continuing technological innovation to maintain its competitive position. No
assurance can be given that the Company's patent applications will be approved,
that the Company will develop any additional proprietary products that are
patentable and/or that any issued patents will provide the Company with a
competitive edge or will not be challenged by any third parties. No assurance
can be given that the Company's processes or products will not infringe patents
or proprietary rights of others or that any license required would be made
available under any such patents or proprietary rights, on terms acceptable to
the Company or at all. From time to time, the Company has received
correspondence alleging infringement of proprietary rights of third parties. No
assurance can be given that any relevant claims of third parties would not be
upheld as valid and enforceable, and therefore that the Company could be
prevented from practicing the subject matter claimed or would be required to
obtain licenses from the owners of any such proprietary rights to avoid
infringement. The Company seeks to preserve the confidentiality of its
technology by entering into confidentiality agreements with its employees,
consultants, customers, and key vendors and by other means. No assurance can be
given, however, that these measures will prevent the unauthorized disclosure or
use of such technology.
LIQUIDITY
The Company Common Stock began trading on the Nasdaq Small Cap
Market on February 28, 1997. Between February 20, 1996 and February 28, 1997,
the Common Stock traded on the Nasdaq electronic bulletin board. As a result,
the Common Stock has a limited trading history. If the Company is unable to
maintain the standards for quotation on the Nasdaq Small Cap Market, the ability
of investors to resell their shares after registration with the Securities and
Exchange Commission may be limited. In addition, the Company's securities may be
subjected to so-called "penny stock" rules that impose additional sales practice
and market making requirements on broker-dealers who sell and/or make a market
in such securities. This could affect the ability or willingness of
broker-dealers to sell and/or make a market in the Company's securities and the
ability of holders of the Company's securities to sell their securities in the
secondary market. There can be no assurance regarding the price at which the
Company Common Stock will trade. The market prices for securities of emerging
companies have historically been highly volatile. Future announcements
concerning the Company or its competitors, including the Company's operating
results, technological innovations or new commercial products, corporate
collaborations, government regulations, developments concerning proprietary
rights, litigation or public concern as to safety of the Company's products, as
well as investor perception of the Company and industry and general economic and
market conditions, may have a significant impact on the market price of the
Company's Common Stock. In addition, the stock market is subject to price and
volume fluctuations that affect the market prices for companies in general and
small capitalization, high technology companies in particular, and are often
unrelated to their operating performance.
22.
<PAGE> 26
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION
Future sales of Common Stock (including shares issued upon the
exercise of outstanding options and warrants) could materially adversely affect
the market price of the Common Stock. Such sales also might make it more
difficult for the Company to sell equity securities or equity-related securities
in the future at a time and price that the Company would deem appropriate. As of
February 28, 1998, the Company had 8,379,396 shares of Common Stock outstanding,
all of which may be freely traded. In addition, as of February 28, 1998 warrants
to purchase 382,497 shares of Common Stock were outstanding. Also, as of
February 28, 1998 stock options to purchase 1,866,480 shares of Common Stock had
been granted under the Company's stock option plans, subject to various vesting
schedules. Stock options to purchase an additional 233,520 shares of Common
Stock may be issued by the Company from time to time under such option plans and
up to 250,000 shares of Common Stock may be purchased under the Company's
Employee Stock Purchase Plan. An aggregate of 2,000,000 shares of Common Stock
may be issued under the Company's 1995 Stock Plan, 150,000 shares of Common
Stock may be issued under the Company's 1995 Director Option Plan and up to
250,000 shares of Common Stock may be issued under the Company's Employee Stock
Purchase Plan. The Company anticipates receiving shareholder approval to amend
and restate the 1995 Stock Plan to increase the number of shares reserved for
issuance thereunder by 1,000,000 shares. Exercise of these options or warrants
may result in substantial dilution to investors. In addition, the Company has
granted certain shareholders and warrantholders piggyback registration rights
with respect to 357,497 shares of Common Stock.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS; POSSIBLE NEGATIVE EFFECT
ON STOCK PRICE
Certain provisions of the Company's Certificate of Incorporation
and the Bylaws may have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Company's Common Stock.
For example, certain of these provisions allow the Company to issue Preferred
Stock without any vote or further action by the shareholders, eliminate the
ability of shareholders to act by written consent without a meeting and
eliminate cumulative voting in the election of directors. These provisions may
make it more difficult for shareholders to take certain corporate actions and
may have the effect of delaying or preventing a change in control of the
Company.
23.
<PAGE> 1
SILICON VALLEY BANK
LOAN AND SECURITY AGREEMENT
by and between
SILICON VALLEY BANK
as Lender
and
ENDOCARE, INC.
as Borrower
Dated: March 24, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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1. DEFINITIONS AND CONSTRUCTION...................................................1
1.1 Definitions.............................................................1
1.2 Accounting and Other Terms..............................................5
2. LOAN AND TERMS OF PAYMENT......................................................6
2.1 Credit Extensions.......................................................6
2.2 Overadvances............................................................6
2.3 Interest Rates, Payments, and Calculations..............................6
2.4 Crediting Payments......................................................7
2.5 Fees....................................................................7
2.6 Additional Costs........................................................7
2.7 Term....................................................................8
3. CONDITIONS OF LOANS............................................................8
3.1 Conditions Precedent to Initial Credit Extension........................8
3.2 Conditions Precedent to all Credit Extensions...........................8
4. CREATION OF SECURITY INTEREST..................................................9
4.1 Grant of Security Interest..............................................9
4.2 Delivery of Additional Documentation Required...........................9
4.3 Right to Inspect........................................................9
5. REPRESENTATIONS AND WARRANTIES.................................................9
5.1 Due Organization and Qualification......................................9
5.2 Due Authorization.......................................................9
5.3 No Prior Encumbrances...................................................9
5.4 [Reserved]..............................................................9
5.5 Merchantable Inventory..................................................9
5.6 [Reserved]..............................................................9
5.7 Name....................................................................10
5.8 Litigation..............................................................10
5.9 No Material Adverse Change in Financial Statements......................10
5.10 Solvency................................................................10
5.11 Regulatory Compliance...................................................10
5.12 Environmental Condition.................................................10
5.13 Taxes...................................................................10
5.14 Subsidiaries............................................................11
5.15 Government Consents.....................................................11
5.16 Full Disclosure.........................................................11
6. AFFIRMATIVE COVENANTS..........................................................11
6.1 Good Standing...........................................................11
6.2 Government Compliance...................................................11
6.3 Financial Statements, Reports, Certificates.............................11
6.4 Inventory...............................................................12
6.5 Taxes...................................................................12
6.6 Insurance...............................................................12
6.7 Principal Depository....................................................12
6.8 Quick Ratio.............................................................13
6.9 Debt-Net Worth Ratio....................................................13
6.10 Tangible Net Worth......................................................13
6.12 Profitability...........................................................13
6.13 Further Assurances......................................................13
7. NEGATIVE COVENANTS.............................................................13
7.1 Dispositions............................................................13
</TABLE>
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<PAGE> 3
TABLE OF CONTENTS (CONTD)
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7.2 Changes in Business, Ownership, or Management, Business Locations.......13
7.3 Mergers or Acquisitions.................................................14
7.4 Indebtedness............................................................14
7.5 Encumbrances............................................................14
7.6 Distributions...........................................................14
7.7 Investments.............................................................14
7.8 Transactions with Affiliates............................................14
7.9 [Reserved]..............................................................14
7.10 Subordinated Debt.......................................................14
7.11 Inventory...............................................................14
7.12 Compliance..............................................................14
8. EVENTS OF DEFAULT..............................................................15
8.1 Payment Default.........................................................15
8.2 Covenant Default........................................................15
8.3 Material Adverse Change.................................................15
8.4 Attachment..............................................................15
8.5 Insolvency..............................................................15
8.6 Other Agreements........................................................15
8.7 Subordinated Debt.......................................................16
8.8 Judgments...............................................................16
8.9 Misrepresentations......................................................16
8.10 Guaranty................................................................16
9. BANK'S RIGHTS AND REMEDIES.....................................................16
9.1 Rights and Remedies.....................................................16
9.2 Power of Attorney.......................................................17
9.3 Accounts Collection.....................................................17
9.4 Bank Expenses...........................................................17
9.5 Bank's Liability for Collateral.........................................18
9.6 Remedies Cumulative.....................................................18
9.7 Demand..................................................................18
10. NOTICES........................................................................18
11. CHOICE OF LAW AND VENUE........................................................18
12. GENERAL PROVISIONS.............................................................19
12.1 Successors and Assigns..................................................19
12.2 Indemnification.........................................................19
12.3 Time of Essence.........................................................19
12.4 Severability of Provisions..............................................19
12.5 Amendments in Writing, Integration......................................19
12.6 Counterparts............................................................19
12.7 Survival................................................................19
</TABLE>
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<PAGE> 4
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is entered into as of March 24, 1998 by and
between SILICON VALLEY BANK ("Bank") and ENDOCARE, INC., a Delaware corporation
("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank desires
to extend credit to Borrower. This Agreement sets forth the terms on which Bank
will advance credit to Borrower, and Borrower will repay the amounts owing to
Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 Definitions. As used in this Agreement, the following terms shall have
the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Advance" or "Advances" means a loan advance under the Committed
Revolving Line.
"Affiliate" means, with respect to any Person, any Person that owns or
controls directly or indirectly such Person, any Person that controls or is
controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, partners and, for any Person that
is a limited liability company, such Persons, managers and members.
"Bank Expenses" means all reasonable costs or expenses (including
reasonable attorneys' fees and expenses) incurred in connection with the
preparation, negotiation, administration, and enforcement of the Loan Documents;
and Bank's reasonable attorneys' fees and expenses incurred in amending,
enforcing or defending the Loan Documents, (including fees and expenses of
appeal or review, or those incurred in any Insolvency Proceeding) whether or not
suit is brought.
"Borrower's Books" means all of Borrower's books and records
including, without limitation: ledgers; records concerning Borrower's assets or
liabilities, the Collateral, business operations or financial condition; and all
computer programs, or tape files, and the equipment, containing such
information.
"Business Day" means any day that is not a Saturday, Sunday, or other
day on which banks in the State of California are authorized or required to
close.
"Closing Date" means the date of this Agreement.
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<PAGE> 5
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached
hereto.
"Committed Revolving Line" means a credit extension of up to
$1,000,000.
"Contingent Obligation" means, as applied to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to (i)
any indebtedness, lease, dividend, letter of credit or other obligation of
another, including, without limitation, any such obligation directly or
indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by
that Person, or in respect of which that Person is otherwise directly or
indirectly liable; (ii) any obligations with respect to undrawn letters of
credit issued for the account of that Person; and (iii) all obligations arising
under any interest rate, currency or commodity swap agreement, interest rate cap
agreement, interest rate collar agreement, or other agreement or arrangement
designated to protect a Person against fluctuation in interest rates, currency
exchange rates or commodity prices; provided, however, that the term "Contingent
Obligation" shall not include endorsements for collection or deposit in the
ordinary course of business. The amount of any Contingent Obligation shall be
deemed to be an amount equal to the stated or determined amount of the primary
obligation in respect of which such Contingent Obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect
thereof as determined by such Person in good faith; provided, however, that such
amount shall not in any event exceed the maximum amount of the obligations under
the guarantee or other support arrangement.
"Credit Extension" means each Advance or any other extension of credit
by Bank for the benefit of Borrower hereunder.
"Current Assets" means, as of any applicable date, all amounts that
should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries as at such date.
"Current Liabilities" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current liabilities on the
consolidated balance sheet of Borrower and its Subsidiaries, as at such date,
plus, to the extent not already included therein, all outstanding Credit
Extensions made under this Agreement, including all Indebtedness that is payable
upon demand or within one year from the date of determination thereof unless
such Indebtedness is renewable or extendable at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt.
"Equipment" means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of 1974,
as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in effect in
the United States from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or the
deferred purchase price of property or services, including without limitation
reimbursement and other obligations with respect to surety bonds and letters of
credit, (b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
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<PAGE> 6
"Insolvency Proceeding" means any proceeding commenced by or against
any person or entity under any provision of the United States Bankruptcy Code,
as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in which Borrower
has any interest, including merchandise, raw materials, parts, supplies, packing
and shipping materials, work in process and finished products intended for sale
or lease or to be furnished under a contract of service, of every kind and
description now or at any time hereafter owned by or in the custody or
possession, actual or constructive, of Borrower, including such inventory as is
temporarily out of its custody or possession or in transit and including any
returns upon any accounts or other proceeds, including insurance proceeds,
resulting from the sale or disposition of any of the foregoing and any documents
of title representing any of the above.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Liquidity Quick Assets" means (A) cash on hand or on deposit in
banks, readily marketable securities issued by the United States, readily
marketable commercial paper rated "A-1" by Standard & Poor's Corporation (or a
similar rating by a similar rating organization), and certificates of deposit
and banker's acceptances plus (B) the net amount of accounts receivable of the
Borrower.
"Liquidity Coverage Ratio" means the ratio of (a) Liquidity Quick
Assets to (b) the aggregate amount of the Committed Revolving Line, as in effect
from time to time.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other present or future agreement entered
into between Borrower and/or for the benefit of Bank in connection with this
Agreement, all as amended, extended or restated from time to time.
"Material Adverse Effect" means a material adverse effect on (i) the
business operations or condition (financial or otherwise) of Borrower and its
Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Maturity Date" means the Revolving Maturity Date.
"Negotiable Collateral" means all of Borrower's present and future
letters of credit of which it is a beneficiary, notes, drafts, instruments,
securities, documents of title, and chattel paper.
"Obligations" means all debt, principal, interest, Bank Expenses and
other amounts owed to Bank by Borrower pursuant to this Agreement or any other
agreement, whether absolute or contingent, due or to become due, now existing or
hereafter arising, including any interest that accrues after the commencement of
an Insolvency Proceeding and including any
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<PAGE> 7
debt, liability, or obligation owing from Borrower to others that Bank may have
obtained by assignment or otherwise.
"Payment Date" means the first calendar day of each month commencing
on the first such date after the Closing Date and ending on the Revolving
Maturity Date.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary
course of business;
and
(e) Indebtedness secured by Permitted Liens, provided that such
Indebtedness incurred in the future for the purchase price of or lease of
equipment shall not exceed, in the aggregate a total of $500,000 at any
time outstanding.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule; and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State
thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having the highest rating obtainable from
either Standard & Poor's Corporation or Moody's Investors Service, Inc.,
and (iii) certificates of deposit maturing no more than one (1) year from
the date of investment therein issued by Bank.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith
by appropriate proceedings and as to which adequate reserves are maintained
on Borrower's Books in accordance with GAAP, provided the same have no
priority over any of Bank's security interests;
(c) Liens (i) upon or in any Equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
Equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such Equipment, or (ii) existing on such equipment at the
time of its acquisition, provided that the Lien is confined solely to the
property so acquired and improvements thereon, and the proceeds of such
equipment;
-4-
<PAGE> 8
(d) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness being extended,
renewed or refinanced does not increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such announced
rate is the lowest rate available from Bank.
"Quick Assets" means, as of any applicable date, the consolidated
cash, cash equivalents, accounts receivable and investments with maturities of
fewer than 90 days of Borrower determined in accordance with GAAP.
"Responsible Officer" means each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"Revolving Maturity Date" means the date that is one day prior to the
first anniversary of the date of this Agreement.
"Schedule" means the schedule of exceptions attached hereto, if any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
"Subsidiary" means with respect to any Person, corporation,
partnership, company association, joint venture, or any other business entity of
which more than fifty percent (50%) of the voting stock or other equity
interests is owned or controlled, directly or indirectly, by such Person or one
or more Affiliates of such Person.
"Tangible Net Worth" means as of any applicable date, the consolidated
total assets of Borrower and its Subsidiaries minus, without duplication, (i)
the sum of any amounts attributable to (a) goodwill, (b) intangible items such
as unamortized debt discount and expense, patents, trade and service marks and
names, copyrights and research and development expenses except prepaid expenses,
and (c) all reserves not already deducted from assets, and (ii) Total
Liabilities.
"Total Liabilities" means as of any applicable date, any date as of
which the amount thereof shall be determined, all obligations that should, in
accordance with GAAP be classified as liabilities on the consolidated balance
sheet of Borrower, including in any event all Indebtedness, but specifically
excluding Subordinated Debt.
1.2 Accounting and Other Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP and all calculations
and determinations made hereunder shall be made in accordance with GAAP. When
used herein, the term "financial statements" shall include the notes and
schedules thereto. The terms "including"/"includes"
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<PAGE> 9
shall always be read as meaning "including (or includes) without limitation",
when used herein or in any other Loan Document.
2. LOAN AND TERMS OF PAYMENT
2.1 Credit Extensions. Borrower promises to pay to the order of Bank, in
lawful money of the United States of America, the aggregate unpaid principal
amount of all Credit Extensions made by Bank to Borrower hereunder. Borrower
shall also pay interest on the unpaid principal amount of all Credit Extensions
at rates in accordance with the terms hereof.
2.1.1 Advances.
(a) Subject to and upon the terms and conditions of this
Agreement, Bank agrees to make Advances to Borrower in an aggregate
outstanding amount not to exceed the Committed Revolving Line. Subject to
the terms and conditions of this Agreement, amounts borrowed pursuant to
this Section 2.1 may be repaid and reborrowed at any time during the term
of this Agreement.
(b) Whenever Borrower desires an Advance, Borrower will notify
Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific
time, on the Business Day that the Advance is to be made. Each such
notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of Exhibit B hereto. Bank is authorized to make
Advances under this Agreement, based upon instructions received from a
Responsible Officer or a designee of a Responsible Officer, or without
instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled
to rely on any telephonic notice given by a person who Bank reasonably
believes to be a Responsible Officer or a designee thereof, and Borrower
shall indemnify and hold Bank harmless for any damages or loss suffered by
Bank as a result of such reliance. Bank will credit the amount of Advances
made under this Section 2.1 to Borrower's deposit account.
(c) The Committed Revolving Line shall terminate on the Revolving
Maturity Date, at which time all Advances under this Section 2.1 and other
amounts due under this Agreement (except as otherwise expressly specified
herein) shall be immediately due and payable.
2.2 Overadvances. If, at any time or for any reason, the amount of
Obligations owed by Borrower to Bank pursuant to Section 2.1.1 of this Agreement
is greater than the Committed Revolving Line, Borrower shall immediately pay to
Bank, in cash, the amount of such excess.
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rate. Except as set forth in Section 2.3(b), any Advances
shall bear interest, on the average daily balance thereof, at a per annum rate
equal to 1.00% percentage points above the Prime Rate.
(b) Default Rate. All Obligations shall bear interest, from and after
the occurrence of an Event of Default, at a rate equal to three and one-half
percentage (3 1/2%) points above the interest rate applicable immediately prior
to the occurrence of the Event of Default.
(c) Payments. Interest hereunder shall be due and payable on each
Payment Date. Borrower hereby authorizes Bank to debit any accounts with Bank,
including, without limitation, Account Number _____________________ for payments
of principal and interest due
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on the Obligations and any other amounts owing by Borrower to Bank. Bank will
notify Borrower of all debits which Bank has made against Borrower's accounts.
Any such debits against Borrower's accounts in no way shall be deemed a set-off.
Any interest not paid when due shall be compounded by becoming a part of the
Obligations, and such interest shall thereafter accrue interest at the rate then
applicable hereunder.
(d) Computation. In the event the Prime Rate is changed from time to
time hereafter, the applicable rate of interest hereunder shall be increased or
decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an
amount equal to such change in the Prime Rate. All interest chargeable under the
Loan Documents shall be computed on the basis of a three hundred sixty (360) day
year for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of Default,
Bank shall credit a wire transfer of funds, check or other item of payment to
such deposit account or Obligation as Borrower specifies. After the occurrence
of an Event of Default, the receipt by Bank of any wire transfer of funds,
check, or other item of payment, whether directed to Borrower's deposit account
with Bank or to the Obligations or otherwise, shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment in
respect of the Obligations unless such payment is of immediately available
federal funds or unless and until such check or other item of payment is honored
when presented for payment. Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Bank after 12:00 noon Pacific
time shall be deemed to have been received by Bank as of the opening of business
on the immediately following Business Day. Whenever any payment to Bank under
the Loan Documents would otherwise be due (except by reason of acceleration) on
a date that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 Fees. Borrower shall pay to Bank the following:
(a) Facility Fee. A Facility Fee equal to $7,500, which fee shall be
due on the Closing Date and shall be fully earned and non-refundable;
(b) Financial Examination and Appraisal Fees. Bank's customary fees
and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and for
each appraisal of Collateral and financial analysis and examination of Borrower
performed from time to time by Bank or its agents;
(c) Bank Expenses. Upon demand from Bank, including, without
limitation, upon the date hereof, all Bank Expenses incurred through the date
hereof, including reasonable attorneys' fees and expenses, and, after the date
hereof, all Bank Expenses, including reasonable attorneys' fees and expenses, as
and when they become due.
2.6 Additional Costs. In case any law, regulation, treaty or official
directive or the interpretation or application thereof by any court or any
governmental authority charged with the administration thereof or the compliance
with any guideline or request of any central bank or other governmental
authority (whether or not having the force of law):
(a) subjects Bank to any tax with respect to payments of principal
or interest or any other amounts payable hereunder by Borrower or otherwise with
respect to the transactions contemplated hereby (except for taxes on the overall
net income of Bank imposed by the United States of America or any political
subdivision thereof);
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<PAGE> 11
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
2.7 Term. Except as otherwise set forth herein, this Agreement shall become
effective on the Closing Date and, subject to Section 12.7, shall continue in
full force and effect for a term ending on the Maturity Date. Notwithstanding
the foregoing, Bank shall have the right to terminate its obligation to make
Credit Extensions under this Agreement immediately and without notice upon the
occurrence and during the continuance of an Event of Default. Notwithstanding
termination of this Agreement, Bank's lien on the Collateral shall remain in
effect for so long as any Obligations are outstanding.
3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Credit Extension. The obligation of
Bank to make the initial Credit Extension is subject to the condition precedent
that Bank shall have received, in form and substance satisfactory to Bank, the
following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
articles, bylaws, incumbency and resolutions authorizing the execution and
delivery of this Agreement;
(c) financing statements (Forms UCC-1);
(d) insurance certificate;
(e) payment of the fees and Bank Expenses then due specified in
Section 2.5 hereof;
(f) Certificate of Foreign Qualification (if applicable); and
(g) such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank
to make each Credit Extension, including the initial Credit Extension, is
further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as provided in
Section 2.1; and
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<PAGE> 12
(b) the representations and warranties contained in Section 5 shall be
true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Credit Extension as
though made at and as of each such date, and no Event of Default shall have
occurred and be continuing, or would result from such Credit Extension. The
making of each Credit Extension shall be deemed to be a representation and
warranty by Borrower on the date of such Credit Extension as to the accuracy of
the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower grants and pledges to Bank a
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure prompt payment of any and all Obligations
and in order to secure prompt performance by Borrower of each of its covenants
and duties under the Loan Documents. Except as set forth in the Schedule, such
security interest constitutes a valid, first priority security interest in the
presently existing Collateral, and will constitute a valid, first priority
security interest in Collateral acquired after the date hereof. Borrower
acknowledges that Bank may place a "hold" on any Deposit Account pledged as
Collateral to secure the Obligations. Notwithstanding termination of this
Agreement, Bank's Lien on the Collateral shall remain in effect for so long as
any Obligations are outstanding.
4.2 Delivery of Additional Documentation Required. Borrower shall from time
to time execute and deliver to Bank, at the request of Bank, all Negotiable
Collateral, all financing statements and other documents that Bank may
reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers, employees, or
agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary is a
corporation duly existing and in good standing under the laws of its state of
incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be so qualified.
5.2 Due Authorization; No Conflict. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Certificate of Incorporation or Bylaws, nor
will they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and indefeasible title to the
Collateral, free and clear of Liens, except for Permitted Liens.
5.4 [Reserved]
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<PAGE> 13
5.5 Merchantable Inventory. All Inventory is in all material respects of
good and marketable quality, free from all material defects.
5.6 [Reserved]
5.7 Name; Location of Chief Executive Office. Except as disclosed in the
Schedule, Borrower has not done business and will not without at least thirty
(30) days prior written notice to Bank do business under any name other than
that specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in Section 10 hereof.
5.8 Litigation. Except as set forth in the Schedule, there are no actions
or proceedings pending, or, to Borrower's knowledge, threatened by or against
Borrower or any Subsidiary before any court or administrative agency in which an
adverse decision could have a Material Adverse Effect or a material adverse
effect on Borrower's interest or Bank's security interest in the Collateral.
5.9 No Material Adverse Change in Financial Statements. All consolidated
financial statements related to Borrower and any Subsidiary that have been
delivered by Borrower to Bank fairly present in all material respects Borrower's
consolidated financial condition as of the date thereof and Borrower's
consolidated results of operations for the period then ended. There has not been
a material adverse change in the consolidated financial condition of Borrower
since the date of the most recent of such financial statements submitted to Bank
on or about the Closing Date.
5.10 Solvency. The fair saleable value of Borrower's assets (including
goodwill minus disposition costs) exceeds the fair value of its liabilities; the
Borrower is not left with unreasonably small capital after the transactions
contemplated by this Agreement; and Borrower is able to pay its debts (including
trade debts) as they mature.
5.11 Regulatory Compliance. Borrower and each Subsidiary has met the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.12 Environmental Condition. None of Borrower's or any Subsidiary's
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower's knowledge, none of Borrower's properties or assets has
ever been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site, or
a candidate for closure pursuant to any environmental protection statute; no
lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal, state or other governmental agency concerning any action or
omission by Borrower or any Subsidiary resulting
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<PAGE> 14
in the release, or other disposition of hazardous waste or hazardous substances
into the environment.
5.13 Taxes. Borrower and each Subsidiary has filed or caused to be filed
all tax returns required to be filed on a timely basis, and has paid, or has
made adequate provision for the payment of, all taxes reflected therein.
5.14 Subsidiaries. Borrower does not own any stock, partnership interest or
other equity securities of any Person, except for Permitted Investments.
5.15 Government Consents. Borrower and each Subsidiary has obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted.
5.16 Full Disclosure. No representation, warranty or other statement made
by Borrower in any certificate or written statement furnished to Bank contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained in such certificates or
statements not misleading.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
a Credit Extension hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower shall deliver to
Bank: (a) as soon as available, but in any event within thirty (30) days after
the end of each month for which quarter end and fiscal year end reports are not
otherwise required to be delivered to the Bank in accordance with this
Agreement, a company prepared consolidated balance sheet and income statement
covering Borrower's consolidated operations during such period, in a form and
certified by an officer of Borrower reasonably acceptable to Bank; (b) as soon
as available, but in any event within the strict time period referred to in
clause (c) hereof with respect to submission of Form 10-K to the Securities and
Exchange Commission, audited consolidated financial statements of Borrower
prepared in accordance with GAAP, consistently applied, together with an
unqualified opinion on such financial statements of an independent certified
public accounting firm reasonably acceptable to Bank; (c) within five (5) days
of filing, copies of all statements, reports and notices sent or made available
generally by Borrower to its security holders or to any holders of Subordinated
Debt and all reports on Form 10-K, 10-Q and 8-K filed with the Securities and
Exchange Commission; (d) promptly upon receipt of notice thereof, a report of
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any legal actions pending or threatened against Borrower or any Subsidiary that
could result in damages or costs to Borrower or any Subsidiary of One Hundred
Thousand Dollars ($100,000) or more; and (e) such budgets, sales projections,
operating plans or other financial information as Bank may reasonably request
from time to time.
Within thirty (30) days after the last day of each month (other than with
respect to fiscal quarter end and fiscal year end periods), Borrower shall
deliver to Bank with the monthly financial statements a Compliance Certificate
signed by a Responsible Officer in substantially the form of Exhibit D hereto.
With respect to all other month end periods, Borrower shall deliver to Bank with
the applicable quarter or year end financial statements together with a
Compliance Certificate signed by a Responsible Officer in substantially the form
of Exhibit D hereto
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, provided that such audits will be conducted no
more often than every twelve (12) months unless an Event of Default has occurred
and is continuing. The first of such audits shall be conducted within 90 days of
the date hereof.
6.4 Inventory; Returns. Borrower shall keep all Inventory in good and
marketable condition, free from all material defects. Returns and allowances, if
any, as between Borrower and its account debtors shall be on the same basis and
in accordance with the usual customary practices of Borrower, as they exist at
the time of the execution and delivery of this Agreement. Borrower shall
promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to make,
due and timely payment or deposit of all material federal, state, and local
taxes, assessments, or contributions required of it by law, and will execute and
deliver to Bank, on demand, appropriate certificates attesting to the payment or
deposit thereof; and Borrower will make, and will cause each Subsidiary to make,
timely payment or deposit of all material tax payments and withholding taxes
required of it by applicable laws, including, but not limited to, those laws
concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal
income taxes, and will, upon request, furnish Bank with proof satisfactory to
Bank indicating that Borrower or a Subsidiary has made such payments or
deposits; provided that Borrower or a Subsidiary need not make any payment if
the amount or validity of such payment is (I) contested in good faith by
appropriate proceedings , (ii) is reserved against (to the extent required by
GAAP) by Borrower and (iii) no lien other than a Permitted Lien results.
6.6 Insurance.
(a) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form, with such
companies, and in such amounts as ordinarily insured against by other owners in
similar businesses conducted in the locations where Borrower's business is
conducted on the date hereof. All such policies of property insurance shall
contain a lender's loss payable endorsement, in a form satisfactory to Bank,
showing Bank as an additional loss payee thereof and all liability insurance
policies shall show the Bank as an additional insured, and shall specify that
the insurer must give at least twenty (20) days notice to Bank before canceling
its policy for any reason. At Bank's
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<PAGE> 16
request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.
6.7 Principal Depository. Borrower shall maintain its principal depository
and operating accounts with Bank.
6.8 Quick Ratio. Borrower shall maintain, as of the last day of each
calendar month, a ratio of Quick Assets to Current Liabilities of at least 1.00
to 1.0.
6.9 Debt-Net Worth Ratio. Borrower shall maintain, as of the last day of
each calendar month, a ratio of Total Liabilities less Subordinated Debt to
Tangible Net Worth plus Subordinated Debt of not more than 1.00 to 1.0.
6.10 Tangible Net Worth. Borrower shall maintain, as of the last day of
each calendar month, a Tangible Net Worth of not less than $2,500,000 through
and including the month ending March 31, 1998. For the month ending April 30,
1998 Borrower shall maintain, as of the last day of such month, a Tangible Net
Worth of not less than $1,750,000. For the month ending May 31 1998 Borrower
shall maintain, as of the last day of such month, a Tangible Net Worth of not
less than $1,250,000. Thereafter, through and including the month ending August
31, 1998, Borrower shall maintain, as of the last day of each calendar month, a
Tangible Net Worth of not less than $1,000,000. Thereafter, Borrower shall
maintain, as of the last day of each calendar month, a Tangible Net Worth of not
less than $2,500,000.
6.11 Liquidity Coverage Ratio. Borrower shall maintain, as of the last day
of each calendar month, a Liquidity Coverage Ratio of at least 1.75 to 1.0
through and including the month ending April 30, 1998. Thereafter, through and
including the month ending August 31, 1998, Borrower shall maintain, as of the
last day of each calendar month, a Liquidity Coverage Ratio of at least 1.50 to
1.0. Thereafter, Borrower shall maintain, as of the last day of each calendar
month, a Liquidity Coverage Ratio of at least 1.75 to 1.0.
6.12 Profitability. Borrower shall have a maximum net loss of $1,250,000
for each fiscal quarter, other than for a single fiscal quarter during the term
hereof in which the maximum quarterly net loss shall be $1,500,000. The maximum
loss for the Borrower's 1998 fiscal year shall be $5,250,000.
6.13 Further Assurances. At any time and from time to time Borrower shall
execute and deliver such further instruments and take such further action as may
reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any Credit Extension
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Advances,
Borrower will not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of
(collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, other than Transfers: (i) of inventory
in the ordinary course of business, (ii) of non-exclusive licenses and similar
arrangements for the use of the property of Borrower or its Subsidiaries in the
ordinary course of business; (iii) that constitute payment of normal and usual
operating expenses in the ordinary course of business; (iii) of worn-out or
obsolete Equipment; or (iv) relating to the disposition of the Borrower's
prolase product.
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7.2 Changes in Business, Ownership, or Management, Business Locations.
Engage in any business, or permit any of its Subsidiaries to engage in any
business, other than the businesses currently engaged in by Borrower and any
business substantially similar or related thereto (or incidental thereto), or
suffer a change in Borrower's ownership of greater than 40%. Borrower will not,
without at least thirty (30) days prior written notification to Bank, relocate
its chief executive office or add any new offices or business locations.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person, other than
the proposed acquisition transaction as disclosed in writing to the Bank on or
prior to the date hereof (the "Proposed Acquisition") provided that (I) any such
acquisition target, if a stock or other entity acquisition, shall become a loan
or accommodation party to the Agreement and related documents and (II) any
assets acquired, or the assets of any target entity that is acquired, shall be
free of all liens and encumbrances.
7.4 Indebtedness. Create, incur, assume or be or remain liable with respect
to any Indebtedness, or permit any Subsidiary so to do, other than Permitted
Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with
respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other distribution or
payment on account of or in redemption, retirement or purchase of any capital
stock.
7.7 Investments; Loans; Guarantees. Directly or indirectly acquire or own,
or make any Investment in or to any Person, or permit any of its Subsidiaries so
to do, other than Permitted Investments, or make any loans of any money or any
other assets to any Person, or guarantee or otherwise become liable with respect
to the obligations of any other Person, other than a loan to the seller party in
connection with the Proposed Acquisition as long as the amount of indebtedness
thereunder shall not exceed $200,000.
7.8 Transactions with Affiliates. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of Borrower except
for transactions that are in the ordinary course of Borrower's business, upon
fair and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm's length transaction with a nonaffiliated Person.
7.9 [Reserved]
7.10 Subordinated Debt. Make any payment in respect of any Subordinated
Debt, or permit any of its Subsidiaries to make any such payment, except in
compliance with the terms of such Subordinated Debt, or amend any provision
contained in any documentation relating to the Subordinated Debt without Bank's
prior written consent.
7.11 Inventory. Store the Inventory with a bailee, warehouseman, or similar
party unless Bank has received a pledge of any warehouse receipt covering such
Inventory. Except for Inventory sold in the ordinary course of business and
except for such other locations as Bank may approve in writing, Borrower shall
keep the Inventory only at the location set forth in Section 10 hereof and such
other locations of which Borrower gives Bank prior written notice and as to
which Borrower signs and files a financing statement where needed to perfect
Bank's security interest.
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7.12 Compliance. Become an "investment company" or a company controlled by
an "investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose; fail
to meet the minimum funding requirements of ERISA; permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the
Federal Fair Labor Standards Act or violate any other law or regulation, which
violation could have a Material Adverse Effect or a material adverse effect on
the Collateral or the priority of Bank's Lien on the Collateral; or permit any
of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay, when due, any of the
Obligations.
8.2 Covenant Default.
(a) If Borrower fails to perform any obligation under Sections 6.3,
6.6, 6.7, 6.8, 6.9, 6.10, 6.11, 6.12 or 6.13, or violates any of the covenants
contained in Article 7 of this Agreement, or
(b) If Borrower fails or neglects to perform, keep, or observe any
other material term, provision, condition, covenant, or agreement contained in
this Agreement, in any of the Loan Documents, or in any other present or future
agreement between Borrower and Bank and as to any default under such other term,
provision, condition, covenant or agreement that can be cured, has failed to
cure such default within ten (10) days after the occurrence thereof; provided,
however, that if the default cannot by its nature be cured within the ten (10)
day period or cannot after diligent attempts by Borrower be cured within such
ten (10) day period, and such default is likely to be cured within a reasonable
time, then Borrower shall have an additional reasonable period (which shall not
in any case exceed thirty (30) days) to attempt to cure such default, and within
such reasonable time period the failure to have cured such default shall not be
deemed an Event of Default (provided that no Advances will be required to be
made during such cure period);
8.3 Material Adverse Change. If there (i) occurs a material adverse change
in the business, operations, or condition (financial or otherwise) of the
Borrower, or (ii) is a material impairment of the prospect of repayment of any
portion of the Obligations or (iii) is a material impairment of the value or
priority of Bank's security interests in the Collateral;
8.4 Attachment. If any material portion of Borrower's assets is attached,
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith
-15-
<PAGE> 19
contest by Borrower (provided that no Credit Extensions will be required to be
made during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within 30 days (provided that no
Advances will be made prior to the dismissal of such Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any agreement to which
Borrower is a party with a third party or parties resulting in a right by such
third party or parties, whether or not exercised, to accelerate the maturity of
any Indebtedness in an amount in excess of One Hundred Thousand Dollars
($100,000) or that reasonably could have a Material Adverse Effect;
8.7 Subordinated Debt. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment of money in an
amount, individually or in the aggregate, of at least One Hundred Thousand
Dollars ($100,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no Credit
Extensions will be made prior to the satisfaction or stay of such judgment); or
8.9 Misrepresentations. If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate or writing delivered to Bank by Borrower or any
Person acting on Borrower's behalf pursuant to this Agreement or to induce Bank
to enter into this Agreement or any other Loan Document.
8.10 Guaranty. Any guaranty of all or a portion of the Obligations ceases
for any reason to be in full force and effect, or any Guarantor fails to perform
any obligation under any guaranty of all or a portion of the Obligations, or any
material misrepresentation or material misstatement exists now or hereafter in
any warranty or representation set forth in any guaranty of all or a portion of
the Obligations or in any certificate delivered to Bank in connection with such
guaranty, or any of the circumstances described in Sections 8.4, 8.5 or 8.8
occur with respect to any Guarantor.
9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies. Upon the occurrence and during the continuance of
an Event of Default, Bank may, at its election, without notice of its election
and without demand, do any one or more of the following, all of which are
authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement, by
any of the other Loan Documents, or otherwise, immediately due and payable
(provided that upon the occurrence of an Event of Default described in Section
8.5 all Obligations shall become immediately due and payable without any action
by Bank);
(b) Cease advancing money or extending credit to or for the benefit of
Borrower under this Agreement or under any other agreement between Borrower and
Bank;
(c) Settle or adjust disputes and claims directly with account debtors
for amounts, upon terms and in whatever order that Bank reasonably considers
advisable;
-16-
<PAGE> 20
(d) Without notice to or demand upon Borrower, make such payments and
do such acts as Bank considers necessary or reasonable to protect its security
interest in the Collateral. Borrower agrees to assemble the Collateral if Bank
so requires, and to make the Collateral available to Bank as Bank may designate.
Borrower authorizes Bank to enter the premises where the Collateral is located,
to take and maintain possession of the Collateral, or any part of it, and to
pay, purchase, contest, or compromise any encumbrance, charge, or lien which in
Bank's determination appears to be prior or superior to its security interest
and to pay all expenses incurred in connection therewith. With respect to any of
Borrower's premises, Borrower hereby grants Bank a license to enter such
premises and to occupy the same, without charge in order to exercise any of
Bank's rights or remedies provided herein, at law, in equity, or otherwise;
(e) Without notice to Borrower set off and apply to the Obligations
any and all (i) balances and deposits of Borrower held by Bank, or (ii)
indebtedness at any time owing to or for the credit or the account of Borrower
held by Bank;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein) the
Collateral. Bank is hereby granted a non-exclusive, royalty-free license or
other right, solely pursuant to the provisions of this Section 9.1, to use,
without charge, Borrower's labels, patents, copyrights, mask works, rights of
use of any name, trade secrets, trade names, trademarks, service marks, and
advertising matter, or any property of a similar nature, as it pertains to the
Collateral, in completing production of, advertising for sale, and selling any
Collateral and, in connection with Bank's exercise of its rights under this
Section 9.1, Borrower's rights under all licenses and all franchise agreements
shall inure to Bank's benefit;
(g) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply the proceeds thereof to the
Obligations in whatever manner or order it deems appropriate;
(h) Bank may credit bid and purchase at any public sale, or at any
private sale as permitted by law; and
(i) Any deficiency that exists after disposition of the Collateral as
provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the occurrence and during the
continuance of an Event of Default, Borrower hereby irrevocably appoints Bank
(and any of Bank's designated officers, or employees) as Borrower's true and
lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; and (e) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Bank determines to be reasonable; provided Bank may
exercise such power of attorney to sign the name of Borrower on any of the
documents described in Section 4.2 regardless of whether an Event of Default has
occurred. The appointment of Bank as Borrower's attorney in fact, and each and
every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder is terminated.
-17-
<PAGE> 21
9.3 Accounts Collection. Upon the occurrence and during the continuance of
an Event of Default, Bank may notify any Person owing funds to Borrower of
Bank's security interest in such funds and verify the amount of such Account.
Borrower shall collect all amounts owing to Borrower for Bank, receive in trust
all payments as Bank's trustee, and if requested or required by Bank,
immediately deliver such payments to Bank in their original form as received
from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any
required proof of payment due to third persons or entities, as required under
the terms of this Agreement, then Bank may do any or all of the following: (a)
make payment of the same or any part thereof; (b) set up such reserves under the
Committed Revolving Line as Bank deems necessary to protect Bank from the
exposure created by such failure; or (c) obtain and maintain insurance policies
of the type discussed in Section 6.6 of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or deposited
by Bank shall constitute Bank Expenses, shall be immediately due and payable,
and shall bear interest at the then applicable rate hereinabove provided, and
shall be secured by the Collateral. Any payments made by Bank shall not
constitute an agreement by Bank to make similar payments in the future or a
waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this Agreement,
the Loan Documents, and all other agreements shall be cumulative. Bank shall
have all other rights and remedies not expressly set forth herein as provided
under the Code, by law, or in equity. No exercise by Bank of one right or remedy
shall be deemed an election, and no waiver by Bank of any Event of Default on
Borrower's part shall be deemed a continuing waiver. No delay by Bank shall
constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be
effective unless made in a written document signed on behalf of Bank and then
shall be effective only in the specific instance and for the specific purpose
for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice of protest,
notice of default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension, or
renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, by certified mail, postage prepaid, return receipt requested,
or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower Endocare, Inc.
7 Studebaker
Irvine, California 92618
Attn: William Hughes
-18-
<PAGE> 22
FAX: (714) 595-4766
If to Bank Silicon Valley Bank
18872 MacArthur Boulevard, Suite 100
Irvine, CA 92715
Attn: Robert Anderson, V.P.
FAX: 714-474-7892
The parties hereto may change the address at which they are to receive notices
hereunder, by notice in writing in the foregoing manner given to the other.
11. CHOICE OF LAW AND VENUE; JURY WAIVER
The Loan Documents shall be governed by, and construed in accordance with,
the internal laws of the State of California, without regard to principles of
conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Orange,
State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS
TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY
OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER
CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH
PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1 Successors and Assigns. This Agreement shall bind and inure to the
benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 Indemnification. Borrower shall, indemnify, defend, protect and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under the Loan Documents, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the performance of all
obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this Agreement shall be
severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
-19-
<PAGE> 23
12.5 Amendments in Writing, Integration. This Agreement cannot be amended
or terminated except by a writing signed by Borrower and Bank. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties hereto with respect to the subject matter of this Agreement,
if any, are merged into this Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made in this
Agreement shall continue in full force and effect so long as any Obligations
remain outstanding. The obligations of Borrower to indemnify Bank with respect
to the expenses, damages, losses, costs and liabilities described in Section
12.2 shall survive until all applicable statute of limitations periods with
respect to actions that may be brought against Bank have run.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.
ENDOCARE, INC.
By: /s/ PAUL W. MIKUS
--------------------------------
Title: Chairman and CEO
--------------------------------
By: /s/ WILLIAM R. HUGHES
--------------------------------
Title: Senior Vice President and CFO
--------------------------------
SILICON VALLEY BANK
By: /s/ ROBERT ANDERSON
--------------------------------
Title: Vice President
--------------------------------
-20-
<PAGE> 24
EXHIBIT A
The Collateral shall consist of all right, title and interest of Borrower in and
to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, leases, license agreements,
franchise agreements, blueprints, drawings, purchase orders, customer lists,
route lists, claims, literature, reports, catalogs, income tax refunds, payments
of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of credit,
certificates of deposit, instruments and chattel paper now owned or hereafter
acquired and Borrower's Books relating to the foregoing; and
(f) Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
Notwithstanding the foregoing, the Collateral shall not include or be
deemed to include any copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work thereof, whether published or unpublished, now owned or hereafter acquired;
any patents, trademarks, servicemarks and applications therefor; any trade
secret rights, including any rights to unpatented inventions, know-how,
operating manuals, license rights and agreements, now owned or hereafter
acquired; or any claims for damages by way of any past, present and future
infringement of any of the foregoing.
<PAGE> 25
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE: _______________
FAX#: (408) __________ TIME: ______________
FROM:___________________________________________________________________________
BORROWER'S NAME
FROM:___________________________________________________________________________
AUTHORIZED SIGNER'S NAME
________________________________________________________________________________
AUTHORIZED SIGNATURE
PHONE:__________________________________________________________________________
FROM ACCOUNT #__________________________ TO ACCOUNT#____________________________
- --------------------------------------------------------------------------------
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
PRINCIPAL INCREASE (ADVANCE) $___________________________________
PRINCIPAL PAYMENT (ONLY) $___________________________________
INTEREST PAYMENT (ONLY) $___________________________________
PRINCIPAL AND INTEREST (PAYMENT) $___________________________________
OTHER INSTRUCTIONS:___________________________________________________________
- --------------------------------------------------------------------------------
All representations and warranties of Borrower stated in the Loan and Security
Agreement are true, correct and complete in all material respects as of the date
of the telephone request for and Advance confirmed by this Advance Request;
provided, however, that those representations and warranties expressly referring
to another date shall be true, correct and complete in all material respects as
of such date.
- --------------------------------------------------------------------------------
BANK USE ONLY:
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
- --------------------------------------------------------------------------------
Authorized Requester
----------------------------------------
Authorized Signature (Bank)
Phone #_________________________________
- --------------------------------------------------------------------------------
<PAGE> 26
EXHIBIT C
[Reserved]
<PAGE> 27
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM:
The undersigned authorized officer of _________________________ hereby certifies
that in accordance with the terms and conditions of the Loan and Security
Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in
complete compliance for the period ending ___________________ with all required
covenants except as noted below and (ii) all representations and warranties of
Borrower stated in the Agreement are true and correct in all material respects
as of the date hereof. Attached herewith are the required documents supporting
the above certification. The Officer further certifies that these are prepared
in accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer expressly acknowledges that h no
borrowings may be requested by the Borrower at any time or date of determination
that Borrower is not in compliance with any of the terms of the Agreement, and
that such compliance is determined not just at the date this certificate is
delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES"
COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
- ------------------ -------- --------
<S> <C> <C>
Monthly financial statements Monthly within 30 days (when no qtr end rpts) Yes No
Annual (CPA Audited) Within 5 days after filing with the SEC Yes No
10Q and 10K Within 5 days after filing with the SEC Yes No
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
- ------------------ -------- ------ --------
<S> <C> <C> <C>
Maintain on a Monthly Basis:
Minimum Quick Ratio 1.00:1.0 _____:1.0 Yes No
Minimum Liq Coverage Ratio 1.75:1.0 (thru 4/30/98) _____:1.0 Yes No
Minimum Liq Coverage Ratio 1.50:1.0 (thru 8/31/98) _____:1.0 Yes No
Minimum Liq Coverage Ratio 1.75:1.0 (thereafter) _____:1.0 Yes No
Minimum Tangible Net Worth $2.5MM (thru 3/31/98) $________ Yes No
Minimum Tangible Net Worth $1.75MM (for 4/30/98) $________ Yes No
Minimum Tangible Net Worth $1.25MM (for 5/31/98) $________ Yes No
Minimum Tangible Net Worth $1MM (thru 8/31/98) $________ Yes No
Minimum Tangible Net Worth $2.5MM (thereafter) $________ Yes No
Maximum Debt/Tangible Net Worth 1.00:1.0 _____:1.0 Yes No
Profitability:Quarterly ($1.25MM) $________ Yes No
Quarterly ($1.5MM for 1 qtr only) $________ Yes No
Annually (98) ($5.25MM) $________ Yes No
</TABLE>
=============================================
BANK USE ONLY
RECEIVED BY:____________________
DATE:________________
REVIEWED BY:____________________
COMPLIANCE STATUS: YES / NO
=============================================
COMMENTS REGARDING EXCEPTIONS:
Sincerely,
_______________________ Date:_______________
SIGNATURE
_______________________
TITLE
<PAGE> 28
CORPORATE BORROWING RESOLUTION
BORROWER: ENDOCARE, INC. BANK: SILICON VALLEY BANK
I, THE UNDERSIGNED SECRETARY OR ASSISTANT SECRETARY OF ENDOCARE, INC. (THE
"BORROWER"), HEREBY CERTIFY that Borrower is a corporation duly organized and
existing under and by virtue of the laws of the State of Delaware.
I FURTHER CERTIFY that at a meeting of the Directors of Borrower (or by
other duly authorized corporate action in lieu of a meeting), duly called and
held, at which a quorum was present and voting, the following resolutions were
adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of Borrower, whose actual signatures are shown below:
<TABLE>
<CAPTION>
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
<S> <C> <C>
Paul W. Mikus Chairman and CEO /s/ PAUL W. MIKUS
---------------------------------
William R. Hughes Senior Vice President
and CFO /s/ WILLIAM R. HUGHES
---------------------------------
</TABLE>
acting for and on behalf of Borrower and as its act and deed be, and they hereby
are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers of
Borrower and Bank, such sum or sums of money as in their judgment should be
borrowed.
EXECUTE LOAN DOCUMENTS. To execute and deliver to Bank the loan documents
of Borrower, on Bank's forms, at such rates of interest and on such terms
as may be agreed upon, evidencing the sums of money so borrowed or any
indebtedness of Borrower to Bank, and also to execute and deliver to Bank
one or more renewals, extensions, modifications, refinancings,
consolidations, or substitutions for one or more of the loan documents, or
any portion of the loan documents.
GRANT SECURITY. To grant a security interest to Bank in any of Borrower's
assets, which security interest shall secure all of Borrower's obligations
to Bank
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts, trade
acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to Borrower or in which Borrower may have an interest, and
either to receive cash for the same or to cause such proceeds to be
credited to the account of Borrower with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
LETTERS OF CREDIT. To execute letter of credit applications and other
related documents pertaining to Bank's issuance of letters of credit.
FOREIGN EXCHANGE CONTRACTS. To execute and deliver foreign exchange
contracts, either spot or forward, from time to time, in such amount as, in
the judgment of the officer or officers herein authorized.
<PAGE> 29
CORPORATE BORROWING RESOLUTION
Page 2
ISSUE WARRANTS. To issue warrants to purchase Borrower's capital stock, for
such class, series and number, and on such terms, as an officer of Borrower
shall deem appropriate.
FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder,
and in all cases, to do and perform such other acts and things, to pay any
and all fees and costs, and to execute and deliver such other documents and
agreements, including agreements waiving the right to a trial by jury, as
they may in their discretion deem reasonably necessary or proper in order
to carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of Borrower's agreements or commitments in effect at the
time notice is given.
I FURTHER CERTIFY that the persons named above are principal officers of
the Corporation and occupy the positions set opposite their respective names;
that the foregoing Resolutions now stand of record on the books of the
Corporation; and that they are in full force and effect and have not been
modified or revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on March 24, 1998 and
attest that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X /s/ WILLIAM R. HUGHES
--------------------------------------
*Secretary or Assistant Secretary
X ______________________________________
