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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:
JUNE 27, 1997
(Date of Earliest Event Reported)
INNOVASIVE DEVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
MASSACHUSETTS
(State or Other Jurisdiction of Incorporation)
0-28492 04-3132641
(Commission File Number) (I.R.S. Employer
Identification No.)
734 FOREST STREET, MARLBORO, MA 01752-3032
(Address of Principal Executive Offices)
(Zip Code)
(508) 460-8229
(Registrant's Telephone Number, Including Area Code)
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Item 2. Acquisition or Disposition of Assets.
------------------------------------
On June 27, 1997, pursuant to an Asset Purchase Agreement dated as of
February 4, 1997, as amended by a First Amendment to Asset Purchase Agreement
dated as of May 30, 1997 (the "Agreement"), a wholly-owned subsidiary of the
registrant acquired substantially all of the assets (the "Assets"), including
intellectual property related to orthopaedic medicine, and assumed substantially
all of the liabilities of MedicineLodge, Inc., a Delaware corporation
("MedicineLodge"). MedicineLodge is a privately held designer, developer and
manufacturer of orthopaedic medical devices, particularly implantable systems
and related instrumentation used in minimally invasive arthroscopic procedures
to repair injuries to the knee, and has approximately 30 employees located at
its Logan, Utah offices. The purchase price paid by the registrant to
MedicineLodge for the Assets was 1,885,000 shares of the registrant's common
stock. At the closing, the registrant issued 1,885,000 shares of its common
stock by delivering 1,696,500 of these shares to MedicineLodge and depositing
the remaining 188,500 shares into escrow with a bank for a one year period to
satisfy certain indemnified claims that may arise subsequent to the closing.
The registrant is obligated to file a registration statement to register the
1,885,000 shares for resale. In accordance with the Agreement, two shareholders
of MedicineLodge were elected as directors of the registrant. One of these two
directors also became an officer of the registrant pursuant to a four year
employment agreement. The other of these directors became a consultant to the
registrant pursuant to a four year consulting agreement. Additionally, another
shareholder of MedicineLodge became an officer of the registrant in accordance
with a four year employment agreement. These arrangements are more fully
detailed on page 23 of the registrant's definitive Proxy Statement for Annual
and Special Meeting of Stockholders held on June 27, 1997 (filed as Exhibit 99.1
hereto), and is incorporated herein by reference.
The purchase price of 1,885,000 shares was arrived at through a
process of negotiation involving the registrant and MedicineLodge taking into
account, among other factors, the ranges of valuation proposed by the
registrant's financial advisor and a consideration of the reasonable ranges of
prices at which the registrant's management and board of directors believed that
the registrant's stock would trade.
With respect to the Assets, the registrant intends to continue
MedicineLodge's business following the Closing.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
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(a) Financial Statements of Business Acquired
The following information appears in the registrant's definitive Proxy
Statement for Annual and Special Meeting of Stockholders held on June 27, 1997
(filed as Exhibit 99.1 hereto) on pages F-1 through F-14, and is incorporated
herein by reference:
Independent Auditors' Report
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Balance Sheets as of December 31, 1996 and 1995
Statement of Changes in Stockholder's Equity for each of the
years ended December 31, 1996 and 1995
Statement of Cash Flows for each of the years ended December 31,
1996 and 1995 Notes to Financial Statements
Condensed Balance Sheet as of March 31, 1997 (unaudited)
Condensed Statement of Operations for each of the three month
periods ended March 31, 1997 and 1996 (unaudited)
Condensed Statement of Cash Flows for each of the three month
periods ending
March 31, 1997 and 1996 (unaudited)
Notes to Unaudited Condensed Financial Statements
(b) Pro Forma Financial Information
The following information appears in the registrant's definitive Proxy
Statement for Annual and Special Meeting of Stockholders held on June 27, 1997
(filed as Exhibit 99.1 hereto) on pages 45 through 49, and is incorporated
herein by reference:
Pro Forma Condensed Combined Balance Sheet as of March 31, 1997
(unaudited)
Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1996 (unaudited)
Pro Forma Condensed Combined Statement of Operations for the
three month period ended December 31, 1996 (unaudited)
Notes to Unaudited Pro Forma Condensed Combined Financial
Statements
(c) Exhibits
The exhibit numbers in the following list correspond to the numbers
assigned to such exhibit in the Exhibit Table of Item 601 of Regulation S-K.
Exhibit No. Description of Document
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2.1 Asset Purchase Agreement, dated February 4, 1997, by and among
the registrant, MedicineLodge and certain shareholders of
MedicineLodge, presented on pages A1-1 through A1-30 of Exhibit
99.1 hereto (the registrant hereby undertakes to furnish omitted
exhibits and schedules upon request of the Commission).
2.2 First Amendment to Asset Purchase Agreement dated as of May 30,
1997, by and among the registrant, MedicineLodge and all
shareholders of Medicine Lodge.
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4.1 Registration Rights Agreement, dated June 27, 1997 by and between
the registrant and MedicineLodge.
99.1 Definitive Proxy Statement for Annual and Special Meeting of
Stockholders held on June 27, 1997.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INNOVASIVE DEVICES, INC.
Dated: July 11, 1997 By: /s/ James V. Barrile
--------------------------
James V. Barrile
Vice President, Finance and Administration
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EXHIBIT 2.2
FIRST AMENDMENT
TO
ASSET PURCHASE AGREEMENT
FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT effective as of May 30,
1997, among Innovasive Devices, Inc. (the "Buyer"), MedicineLodge Inc.
("Seller"), certain securityholders of Seller's capital stock (the
"Shareholders") and Innovasive Acquisition Corp., a wholly-owned subsidiary of
the Buyer (the "Subsidiary").
The Buyer, Seller and certain of the Shareholders entered a certain
Asset Purchase Agreement dated as of February 4, 1997 (the "Purchase Agreement")
pursuant to which the Buyer agreed to purchase, and Seller agreed to sell,
substantially all of the operating assets and liabilities of Seller. The
Purchase Agreement allows the Buyer to assign its rights under the Purchase
Agreement to a subsidiary, which the Buyer now wishes to do. In addition, the
Purchase Agreement may be terminated by a party if the transactions contemplated
therein are not consummated by June 16, 1997. The parties wish to extend such
date as set forth herein.
NOW THEREFORE, the parties agree as follows:
1. Assignment to Subsidiary. Pursuant to its right set forth in the
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last paragraph of Article I of the Purchase Agreement, the Buyer hereby assigns
its rights under the Purchase Agreement to the Subsidiary, the Subsidiary hereby
accepts such assignment, and Seller and the Shareholders hereby consent to such
assignment.
2. Extension of Termination Date. Section 9.1(b) of the Purchase
-----------------------------
Agreement is hereby amended by replacing therein both instances of "June 16"
with "July 31", thereby extending the date after which the parties may
unilaterally terminate the Purchase Agreement to July 31, 1997; and Section 3.1
of the Purchase Agreement is hereby amended by replacing therein "June 16" with
"July 31".
3. Parties. Effective as of May 30, 1997, the following persons are
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hereby joined as parties to the Purchase Agreement as Shareholders with all the
benefits and obligations thereto: Tom Winters, Kenneth Jensen, Dan Perkins,
Daniel Justin and Jeff J. Robbins.
4. 1997 Interim Financial Statements.
---------------------------------
(a) Section 2.3(a)(i) of the Purchase Agreement is hereby amended by
inserting therein "and the 1997 Interim Financial Statements with the exception
of the Employee withholdings attributable to the disclosure in Schedule 4.11"
after the reference to "1996 Financial Statements; and
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(b) Section 4.5(a) of the Purchase Agreement is hereby amended
and restated as follows:
"SECTION 4.5 REPORTS AND FINANCIAL STATEMENTS.
(a) The Seller has delivered to Buyer a compiled balance sheet and
statement of operations for the fiscal year ended December 31, 1994, a reviewed
balance sheet and statement of operation for the fiscal year ended December 31,
1995 (the "Annual Financial Statements"), a balance sheet and income statement
---------------------------
for the fiscal year ended December 31, 1996 (the "1996 Financial Statements")
-------------------------
and a balance sheet and income statement for the interim period ending June 26,
1997 (the "1997 Interim Financial Statements") (the Annual Financial Statements,
the 1996 Financial Statements and the 1997 Interim Financial Statements are
collectively referred to as the "Seller Financial Statements"). The Annual
---------------------------
Financial Statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis and fairly present the
financial condition of the Seller as of the dates thereof and the results of its
operations for the periods then ended. The 1996 Financial Statements and the
1997 Interim Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a basis consistent with the
Annual Financial Statements. The 1996 Financial Statements fairly present the
financial condition of the Seller as of December 31, 1996 and for the twelve
month period then ended, subject to the absence of notes thereto and normal
year-end audit adjustments, none of which is expected to be material, and have
been certified by the President of the Seller."
5. Excluded Assets. Schedule 1.1 is hereby amended to delete the
---------------
existing items 8 and 9 and to add as new item 8:
"8. Note Receivables - Shareholders $317,205
(withholdings due in compensatory options)
6. Effect of Amendment. For purposes of the Purchase Agreement, the
-------------------
changes contained herein will be deemed to have been made to the Purchase
Agreement as of the date hereof. Except to the extent specifically amended
hereby, all terms of the Purchase Agreement shall remain in full force and
effect.
7. Counterparts. This Amendment Agreement may be executed in any
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number of counterparts, all of which taken together shall constitute one and the
same instrument.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
INNOVASIVE DEVICES, INC.
By: /s/Richard D. Randall
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Richard D. Randall
President
INNOVASIVE ACQUISITION CORP.
By: /s/James V. Barrile
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James V. Barrile
President
MEDICINE LODGE, INC.
By: /s/Alan Chervitz
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Alan Chervitz
President
SHAREHOLDERS:
/s/Tom Winters /s/E. Marlowe Goble
- --------------------------------- --------------------------------------
Tom Winters E. Marlowe Goble, M.D.
/s/Kenneth Jensen /s/Alan Chervitz
- --------------------------------- --------------------------------------
Kenneth Jensen Alan Chervitz
/s/Dan Perkins /s/T. Wade Fallin
- ---------------------------------- --------------------------------------
Dan Perkins T. Wade Fallin
/s/Daniel Justin /s/Richard B. Caspari
- ----------------------------------- --------------------------------------
Daniel Justin Richard B. Caspari, M.D.
/s/Jeff J. Robbins /s/Judith B. Caspari
- ----------------------------------- --------------------------------------
Jeff J. Robbins Judith B. Caspari
/s/Stephen J. Snyder
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Stephen J. Snyder, M.D., individually
/s/Stephen J. Snyder
--------------------------------------
Stephen J. Snyder, as Trustee of the
Stephen J. Snyder and Lee Ann Snyder
Family Trust
<PAGE>
EXHIBIT 4.1
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT made and entered into as of this 27th
day of June, 1997, by and between INNOVASIVE DEVICES, INC., a Massachusetts
corporation (the "Company"), and MEDICINELODGE, INC., a Delaware corporation
("Holder").
WHEREAS, Holder has agreed to sell to a wholly-owned subsidiary of the
Company certain of its assets relating to its orthopaedic medical devices
business pursuant to an Asset Purchase Agreement dated as of February 4, 1997
(the "Asset Purchase Agreement"); and
WHEREAS, the consideration for the purchase of such assets is the
issuance by the Company to the Holder of 1,885,000 shares of the Company's
Common Stock (the "Purchase Shares"); and
WHEREAS, the Purchase Shares are restricted securities being issued
without registration under the Securities Act (as defined below), and applicable
state securities laws, pursuant to exemptions from registration thereunder; and
WHEREAS, a condition of the consummation of the transactions
contemplated by the Asset Purchase Agreement is that the Company and Holder
enter into this agreement providing for the registration of the Purchase Shares
under the Securities Act.
NOW, THEREFORE, the parties hereto agree as follows:
1. Certain Other Definitions. As used in this Agreement the
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following terms have the following respective meanings:
"Commission" means the Securities and Exchange Commission or another
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Federal agency from time to time administering the Securities Act.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
or any similar Federal statute, and the rules and regulations of the
Commission issued under such Act, as they each may, from time to time, be
in effect.
"Holders" or "Holder" means the Holder and the Shareholders who are
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holders of Registrable Shares and their registered successors and assigns.
"Opinion of Counsel" means an opinion of counsel reasonably acceptable
------------------
to the Company experienced in Securities Act matters chosen by a Holder,
which counsel may be counsel to such Holder.
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"Person" means any unincorporated organization, association,
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corporation, individual, sole proprietorship, partnership, joint venture,
trust institution, entity, party or government (including any
instrumentality, division, agency, body or department thereof).
The terms "register", "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registrable Securities" means the Purchase Shares and any other
----------------------
shares of Common Stock of the Company issued in respect of the Purchase
Shares (because of stock splits, stock dividends, reclassifications,
recapitalizations, or similar events); provided, however, that shares of
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Common Stock which are Registrable Shares shall cease to be Registrable
Shares upon any sale pursuant to a registration statement or Rule 144 under
the Securities Act (or any combination thereof), or upon the expiration of
the period set forth in Section 2.1 below.
"Securities Act" means the Securities Act of 1933, as amended, or any
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successor Federal statute, and the rules and regulations of the Commission
promulgated thereunder, all as the same shall be in effect from time to
time.
"Shareholders" means the holders of the capital stock of Holder as of
------------
the date hereof, and their respective successors and assigns who agree to
be bound by this Agreement.
2. Registration Under Securities Act, etc.
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2.1 Required Registration. As soon as practicable after June 6,
---------------------
1997, the Company shall use its best efforts to effect the registration Form S-
3, in accordance with Rule 415 under the Securities Act, to permit the offer and
sale of the Registrable Securities by the Holders from time to time on a delayed
or continuous basis; provided, however, if in the opinion of an independent
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investment banking firm such registration would, if not deferred, materially and
adversely affect a proposed business or financial transaction of substantial
importance to the Company's financial condition (a "Substantial Business
Transaction"), the Company may defer such registration for a single period
(specified in such notice) of not more than ninety (90) days. The Company
shall use its best efforts to keep such registration continuously effective and
current until all of the Registrable Shares covered thereby shall become
eligible to be sold pursuant to the provisions of Rule 144(k) under the
Securities Act or any successor thereto.
Each Holder of Registrable Securities agrees by acquisition of such
Registrable Securities that upon receipt of any notice from the Company that:
(i) the Company has
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received an opinion of counsel that the making of offers and sales pursuant to
the registration would require the Company to make additional disclosure by
amending or supplementing a prospectus included in the registration statement
for the registration (other than information with respect to the Holders of
Registrable Securities, the plan of distribution thereof or the sale thereof)
and (ii) the Board of Directors of the Company has determined that making such
disclosure would not be in the best interest of the Company's shareholders, the
Company shall have the right to suspend sales under the registration. Upon
receipt of any such notice, each Holder of Registrable Securities will forthwith
discontinue such Holder's disposition of such Registrable Securities pursuant to
the registration until the Company shall have provided notice that such Holder
may resume such disposition (each such period of discontinuation of disposition,
a "Black-Out Period"); provided that (i) no Black-Out Period shall be effective
unless a comparable Black-Out Period shall be applicable to sales by the
Company's officers and directors; and (ii) no Black-Out Period shall be
effective at any time when the Company is publicly selling shares of the Common
Stock of the Company.
2.2 Registration Procedures. In connection with the registration of
-----------------------
the Company's securities under the Securities Act as required by Section 2.1,
the Company will, as expeditiously as is possible:
(a) prepare and file as soon as practicable after June 6, 1997 with
the Commission a registration statement on Form S-3 with respect to such
securities; prepare and file with the Commission such amendments and supplements
to such registration statement and the prospectus used in connection therewith
as may be necessary to keep such registration statement effective and the
prospectus current for the period specified in Section 2.1; prepare and timely
file with the Commission all reports and other information required under the
Exchange Act; and comply with the provisions of the Securities Act with respect
to the sale of all securities covered by such registration statement whenever
the Holder of such securities shall desire to sell the same;
(b) notify each Holder (i) when a registration statement, prospectus
or any prospectus supplement or post-effective amendment has been filed and,
with respect to such registration statement or any post-effective amendment,
when the same has become effective, (ii) of any comments on or requests by the
Commission for amendments or supplements to the registration statement or
related prospectus or for additional information, (iii) of the issuance by the
Commission of any stop order suspending the effectiveness of the registration
statement or the initiation of any proceedings for that purpose, (iv) if, at any
time, the representations and warranties of the Company made as contemplated by
paragraph (j) below cease to be true and correct in all material respects, (v)
of the receipt by the Company of any notification with respect to the suspension
of the qualification of any of the Registrable Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose, and (vi) of the Company's determination that a post-effective amendment
to the registration statement would be appropriate;
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(c) use its best efforts to obtain the withdrawal of any order
suspending the effectiveness of such registration statement or the lifting of
any suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction;
(d) furnish to each Holder of Registrable Securities, without charge,
at least one conformed copy of the registration statement and any amendments
thereto, including financial statements and schedules and all exhibits;
(e) furnish to each Holder, without charge, such numbers of copies of
preliminary prospectuses and prospectuses and each supplement or amendment
thereto and such other documents as each Holder may reasonably request in order
to facilitate the sale or other disposition of the securities owned by such
Holder in conformity with (i) the requirements of the Securities Act and (ii)
the Holder's proposed method of distribution;
(f) register or qualify the securities covered by such registration
statement under the securities or "blue sky" laws of the applicable
jurisdictions requested by the Holders, and do such other reasonable acts and
things as may be required of it to enable each Holder to consummate the sale or
other disposition in such jurisdictions of the securities owned by such Holder;
provided, however, that the Company shall not be required to qualify as a
- -------- -------
foreign corporation or consent to a general and unlimited service of process in
any such jurisdiction;
(g) otherwise use its best efforts to comply with all applicable rules
and regulations of the Commission, and make available to its security holders as
soon as reasonably practicable, but not later than sixteen (16) months after the
effective date of the registration statement, an earnings statement covering a
period of at least twelve (12) months beginning after the effective date of the
registration statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act;
(h) notify each Holder at any time when a prospectus relating to the
registration is required to be delivered under the Securities Act, upon
discovery that, or upon the happening of any event as a result of which, the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made; except
in the case of a noticed Black-Out Period, at the request of any such Holder
promptly prepare and furnish to such Holder a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such securities, such prospectus shall
not include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances under which they were made; and
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(i) keep each Holder advised in writing as to the initiation and
progress of any registration under Section 2.1;
(j) make such representations and warranties to the Holders of the
Registrable Securities with respect to the accuracy and completeness of the
registration statement, prospectus and documents incorporated by reference
therein as the Holders may reasonably request;
(k) use its best efforts to cause all of the Registrable Securities to
be listed on each securities exchange or the Nasdaq Stock Market, as applicable,
on which securities of the Company of the same type as the Registrable
Securities are listed; and
(l) provide and cause to be maintained a transfer agent and registrar
for all of the Registrable Securities covered by the registration statement from
and after a date not later than the effective date of such registration
statement.
2.3 Preparation; Reasonable Investigation. In connection with the
-------------------------------------
preparation and filing of the registration statement under the Securities Act
pursuant to this Agreement, the Company will give the Holders the opportunity to
appoint a representative who, acting on behalf of all of the Holders of
Registrable Securities to be registered under such registration statement, may
participate in the preparation of such registration statement, each prospectus
included therein or filed with the Commission and each amendment thereof or
supplement thereto, and will give such representative and his counsel reasonable
access to its books and records and such opportunities to discuss the business
of the Company with its officers and the independent public accountants who have
certified its financial statements as shall be necessary, in the reasonable
opinion of the representative and his counsel, to conduct a reasonable
investigation within the meaning of the Securities Act. Any material nonpublic
information disclosed to the representative or his counsel during this
registration process shall be deemed confidential and shall not be disclosed by
the representative or his counsel until it has been publicly disclosed by the
Company.
2.4 Allocation of Expenses. The Company shall pay all expenses in
----------------------
connection with the registration required pursuant to Section 2.1, including,
without limitation, (a) all expenses incident to filing with the National
Association of Securities Dealers, Inc. or any exchange on which the Company's
Common Stock is then listed, (b) registration fees, (c) printing expenses, (d)
fees and expenses of the Company's accountants and lawyers, (e) expenses of any
special audits incident to or required by any such registration or
qualification, (f) reasonable fees and expenses (not to exceed $10,000) of one
independent counsel for the Holders, and (g) expenses of complying with the
securities or "blue sky" laws of any applicable jurisdiction in connection with
such registration or qualification; provided, however, the Company shall not be
-------- -------
liable for (1) any discounts or commissions to any underwriter or sales agent
attributable to Registrable Securities being sold; (2) any transfer
5
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taxes incurred in respect of Registrable Securities being sold; or (3) except
for 2.4 (f) above, the legal fees of any holder of Registrable Securities being
sold.
2.5 Indemnification. In connection with any registration or
---------------
qualification of securities under Section 2.1, the Company agrees to indemnify
the Holder, including each Person, if any, who controls such Holder within the
meaning of Section 15 of the Securities Act, against all losses, claims,
damages, liabilities and expenses (including the reasonable costs of
investigation) caused by any untrue, or alleged untrue, statement of a material
fact contained in any registration statement, preliminary prospectus, prospectus
or notification or offering circular (as amended or supplemented if the Company
shall have furnished any amendments or supplements thereto) or caused by any
omission, or alleged omission, to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or expenses are
caused by any untrue statement or alleged untrue statement or omission or
alleged omission based upon information furnished in writing to the Company by
any such Holder expressly for use therein. The Company and each officer,
director and controlling Person of the Company, shall be indemnified by any
Holder for all such losses, claims, damages, liabilities and expenses (including
the reasonable costs of investigation) caused by any such untrue, or alleged
untrue, statement or any such omission, or alleged omission, based upon
information furnished in writing to the Company by any such Holder expressly for
use in any such registration statement, preliminary prospectus, prospectus or
notification or offering circular.
Promptly upon receipt by a party indemnified under this Section 2.5 of
notice of the commencement of any action against such indemnified party in
respect of which indemnity or reimbursement may be sought against any
indemnifying party under this Section 2.5, such indemnified party shall notify
the indemnifying party in writing of the commencement of such action, but the
failure to so notify the indemnifying party shall not relieve it of any
liability which it may have to any indemnified party under this Section 2.5
unless such failure shall materially adversely affect the defense of such
action. In case notice of commencement of any such action shall be given to the
indemnifying party as above provided, the indemnifying party shall be entitled
to participate in and, to the extent it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense of such action at
its own expense, with counsel chosen by it and satisfactory to such indemnified
party. The indemnified party shall have the right to employ separate counsel in
any such action and participate in the defense thereof, but the fees and
expenses of such counsel (other than reasonable costs of investigation) shall be
paid by the indemnified party unless (i) the indemnifying party agrees to pay
the same, (ii) the indemnifying party fails to assume the defense of such action
with counsel reasonably satisfactory to the indemnified party or (iii) the named
parties to any such action (including any impleaded parties) have been advised
by such counsel that representation of such indemnified party and the
indemnifying party by the same counsel would be inappropriate under applicable
standards of professional conduct (in which case the indemnifying party shall
not have the right to assume the defense of such action on behalf of such
indemnified party). No indemnifying party shall be liable for any settlement
entered into without its consent;
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provided, however, that the indemnifying party shall not unreasonably withhold,
delay or condition its consent. No indemnifying party shall, without the consent
of the indemnified party, consent to entry of any judgment or enter into any
settlement that does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such indemnified party of a release from any
liability with respect to such claim or litigation.
If the indemnification provided for in this Section 2.5 is unavailable
or insufficient to hold harmless an indemnified party in respect of any losses,
claims, damages, liabilities, expenses or actions in respect thereof referred to
herein, then each indemnifying party shall in lieu of indemnifying such
indemnified party contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages, liabilities, expenses or
actions in such proportion as is appropriate to reflect the relative fault of
the Company, on the one hand, and the Holders of Registrable Securities, on the
other, in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities, expenses or actions as well as any other
relevant equitable considerations, including the failure to give the notice
required hereunder. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or omission or alleged omission of a material fact relates to information
supplied by the Company, on the one hand, or the Holders of Registrable
Securities, on the other hand, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company and all holders of Registrable Securities agree that it
would not be just and equitable if contribution pursuant to this Section 2.5
were determined by pro rata allocation (even if all of the Holders of
Registrable Securities were treated as one entity for such purpose) or by any
other method of allocation which did not take account of the equitable
considerations referred to above. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, liabilities or actions in
respect thereof referred to above shall 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
contribution provisions of this Section 2.5, in no event shall the amount
contributed by any Holder of Registrable Securities exceed the aggregate gross
offering proceeds received by such Holder from the sale of such Registrable
Securities to which such contribution claim relates. No Person guilty of
fraudulent misrepresentations (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who is not
guilty of such fraudulent misrepresentation.
Each Holder of Registrable Securities by acceptance thereof, agrees to
the indemnification and contribution provisions of this Section 2.5.
2.6 Supplying Information. The Company and the Holders shall
---------------------
cooperate with each other in supplying such information as may be necessary for
any of such parties to complete and file any information reporting forms
presently or hereafter required by the Commission or any commissioner or other
authority administering the blue sky or securities
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laws of any jurisdiction where Registrable Securities are proposed to be sold
pursuant to Section 2.1.
3. Form S-3 and Rule 144. The Company shall take such actions as
---------------------
may be reasonably required to maintain its status as a company permitted to file
a registration statement on Form S-3 on behalf of the Holders. The Company
shall take such action as any Holder may reasonably request, all to the extent
required from time to time to enable such Holder to sell shares of Registrable
Securities without registration under the Securities Act within the limitation
of the exemptions provided by (a) Rule 144 under the Securities Act, as such
Rule may be amended from time to time, or (b) any similar rule or regulation
hereafter adopted by the Commission. Upon the request of any Holder, the
Company will deliver to such Holder a written statement as to whether it has
complied with such requirements.
4. Amendments and Waivers. This Agreement may be amended, and the
----------------------
Company may take any action herein prohibited or omit to perform any act herein
required to be performed by it, only if the Company shall have obtained the
written consent of the holders of a majority in interest of the Registrable
Securities then outstanding to such amendment, action or omission to act.
5. Nominees for Beneficial Owners. In the event that any
------------------------------
Registrable Securities are held by a nominee for the beneficial owner thereof,
the beneficial owner thereof may, at its election, be treated as the Holder of
such Registrable Securities for purposes of any request or other action by any
Holder or Holders of Registrable Securities pursuant to this Agreement or any
determination of any number or percentage of shares of Registrable Securities
held by any Holder or Holders of Registrable Securities contemplated by this
Agreement. If the beneficial owner of any Registrable Securities elects to be
treated as the Holder for such purposes, the Company may require assurances
reasonably satisfactory to it of such owner's beneficial ownership of such
Registrable Securities.
6. Other Registration Rights. The Company covenants that it will
-------------------------
not make a future grant of any right of registration under the Securities Act
relating to any of its shares of capital stock or other securities to any Person
(including, without limitation, voluntarily allowing such Person to include such
Person's securities in the registration contemplated by Section 2.1 hereof)
other than pursuant to this Agreement, unless (i) the rights so granted to
another Person do not limit or restrict the rights of the Holders to the
registration provided for in Section 2.1 hereof, (ii) such rights are not
granted priority over the rights of Holders of Registrable Securities pursuant
to this Agreement, and (iii) if such rights extend to underwritten offerings,
the Holders of Registrable Securities are provided with rights comparable to the
rights granted to such Person.
7. Notices. Notices and other communications under this Agreement
-------
shall be in writing and shall be sent by registered mail, postage prepaid,
addressed
8
<PAGE>
(a) if to any Holder, at the address shown on the stock or transfer
books of the Company unless such Holder has advised the Company in writing
of a different address as to which notices shall be sent under this
Agreement, with copies to Theodore L. Chandler, Esquire, Williams, Mullen,
Christian & Dobbins, P.O. Box 1320, Richmond, Virginia 23210-1320, counsel
to Holder, and to any representative appointed by the Holders under Section
2.3 hereof, and
(b) if to the Company, at 734 Forest Street, Marlboro, MA 01752-3032
to the attention of Chief Financial Officer or to such other address as the
Company shall have furnished to each Holder.
Any notices of change in address with respect to (a) and (b) above shall be
given in accordance with this Section 7.
8. Termination. This Agreement shall terminate at such time as the
-----------
Holders of Registrable Shares are furnished with an Opinion of Counsel (from
counsel reasonably acceptable to such Holders) that all Registrable Securities
may be transferred without registration under Rule 144(k) under the Securities
Act and all legends on Registrable Shares are removed.
9. Miscellaneous.
-------------
(a) Binding Effect. This Agreement shall be binding upon and inure to
--------------
the benefit of and be enforceable by the respective successors and assigns of
the parties hereto, whether so expressed or not, and, in particular, shall inure
to the benefit of and be enforceable by any Holder or Holders of Registrable
Securities. The obligations and benefit of this Agreement shall inure to the
benefit of and be binding upon the Shareholders of the Company (as described in
the Asset Purchase Agreement) upon the distribution of the Registrable Shares
from the Holder to such Shareholders, whether or not in liquidation of the
Holder.
(b) Entire Agreement. This Agreement embodies the entire agreement
----------------
and understanding between the Company and the other parties hereto with respect
to the subject matter hereof and supersedes all prior agreements and
understandings relating to the subject matter hereof.
(c) Governing Law. This Agreement and all questions relating to its
-------------
validity, interpretation, performance and enforcement shall be construed in
accordance with the law of The Commonwealth of Massachusetts.
(d) Headings. The headings in this Agreement are for purposes of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(e) Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original but all of which together shall
constitute one instrument.
9
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.
INNOVASIVE DEVICES, INC.
By: /s/ Richard D. Randall
--------------------------------------
Richard D. Randall
President
MEDICINELODGE, INC.
By: /s/Alan Chervitz
----------------------------------------
Alan Chervitz
President
10
<PAGE>
INNOVASIVE DEVICES, INC.
734 FOREST STREET
MARLBORO, MASSACHUSETTS 01752-3032
PROXY STATEMENT FOR
ANNUAL AND SPECIAL MEETING OF STOCKHOLDERS
This Proxy Statement is furnished to the holders of common stock ("Common
Stock") of Innovasive Devices, Inc. (hereinafter referred to as the "Company")
in connection with the solicitation of proxies to be voted at the Annual and
Special Meeting of Stockholders to be held on June 27, 1997 and at any
adjournment of that meeting. The enclosed proxy is solicited on behalf of the
Board of Directors of the Company. Each properly signed proxy will be voted in
accordance with the instructions contained therein, and, if no choice is
specified, the proxy will be voted in favor of the proposals set forth in the
Notice of Annual and Special Meeting.
A person giving the enclosed proxy has the power to revoke it at any time
before it is exercised at the meeting, by written notice to the Clerk of the
Company, by sending a later dated proxy, or by revoking it in person at the
meeting.
The approximate date on which this Proxy Statement and the enclosed proxy
will first be sent to stockholders is June 6, 1997. The Company's Annual
Report to Stockholders for the year ended December 31, 1996 is being mailed
together with this Proxy Statement.
Only holders of Common Stock of record on the stock transfer books of the
Company at the close of business on April 30, 1997 (the "record date") will be
entitled to vote at the meeting. There were 7,265,571 shares of Common Stock
outstanding and entitled to vote on the record date.
Each share of Common Stock is entitled to one vote. The affirmative vote of
the holders of a plurality of the shares represented at the meeting, if a
quorum is present, is required for the election of directors. If a quorum is
present, approval of the other matters which are before the meeting will
require the affirmative vote at the meeting of the holders of a majority of
votes cast with respect to such matters.
For purposes of the matters before the Annual and Special Meeting, under the
Company's By-Laws, a quorum consists of a majority of the issued and
outstanding shares entitled to vote on such matters as of the record date.
Shares as to which a nominee (such as a broker holding shares in street name
for a beneficial owner) has no voting authority in respect of such matter will
be deemed represented for quorum purposes but will not be deemed to be voting
on such matters, and therefore will not be counted as negative votes as to
such matters. Votes will be tabulated by the Company's transfer agent subject
to the supervision of persons designated by the Board of Directors as
inspectors.
The Company's stockholders have no appraisal or dissenters' rights with
respect to the matters to be acted upon at the meeting.
The delivery of this Proxy Statement shall not, under any circumstances,
create any implication that there has been no change in the information set
forth herein or in the affairs of the Company or MedicineLodge, Inc. ("MLI")
since the date hereof. If, however, any material change occurs during the
period that the Proxy Statement is required to be delivered, this Proxy
Statement will be amended or supplemented accordingly. All information
regarding MLI in this Proxy Statement is based solely on information supplied
by MLI and the principal shareholders of MLI and other sources the Company
believes to be reliable. Immediately following the acquisition of MLI, MLI
will own approximately 20.5% of the Company's outstanding Common Stock. Prior
to the acquisition, there was no affiliation between the Company and MLI.
<PAGE>
STOCK OWNERSHIP OF DIRECTORS, NOMINEES, EXECUTIVE OFFICERS
AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of April 30, 1997 by (a) each
director and nominee for director of the Company, (b) each of the executive
officers named in the Summary Compensation Table below, (c) each person known
by the Company to own beneficially 5% or more of its Common Stock and (d) all
current directors and executive officers as a group. Except as otherwise
indicated, each person has sole investment and voting power with respect to
the shares shown as being beneficially owned by such person, based on
information provided by such owners.
<TABLE>
<CAPTION>
SHARES PERCENTAGE
BENEFICIALLY OF
EXECUTIVE OFFICERS, DIRECTORS AND NOMINEES OWNED COMMON STOCK
------------------------------------------ ------------ ------------
<S> <C> <C>
Richard D. Randall(1)............................. 225,051 3.0
James E. Nicholson................................ 411,351 5.7
James V. Barrile(2)............................... 180,555 2.9
Joseph A. Ciffolillo(3)........................... 71,926 *
Thomas C. McConnell(4)............................ 931,363 12.8
Robert R. Momsen(5)............................... 678,227 9.3
Howard D. Palefsky(6)............................. 848,936 11.6
Karen L. Mattocks(7).............................. 12,778 *
Philip H. Heitlinger(8)........................... 11,110 *
Richard B. Caspari(9)............................. 0 0
Alan Chervitz(10)................................. 0 0
<CAPTION>
5% STOCKHOLDERS
---------------
<S> <C> <C>
Collagen Corporation.............................. 843,936 11.6%
2500 Faber Place,
Palo Alto, CA 94303
Entities affiliated with InterWest Partners(11)... 675,727 9.3
3000 Sand Hill Road,
Building 3, Suite 255
Menlo Park, CA 94025
New Enterprise Associates VI, Limited 928,863 12.7
Partnership......................................
2490 Sand Hill Road,
Menlo Park, CA 94025
Delphi Ventures II, L.P.(12)...................... 587,443 8.1
3000 Sand Hill Road,
Building 1, Suite 135
Menlo Park, CA 9025
S. Richard Penni.................................. 485,612 6.7
100 Hancock Street, N.
Quincy, MA 02171
All current executive officers and directors as a
group (13 persons)(13)........................... 3,332,976 43.8
</TABLE>
- --------
* Less than 1.0% of the outstanding Common Stock.
(1) Includes 204,667 shares which Mr. Randall may acquire within 60 days of
April 30, 1997 by exercise of options.
(2) Includes 2,777 shares which Mr. Barrile may acquire within 60 days of
April 30, 1997 by exercise of options.
(3) Consists of 53,872 shares held by an investment company of which Mr.
Ciffolillo is the president and 18,054 shares which Mr. Ciffolillo may
acquire within 60 days of April 30, 1997 by exercise of options.
2
<PAGE>
Mr. Ciffolillo may be deemed to share voting and investment power with
respect to the shares held by the investment company. He disclaims
beneficial ownership of such shares except to the extent of his
proportionate interest therein.
(4) Consists of 2,500 shares which Mr. McConnell may acquire within 60 days
of April 30, 1997 by exercise of options and 928,863 shares held by New
Enterprise Associates VI, Limited Partnership with respect to which Mr.
McConnell may be deemed to share voting and investment power by virtue of
his status as a general partner of NEA Partners VI, Limited Partnership,
the general partner of New Enterprises Associates VI, Limited
Partnership. Mr. McConnell disclaims beneficial ownership of the shares
held by such entities except to the extent of his proportionate
partnership interest therein.
(5) Consists of 2,500 shares which Mr. Momsen may acquire within 60 days of
April 30, 1997 by exercise of options, 671,363 shares held by InterWest
Partners V, L.P. ("IWP") and 4,364 shares held by InterWest Investors V,
L.P. ("IWI"). Mr. Momsen is a general partner of InterWest Management
Partners V, L.P., the general partner of IWP, and a general partner of
IWI and accordingly may be deemed to share voting and investment power
with respect to these shares. Mr. Momsen disclaims beneficial ownership
of the shares held by such entities except to the extent of his
proportionate partnership interest therein.
(6) Consists of 2,500 shares held directly by Mr. Palefsky, 2,500 shares
which Mr. Palefsky may acquire within 60 days of April 30, 1997 by
exercise of options and 843,936 shares held by Collagen Corporation. Mr.
Palefsky is Chairman of the Board of Collagen Corporation and,
accordingly may be deemed to share voting and investment power with
respect to such shares. Mr. Palefsky disclaims beneficial ownership of
these shares.
(7) Includes 8,334 shares which Ms. Mattocks may acquire within 60 days of
April 30, 1997 by exercise of options.
(8) Consists of shares which Mr. Heitlinger may acquire within 60 days of
April 30, 1997 by exercise of options.
(9) Dr. Caspari is a nominee for director of the Company and does not
currently own any Common Stock of the Company. Upon his election as a
director and approval by the stockholders of the acquisition of MLI, upon
which his election is conditioned, Dr. Caspari will be granted options to
purchase 10,000 shares of the Company's Common Stock pursuant to the
Company's 1996 Non-Employee Director Stock Option Plan. Dr. Caspari will
also be granted options to purchase 40,000 shares of the Company's Common
Stock pursuant to the terms of a Consulting Agreement. As a principal
stockholder of MLI, Dr. Caspari will be entitled beneficially to his pro
rata portion of the shares of Common Stock which will be issued by the
Company as consideration for the purchase of MLI's assets. Dr. Caspari
and his wife, Judith Caspari, together own approximately 19.5% of the
shares of MLI which are expected to be outstanding at the time the
Acquisition is closed, assuming the exercise of all outstanding MLI stock
options, which will represent a beneficial interest in 368,329 shares of
the Common Stock of the Company upon closing of the Acquisition. See
"ACQUISITION OF MEDICINELODGE, INC. (Item 2)".
(10) Mr. Chervitz is a nominee for director of the Company and does not
currently own any Common Stock of the Company. Upon his election as a
director and upon approval by the stockholders of the acquisition of MLI,
upon which his election is conditional, Mr. Chervitz will be granted
options to purchase 35,000 shares of the Company's Common Stock pursuant
to the Company's 1996 Omnibus Stock Plan. As a principal stockholder of
MLI, Mr. Chervitz will be entitled beneficially to his pro rata share of
the shares of Common Stock issued by the Company as consideration for the
purchase of MLI's assets. Mr. Chervitz owns approximately 14.6% of the
shares of MLI which are expected to be outstanding at the time the
Acquisition is closed, assuming the exercise of all outstanding MLI stock
options, which will represent a beneficial interest in 275,022 shares of
the Common Stock of the Company upon closing of the Acquisition. See
"ACQUISITION OF MEDICINELODGE, INC. (Item 2)".
(11) Consists of 671,363 shares held by IWP and 4,364 shares held by IWI.
(12) Consists of 584,452 shares held by Delphi Ventures II, L.P. and 2,991
shares held by Delphi BioInvestments II, L.P.
(13) Includes 2,273,526 shares beneficially owned by entities affiliated with
Messrs. Ciffolillo, McConnell, Momsen and Palefsky, for which they
disclaim beneficial ownership except to the extent of their proportionate
interest therein and 2,500 shares held directly by Mr. Palefsky. Also
includes 349,105 shares which the executive officers and directors may
acquire within 60 days of April 30, 1997 by exercise of options.
3
<PAGE>
ELECTION OF DIRECTORS
(ITEM 1 OF NOTICE)
There are currently six members of the Board of Directors. The Board has
fixed the number of directors for the ensuing year at eight and has nominated
Thomas C. McConnell and Robert R. Momsen for re-election and Richard B.
Caspari and Alan Chervitz for election to the Board of Directors. In the case
of Dr. Caspari and Mr. Chervitz such nomination is conditional upon approval
by the stockholders of the acquisition of MedicineLodge, Inc. (See Item 3).
Each of Messrs. McConnell, Momsen and Caspari have consented to serve, if
elected at the meeting, for a three-year term expiring at the time of the
Annual Meeting in 2000 and when his successor is elected and qualified. Mr.
Chervitz has consented to serve, if elected at the meeting, for a two-year
term expiring at the Annual Meeting in 1999 and when his successor is elected
and qualified. The shares represented by the enclosed proxy will be voted to
elect the nominees unless such authority is withheld by marking the proxy to
that effect. The nominees have agreed to serve, but in the event any becomes
unavailable for any reason, the proxy, unless authority has been withheld as
to such nominee, may be voted for the election of a substitute. The Board of
Directors of the Company unanimously recommends that stockholders of the
Company vote FOR the election of the foregoing nominees.
The following information is furnished with respect to each nominee for
election as a director.
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
AS OF APRIL 30, 1997 DURING LAST FIVE YEARS; DIRECTORSHIPS OF PUBLIC COMPANIES
- -------------------- ---------------------------------------------------------
<S> <C>
Thomas C. McConnell, Mr. McConnell has been a director of the Company since
42..................... February 1995. He joined New Enterprise Associates, a venture
capital firm, in 1985 and has been a general partner since
1989. He is also a director of Conceptus, Inc., Applied
Imaging Corporation, Cardio Thoracic Systems and Sequana
Therapeutics, Inc., a maker of diagnostics for gene
identification.
Robert R. Momsen, 50.... Mr. Momsen has been a director of the Company since February
1994. He joined InterWest Partners, a venture capital firm, in
1981 and has been a general partner since 1982. He is also a
director of ArthroCare Corporation, a manufacturer of
arthroscopic surgical equipment, Ventritex, Inc., a
manufacturer of implantable cardiac defibrillators, COR
Therapeutics, Inc., a developer of cardiovascular
pharmaceuticals, Integ, a developer of blood free fructose
monitoring, Coulter Pharmaceutical, a developer of cancer
pharmaceuticals, and Urologix.
Richard B. Caspari, Dr. Caspari has been a partner of Tuckahoe Orthopaedic
M.D., 55............... Associates since 1973, and the president and a member of the
Board of Directors of Orthopaedic Research of Virginia since
1981. He is a founding member of the Arthroscopy Association
of North America and served as its president in 1991. From
1984 to 1986 Dr. Caspari was president of Precision Surgical
Instruments Inc., a developer and manufacturer of arthroscopic
devices. He served on the Board of Directors of Arthrotek, a
subsidiary of Biomet from 1991 to 1996, and currently serves
on the Board of Directors of Lifenet, Inc., an organ and
tissue transplantation non-profit organization, and Heloair,
Inc., a helicopter charter company. Dr. Caspari joined the
Board of Directors of MedicineLodge, Inc. in 1996.
Alan Chervitz, 35....... Mr. Chervitz has been a director of MedicineLodge, Inc. since
January 1994. He joined MedicineLodge, Inc. in August of 1993
as a co-founder and has served as President and CEO of
MedicineLodge, Inc. since January 1996. He also served as
Executive VP/General Manager of MedicineLodge, Inc. from 1993
to January 1996. Prior to joining MedicineLodge, Inc., he
served as President and Chief Executive Officer of Ortho
Dynamics, Inc. from August 1989 through December 1993. Mr.
Chervitz also served as a director of Medisys Technologies,
Inc. from January 1992 through 1996. Mr. Chervitz is also
manager of GCL, L.C., a Wyoming limited liability company.
</TABLE>
4
<PAGE>
The following table contains similar information about the other directors
of the Company, whose terms do not expire at the 1997 Annual and Special
Meeting and who consequently are not nominees for election in 1997:
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
S OF APRIL 30, 1997A DURING LAST FIVE YEARS; DIRECTORSHIPS OF PUBLIC COMPANIES
- -------------------- ---------------------------------------------------------
<S> <C>
Richard D. Randall, 45.. Mr. Randall has been President, Chief Executive Officer and a
director of the Company since February 1994. He currently serves
as a director of Target Therapeutics, Inc. ("Target"), a
developer of neurovascular devices. He was employed by Target
from June 1989 to January 1994, during which time he served as
President, Chief Executive Officer and Chairman. Mr. Randall
currently serves as Chairman of the Board of Directors of
Conceptus, Inc. ("Conceptus"), a developer of minimally invasive
devices for reproductive medical applications. He was also
acting President and acting Chief Executive Officer of Conceptus
from December 1992 to July, 1993. Mr. Randall was also a
director of Neuro Navigational Corporation, a minimally invasive
neurosurgery company (from which office Mr. Randall resigned
effective March 20, 1997).
James E. Nicholson, 58.. Mr. Nicholson, a co-founder of the Company, has been a director
of the Company since the Company's inception in September 1991.
He also served as Chief Technical Officer from February 1994 to
April 1997 and President and Chief Executive Officer from
inception to February 1994. Since April 1997 Mr. Nicholson has
been a consultant to the Company. He was founder and President
of Nicholson Associates, Inc., a surgical device company which
was formed in June 1990 and merged into the Company in May 1992.
Mr. Nicholson was also a co-founder of Mitek Surgical Products,
Inc., a bone anchor manufacturer, and served as its President
from 1985 to 1990. He currently serves as a director of
Physiometrix, Inc.
Joseph A. Ciffolillo, Mr. Ciffolillo has been a director of the Company since February
58..................... 1994. Now retired, from 1987 to March 1995, he was Chief
Operating Officer of Boston Scientific Corporation ("Boston
Scientific"), a manufacturer and marketer of minimally invasive
medical devices. From March 1995 until his retirement in April
1996, he was Executive Vice President--Office of the Chairman,
for Boston Scientific Venture Group, the venture capital
division of Boston Scientific. He is also a director of CompDent
Corporation, a dental health maintenance organization.
Howard D. Palefsky, 50.. Mr. Palefsky has been a director of the Company since September
1995. He was Chief Executive Officer of Collagen Corporation
from 1978 through 1996 and currently serves as Chairman of
Collagen Corporation's Board. He is also a director of Target
Therapeutics, Inc., Calgene, Inc., an agricultural biotechnology
company and Sequana Therepeutics, Inc., a maker of diagnostics
for gene identification.
</TABLE>
BOARD OF DIRECTORS AND COMMITTEE MEETINGS
The Board of Directors has Audit and Compensation Committees. It does not
have a nominating or similar committee.
The Audit Committee, which periodically meets with management and the
Company's independent accountants, reviews the results and scope of the audit
and other services provided by the Company's independent accountants, the need
for internal auditing procedures and the adequacy of internal controls. The
directors currently serving on the Audit Committee are Messrs. McConnell and
Palefsky. The Audit Committee met once during fiscal 1996.
5
<PAGE>
The Compensation Committee establishes salaries for officers and incentives
and other forms of compensation for officers and other key employees;
administers the various incentive compensation and benefit plans; and
recommends policies relating to such plans. The directors currently serving on
the Compensation Committee are Messrs. Ciffolillo and Momsen. The Compensation
Committee met three times during fiscal 1996.
During fiscal 1996, the Board of Directors of the Company held seven
meetings. Each incumbent director attended at least 75% of the aggregate
number of the meetings of the Board and the meetings of the committees of the
Board on which he served.
DIRECTOR COMPENSATION
The Company's directors may be reimbursed for certain expenses in connection
with attendance at Board and committee meetings. Under the Company's 1996 Non-
Employee Director Stock Option Plan each non-employee director serving as such
on the date of the Annual Meeting of the Board of Directors is entitled to
receive on such date an option to purchase 2,500 shares of Common Stock
(subject to vesting over four annual periods), exercisable at a price per
share equal to fair market value on the date of grant. Any non-employee
director, upon his or her first election to the Board of Directors, is
entitled to receive an option to purchase 10,000 shares of Common Stock.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This report, prepared by the Compensation Committee of the Company's Board
of Directors (the "Committee"), addresses the Company's executive compensation
policies and the basis on which fiscal 1996 executive officer compensation
determinations were made. The Committee designs and approves all components of
executive pay.
To ensure that executive compensation is designed and administered in an
objective manner, the Committee's members are all non-employee directors.
During fiscal 1996, the Committee members were Messrs. Ciffolillo and Momsen.
Compensation Philosophy
The Company's executive compensation policies are intended to attract,
retain, motivate and reward executives who can lead the Company in achieving
its long-term growth and earnings goals. The objective of the Committee is to
implement a compensation program that will provide appropriate incentives
while, at the same time, encouraging executive officers to increase their
equity ownership in the Company and thereby align their interests with those
of the Company's stockholders. The compensation program consists primarily of
three components, namely (a) base salary, (b) bonus and (c) stock options.
Each of these factors are further described below. In addition, executive
officers are eligible to participate, on a non-discriminatory basis, in
various benefit programs provided to all full-time employees, including the
Company's stock purchase plan, 401(k) plan and group medical, disability and
life insurance programs. The Committee believes that executive compensation
packages should be viewed as a whole in order to assess properly their
appropriateness.
In establishing total compensation packages for the Company's executive
officers, the Committee takes into account the compensation packages offered
to executives of other medical device design and manufacturing companies of
similar stature. The Committee uses this comparative data primarily as
benchmarks to ensure that the Company's executive compensation packages are
competitive. The Committee seeks to maintain total compensation within the
broad middle range of comparative pay. The Committee generally meets quarterly
and at other times that it deems are necessary and, from time to time, confers
with outside advisors concerning acceptable industry practices. Individual
amounts are based not only on comparative data, but also on such factors as
length of service with the Company and the Committee's judgment as to
individual contributions. These factors are not assigned specific mathematical
weights.
6
<PAGE>
Salary
Base salaries are reviewed annually. It is the Committee's intention to pay
slightly below-market base salary but provide a significant equity ownership
opportunity to create incentives for the Company's executive officers to
maximize the Company's growth and success while increasing stockholders' value
over the long term. Changes in base salary from year to year depend upon such
factors as individual performance, cost of living changes and the economic and
business conditions affecting the Company.
Richard D. Randall's base salary was increased from $150,000 to $175,000 on
April 1, 1996, an increase of 16.67%. This increase was largely based on his
contributions to the Company's meeting its growth and profit objectives.
Bonus
Executive bonuses are determined in accordance with achievement of the
Company's goals for the most recent fiscal year. The amounts are intended to
reward management for achieving certain milestones set out at the beginning of
the fiscal year. Among these are growth in operating profit, sales and
earnings. The cash bonus for the Chief Executive Officer is also influenced by
his ability to execute strategic plans determined by the Board of Directors,
including merger and acquisition programs.
Stock Options
As noted above, stock options are an important component of total executive
compensation. Stock options are considered long-term incentives that link the
long-term interests of management with those of the Company's stockholders.
Stock options that the Committee has granted to executive employees generally
vest over a four year period from the date of grant at the rate of 25% per
fiscal year, commencing at the end of the year in which they are granted. The
Committee also granted in 1996 special options to sales employees, including
certain executive marketing and sales officers of the Company, which were
exercisable only after ten years unless the individual sales targets of the
recipients were achieved. If individual sales targets were achieved, the
exercisability of the options would accelerate to the standard four-year
vesting schedule for sales employees (20% after the first and second year and
30% after the third and fourth year). The 1996 sales targets of the executive
officers of the Company to whom these special options were granted were not
achieved, so the options granted to such officers are not exercisable until
2006. Option exercise prices are set at 100% of the fair market value of the
stock at the date of the grant and expire after ten years. The Committee has
absolute discretion to determine the recipients and the number of options to
be awarded. Each award is at the Committee's discretion and is not subject to
any specific formula or criteria. The Committee generally awards options on an
annual basis. The number of shares for which options were granted to executive
officers in fiscal 1996 was determined by the Committee based upon several
factors, including the executive's position, his or her past and future
expected performance, the comparative data described above, and the number of
shares under options previously granted. These factors were evaluated in a
qualitative manner and were not assigned predetermined weights.
Section 162(m)
Section 162(m) of the Internal Revenue Code which became effective January
1, 1994, generally limits the deductibility of annual compensation for certain
officers to $1 million. It is the general intention of the Committee to assure
that officer compensation will meet the Section 162(m) requirements for
deductibility. However, the Committee reserves the right to use its judgment
to authorize compensation payments which may be in excess of the limit when
the Committee believes such payment is appropriate, after taking into
consideration changing business conditions or the officer's performance, and
is in the best interest of the shareholders. The Committee will review its
policy concerning Section 162(m) on a year-by-year basis.
Compensation Committee
Joseph A. Ciffolillo
Robert R. Momsen
7
<PAGE>
COMPARISON OF CUMULATIVE TOTAL STOCKHOLDER RETURN
The following performance graph assumes an investment of $100 on June 7,
1996 (the day following the date the Company's Common Stock was first
registered under Section 12 of the 1934 Act) and compares the changes
thereafter in the market price of the Company's Common Stock with a broad
market index (Standard & Poor's SmallCap 600) and an industry index (Standard
& Poor's Health Care--Medical Products). The Company paid no dividends during
the periods shown; the performance of the indexes is shown on a total return
(dividend reinvestment) basis. The graph lines merely connect the initial
public offering date and the fiscal year-end dates and do not reflect
fluctuations between those dates.
[COMPARISON OF 6 MONTH CUMULATIVE TOTAL RETURN CHART APPEARS HERE]
06/07/96 12/31/96
-------- --------
INNOVASIVE DEVICES, INC. 100 62
S&P SMALL CAP 600 100 105
S&P HEALTH CARE 100 113
THE COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION AND THE
COMPARISON OF CUMULATIVE TOTAL STOCKHOLDER RETURN INFORMATION ABOVE SHALL NOT
BE DEEMED "SOLICITING MATERIAL" OR INCORPORATED BY REFERENCE INTO ANY OF THE
COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION BY IMPLICATION
OR BY ANY REFERENCE IN ANY SUCH FILING TO THIS PROXY STATEMENT.
8
<PAGE>
EXECUTIVE OFFICER COMPENSATION
The following summary compensation table sets forth the compensation paid or
accrued for services rendered in fiscal 1996, 1995 and 1994 to the chief
executive officer and the other four most highly compensated executive
officers of the Company (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND FISCAL BONUS(S) COMPENSATION UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) ($) ($)(1) OPTIONS (#) ($)(2)
------------------ ------ ---------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Richard D. Randall...... 1996 170,096 35,000 -- 44,444 195
President and Chief 1995 150,000 -- -- -- 244
Executive Officer 1994 149,940 -- -- 244,445 195
James E. Nicholson...... 1996 131,000 -- -- -- --
Chief Technical Officer 1995 130,000 -- -- -- --
1994 128,269 -- -- -- --
James V. Barrile........ 1996 122,212 25,000 -- 11,111 167
Vice President, Finance
and 1995 110,000 -- -- -- 209
Administration 1994 108,210 -- -- -- 139
Philip H. Heitlinger.... 1996 80,615 -- 39,234 11,111 84
Vice President of Sales
and 1995 80,000 -- 16,237 -- 15,981(3)
Marketing 1994 67,018 10,000 13,200 13,333 162
Karen L. Mattocks....... 1996 99,558 -- 17,039 6,667 128
Vice President of Clini-
cal 1995 95,906 -- 4,040 4,444 160
Marketing and Education 1994 94,603 -- -- 13,334 117
</TABLE>
- --------
(1) The amounts indicated under "Other Annual Compensation" consist of sales
commissions paid pursuant to achievement of specified goals as set forth
in an established compensation plan.
(2) The amounts indicated under "All Other Compensation" indicate annual
contributions by the Company towards group term life insurance for the
Named Executive Officers. These amounts are included as reportable income
in each individual's Form W-2.
(3) Consists of $104 of group term life insurance premiums and $15,877 for
reimbursement of moving expenses.
9
<PAGE>
OPTIONS GRANTS IN LAST FISCAL YEAR
The following table shows all stock option grants to the Named Executive
Officers during fiscal 1996.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATE OF STOCK
PRICE APPRECIATION FOR
NUMBER OF SHARES PERCENT OF TOTAL OPTIONS OPTION TERM (1)
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE PRICE EXPIRATION -----------------------
NAME GRANTED (#) IN FISCAL YEAR PER SHARE DATE 5% 10%
---- ------------------ ------------------------ -------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Richard D. Randall...... 44,444(2) 23% $6.75 2/20/06 $ 188,443 $ 477,773
James E. Nicholson...... -- -- -- -- -- --
James V. Barrile........ 11,111(2) 6% 6.75 2/20/06 47,111 119,443
Philip H. Heitlinger.... 11,111(3) 6% 6.75 2/20/06 47,111 119,443
Karen L. Mattocks....... 6,667(3) 3% 6.75 2/20/06 28,268 71,670
</TABLE>
- --------
(1) As required by the rules of the Securities and Exchange Commission,
potential values stated are based on the prescribed assumption that the
Company's Common Stock will appreciate in value from the date of grant to
the end of the option term at rates (compounded annually) of 5% and 10%,
respectively, and therefore are not intended to forecast possible future
appreciation, if any, in the price of the Company's Common Stock.
(2) These options vest in four (4) equal annual installments, commencing on
February 20, 1997, the first anniversary of the date of grant, subject to
continuing employment.
(3) Consists of 6,667 options for Mr. Heitlinger and Ms. Mattocks which vest
January 1, 2006. The remaining 4,444 options granted to Mr. Heitlinger
vest under the terms stated in note (2).
FISCAL YEAR-END OPTION VALUES
The following table sets forth information regarding the number of options
exercised in fiscal 1996 and the number of vested and unvested options and the
unrealized value or spread (the difference between the exercise price and the
market value) of the unexercised options issued by the Company and held by the
Named Executive Officers on December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS(#) OPTIONS($)
ACQUIRED ON VALUE ------------------------ ----------------------
NAME EXERCISE (#) REALIZED VESTED UNVESTED VESTED UNVESTED
---- ------------ -------- ----------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard D. Randall...... -- -- 142,667 146,222 $ 864,562 $ 661,219
James E. Nicholson...... -- -- -- -- -- --
James V. Barrile........ -- -- -- 11,111 -- 11,111
Philip H. Heitlinger.... -- -- 6,666 17,778 40,396 51,513
Karen L. Mattocks....... 4,444 $22,487 5,000 15,001 30,300 57,191
</TABLE>
10
<PAGE>
ACQUISITION OF MEDICINELODGE, INC.
(ITEM 2 OF NOTICE)
At the Annual Meeting and Special Meeting, stockholders of the Company will
be asked, among other things, to consider and vote upon a proposal to approve
the acquisition by the Company of certain assets, and the assumption by the
Company of certain liabilities, of MedicineLodge, Inc. ("MLI"), a Delaware
corporation, in exchange for the issuance of a maximum of 1,885,000 shares
(the "Innovasive Shares") of Common Stock (the "Share Issuance"). The
acquisition (the "Acquisition") is more fully described elsewhere in this
Proxy Statement. The Acquisition will be effected pursuant to an Asset
Purchase Agreement dated as of February 4, 1997 (the "Asset Purchase
Agreement") by and among the Company, MLI and certain shareholders of MLI (the
"MLI Shareholders"), a copy of which is attached as Annex I.
The Board of Directors of the Company has unanimously approved the Share
Issuance and the Acquisition and unanimously recommends that stockholders of
the Company vote FOR approval of the Share Issuance and Acquisition. In
addition, the Company has received an opinion from its financial advisor,
Piper Jaffray, Inc. ("Piper Jaffray") that the Acquisition is fair, from a
financial point of view, to the stockholders of the Company. See "Summary of
The Proposed Acquisition and the Share Issuance--Opinion of the Company's
Financial Advisor" and the copy of such fairness opinion attached hereto as
Annex II.
11
<PAGE>
MARKET PRICE OF THE COMPANY'S STOCK AND DIVIDEND INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market. The
table below lists the quarterly range of the high and low per share closing
bids of the Company's Common Stock on the Nasdaq National Market during the
periods indicated.
<TABLE>
<CAPTION>
FISCAL PERIOD HIGH LOW
------------- ------- -----
<S> <C> <C>
Third Quarter--1996 (1)....................................... $12 1/2 $8
Fourth Quarter--1996.......................................... 9 1/2 6 7/8
First Quarter--1997........................................... 12 3/8 7 3/4
</TABLE>
- --------
(1) The Company's Common Stock began trading on the Nasdaq National Market on
June 6, 1996, the date of the commencement of the Company's initial public
offering.
On February 3, 1997, the last trading day prior to the public announcement
that the Company intended to acquire MLI and had executed and delivered the
Asset Purchase Agreement, the high and low sales prices per share of the
Company's Common Stock on the Nasdaq National Market were $10 1/8 and $9 1/2,
respectively. On May 28, 1997, the latest practicable date before the printing
of the Proxy Statement, the high and low sales price per share of the
Company's Common Stock was $10 3/8.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain all earnings for the operation
and expansion of its business and therefore does not anticipate paying any
cash dividends in the foreseeable future.
As of April 30, 1997, the record date, the approximate number of
stockholders of record of the Company was 90.
OWNERSHIP OF MLI COMMON STOCK AND DIVIDEND INFORMATION
MLI Common Stock is not publicly traded. The following chart sets forth the
respective direct interests in MLI to be held by its owners at the closing of
the Acquisition assuming the exercise of all outstanding options.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
COMMON SHARES COMMON SHARES
NAME OF SHAREHOLDER AND EQUIVALENTS AND EQUIVALENTS
------------------- --------------- ---------------
<S> <C> <C>
Judith B. Caspari............................ 72,650(1) 1.98%
Richard B. Caspari........................... 643,960 17.56
Alan Chervitz................................ 535,211 14.59
T. Wade Fallin............................... 241,000 6.57
E. Marlowe Goble............................. 1,729,333(1) 47.15
Stephen J. Snyder............................ 219,939(2) 6.00
Other Shareholders........................... 225,380 6.15
--------- ------
Total...................................... 3,667,473 100.00%
</TABLE>
- --------
(1) Includes 1,650,000 shares and 50,000 shares of MLI's Series A Preferred
Stock owned by E. Marlowe Goble and Judith B. Caspari, respectively, each
share of which is convertible into one share of MLI's Common Stock.
(2) Consists of shares owned by Dr. Snyder individually and as trustee for the
Stephen J. Snyder and Lee Ann Snyder Family Trust.
MLI has never declared or paid any cash dividends on its Common Stock or
Preferred Stock.
12
<PAGE>
SUMMARY OF THE PROPOSED ACQUISITION AND THE SHARE ISSUANCE
The following summary describes the material provisions of the Acquisition
and the Share Issuance. Stockholders are urged to review the complete text of
the Asset Purchase Agreement, which is attached to this Proxy Statement as
Annex I and is incorporated herein by reference.
GENERAL
The Company proposes to acquire from MLI substantially all of its operating
assets and will assume substantially all of its operating liabilities. In
consideration of the Acquisition, the Company will issue to MLI 1,885,000
shares of the Company's Common Stock. The Acquisition will be effected
pursuant to the Asset Purchase Agreement described more fully below. See "--
The Asset Purchase Agreement". The number of shares to be issued by the
Company to MLI was arrived at by a process of negotiation involving the
Company and MLI, taking into account, among other factors, the ranges of
valuation proposed for MLI by the Company's financial advisor and the
anticipated trading price of the Company's shares. The consummation of the
Acquisition is not contingent or conditional on the Company's stock price.
THE COMPANIES INVOLVED IN THE ACQUISITION
Innovasive Devices, Inc., a Massachusetts corporation, designs, develops,
manufactures and markets proprietary tissue repair systems which facilitate
the repair of soft tissue injuries. The Company's executive offices are
located at 734 Forest Street, Marlborough, Massachusetts 01752-3032 and its
telephone number is (508) 460-8229.
MedicineLodge, Inc., a Delaware corporation, primarily designs, develops and
manufactures proprietary implantable medical devices and related
instrumentation used in minimally invasive arthroscopic procedures to repair
injuries of the knee. MLI's executive offices are located at 152 South 600
West, Logan, Utah 84321 and its telephone number is (801) 753-7675.
Innovasive Acquisition Corp., a Massachusetts corporation, will be a wholly-
owned subsidiary of the Company, to be formed for the purpose of acquiring the
assets of MLI in the Acquisition. The principal executive office of Innovasive
Acquisition Corp. will be located at 734 Forest Street, Marlborough,
Massachusetts 01752-3032 and its telephone number will be (508-460-8229).
THE CLOSING
The closing of the transactions contemplated by the Asset Purchase Agreement
(the "Closing") will take place as soon as possible after the satisfaction or
waiver of the conditions set forth in the Asset Purchase Agreement (the
"Closing Date"), which includes, among other things, the approval of the Share
Issuance and the Acquisition by the Company's stockholders.
BACKGROUND OF THE ACQUISITION
The Company first met with MLI in February, 1996 to gain information
regarding the technologies under development by MLI and to explore with MLI
the possibility that the Company could license or distribute MLI products that
were complementary to the Company's product offering. The attendees at that
first meeting, including the Company's President and Chief Technical Officer
and MLI's President and Chairman, concluded that each company would pursue
independent paths.
After completing its initial public offering in June, 1996, the Company was
financially stronger and in a better position to pursue outside opportunities.
In October, 1996 the Company decided to resume discussions with MLI and had
its Chief Technical Officer call the Chairman of MLI. The Chairman was
unavailable but MLI's President returned the call and agreed to meet in early
November to share information pertaining to new product development progress
and to discuss the possibility of licensing or distribution arrangements.
13
<PAGE>
In early November, 1996 the President and Chief Technical Officer of the
Company met with the Chairman, the President and the Vice President of
Research and Development for MLI. Although there were not substantive
discussions regarding the form of the ongoing working relationship, both
companies had a high level of interest in continuing these conversations due
to operational and technological synergies. While both companies were
targeting the sports medicine/arthroscopy market within orthopaedics, the
Company's patent and product portfolio was primarily focused on shoulder
repair and MLI's patents and product development efforts were directed toward
knee repair. The Company's strategic plan was to expand its clinical platform
to include knee repair and believed that a collaboration with MLI would
accelerate that path. In addition, MLI possessed metallic-based manufacturing
capabilities that could be of value to the Company. The Company also became
more aware of MLI's capabilities with bioabsorbable materials and the strength
of its management team. MLI had not yet invested in the sales and marketing
infrastructure required to market its products and understood that a broad
product offering was necessary to build a cost effective and efficient sales
channel. The Company had an established sales effort in the United States and
several other countries.
The Company met again with MLI in late November at the Arthroscopic
Association of North America (AANA) conference to more closely review product
development efforts and MLI's plans for its business. The Chief Financial
Officer and Vice President of Research and Development of the Company met with
the President and Vice President of Research and Development of MLI. After
returning from AANA, the Company's senior management team met and concluded
that an acquisition would be preferable to a licensing or distribution
arrangement. The Company contacted MLI to schedule a meeting to begin
negotiations concerning a combination. A meeting was held on December 5, 1996
at which the Company made a proposal to acquire MLI for approximately 1.2
million shares of the Company's Common Stock. MLI rejected the proposal and
stated that the number of shares should be higher to reflect the relative
values of the two companies. On December 20, 1996 the Company's President and
Chief Financial Officer met with the President, Vice President of Research and
Development and a shareholder of MLI to continue negotiations. At this meeting
the two companies agreed, subject to due diligence and acceptable definitive
agreements, to a combination based on the issuance of approximately 1.9
million shares of the Company's Common Stock in exchange for stock or
substantially all of the assets of MLI. Discussions and negotiations continued
through December, 1996 and January, 1997. In the meantime, the Company and MLI
conducted due diligence reviews of the other. The efforts culminated with the
signing of a definitive Asset Purchase Agreement on February 4, 1997.
RECOMMENDATION OF THE COMPANY'S BOARD AND REASONS FOR THE ACQUISITION
The Company's Board has authorized the Asset Purchase Agreement and related
Share Issuance and unanimously recommends that holders of the Common Stock
vote FOR approval of the Share Issuance and the Acquisition. The
recommendation of the Company's Board is based upon the Board's conclusion
that the Acquisition is in the best interests of and is fair to the Company
and its stockholders. In reaching such conclusion, the Company's Board
considered and relied upon the following factors:
. Benefit of additional technology and products compatible, both
strategically and technically, with the Company's current products. In
order to more broadly service the needs of the Company's customer base,
the Company had established a strategic goal of expanding its product
offering to include devices to repair knee related injuries. The Company
introduced its COR(TM) System in the fourth quarter of 1996 to repair
cartilage defects in the knee. With the Acquisition, the Company will
broaden its knee offering to include unique technologies and a
comprehensive solution for the arthroscopic repair of the anterior
cruciate ligament.
. Benefit of additional management, marketing, technical and consulting
support for the Company's products and operations. MLI has a metallic-
based manufacturing capability that complements the Company's expertise
with polymer-based products. MLI's management team is experienced in the
sports medicine/arthroscopic market and has focused its research and
development resources primarily on product solutions for the knee, which
will broaden the Company's product offering in the sports
medicine/arthroscopy markets. In addition to the management team, the
surgeons associated with MLI
14
<PAGE>
have successfully demonstrated the ability to conceptualize and
commercialize products within the sports medicine/arthroscopy market and
will continue to work with the Company in this capacity as consultants
to the Company after the Acquisition.
. Benefit of estimated operating synergies (incremental revenue and
expense savings) relating to a combined selling and marketing force,
combined administrative functions and a complementary research and
development team. Although there can be no assurance that the operating
synergies will be achieved, management has estimated that annual
operating synergies could range from approximately $50,000 to
approximately $4,000,000 during the period 1997 to 2000, depending on
internal and external factors.
. The favorable opinion of Piper Jaffray as to the fairness to the
stockholders of the consideration to be paid in the Acquisition, and the
Board's determination that the 1,885,000 shares to be issued in the
Acquisition, taking into account the ranges of valuation of MLI proposed
by Piper Jaffray and the anticipated trading price of the shares to be
issued in the Share Issuance, was reasonable.
The Company's Board also identified and considered the following potential
negative factors associated with the Acquisition:
. The risks associated with the Company's ability to complete development
of MLI's existing products and enhancements on a timely and cost
effective basis, which will depend on completion of product designs,
maintaining sources of reliable, quality materials, development of new
materials and manufacturing processes and timely regulatory approval.
. The risks associated with actions which may be taken by the federal,
state and foreign regulatory agencies having oversight of the Company's
and MLI's products, which may have the effect of delaying or preventing
commercial sale of MLI products or may require time consuming or
expensive testing, a trial or reports.
. The investment which will be required to develop, market and sell MLI's
products which will be derived from the Company's operating income and
the proceeds from its initial public offering, making some of these
funds unavailable for other corporate purposes.
. The risk that the MLI products, which have not yet been offered for
commercial sale, will not be accepted in the marketplace.
The Board recognized these risks as those associated with most new product
development programs.
The Company's Board did not find it practical to quantify or assign relative
values to the specific factors considered with respect to the Acquisition.
Instead, the Company's management and Board reviewed the overall business plan
of MLI and applied qualitative assessments to determine the strategic and
operational benefit to the Company from the Acquisition. The synergies, for
the most part, relate to the complementary product portfolios and the ability
to provide an expanded line of orthopaedic products for the Company's direct
sales force. The Company also considered the possibility that certain unique
products developed by MLI could enhance sales of complementary products
manufactured by MLI and the Company that are likely to be subject to greater
competitive pressure. The Board did not consider the potential negative
factors, which it views as inherent in any early stage company, to outweigh
the favorable factors which it considered.
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
Piper Jaffray was engaged by the Company pursuant to an engagement letter
dated December 11, 1996, to render to the Company's Board its opinion as to
the fairness, from a financial point of view, to the Company of the
consideration involved in the Acquisition. Piper Jaffray delivered to the
Company's Board on February 4, 1997, its written opinion (the "Piper Opinion")
to the effect that, as of the date thereof and based on and subject
15
<PAGE>
to the assumptions, factors and limitations set forth therein, the
consideration to be paid by the Company in the Acquisition was fair, from a
financial point of view, to the Company. A copy of the Piper Opinion which
sets forth the assumptions made, factors considered and limits of its review,
is attached to this Proxy Statement as Annex II and is incorporated herein by
reference. The following summary, which addresses the material portions of the
Piper Opinion, is qualified in its entirety by reference to the full text of
the Piper Opinion. The Company's stockholders are urged to read such opinion
carefully and in its entirety.
Piper Jaffray was not requested to and did not make any recommendation to
the Company's Board as to the form or amount of the consideration to be paid
by the Company in the Acquisition, which was determined through negotiations
between the Company and MLI. The opinion of Piper Jaffray was directed to the
Company's Board and does not constitute a recommendation to any of the
Company's stockholders as to how such stockholder should vote at the Company's
Annual and Special Meeting of Stockholders. Piper Jaffray was not requested to
opine as to, and its opinion does not address, the Company's underlying
business decision to proceed with or effect the Acquisition.
In arriving at its opinion, Piper Jaffray reviewed, among other things, (i)
the Asset Purchase Agreement, (ii) certain proprietary information relative to
MLI, (iii) certain internal financial planning information of MLI and relative
to the combined company after the Acquisition furnished by management of MLI,
(iv) to the extent publicly available, the financial terms of certain
acquisition transactions involving companies operating in industries deemed
relevant to those in which MLI operates, (v) certain publicly available
information relative to the Company, (vi) certain internal financial planning
information of the Company and relative to the combined company after the
Acquisition furnished by management of the Company, and (vii) certain
financial and securities data of the Company and companies deemed similar to
the Company. In addition, Piper Jaffray engaged in discussions with members of
management, principals and shareholders of MLI and with members of management,
accountants and counsel of the Company concerning the respective financial
condition, current operating results and business outlook of MLI, the Company
and the combined company after the Acquisition. These discussions included
information with respect to estimated operating synergies of the combined
companies, including incremental revenue and operating expense savings in
selling and marketing, general and administrative, and research and
development activities. Piper Jaffray also visited the headquarters of MLI and
the Company.
In delivering its opinion to the Company's Board on February 4, 1997, Piper
Jaffray prepared and delivered to the Company's Board certain written
materials containing a summary of various analyses and other information
material to the Piper Opinion.
The following is a summary of these materials:
Overview of the Acquisition. Piper Jaffray reviewed the principal terms of
the Acquisition. Piper Jaffray noted that the Acquisition, if consummated,
would enable the Company to (i) address new markets, (ii) broaden its product
offerings, (iii) leverage its direct sales force, and (iv) enhance the
clinical marketing initiative with the physician principals of MLI.
Stock Price Analysis. Piper Jaffray reviewed the trading activity, including
share price and trading volume, of the Company's Common Stock for the period
June 6, 1996 (the date of the Company's initial public offering), to January
31, 1997. In addition, Piper Jaffray compared the indexed performance of the
Company's Common Stock for the period June 6, 1996 to January 31, 1997 to both
a composite index made up of the Comparable Companies (as defined below) and
the NASDAQ Composite Index. The Comparable Companies were: Biomet Inc., DePuy
Inc., Orthologic Corp., Sofamor/Danek Group Inc., Spine-Tech Inc. and Stryker
Corp. Piper Jaffray noted that the price of the Company's Common Stock had
underperformed the indexed performance of both the Comparable Companies and
the NASDAQ Composite for the period. Based on the closing price of the
Company's Common Stock on January 31, 1997 of $9.50 and the proposed issuance
of 1,885,000 shares of the Company's Common Stock in the Acquisition, Piper
Jaffray calculated an implied purchase price for the Acquisition of $17.9
million.
16
<PAGE>
Discounted Cash Flow Analysis. Piper Jaffray estimated the present value of
the projected future cash flows of MLI on a stand-alone basis using internal
financial planning data prepared by management of the Company for the years
ending December 31, 1997 through 2000 and certain variants thereof including
those giving effect to certain synergies the Company might expect to achieve
following the Acquisition. Piper Jaffray applied a range of terminal value
multiples to projected year 2000 operating income of 12.0x to 16.0x and a
range of discount rates of 30.0% to 40.0%. This analysis yielded a range of
estimated present values of MLI equity of approximately (i) $19.6 million to
$35.7 million without giving effect to the expected synergies, and (ii) $32.5
million to $59.0 million giving effect to such synergies. These equity value
ranges compared to an implied purchase price for MLI of $17.9 million
calculated by Piper Jaffray as described under "Stock Price Analysis" above.
Pro Forma Analysis. Piper Jaffray analyzed the potential effect on projected
annual earnings or losses per share of the Company's Common Stock for the
three year period ending December 31, 1999 resulting from the Acquisition,
based on the pro forma combined projected results of the Company and MLI for
such periods included in internal financial planning data provided by
management of the Company. This combined company data reflects the Company's
management's estimates of revenue and operating synergies in a combined
company, including operating expense savings, as well as the immediate write-
off of in-process research and development purchased from MLI. Piper Jaffray
observed that the Acquisition contemplated by the Asset Purchase Agreement
would be neither accretive nor dilutive on an earnings per share basis in the
year ending December 31, 1997 and would be accretive to the Company on an
earnings per share basis in the year ending December 31, 1998 and 1999.
Contribution Analysis. Piper Jaffray compared the contribution of the
Company and MLI to projected pro forma combined total revenue, gross profit,
operating income and net income (fully taxed) for fiscal years 1997, 1998 and
1999, using internal financial planning data prepared by management of the
Company for the years ending December 31, 1997 through 1999 and certain
variants thereof including those giving effect to certain synergies the
Company might expect to achieve following the Acquisition. For such periods,
Piper Jaffray noted that (i) assuming no synergies, MLI would contribute 12.8%
to 28.2% of pro forma combined total revenue, 14.3% to 28.0% of pro forma
combined gross profit, 31.9.% to 39.1% of pro forma combined operating income,
and 21.8% of pro forma combined net income, and (ii) giving effect to such
synergies, MLI would contribute 15.9% to 29.7% of pro forma combined total
revenue, 15.5.% to 29.5% of pro forma combined gross profit, 43.4% to 58.2.%
of pro forma combined operating income, and 29.9% to 34.1% of pro forma
combined net income. Piper Jaffray compared these historical and projected
contribution percentages to 20%, the approximate pro forma ownership (on a
fully diluted basis) of the combined company by holders of MLI Common Stock
and Preferred Stock resulting from the Acquisition.
Comparable Public Company Analysis. Piper Jaffray compared certain financial
information and valuation ratios relating to the Company and MLI to
corresponding data and ratios from the Comparable Companies. Piper Jaffray
used a comparable company analysis to analyze MLI's and the Company's
operating performance, and projected future performance and the Company's
market valuation relative to the Comparable Companies. Given MLI's early stage
of development and the lack of meaningful revenue and income, Piper Jaffray
was unable to make any meaningful comparison of MLI's valuation ratios to
corresponding ratios for the Comparable Companies.
Comparable Acquisition Analysis. Piper Jaffray reviewed recent acquisition
transactions involving companies operating in the orthopaedic industry. This
review produced ten transactions for which information was publicly available
(the "Comparable Transactions"). Piper Jaffray calculated enterprise value to
net sales and to operating income and equity value to net income and to book
value for each of the Comparable Transactions. Given MLI's early stage of
development and the lack of meaningful revenue and income, Piper Jaffray was
unable to make any meaningful comparison of valuation ratios for MLI to
corresponding ratios for the Comparable Transactions.
The preparation of a fairness opinion is a complex process and not
necessarily susceptible to partial analysis or summary description. Piper
Jaffray believes that its analyses must be considered as a whole and that
selecting
17
<PAGE>
portions of its analyses and of the factors considered by it, without
considering all factors and analyses, would create a misleading view of the
processes underlying its opinions. Each of the analyses described above
(excluding those which did not result in meaningful comparisons) supported
Piper Jaffray's conclusion as to the fairness, from a financial point of view,
of the consideration to be paid by the Company in the Acquisition. In reaching
its conclusion as to fairness of the consideration to be paid in the
Acquisition pursuant to the Asset Purchase Agreement and in its presentation
to the Company's Board, Piper Jaffray did not rely on any single analysis or
factor described above, or assign relative weights to the analyses or factors
considered by it. The analyses of Piper Jaffray are not necessarily indicative
of actual values or future results, which may be significantly more or less
favorable than suggested by such analyses. Analyses relating to the value of
companies do not purport to be appraisals or valuations or necessarily reflect
the price at which companies may actually be sold. No company or transaction
used in any comparable analysis as a comparison was identical to the Company,
MLI or the Acquisition contemplated by the Asset Purchase Agreement.
Accordingly, an analysis of the results is not mathematical, rather it
involves complex considerations and judgments concerning differences in the
various characteristics considered.
For purposes of its opinion, Piper Jaffray relied upon and assumed the
accuracy, completeness and fairness of the financial and other information
made available to it and did not assume responsibility for the independent
verification of such information. Piper Jaffray relied upon the assurances of
the Company's and MLI's managements that the information provided by the
Company and MLI had a reasonable basis and, with respect to financial planning
data and other business outlook information, reflected the best available
estimates, and that they were not aware of any information or fact that would
make the information provided to Piper Jaffray incomplete or misleading. In
arriving at its opinion, Piper Jaffray did not perform, nor was it furnished,
any appraisal or valuation of specific assets or liabilities of the Company
and MLI and expressed no opinion regarding the liquidation value of any
entity. Piper Jaffray assumed, with the consent of the Company, that the
Acquisition will qualify as a reorganization within the meaning of Section
368(a)(1)(C) of the Internal Revenue Code and as a purchase transaction under
generally accepted accounting principles. Piper Jaffray also assumed, with the
consent of the Company, that the assets and liabilities to be received from
MLI in the Acquisition represent all of the operations of MLI as a going
concern and accordingly did not undertake to consider specific assets or
liabilities of MLI, but rather considered the business of MLI as a whole on a
going concern basis. No limitations were imposed by the Company on the scope
of Piper Jaffray's investigation or the procedures to be followed in rendering
its opinion. Piper Jaffray expressed no opinion as to the price at which
shares of the Company's Common Stock have traded or may trade at any future
time. The opinion was based upon information available to Piper Jaffray and
the facts and circumstances as they existed were subject to evaluation on the
date of the opinion. Events occurring after such date could materially affect
the facts and assumptions used in preparing the opinion.
Piper Jaffray, as a customary part of its investment banking business, is
engaged in the evaluation of businesses and their securities in connection
with mergers and acquisitions, underwritings and other distributions of
securities, private placements and evaluations for estate, corporate and other
purposes. The Company's Board selected Piper Jaffray because of its experience
with medical device companies generally and familiarity with the Company in
particular. Piper Jaffray has provided investment banking services to the
Company in the past for which it received a fee. Piper Jaffray acted as co-
manager of the initial public offering of the Company's Common Stock in 1996.
Piper Jaffray makes a market in the Common Stock of the Company and also
provides research coverage of the Company. In the ordinary course of its
securities business, Piper Jaffray actively trades the Company's Common Stock
for its own account or the account of its customers, and may accordingly from
time to time hold a long or short position in such security.
For its services to the Company's Board in connection with the Acquisition,
the Company agreed to pay Piper Jaffray $125,000 in cash upon rendering the
Piper Opinion. The fee is not contingent upon the consummation of the
Acquisition. The Company also agreed to pay the reasonable out-of-pocket
expenses of Piper Jaffray and to indemnify Piper Jaffray against certain
liabilities incurred (including liabilities under the federal securities laws)
in connection with the engagement of Piper Jaffray to the Company.
18
<PAGE>
THE ASSET PURCHASE AGREEMENT
The Purchase. Pursuant to the Asset Purchase Agreement, the Company (or one
or more direct or indirect wholly-owned subsidiaries of the Company), will
acquire from MLI substantially all of its operating assets and will assume
substantially all of its operating liabilities. In consideration of the
Acquisition, the Company will issue to MLI 1,885,000 shares of the Company's
Common Stock. The Company will not acquire certain excluded assets and will
not assume certain excluded liabilities which are referred to in the Asset
Purchase Agreement. See "--The Excluded Assets and Liabilities". The shares of
the Company's Common Stock to be delivered to MLI will represent approximately
20.5% of the Company's issued and outstanding shares of Common Stock as of the
Closing. 188,500 shares of the Company's Common Stock to be delivered to MLI
at the Closing will be deposited into escrow with a bank acceptable to the
Company and MLI to be available to the Company, for a one year period
following the Closing, to satisfy certain indemnified claims that may arise
subsequent to the Closing. See "--Indemnification; Escrow Agreement".
The Excluded Assets and Liabilities. The Company will not assume the
following assets of MLI (the "Excluded Assets"): (i) $15,000 of cash; (ii) an
Asset Purchase Agreement dated September 14, 1994 among MLI, GCL, L.C., a
Wyoming limited liability company wholly-owned by E. Marlowe Goble and Alan
Chervitz, two principal shareholders of MLI ("GCL"), and Mitek Surgical
Products, Inc. and related rights to manufacture certain Mitek products; (iii)
a Settlement Agreement dated April 10, 1996 between MLI and Mitek Surgical
Products, Inc.; (iv) the MedicineLodge, Inc. trademark; and (v) two suture
anchor products which are currently the subject of an offer of sale by MLI to
a third party. If the third party declines the offer, the excluded products
referenced in (v) above will be transferred to the Company at the Closing. In
addition, the Company will not assume obligations of MLI other than those
shown on MLI's 1996 year end balance sheet (excluding tax liabilities) and
those arising in MLI's ordinary course of business prior to the Acquisition.
The Asset Purchase Agreement specifically excludes the following liabilities
(the "Excluded Liabilities"): (i) any liabilities for taxes relating to MLI's
operations prior to the Closing or the transactions contemplated by the Asset
Purchase Agreement; (ii) costs incurred by MLI or the MLI Shareholders in
connection with the Acquisition which MLI shall pay prior to Closing; (iii)
liabilities with respect to judgments or pending or threatened litigation
other than those arising in the ordinary course of MLI's business; (iv) any
broker's or finder's fees or commissions incurred by MLI or the MLI
Shareholders, (v) any and all debt due to shareholders, employees or
affiliates of MLI, (vi) liabilities arising out of any transactions in the
equity securities of the MLI or any affiliates of MLI, including stock
issuances, sales, transfers, redemptions, purchases, retirements or grants or
issuances of options, warrants or other convertible securities, or (vii)
liabilities, obligations and commitments relating to discharged employees of
MLI. The Company's Board believes that the Excluded Assets include no material
income producing assets of MLI, and that the exclusion of the Excluded
Liabilities will benefit the Company by excluding liability for non-operating
liabilities associated with MLI's activities prior to the Acquisition.
Representations and Warranties. The Asset Purchase Agreement contains
various representations and warranties of MLI and the MLI Shareholders
relating to: (i) the corporate existence, standing and powers of MLI; (ii) the
capital structure and ownership of shares of MLI; (iii) the subsidiaries and
other investments of MLI; (iv) the due authorization and capacity of MLI and
each of the MLI Shareholders to enter into the Asset Purchase Agreement and
related agreements; (v) the recent financial statements of MLI; (vi) the
absence of undisclosed liabilities pertaining to MLI; (vii) the absence of
certain changes or events between the execution of the Asset Purchase
Agreement and the Closing; (viii) the absence of any litigation involving MLI;
(ix) compliance with law by MLI; (x) the absence of any conflicting agreement
to which the MLI Shareholders or MLI is a party or the necessity of third-
party consents; (xi) tax matters concerning MLI; (xii) employee benefit plans
and issues of MLI; (xiii) the material contracts of MLI; (xiv) labor matters;
(xv) environmental matters; (xvi) the status of copyrights, patents,
trademarks and other intellectual property rights of MLI; (xvii) the principal
customers of MLI; (xviii) the absence of investment banking, broker or finder
fees; (xix) insurance policies of MLI; (xx) title to and the absence of liens
on assets; (xxi) the condition of fixed assets and compliance with relevant
law; (xxii) leasehold property of MLI; (xxiii) inventory of MLI; (xxiv)
existing warranties and claims thereunder of MLI; and (xxv) the investment
intent of MLI and the MLI Shareholders.
19
<PAGE>
The Asset Purchase Agreement also contains various representations and
warranties of the Company relating to (i) the corporate existence, standing
and powers of the Company; (ii) the capital structure and ownership of shares
of the Company; (iii) the due authorization of the Company to enter into the
Asset Purchase Agreement and related agreements; (iv) the financial statements
of the Company, the Company's quarterly reports to the SEC on Form 10-Q, and
the Company's Prospectus related to its initial public offering; (v) the
absence of undisclosed liabilities of the Company, (vi) the absence of
material adverse changes to the business of the Company; (vii) the absence of
investment banking, broker or finder fees except to Piper Jaffray, Inc.;
(viii) the due authorization and issuance of the Innovasive Shares; (ix)
compliance with law by the Company; and (x) litigation matters.
Business of MLI Pending the Acquisition. Pending the consummation of the
Acquisition, and except as otherwise consented to or approved in advance by
the Company in writing, MLI has agreed that it will conduct its business in
the ordinary course. MLI specifically agreed that it shall not (i) fail to
maintain its corporate existence; (ii) amend its charter documents or change
its capitalization, except for conversion of existing preferred stock to
common stock; (iii) issue equity or additional rights to its equity; (iv)
incur indebtedness except as described in a financial plan agreed upon between
MLI and the Company, or acquire or sell any of its assets or businesses; (v)
fail to preserve its goodwill and business relationships with suppliers,
distributors and customers; (vi) fail to confer on a regular basis with
representatives of the Company; (vii) enter into or amend any employee-related
agreements; (viii) increase the compensation payable to any of its directors,
officers, employees, shareholders, consultants or other representatives; (ix)
adopt or amend any employee benefit plans or related arrangements; (x) fail to
keep its assets in good repair and working condition; (xi) fail to maintain
its books in its usual and ordinary manner; (xii) fail to pay when due all
taxes, assessments and governmental charges; (xiii) change its method of
management; (xiv) modify, amend, cancel or terminate any material contract;
(xv) make any material change in its accounting methods or practices; (xvi)
settle or compromise any suit or claim or threatened suit or claim; (xvii)
enter into certain types of contracts; or (xviii) use any device in human
clinical trials or in commercial sales based upon a regulatory exemption
promulgated by the Federal Drug Administration except in certain
circumstances.
Business of the Company Pending the Acquisition. Pending the consummation of
the Acquisition, unless MLI shall consent in writing, the Company has agreed
that it shall not (i) issue or agree to issue any additional shares of, or
rights of any kind to acquire any shares of its capital stock of any class,
except pursuant to exercises of currently outstanding stock options and the
grant of up to 225,000 shares of the Company's Common Stock pursuant to the
1996 Omnibus Stock Plan or the 1996 Non-Employee Director Stock Option Plan,
or (ii) increase the compensation to any of its directors, officers,
employees, shareholders, consultants or other representatives.
Additional Agreements. MLI and the Company have agreed to certain additional
agreements with respect to the Acquisition. MLI shall afford to the Company
and its representatives access to its books, records and other documents
subject to certain confidentiality covenants. MLI agrees to maintain its
insurance until the Closing Date. MLI, (or if the Innovasive Shares have been
distributed to the shareholders of MLI, such shareholders owning a majority of
the Innovasive Shares), shall have the right to nominate up to two directors
to the Company's Board of Directors. So long as MLI or its current
shareholders own in the aggregate at least 10% but less than 15% of the issued
and outstanding shares of Common Stock, they shall have the right to nominate
one director. If MLI or its current shareholders own in the aggregate 15% or
more of the issued and outstanding of Common Stock they shall have the right
to nominate two directors. MLI agrees that it will not compete with or
interfere with the business of the Company in the development, manufacture or
sale of devices used in sports medicine or arthroscopy, for a period of four
years from the Closing Date. MLI agrees that neither it or any of its
affiliates shall use the name "MedicineLodge" and the registered trade name or
logo associated therewith in the field of sports medicine or arthroscopy.
Except as required by obligations under existing license agreements, MLI's
shareholders agree not to license any technology that is included in the
assets to be acquired by the Company in the Acquisition.
Indemnification; Escrow Agreement. Subject to certain terms and conditions
set forth in the Asset Purchase Agreement, the Company on the one hand, and
the MLI Shareholders and MLI on the other, have
20
<PAGE>
agreed to indemnify each other against any and all actions, suits, claims,
proceedings, costs, losses, damages, judgements, amounts paid in settlement
and reasonable expenses resulting from any breach of a representation or
warranty, any breach of an agreement or non-fulfillment of covenant contained
in the Asset Purchase Agreement. The maximum aggregate liability of MLI or the
MLI Shareholders is limited to an amount equal to 10% of the value of the
Innovasive Shares (valued at the time of any indemnifying payment); however,
any claims, damages or expenses arising from the failure of MLI to discharge
certain liabilities that the Company will not assume in the Acquisition shall
not be so limited. The representations and warranties contained in the Asset
Purchase Agreement, (except for those relating to tax liabilities and common
law fraud) survive the Closing for one year whereupon they expire together
with any right to indemnification, except to the extent of claims made prior
to said expiration date. The survival period for breaches of the tax
representations and common law fraud survive as long as the statutory or
common law statute of limitations for such claims.
In order to secure the indemnification obligations of the MLI Shareholders
and MLI under the Asset Purchase Agreement, the MLI Shareholders and MLI have
agreed to place an aggregate of 10% of the Innovasive Shares into escrow (the
"Escrow") pursuant to the terms of an Escrow Agreement in the form agreed to
by the parties which will be executed at the Closing (the "Escrow Agreement").
The Company may seek to recover losses from MLI or the MLI Shareholders only
if and to the extent such losses exceed $150,000. Upon a submission of a
notice of a claim by the Company to MLI and the escrow agent, the escrow agent
will reserve the number of shares from the Escrow necessary to satisfy such
claim. Such reserved shares shall be distributed to the Company upon
resolution of the claim. If no claim or notice of a potential claim is made
pursuant to the Escrow Agreement within one year of the Closing, the
Innovasive Shares held in escrow shall be released to MLI or, if it has
dissolved, to its shareholders. With the exception of claims arising out of
liabilities not assumed by the Company in the Acquisition, MLI and the MLI
Shareholders shall have no liability to the Company for any losses that exceed
the Escrow.
Conditions to the Acquisition. The Company's consummation of the Acquisition
is subject to the satisfaction of the following conditions: (i) MLI shall have
performed in all material respects its respective agreements contained in the
Asset Purchase Agreement; (ii) the representations and warranties of MLI
contained in the Asset Purchase Agreement shall be true and correct in all
material respects; (iii) the Company shall have received a favorable legal
opinion from counsel to MLI; (iv) MLI shall have received all consents, orders
and approvals legally or contractually required for the consummation of the
Acquisition; (v) certain principals of MLI shall have entered into employment
agreements with the Company and all existing agreements between MLI and such
employees shall have been canceled or terminated; (vi) certain consultants to
MLI shall have entered into consulting agreements with the Company and all
existing agreements between MLI and such consultants shall have been canceled
or terminated; (vii) MLI shall have obtained and delivered to the Company a
Phase I Environmental Report for its Logan, Utah facility; (viii) the Company
shall have entered into a new lease for MLI's Logan, Utah facility; (ix) MLI
shall have obtained all necessary tax clearance certificates; (x) the absence
of changes which would have a material adverse affect on the assets being
purchased in the Acquisition; (xi) all of MLI's outstanding stock options and
warrants shall have been terminated or exercised; (xii) delivery to the
Company of MLI's audited financial statements for the years ended December 31,
1995 and 1996; and (xiii) the Company's shareholders shall have approved the
Acquisition and the Share Issuance.
MLI's consummation of the Acquisition is subject to the satisfaction of the
following conditions: (i) the Company shall have performed in all material
respects its respective agreements contained in the Asset Purchase Agreement;
(ii) the representations and warranties of the Company contained in the Asset
Purchase Agreement shall be true and correct and all materials respects; (iii)
the Company shall have received all consents orders and approvals legally
required for the consummation of the Acquisition; (iv) the Company shall have
entered into a new lease for MLI's Logan, Utah facility; (v) the Company's
stockholders shall have approved the Acquisition and the Share Issuance; (vi)
MLI shall have received a favorable opinion from counsel to the Company; (vii)
the Company and the MLI Shareholders shall have entered into a Registration
Rights Agreement; (viii) the Company shall have issued and delivered the
Innovasive Shares; (ix) the Company shall have entered into stock option
agreements with certain principals of MLI; (x) MLI and the MLI Shareholders
shall have received an opinion
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<PAGE>
from the Company's counsel to the effect that the Acquisition will be treated
for Federal income tax purposes as a tax-free reorganization; and (xi) the
Company shall have assumed MLI's outstanding debt or repaid such debt.
Termination; Amendment and Waiver. The Asset Purchase Agreement may be
terminated (i) at any time prior to the Closing Date by mutual consent of the
Company and MLI; (ii) at any time after July 31, 1997 by the Company or MLI so
long as such party has not breached its obligations if the Acquisition has not
been consummated on or before such date; (iii) by the Company or MLI if any
governmental entity has issued an order or ruling enjoining, restraining or
otherwise prohibiting the Acquisition; and (iv) unilaterally by the Company or
MLI if the other party has breached a representation, warranty, covenant or
obligation contained in the Asset Purchase Agreement.
At any time prior to the Closing, the Company and MLI may (i) extend the
time for the performance of any of the obligations or other acts to be
performed by the other party pursuant to the Asset Purchase Agreement, (ii)
waive any inaccuracies in a representation or warranty of the other party
contained in the Asset Purchase Agreement or any documents delivered pursuant
to the Asset Purchase Agreement; or (iii) waive compliance within any
agreements or conditions of the other party contained in the Asset Purchase
Agreement. If a material condition of the Acquisition is waived by the
Company, the Company will resolicit stockholder approval before consummating
the Acquisition.
The Asset Purchase Agreement may be amended by an agreement in writing among
the parties thereto at any time prior to the Closing.
Fees and Expenses. All fees and expenses incurred in connection with the
Asset Purchase Agreement will be paid by the party incurring such expenses,
whether or not the Acquisition is consummated.
REGULATORY FILINGS AND APPROVALS
Other than compliance with applicable state corporate laws and Federal and
state securities laws, the Company is not aware of any governmental or
regulatory requirements for consummation of the Acquisition.
RESTRICTIONS ON SALES OF THE INNOVASIVE SHARES BY MLI; REGISTRATION OF THE
INNOVASIVE SHARES FOR RESALE
The Innovasive Shares shall be issued to MLI in the Acquisition without
registration under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to exemptions from registration available under Regulation D
and Section 4(2) promulgated under the Securities Act, and may be transferred
by MLI (or its shareholders) only if (i) the offer and sale of such shares is
in compliance with the registration requirements of the Securities Act and
applicable state securities laws or (ii) pursuant to and in compliance with
applicable exemptions under or from all such United States federal and state
laws.
The Company has agreed that, after June 6, 1997, it will file a registration
statement to register the Innovasive Shares to be issued in the Acquisition
with the Securities and Exchange Commission on Form S-3 promulgated under the
Securities Act. The Company will bear the expenses of such registration and up
to $10,000 of counsel fees for MLI or its stockholders, if the Innovasive
Shares have theretofore been distributed to MLI's stockholders as part of
MLI's plan of liquidation. Each party has agreed to indemnify the other
against certain liabilities under the Securities Act.
ACCOUNTING TREATMENT
It is expected that the Acquisition will be accounted for as a purchase
transaction in accordance with generally accepted accounting principles.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
It is a condition of MLI's obligations to consummate the Acquisition that
MLI shall have received an opinion from Choate, Hall & Stewart, counsel to the
Company, to be based on customary representations from
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<PAGE>
the Company, MLI and the MLI Shareholders, to the effect that the Acquisition
will qualify as a tax-free reorganization.
The Acquisition will not result in the realization of any gain or loss for
Federal income tax purposes to the Company's current stockholders, who will
continue to hold their shares in the Company. Similarly, the Acquisition will
not directly result in any realization of any gain or loss to the Company or
its subsidiaries.
The preceeding discussion is included for general information with the
respect to the principal Federal income tax consequences for the Company and
its stockholders. It does not describe all potentially relevant tax
considerations, and is based upon Federal income tax laws as in effect on the
date hereof; future legislation, regulations, administrative rulings, or court
decisions may affect the anticipated Federal income tax consequences.
CERTAIN ARRANGEMENTS
At the Closing, Drs. E. Marlowe Goble, Richard B. Caspari and Stephen J.
Snyder, who are currently shareholders of MLI, will become consultants to the
Company under Consulting Agreements terminating four years after the Closing,
and will be granted 40,000, 40,000 and 35,000 Non-Qualified Stock Options,
respectively, from the Company pursuant to the Company's 1996 Omnibus Stock
Plan in consideration of the consulting services they will be performing. The
consulting services to be provided by Drs. Goble, Caspari and Snyder will
include review and advice to the Company concerning new products and improved
procedures in the field of arthroscopy and sports medicine. At the Closing,
Alan Chervitz and T. Wade Fallin, who are currently shareholders of MLI, will
become employees of the Company pursuant to four year Employment Agreements
and will be granted 35,000 and 25,000 Incentive Stock Options, respectively,
from the Company pursuant to the Company's 1996 Omnibus Stock Plan. Daniel
Justin, a shareholder of MLI, will become an employee of the Company following
the Closing and will be granted pursuant to the Company's 1996 Omnibus Stock
Plan an Incentive Stock Option from the Company. All of the options described
above will vest over a four year period in accordance with the Company's
standard policy. The other existing employees of MLI are expected to become
employees of the Company or its subsidiaries and will be eligible to receive
stock options from the Company from time to time in the future.
Subject to stockholder approval of the Acquisition and the Share Issuance
and election by the stockholders, Richard B. Caspari and Alan Chervitz will
become directors of the Company. Dr. Caspari is entitled, pursuant to the
Company's 1996 Non-Employee Director Stock Option Plan, to receive an option,
which will vest over four years, to purchase 10,000 shares of the Company's
Common Stock upon his election to the Company's Board of Directors.
E. Marlowe Goble and Alan Chervitz are the sole owners of GCL. At the
Closing, the Company will enter a lease as lessee with GCL as lessor for the
property located in Logan, Utah, which is currently occupied by MLI, on terms
which the Company believes are consistent with the current market for similar
properties.
MLI has licensed seven inventions from E. Marlowe Goble for technology used
in anterior cruciate ligament repair which are patented or subject to pending
patent applications. Dr. Goble is a principal shareholder of MLI and will upon
completion of the Acquisition own a beneficial interest in 888,778 shares of
the Company's Common Stock. The licenses between MLI and Dr. Goble require MLI
to pay royalties to Dr. Goble equal to 4% of the net sales of products which
incorporate the technology described in the patents and patent applications.
Royalties are payable until the expiration of the applicable patents. Only
minimal royalties have accrued and are payable to date with respect to these
inventions. The Company will acquire the license from Dr. Goble and will
assume MLI's royalty obligations after the consummation of the Acquisition.
MLI has licensed three inventions from Justwin Medical, Inc. ("Justwin
Medical") for technology used in meniscal repair which are patented or subject
to pending patent applications. Daniel Justin, who will become an employee of
the Company following the Acquisition, is an owner of Justwin Medical and will
be eligible to
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<PAGE>
receive options for shares of the Company's Common Stock. The licenses between
MLI and Justwin Medical require MLI to pay royalties to Justwin Medical equal
to 6% of the net sales of products which incorporate the technology described
in the patents and patent applications. In order for MLI to retain the
licensed technology, certain minimum royalties are payable. Royalties are
payable until the expiration of the applicable patents. No royalties have
accrued or are payable to date with respect to these inventions. The Company
will acquire the license from Justwin Medical and will assume MLI's royalty
obligations after the consummation of the Acquisition. The Board of Directors
of the Company approved the licenses with Dr. Goble and Justwin Medical in
connection with the Acquisition.
The Company's Board of Directors has authorized a loan to MLI of up to
$500,000 to be used by MLI for working capital pending consummation of the
Acquisition. The loan will bear interest at 10.5% and is due 30 days after
demand, but in no event before June 16, 1997. The loan has been guaranteed by
Dr. Goble, Dr. Caspari and Mr. Chervitz. As of April 30, 1997, the outstanding
principal balance of the loan was $200,000.
BUSINESS OF THE COMPANY AND MLI
The Company and MLI operate in the soft tissue repair segment of the sports
medicine/arthroscopic surgery market. The Company and MLI market their
respective products and related instruments principally to sports medicine
surgeons and orthopaedic specialists who treat and repair soft tissues, within
and around joints, which have been damaged by traumatic injury or degenerative
disease.
INFORMATION CONCERNING THE COMPANY
BUSINESS
GENERAL
The Company designs, develops manufactures and markets proprietary tissue
repair systems which facilitate the repair of soft tissue injuries. The
Company's tissue repair systems are designed to be used in either open
surgical or minimally invasive arthroscopic procedures. Performing repairs
arthroscopically offers several benefits, including reduced patient trauma and
shorter rehabilitation times, resulting in an expedited return to full
physical activity. The Company's initial products consisted of the ROC(TM)
(Radial Osteo Compression) family of suture fasteners and related arthroscopic
instruments which are marketed for use in the sports medicine/arthroscopy
segment of the orthopaedic market. The Company's suture fastener, a bone
anchor with an attached suture, is deployed into bone and used to secure soft
tissue, such as ligaments and tendons, to the bone. The Company has expanded
its product offering to include the ROC XS(TM) and Mini ROC(TM) suture
fastener systems for soft bone and small joint indications and the COR(TM)
system for the repair of osteochondral defects.
The Company's products are based on unique and proprietary technologies
which afford them many advantages when compared to the most widely-used metal
bone anchors. The unique radial osteo compression method of attachment has
allowed the Company to develop a family of suture fasteners which are
efficacious in a broad variety of bone densities and sizes. The ROC design
allows for placement of suture fasteners in close proximity for precise
positioning, which enhances tissue to bone reattachment. ROC suture fasteners
require as little as 6mm (approximately 1/4 inch) of depth, making them well-
suited for small joint tissue repair. ROC suture fasteners are not forced,
hammered or screwed into the bone and therefore are particularly suitable for
placement in smaller, more fragile bones. ROC suture fasteners are polymer-
based and can be removed and replaced with another ROC suture fastener in the
event a revision or a second surgery is required. Based on its existing
designs, the Company is developing and currently testing next generation
suture fasteners using bioabsorbable composites, which degrade and absorb into
surrounding tissue, and collagen-based biomaterial composites, which remodel
into surrounding tissue. In addition, the Company is pursuing opportunities to
apply its core technologies outside of orthopaedics in areas such as
uro/gynecology, maxillo-facial trauma repair and plastic surgery.
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CURRENT PRODUCTS AND APPLICATIONS
The Company currently markets a family of suture fastener products cleared
by the FDA for clinical applications for the shoulder, knee, wrist, hand and
ankle. In addition, the Company markets a family of arthroscopic instruments,
including the IDeal Suture Grasper and the IDeal Knot Pusher. All of the
Company's current products have received 510(k) clearance or have been
exempted by the FDA from the 510(k) clearance process. The following chart
sets forth the product release date, current applications and features and
benefits of the Company's current products:
<TABLE>
<CAPTION>
INITIAL CURRENT
PRODUCT RELEASE DATE APPLICATIONS FEATURES AND BENEFITS
------- ------------ ------------ ---------------------
<S> <C> <C> <C>
2.8mm ROC March 1995 shoulder, knee, foot and ankle .all polymer design
Suture Fastener .revisable
.available for open and arthroscopic repair
3.5mm ROC May 1994 shoulder, knee, foot and ankle .primary fastener for soft bone
Suture Fastener .revision fastener for 2.8mm ROC
.all polymer design
.revisable
.available for open and arthroscopic repair
1.9mm ROC April 1996 shoulder, hand and wrist .primary fastener for small bones
Suture Fastener .all polymer design
.revisable
.5mm fastener length
2.3mm ROC May 1996 shoulder, hand and wrist .revision fastener for 1.9mm ROC
Suture Fastener .all polymer design
.revisable
.5mm fastener length
3.5mm ROC XS May 1996 shoulder .primary fastener for soft bone
Suture Fastener .revision fastener for 3.5mm ROC
.all polymer design
IDeal Suture January 1995 open and arthroscopic tissue .15, 30, 45 and 60 degree angles
Grasper suturing .arthroscopically sutures tissue without needle
IDeal Knot September 1994 open and arthroscopic knot tying .delivers all types of knots
Pusher .tip spreads to tighten knots
3.5mm ROC November 1996 bladder neck suspension .all polymer design
.revisable
.available for arthroscopic repair
3.5mm ROC XS February 1997 bladder neck suspension .all polymer design
.added holding strength in soft bone
6mm COR set September 1996 Grafting of bone plugs in the knee .cutter allows for precise cutting of bone plugs
.bone plugs are cleanly transferred to donor site
.no handling of plugs required
Soft Tissue Retractor December 1995 establishing surgical site for open .stainless steel design
surgical procedures .multiple size and location retractor arms
.clears surgical view
</TABLE>
The Company markets its fasteners and instruments as part of its complete
IDeal Arthroscopic Tissue Repair System, but each of the components may be
purchased separately. The Company also offers customized, reusable drill
guides, drills, ROC handles and awls as part of its standard instrument set
used to deploy the ROC family of suture fasteners. The Company markets this
instrument set in a standard tray which is universal to all the ROC suture
fasteners. The universal tray allows the hospital to standardize its soft
tissue fixation using a single cost effective instrument set.
In October 1996, the Company launched the Innovasive COR System which
facilitates the open or arthroscopic repair of articular cartilage defects
using bone grafting techniques.
25
<PAGE>
PRODUCT DEVELOPMENT
The Company has a variety of new products in various stages of development
designed to address a number of clinical needs. The Company does not currently
have FDA clearance to market any of these products, other than the bladder
neck suspension products described below. See "--Non-Arthroscopy/Sports
Medicine Applications."
NEXT GENERATION SUTURE FASTENERS
Bioabsorbable ROC Suture Fasteners. The Company has been developing
bioabsorbable suture fasteners employing the ROC technology. Suitable
bioabsorbable materials have been identified, fasteners have been manufactured
and pre-clinical testing is under way. The goal is to develop a suture
fastener with mechanical properties similar to the ROC fastener in a format
that will degrade and absorb into surrounding tissue after the damaged tissue
has securely reattached to the bone.
Collagen Biomaterial Tissue Repair System. The Company has a collaborative
agreement with Collagen Corporation to develop tissue repair systems using the
biomaterial collagen. Products are being designed to degrade into by-products
which will be reincorporated, or remodeled, into surrounding tissues, such as
cartilage or bone. The initial project, a collagen suture fastener, is in pre-
clinical testing.
MENISCAL AND CARTILAGE REPAIR
The meniscus is a pad of spongy cartilage tissue which acts as a shock
absorber between the two major bones which form the knee. The surfaces of the
knee bones are covered by articular cartilage that also cushion the joint.
Tears of the meniscus and damage to the articular cartilage are two common
orthopaedic injuries. Conventional techniques for meniscal and cartilage
repair may be rather tedious, time-consuming and accompanied by risks of
complications.
Meniscal Repair. Tears of the meniscus are currently treated primarily by
arthroscopic menisectomy, the removal of torn tissue. Partial menisectomies
can be performed in a matter of minutes with limited risks of complications
and often result in short-term functional improvements of the knee due to the
removal of attached and detached tissue fragments. However, menisectomies may
lead to greater knee instability and accelerate the onset of degenerative knee
disease. An alternative treatment for tears of the meniscus is meniscal suture
repair, which involves the repeated passing of long needles and suture through
the tight confines of the knee joint to reapproximate the torn tissue.
The Company intends to expand its product offering to knee applications with
the development of an arthroscopic system designed to repair the torn
meniscus. This product is currently in pre-clinical testing and is designed to
replace current suturing techniques.
NON-ARTHROSCOPY/SPORTS MEDICINE APPLICATIONS
The Company believes that a significant market opportunity is available for
its existing products and core proprietary technologies outside of the
arthroscopy/sports medicine market. The Company has received FDA clearance to
market its ROC XS suture fastener for the uro/gynecological application set
forth below and will seek FDA clearance for its devices for the other non-
arthroscopy/sports medicine applications. No assurance can be given as to when
or whether the Company will receive such clearances.
Uro/Gynecology. Female urinary incontinence can result when the bladder sags
from its original position and alters the architecture of the urinary
retention structures within the urinary tract. Pain and reproductive problems
can occur when the uterus sags from its normal position and impinges upon
adjacent tissue structures. The Company believes that its suture fasteners can
be delivered in an open or minimally invasive laparascopic approach to attach
and elevate the sagging bladder neck or uterus to the pubic bone. The Company
intends to seek a marketing partner to distribute the bladder neck suspension
products, allowing the Company to concentrate on its core market.
26
<PAGE>
Reconstructive and Endoscopic Plastic Surgery. Reconstructive plastic
surgery typically requires the reattachment of bone and tissue to surrounding
bone. Occasionally, tissue must be removed and replaced for aesthetic
considerations. The Company believes its proprietary fixation technology can
be developed to provide a means to reattach bone and tissue structures using
conventional or biomaterial fracture fixation plates. The Company also
believes that suture fasteners using its proprietary ROC technology in a
minimally invasive endoscopic procedure can be developed to attach sagging
tissue which cause facial wrinkles. If products are developed for endoscopic
plastic surgery using Collagen Corporation's proprietary technology, Collagen
Corporation would have the right to distribute such products under its
distribution agreement with the Company. See "--Relationship with Collagen
Corporation."
RESEARCH AND DEVELOPMENT
The Company's objective is to continue to develop innovative products for
the sports medicine/arthroscopy market and to maximize the potential of its
core proprietary technology in nonorthopaedic markets. The Company's research
and development department currently consists of six engineers with
substantial design experience in the field of arthroscopy. During the fiscal
years ended December 31, 1996, 1995 and 1994, the Company incurred expenses of
$2.7 million, $1.6 million and $1.2 million, respectively, in connection with
its research and development efforts.
The Company's research and development department is continually engaged in
assessing new tissue repair device technologies and techniques which are
applicable to the Company's business strategy. The research and development
engineers spend a significant amount of time with surgeon advisors and members
of the Company's Medical Advisory Board in evaluating new product ideas. The
Company has collaborative arrangements with university-based research centers
for pre-clinical design testing. In the future, the Company's research and
development efforts may include the identification of new technologies
developed by others and the acquisition or licensing of new technologies and
product lines and extensions.
SALES AND MARKETING
The Company's sales and marketing strategy is to focus its efforts on
arthroscopic/sports medicine surgeons through a combination of direct sales
calls, clinical workshops and presentations at medical meetings and
symposiums. The Company's products are marketed domestically to approximately
7,400 arthroscopic surgeons and sports medicine specialists. The Company's
clinical sales agents and marketing personnel meet with surgeons to conduct
product demonstrations, attend surgical procedures and provide training. Sales
and marketing personnel also attend numerous domestic and foreign medical
conventions each year where they exhibit and demonstrate the Company's
products.
The Company markets its products to surgeons in the United States through a
network of ten clinical employee sales representatives, 55 independent sales
agents and three regional sales managers. In addition to its field sales
force, as of April 30, 1997 the Company employed a staff of eleven corporate
marketing, sales and customer service support staff employees. This staff
manages clinical training workshops, sales management, print and video
promotion, sales data analysis, convention management and international
marketing. The Company ships to and invoices its hospital customers directly.
The Company markets its products internationally through established
distributors of orthopaedic medical devices. The Company's products are sold
directly to stocking distributors who sell the products to hospitals and
clinics. For the year ended December 31, 1996, international sales accounted
for 26.8% of net sales.
The Company also works with a Clinical Advisory Group (the "CAG") of twenty
surgeons located across the United States. The members of the CAG are opinion
leaders in the field of arthroscopy and sports medicine and are affiliated
with professional athletic teams, collegiate athletic departments and major
orthopaedic hospitals. The Company relies on the CAG to conduct workshops at
which new surgeons train on the use of the Company's products, evaluate
products clinically prior to their general market release, present the
Company's products at conferences, assist in creating training videos and
advise the Company on new surgical and product techniques.
27
<PAGE>
MANUFACTURING AND QUALITY CONTROL
The manufacture of the Company's devices and instrument consists of
inspection, assembly, testing and packaging of components that have been
molded, machined or manufactured to the Company's specifications by outside
contractors. The Company maintains a high level of quality control and
inspects each lot of components to ensure that they comply with the Company's
exacting specifications. The Company abides by the FDA's Good Manufacturing
Practices and the requirements of foreign regulatory agencies. Samples of
sterilized products are sent to a certified laboratory to validate that
sterilization procedures have been adequately performed. After this
validation, the products are shipped to customers.
Most purchased components are available from more than one vendor. For
certain of these components, there are relatively few alternative sources of
supply and establishment of additional or replacement suppliers for such
components cannot be accomplished quickly. Many components are injection
molded using Company owned molds. Many polymer components have only one mold
and replacement of the molds can take 12 to 16 weeks. Any bioabsorbable
materials used in future products will likely be available from a single
source. Any supply interruption from single source vendors could have a
material adverse effect on the Company's ability to supply products.
There is risk that certain suppliers may terminate sales of certain
materials to companies that manufacture medical devices in an attempt to limit
their potential product liability exposure. If the polymers which are used to
manufacture the Company's ROC suture fasteners become unavailable, the Company
would be required to identify a new polymer material for the suture fasteners
and certify the quality and suitability of the new material. In addition, a
new 510(k) clearance would have to be obtained to market products manufactured
from the new materials. This process could take a substantial period of time
and there is no assurance that the Company would be able to identify, certify
or obtain clearance for the new polymer based fasteners.
RELATIONSHIP WITH COLLAGEN CORPORATION
The Company is a party to a Research and Development Agreement, a
Manufacturing and Supply Agreement and a Distribution Agreement with Collagen
Corporation, a leading developer of implantable bovine collagen. Pursuant to
these agreements, the Company and Collagen Corporation have cross licensed
their respective technologies relating to collagen materials and medical
devices. Collagen Corporation holds approximately 11.6% of the Company's
Common Stock. Pursuant to an agreement among the Company and certain of its
stockholders, Collagen Corporation has the right to designate one member of
the Company's Board of Directors so long as it holds at least five percent of
the Company's outstanding Common Stock on a fully-diluted basis. Howard D.
Palefsky, Chairman of the Board of Collagen Corporation, currently serves as
Collagen Corporation's designee on the Company's Board of Directors.
Under the Research and Development Agreement, the Company and Collagen
Corporation have agreed to undertake the joint development of suture fasteners
made from collagen-based materials, to be funded by the Company up to certain
amounts as specified in an agreed project plan. The Research and Development
Agreement contemplates subsequent development of collagen-based tissue
fixation devices if the parties can agree on a project plan and budget for
their development. Any technology jointly developed pursuant to a project plan
is to be owned jointly by the parties. Until October 17, 2000, the parties
have agreed to work exclusively together with respect to the development of
products covered by the agreement. With respect to products for which a
project plan has been approved by the parties prior to October 17, 2000 and
for which there is funding through completion of development, Collagen
Corporation and the Company have agreed not to commence the development of
competing products until after the second anniversary of the first commercial
sale of such products.
The Manufacturing and Supply Agreement provides that Collagen Corporation
will be the exclusive supplier to the Company for products manufactured from
collagen and developed under the Research and Development Agreement. If
Collagen Corporation is unable to supply such products, the Company is
entitled to develop a
28
<PAGE>
second source of supply. The Manufacturing and Supply Agreement remains in
effect with respect to a product until either the Distribution Agreement
between Collagen Corporation and the Company relating to such product
terminates or expires or until the Manufacturing Agreement is terminated by
reason of default or as the result of the bankruptcy or insolvency of a
contracting party.
The Distribution Agreement provides that Collagen Corporation will have
exclusive distribution rights to the Company's 3.5mm, 2.8mm and 1.9mm ROC
suture fasteners and collagen-based products developed under the Research and
Development Agreement which are labeled for facial plastic surgery or
dermatology applications. Under the agreement, the Company will have exclusive
distribution rights to collagen-based products developed under the Research
and Development Agreement which are labeled for orthopaedic applications. Each
party must sell a minimum number of units of products in its exclusive field
to maintain exclusivity; otherwise, the other party gains co-exclusive rights
to market and distribute products in that field. Under the agreement, a
distributing party will purchase products from a manufacturing party at
various discounts from the actual average selling price of the products, and
Collagen Corporation is required to pay royalties to the Company with respect
to Collagen Corporation's net sales or products for which development was
funded by the Company pursuant to the Research and Development Agreement.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company believes that a key element of its competitive advantage depends
on its ability to develop and maintain proprietary aspects of its technology.
To this end, the Company files patent applications to protect technology,
inventions and improvements that it believes are significant to the growth of
its business. As of March 21, 1997 the Company, had 8 issued patents and more
than 50 U.S. and foreign patent applications pending. These issued patents and
pending patent applications cover its radial osteo compression (ROC)
technology, surgical tools and methods, its COR cartilage repair technology,
and various surgical tools, systems and methods.
In 1996, the Company received a notice alleging that instruments based on
one of its patents may infringe the patent of a third party. The only products
currently manufactured by the Company using the Company's patent are its knot
pusher and laparascopic scissors. Based on advice of its patent counsel,
Pandiscio & Pandiscio, P.C., the Company does not believe that its knot pusher
or laparascopic scissors infringe the cited third party patent and intends to
defend vigorously its position. The Company has not received any recent
notices relating to this claim. However, should one arise, the Company may not
be able to successfully defend against an infringement claim and there can be
no assurance that the Company will not become subject to other patent
infringement claims or litigation or interference proceedings. Moreover, there
can be no assurance that current and potential competitors and other third
parties have not filed or in the future will not file applications for, or
have not received or in the future will not receive, patents and will not
obtain additional proprietary rights relating to materials or processes used
or proposed to be used by the Company. Accordingly, there can be no assurance
that the Company's products have not, do not or will not infringe any patents
or other proprietary rights of third parties.
The Company typically requires its employees, consultants and advisors to
execute appropriate confidentiality agreements in connection with their
employment, consulting or advisory relationships with the Company. The Company
also typically requires its employees, consultants and certain advisors to
agree to disclose and assign to the Company all inventions conceived of on
Company time, using Company property or which relate to the Company's
business. There can be no assurance, however, that the foregoing agreements
will effectively prevent disclosure of the Company's confidential information
or provide meaningful protection for the Company's confidential information if
there is unauthorized use or disclosure. Furthermore, no assurance can be
given that competitors will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the
Company's proprietary technology.
29
<PAGE>
COMPETITION
The Company faces strong competition in the marketplace from metal bone
anchors sold by large corporations with orthopaedic divisions. Mitek Surgical
Products, Inc. ("Mitek"), a division of Johnson & Johnson, the Zimmer and
Linvatec divisions of Bristol-Meyers Squibb Company, Dyonics, Inc.
("Dyonics"), a subsidiary of Smith & Nephew, Inc., and Arthrotek Inc., a
division of Biomet, Inc., all compete in the Company's market with metal
suture anchors. Dyonics currently sells an all plastic design as well as a
bioabsorbable suture fastener. These competitors have significantly greater
financial, manufacturing, marketing, distribution and technical resources than
the Company. Mitek, which sells a metal barbed anchor, currently has the
largest share of the suture fastener market. In addition, Mitek recently
introduced a bioabsorbable anchor. The Company also faces competition from
smaller companies developing new metallic anchor systems, including Arthrex
Inc., Li Medical, Inc. and Orthopaedic Biosystems Ltd., Inc.
The Company believes that its products compete favorably against its
competitions based on a number of factors, including the Company's proprietary
radial osteo compression design which permits adequate holding strength in
both large and small bones and can be modeled from plastic, bioabsorbable
polymers and biomaterial; the revisability of the Company's fasteners; the
availability of a proprietary arthroscopic delivery system for its products;
and the small profile of the Company's products when inserted into bone, which
permits its fasteners to be deployed in the small bones of the wrist, hand,
ankle and foot. However, there can be no assurance that the Company's
competitors will not succeed in developing products and technologies that are
more effective or less costly than those that have been or may be developed by
the Company.
GOVERNMENT REGULATION
Clinical testing, manufacture and sale of the Company's products, including
the ROC suture fasteners, the IDeal suture graspers and IDeal knot pusher are
subject to regulation by the FDA and corresponding state and foreign
regulatory agencies. Pursuant to the Federal Food, Drug, and Cosmetic Act, and
the regulations promulgated thereunder, the FDA regulates the clinical
testing, manufacture, labeling, distribution and promotion of medical devices.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, failure of the government to grant pre-
market clearance or pre-market approval for devices, withdrawal of marketing
approvals and criminal prosecution. The FDA also has the authority to request
repair, replacement of refund of the cost of any device manufactured or
distributed by the Company.
In the United States, medical devices are classified into one of three
classes (i.e., Class I, II, or III) on the basis of the controls deemed
necessary by the FDA to reasonably ensure their safety and effectiveness.
Class I devices are subject to general and special controls (e.g., performance
standards, postmarket surveillance, patient registries and FDA guidelines).
Generally, Class III devices are those which must receive premarket approval
by the FDA to ensure their safety and effectiveness (e.g., life-sustaining,
life-supporting and implantable devices, or new devices which have been found
not to be substantially equivalent to legally marketed devices).
Before a new device can be introduced in the market, the Company must
generally obtain FDA clearance or approval through either clearance of a
510(k) notification or approval of a Premarket Approval (a "PMA"). A 510(k)
clearance will be granted if the submitted information establishes that the
proposed device is "substantially equivalent" to a legally marketed Class I or
Class II medical device or a Class III medical device for which the FDA has
not called for PMAs. The FDA recently has been requiring more rigorous
demonstration of substantial equivalence than in the past, including in some
cases requiring submission of clinical trial data. The FDA may determine that
the proposed device is not substantially equivalent to a predicate device or
that additional information is needed before a substantial equivalence
determination can be made. It generally takes from four to 12 months from
submission to obtain 510(k) premarket clearance, but the process may take
longer. The FDA may determine that a proposed device is not substantially
equivalent to a legally marketed device or that additional information is
needed before a substantial equivalence determination can be made. A "not
substantially equivalent" determination or a request for additional
information could prevent or delay the market
30
<PAGE>
introduction of new products that fall into this category and could have a
material adverse effect on the Company's business, financial condition or
results of operations. For any of the Company's devices that are cleared
through the 510(k) process, modifications or enhancements that could
significantly affect the safety or effectiveness of the device or that
constitute a major change to the intended use of the device will require a new
510(k) submission.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a
Class III device for which the FDA has called for PMAs. A PMA application must
be supported by valid scientific evidence which typically includes extensive
information (including relevant bench tests, laboratory and animal studies and
clinical trial data) to demonstrate the safety and effectiveness of the
device. The PMA application also must contain a complete description of the
device and its components; a detailed description of the methods, facilities
and controls used to manufacture the device; and the proposed labeling,
advertising literature and training materials (if any). The PMA process can be
expensive, uncertain and lengthy. A number of devices for which FDA approval
has been sought by other companies have never been approved for marketing.
Modifications to a device that is the subject of an approved PMA, its
labeling, or manufacturing process may require approval by the FDA or PMA
supplements or new PMAs.
If human clinical trials of a device are required and the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or the
distributor of the device) will have to file an investigational device
exemption ("IDE") application prior to commencing human clinical trials. The
IDE application must be supported by data, typically including the results of
animal and laboratory testing. If the IDE application is approved by the FDA
and one or more appropriate Institutional Review Boards ("IRBs"), human
clinical trials may begin at a specific number of investigational sites with a
specific number of patients, as approved by the FDA. If the device presents a
"nonsignificant risk" to the patient, a sponsor may begin the clinical trial
after obtaining approval for the study by one or more appropriate IRBs without
the need for FDA approval. Sponsors of clinical trials are permitted to sell
investigational devices distributed in the course of the study provided that
compensation does not exceed recovery of the costs of manufacture, research,
development and handling. An IDE supplement must be submitted to and approved
by the FDA before a sponsor or investigator may make a change to the
investigational plan that may affect its scientific soundness or the rights,
safety or welfare of human subjects.
To date, all of the Company's products have received 510(k) clearance or
have been exempted by the FDA from the 510(k) clearance process. The Company
has made modifications to its devices which the Company believes do not
require the submission of new 510(k) notices. There can be no assurance,
however, that the FDA would agree with any of the Company's determinations not
to submit a new 510(k) notice for any device modification, or would not
require the Company to submit a new 510(k) notice for any of the changes made
to the device. If the FDA requires the Company to submit a new 510(k) notice
for any device modification, the Company may be prohibited from marketing the
modified device until the 510(k) notice is cleared by the FDA. There can be no
assurance that any proposed modification will be cleared on a timely basis, if
at all.
The Company anticipates that its bioabsorbable suture fasteners under
development will be considered a Class II device subject to the 510(k)
clearance process. Based on discussions and a written response from the FDA,
the Company believes the FDA has determined that clinical data will not be
required for bioabsorbable fasteners provided the material selected for the
device is well characterized and known to the FDA. This includes the PLA
material currently selected for the bioabsorbable fastener. To comply with the
510(k) clearance process and avoid clinical evaluation, additional testing
including in-vitro and in-vivo analysis will be required. To the Company's
knowledge, collagen-based medical devices currently being marketed have
required PMA approval. The Company anticipates that the FDA will require
clinical trial data for its biomaterial suture fastener, regardless of which
regulatory path the FDA ultimately requires. There can be no assurance the FDA
will not determine that the Company's future products, including the
bioabsorbable and biomaterial suture fasteners now in development, must adhere
to the more costly, lengthy, and uncertain PMA approval process. There also
can be no assurance that the Company will obtain FDA clearance or approval for
such future products on a timely basis, if at all, or that the FDA will not
impose limitations on the intended use of such products as a condition of
31
<PAGE>
clearance or approval. Any delay in receipt of, failure to obtain, or
limitations on clearance or approval could have a material adverse effect on
the Company's business, financial condition or results of operation.
Any devices manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA and certain state agencies. Manufacturers of medical devices for
marketing in the United States are required to adhere to applicable
regulations setting forth detailed Good Manufacturing Practices ("GMP")
requirements, which include testing, control and documentation requirements.
Manufacturers must also comply with Medical Devices Reporting ("MDR")
requirements that a firm report to the FDA any incident in which its product
may have caused or contributed to a death or serious injury, or in which its
product malfunctioned and, if the malfunction were to recur, it would be
likely to cause or contribute to a death or serious injury. Labeling and
promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. Current FDA enforcement policy
prohibits the marketing of approved medical devices for unapproved uses.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with GMP requirements, MDR requirements, and other
applicable regulations. In October 1996, the FDA authorized changes to the GMP
regulations which will likely increase the cost of compliance with GMP
requirements. Changes in existing requirements or adoption of new requirements
could have a material adverse effect on the Company's business, financial
condition or results of operation.
The Company is also subject to regulation in each of the foreign countries
in which it sells its products in the areas of product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. Many of the regulations applicable to the
Company's products in these countries are similar to those of the FDA. The
national health organization of some countries require the Company's products
to be qualified before they can be marketed in those countries. The Company
relies on its international distributors to comply with these requirements. To
date, the Company has not experienced significant difficulty in complying with
these regulations.
The Company is in the process of implementing policies and procedures which
are intended to allow the Company to receive ISO 9001 certification. ISO 9001
standards for quality systems in manufacturing have been developed to ensure
that companies know, on a worldwide basis, the standards of quality to which
they will be held. The European Union has promulgated rules which require that
medical products receive the CE mark by mid-1998. The CE mark is an
intentional symbol of quality and compliance with applicable European medical
device directives. Failure to receive CE mark certification will prohibit the
Company from selling its products in Europe. There can be no assurance that
the Company will be successful in meeting the certification requirements. ISO
9001 certification is one of the CE mark certification requirements.
The Company is subject to numerous federal, state and local laws relating to
such matters as safe working conditions and environmental protection. There
can be no assurance that the Company will not be required to incur significant
costs to comply with such laws and regulations in the future or that such laws
or regulations will not have a material adverse effect upon the Company's
business, financial condition or results of operations.
PRODUCT LIABILITY AND INSURANCE
Medical device companies are subject to an inherent risk of product
liability and other liability claims in the event that the use of their
products results in personal injury. The Company maintains liability insurance
coverage in the amounts deemed appropriate by management based upon the nature
and risks of its business in general and its actual experience to date. There
can be no assurance that a future claim will not exceed insurance coverage or
that such coverage will continue to be available. In addition, any substantial
increase in the cost of such insurance could have a material adverse effect on
the Company's business, financial condition and results of operations.
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EMPLOYEES
As of April 30, 1997, the Company employed 63 individuals, 14 of whom were
engaged in research and development and regulatory, 17 in manufacturing and
quality assurance and 32 in marketing, sales and administrative positions. The
Company also contracts with outside consultants. None of the Company's
employees is covered by a collective bargaining agreement. The Company
believes that it maintains good relations with its employees.
FACILITIES
The Company's facility is located in Marlborough, Massachusetts and contains
approximately 28,000 square feet, which is divided equally between offices,
manufacturing and expansion space. The facility is leased through May 2002.
The Company has options to renew the lease for a total of six additional years
and has a right of first offer on additional space in the building.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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INFORMATION CONCERNING MLI
BUSINESS
GENERAL
MLI designs, develops, manufactures and is in the early stages of marketing
proprietary surgical implant systems which facilitate the repair of the
anterior cruciate ligament ("ACL") of the knee. MLI's ACL repair systems are
designed to be used in either open surgical or minimally invasive arthroscopic
procedures. MLI has received 510(k) clearance on the products it intends to
market.
MLI's products are targeted primarily to sports medicine surgeons and
orthopaedic specialists who treat sports injuries. This is the same market
identified and discussed at more length in the information about the Company.
See "Business of the Company and MLI" and "Information Concerning the
Company--Business--General." Based on its existing designs, MLI is developing
next generation devices which will further provide the surgeon with options
for the repair of the ACL. MLI's strategy for establishing and maintaining a
leadership position in the ACL market consists of developing a strong
proprietary technology position for products which minimize surgical time and
trauma and provide for ease of implantation of devices.
CURRENT PRODUCTS AND APPLICATIONS
MLI is in the early stage of marketing a family of products cleared by the
FDA for clinical applications primarily for the repair of the ACL. The
following MLI products have received 510(k) clearance or are exempt from the
510(k) clearance process. The following chart summarizes the products, current
applications and FDA clearance dates:
<TABLE>
<CAPTION>
INITIAL CURRENT
PRODUCT RELEASE DATE APPLICATIONS FEATURES AND BENEFITS
- --------------------- -------------- ------------------------ ----------------------------
<S> <C> <C> <C>
Cannulated January 1996 ACL Bone-Tendon-Bone .Design minimizes tissue
Interference Screw Femoral and Tibial trauma
System
Fixation . Locking threads recure
bone block fixation
Cross Pin Transverse September 1996 ACL--Soft Tissue Graft . Rigid fixation for soft
Fixation System Femoral Fixation tissue ACL grafts
. Easily revisable
Set Screw Transverse August 1996 ACL Bone-Tendon-Bone . A traumatic, adjustable
Fixation System Femoral Fixation ACL fixation
. Revisable with larger size
screw
. Hardware easy to remove
Soft Tissue Screw and July 1996 ACL--Soft Tissue Graft . Low profile screws and
Washer Fixation Femoral or Tibial washers minimize tissue
System Fixation irritation
. Washers shaped to conform
to bone contours
Modular Staple October 1996 ACL--Soft Tissue Graft . Adjustable staple/washer
Fixation System Tibial Fixation increase fixation strength
. Novel staple remover
operates easily and
atraumatically
Expanded Body Suture May 1996 Transosseous Suturing . Expanded surface area
increases strength of
transosseous tissue
repairs
</TABLE>
MLI intends to market its fixation devices and instruments as part of a
comprehensive ACL Fixation System with each of the components and related
instrumentation to implant devices being available for purchase separately.
34
<PAGE>
PRODUCT DEVELOPMENT
MLI has a variety of new products under development, none of which have
received FDA clearance for marketing. These new products include meniscal
repair implants and instrumentation, new devices and instrumentation for ACL
repair and devices for arthroscopic tissue repair.
RESEARCH AND DEVELOPMENT
MLI's objective has been to continue to develop innovative products for the
sports medicine/arthroscopy market and to maximize the potential of its core
proprietary technology. As of March 3, 1997, MLI's research and development
department consisted of seven employees with substantial design and
development experience in the field of orthopaedics. During the fiscal year
ended December 31, 1996 and 1995, MLI incurred expenses of $562,302 and
$385,944 respectively, in connection with its research and development
efforts, and anticipates a substantial continuing commitment to ongoing
programs.
MLI's research and development department is continually engaged in
assessing technologies and techniques which are applicable to MLI's business
strategy. The research and development engineers spend a significant amount of
time with surgeon advisors evaluating new product ideas. MLI has acquired or
licensed new technologies from outside parties and anticipates that it will
continue to explore opportunities for licensing products from other parties in
the future.
SALES AND MARKETING
Because of the early stage of MLI's development, MLI has not yet employed
any sales or marketing personnel. However, MLI has exhibited its products at
trade shows and surgeons who are consultants to MLI have made presentations at
an orthopaedic surgeon conference on the use of the MLI products.
MANUFACTURING AND QUALITY CONTROL
MLI's products are manufactured from components manufactured at MLI and by
outside contractors to MLI's specifications. The manufacturing process at MLI
consists primarily of component manufacturing, assembly, testing and
packaging. Sterilization and some testing is also done by outside vendors. MLI
maintains a high degree of quality control and inspects each lot of components
to ensure that they comply with MLI's exacting specifications. MLI abides by
the FDA's Good Manufacturing Practices and the requirements of state and
federal regulatory agencies.
Most components derived from outside contractors are available from more
than one source. MLI believes that it could readily obtain components from
other sources that are now derived from single source vendors. MLI's current
products are manufactured from readily available materials. As with the
Company, this may not be true for bioabsorbable materials and biomaterials
that may be used in future products. If certain bioabsorbable and biomaterial
materials become limited in supply or unavailable, MLI would have to develop
alternative sources of supply, which could take a substantial period of time,
and there is no assurance that such materials could be identified or approved.
INTELLECTUAL PROPERTY
MLI believes that a key element of its competitive advantage depends on its
ability to develop and maintain proprietary aspects of its technology. To this
end, MLI files patent applications to protect technology, inventions, and
improvements that it believes are significant to the growth of its business.
MLI has filed for 38 U.S. and foreign patents for orthopaedic and sports
medicine applications of which 27 have been issued, some of which have been
licensed to others. There can be no assurance that current and potential
competitors and other third parties have not filed or in the future will not
file applications for, or have not received or in the future will not receive,
patents and will not obtain additional proprietary rights relating to
materials or processes used or proposed to be used by MLI. Accordingly, there
can be no assurance that MLI's products have not, do not or will not infringe
any patents or other proprietary rights of third parties.
35
<PAGE>
MLI typically requires its employees, consultants and advisors to execute
appropriate confidentiality agreements in connection with their employment,
consulting or advisory relationships with MLI. MLI also typically requires its
employees, consultants and certain advisors to agree to disclose and assign to
MLI all inventions conceived of on the company time, using company property or
which relate to MLI's business. There can be no assurance, however, that the
foregoing agreements will effectively prevent disclosure of MLI's confidential
information or provide meaningful protection for MLI's confidential
information if there is unauthorized use or disclosure. Furthermore, no
assurance can be given that competitors will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to MLI's proprietary technology.
Where appropriate, MLI has licensed technology from third parties, including
its shareholders, consultants and competitors. MLI has licensed certain
technology from E. Marlowe Goble, its principal stockholder, in circumstances
where the technology has also been licensed by Dr. Goble to independent third
parties. (Inventions of Dr. Goble relating to MLI's business that have not
been subject to rights in third parties have been assigned by Dr. Goble to
MLI.) MLI has also licensed technology from Justwin Medical, a corporation one
of whose owners is Daniel Justin, who will become an employee of the Company
following the Acquisition. The licenses from Dr. Goble and Justwin Medical
will require MLI to pay royalties at a rate which MLI believes to be
consistent with royalties which would be payable to independent inventors.
Such royalties are based on a percentage of the net sales of products
incorporating the licensed technology. Only minimal royalties have accrued and
are payable to Dr. Goble and no royalties have accrued or are payable to
Justwin Medical by MLI to this point. See "Summary of the Proposed Acquisition
and the Share Issuance--Certain Arrangements".
MLI has also licensed technology it has developed to third parties where it
believes the technology is not central to its core business. When MLI has
assigned its rights in technology to third parties, it has on occasion taken
back a non-exclusive license from the assignee or licensee enabling MLI to use
the technology in certain fields or for certain uses. MLI intends to continue
to be opportunistic with technology, developing, licensing or assigning its
inventions and acquiring and licensing technology from others to promote the
achievement of its business strategies and objectives.
COMPETITION
MLI faces strong competition in the marketplace from large corporations with
orthopaedic divisions, Smith & Nephew Endoscopy Division, Arthrotek, Inc., a
division of Biomet, Inc., the Linvatec division of Bristol Meyers Squibb
Company, and Mitek Surgical Products, Inc. ("Mitek"), a division of Johnson &
Johnson, all of which compete in the market of ACL repair. These competitors
have significantly greater financial, manufacturing, marketing, distribution
and technical resources than MLI. MLI also faces competition from smaller
companies including Arthrex, Inc.
MLI believes that its products compete favorably against its competitors
based on a number of factors, including MLI's strong proprietary technology
position which enables it to offer a multitude of different fasteners designed
to address different patient requirements. However, there can be no assurance
that MLI's competitors will not succeed in developing products and
technologies that are more efficient or less costly than those that have been
or may be developed by MLI.
PRODUCT LIABILITY AND INSURANCE
Medical device companies are subject to inherent risk of product liability
and other liability insurance claims in the event that the use of their
product results in personal injury. MLI maintains liability insurance coverage
in the amount deemed appropriate by management based upon the nature and risk
of its business in general and its actual experience to date. There can be no
assurance that a future claim will not exceed insurance coverage or that such
coverage will continue to be available. In addition, any substantial increase
in the cost of such insurance could have a material adverse effect on MLI's
business, financial condition and results of operations. The Company believes
such risk to be inherent in medical products companies.
36
<PAGE>
CONTINUING COMMITMENT
The Company recognizes that the Acquisition will involve a significant
commitment of resources for product development and marketing and sales. The
Company will use a portion of the proceeds of its initial public offering in
June 1996, together with income from operations, to fund these commitments.
EMPLOYEES
As of March 3, 1997, MLI employed 29 individuals, 11 of whom were engaged in
research and development and regulatory and quality assurance, 16 in
manufacturing and 2 in administrative positions. MLI also contracts with
outside consultants.
FACILITIES
MLI occupies two buildings in Logan, Utah that together contain
approximately 11,500 square feet, in which MLI maintains its offices and
manufacturing area. The buildings are currently leased from GCL at rent and
upon terms the Company believes to be commercially reasonable and fair. Upon
closing of the Acquisition, the Company will enter a new lease with GCL for a
term of 3 years at comparable rent and terms. MLI also occupies a nearby
facility in Logan, Utah in which MLI leases approximately 1,800 square feet.
This space is leased from a third party landlord pursuant to a lease due to
expire in October 1997. MLI has a right of first refusal in the event the
landlord chooses to sell the facility.
LEGAL PROCEEDINGS
MLI is not a party to any material legal proceedings.
37
<PAGE>
SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA
The selected historical financial data of the Company for each of the years
in the five-year period ended December 31, 1996 have been derived from the
audited historical financial statements of the Company incorporated by
reference herein. The selected historical financial data of MLI for each of
the years in the five-year period ended December 31, 1996 have been derived
from the audited historical financial statements of MLI for each of the years
in the two-year period ended December 31, 1996 included elsewhere herein, and
from the unaudited historical financial statements of MLI for each of the
years in the three-year period ended December 31, 1994. The selected
historical financial data of the Company and MLI at March 31, 1997 and for the
three months ended March 31, 1997 and 1996 have been derived from, and are
qualified by reference to, the Company's and MLI's unaudited financial
statements appearing herein or incorporated by reference, and which, in the
opinion of management, include all adjustments consisting of normal recurring
adjustments necessary for a fair statement of the results for the unaudited
interim period.
The selected pro forma financial data are derived from the unaudited pro
forma condensed combined financial statements appearing elsewhere herein,
which give effect to the Acquisition as a purchase. The pro forma data are
presented for illustrative purposes only and is not necessarily indicative of
the combined financial position or results of operations of future periods or
the results that actually would have been realized had the Acquisition been in
effect for the period presented.
This data should read in conjunction with the financial statements of each
of the Company and MLI, and the related notes thereto, included elsewhere
herein or incorporated by reference and in conjunction with the unaudited pro
forma financial statements, including the notes thereto, appearing elsewhere
in this Proxy Statement. See "Pro Forma Condensed Combined Financial
Statements", "Financial Information of MLI" and "Financial Information of the
Company".
INNOVASIVE DEVICES, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED DECEMBER 31,
MARCH 31, -------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ----------- ------- ------- ------- ------- -------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales (1)........... $1,663 $ 802 $ 4,353 $ 1,234 $ 244 $ 126 $ 344
Cost of sales........... 510 338 1,611 1,000 465 263 --
------ ------- ------- ------- ------- ------- -------
Gross profit (loss)..... 1,153 464 2,742 234 (221) (137) 344
Selling, general and
administrative
expenses............... 1,495 1,091 4,922 2,435 1,533 914 580
Research and development
expenses (2)........... 830 582 2,667 1,597 1,172 922 2,589
------ ------- ------- ------- ------- ------- -------
Loss from operations.... (1,172) (1,209) (4,847) (3,798) (2,926) (1,973) (2,825)
Interest income
(expense), net......... 299 62 785 64 34 (238) 1
------ ------- ------- ------- ------- ------- -------
Net loss................ $ (873) $(1,147) $(4,062) $(3,734) $(2,892) $(2,211) $(2,824)
====== ======= ======= ======= ======= ======= =======
Pro forma net loss per
share (3).............. $(0.12) $ (0.21) $ (0.63) $ (0.76)
====== ======= ======= =======
Shares used in computing
pro forma net loss per
share.................. 7,261 5,457 6,465 4,939
====== ======= ======= =======
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------------------------------
1997 1996 1995 1994 1993 1992
----------- ------- ------- ------- ------- -------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 5,126 $12,825 $ 5,052 $ 2,051 $ 294 $ 408
Working capital......... 21,907 22,841 4,857 1,628 (3,835) (409)
Total assets............ 24,633 25,363 6,399 3,099 869 639
Long-term note payable,
less current portion... -- -- -- -- -- 906
Mandatorily redeemable
convertible preferred
stock.................. -- -- 13,970 6,993 -- --
Stockholders' equity
(deficit).............. $22,936 $23,788 $(8,501) $(4,759) $(3,426) $(1,189)
</TABLE>
38
<PAGE>
- --------
(1) Sales amount for the year ended December 31, 1992 represents amounts
received pursuant to a collaborative research and development arrangement.
(2) Includes research and development costs payable to a related party of $222
and $200 for the three months ended March 31, 1997 and 1996, respectively,
and $664 and $265 for the years ended December 31, 1996 and 1995,
respectively, and a charge of $1,700 in connection with a termination of a
development agreement in 1992.
(3) See Note 1 of Notes to Financial Statements which are included in the
Company's Annual Report and incorporated herein by reference.
MEDICINELODGE, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEARS ENDED DECEMBER 31,
----------------------- --------------------------------------
1997 1996 1996 1995 1994 1993 1992
------------ --------- ------- ------ ------ ------- -----
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales (1)........... $ 283 $ 369 $ 1,306 $ 951 $3,819 $ 1,299 $ 93
Cost of sales........... 270 189 645 457 1,946 694 9
--------- --------- ------- ------ ------ ------- -----
Gross profit............ 13 180 661 494 1,873 605 84
Selling, general and
administrative
expenses............... 230 41 613 441 1,355 354 139
Research and development
expenses............... 139 72 562 386 201 -- --
--------- --------- ------- ------ ------ ------- -----
Income (loss) from
operations............. (356) 67 (514) (333) 317 251 (55)
Other income (expense),
net (2)................ (8) (7) 445 17 468 (47) (20)
--------- --------- ------- ------ ------ ------- -----
Income (loss) from
operations before
provision (benefit) for
income taxes........... (364) 60 (69) (316) 785 204 (75)
Provision (benefit) for
income taxes (3)....... -- -- (24) (118) 288 -- --
--------- --------- ------- ------ ------ ------- -----
Net income (loss) (4)... $ (364) $ 60 $ (45) $ (198) $ 497 $ 204 $ (75)
========= ========= ======= ====== ====== ======= =====
<CAPTION>
MARCH 31 DECEMBER 31,
------------ ------------------------------------------
1997 1996 1995 1994 1993 1992
------------ --------- ------- ------ ------ -------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 18 $ 831 $ 221 $ -- $ 1 $ 11
Working capital......... 147 365 352 635 72 78
Total assets............ 1,091 1,794 1,076 1,824 1,298 395
Long-term note payable,
less current portion... 514 532 455 499 707 442
Stockholders' equity
(deficit).............. $ 334 $ 470 $ 371 $ 570 $ 118 $ (75)
</TABLE>
- --------
(1) For the three months ended March 31, 1997 and 1996, and the years ended
December 31, 1996 and 1995, sales were principally derived from contract
manufacturing services provided to third parties. In 1994, a significant
percentage of MLI sales resulted from a contract manufacturing agreement
for which rights were sold to a third party in December, 1994.
(2) Includes a gain on the sale of patent and technology rights of $275 and a
gain from the sale of securities of $203 in 1996 and a gain on the sale of
assets of $592 in 1994.
(3) An income tax provision was not provided for the years ended December 31,
1993 and 1992, as MLI operated as a limited liability company.
(4) Net income (loss) per share is not considered meaningful and therefore is
not presented herein.
39
<PAGE>
UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
1997 1996
--------------- ------------
<S> <C> <C>
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA:
Net sales........................................ $ 1,946 $5,659
Loss from operations............................. (1,545) (5,429)
Net loss......................................... (1,254) (4,199)
Net loss per share............................... $ (0.14) $(0.50)
Shares used in computing net loss per share...... 9,146 8,350
<CAPTION>
MARCH 31,
1997
---------------
<S> <C> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 5,144
Working capital.................................. 21,754
Total assets..................................... 26,646
Long-term note payable, less current portion .... 514
Stockholders' equity............................. $23,892
</TABLE>
40
<PAGE>
COMPARATIVE PER SHARE DATA
(UNAUDITED)
The following table sets forth as of the date and for the period indicated
selected historical per share data of the Company and MLI and the
corresponding unaudited pro forma per share data giving effect to the proposed
Acquisition. The data presented are based upon the historical financial
statements and related notes of the Company incorporated by reference herein
and the historical financial statements of MLI appearing elsewhere herein, and
the pro forma condensed combined financial statements appearing elsewhere
herein. This information should be read in conjunction with such historical
and pro forma financial statements and related notes thereto. The assumptions
used in the preparation of this table appear elsewhere in this Proxy
Statement. See "Pro Forma Condensed Combined Financial Statements", "Financial
Information of the Company" and "Financial Information of MLI". These data are
not necessarily indicative of the results of the future operations of the
combined organization or the actual results that would have occurred if the
Acquisition had been consummated at the beginning of the period indicated.
<TABLE>
<CAPTION>
PRO FORMA EQUIVALENT
COMBINED PRO FORMA
PER COMBINED
COMPANY MLI COMPANY PER MLI
HISTORICAL(4) HISTORICAL(1) SHARE(2) SHARE(3)
------------- ------------- --------- ----------
<S> <C> <C> <C> <C>
Book value per common share:
December 31, 1996.......... $ 3.28 $ 0.18 $ 2.71 $ 1.82
March 31, 1997............. $ 3.16 $ 0.12 $ 2.61 $1.75
Cash dividends per common
share:
Year ended December 31,
1996...................... -- -- -- --
Quarter ended March 31,
1997...................... -- -- -- --
Net loss per common share
from continuing operations:
Year ended December 31,
1996...................... $(0.63) $(0.09) $(0.50) $(0.34)
Quarter ended March 31,
1997...................... $(0.12) $(0.34) $(0.14) $(0.09)
</TABLE>
- --------
(1) The calculation of book value per common share assumes the conversion to
common stock of 1,700,000 shares of Series A Convertible Preferred Stock
("Preferred Stock") as the Preferred Stock will be converted to common
stock prior to the closing of the Acquisition. The calculation of
historical net loss per common share excludes the effect of the Preferred
Stock conversion as it is antidilutive.
(2) Assumes 1,885,000 shares are issued pursuant to the Asset Purchase
Agreement.
(3) Equivalent pro forma combined book value per MLI share and the equivalent
pro forma combined net loss per MLI share have been calculated by
multiplying the respective pro forma combined per Company share amounts by
a ratio of .67 of a share of Company Common Stock for each share of MLI
common stock, including the assumed conversion of 1,700,000 shares of MLI
Preferred Stock to MLI common stock. This ratio was derived from a
comparison of the outstanding shares of MLI's capital stock and the shares
to be issued as the Share Issuance.
(4) Net loss per common share has been calculated on a pro forma basis as
historical net loss per share is not considered meaningful. Pro forma net
loss per share is determined by dividing the net loss attributable to
common stockholders by the weighted average number of common stock
outstanding during the period, including the effect of the assumed
conversion of all convertible preferred stock upon issuance. Actual
conversion of the preferred stock occurred in June, 1996 upon the closing
of the Company's initial public offering.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
83, common stock options and convertible preferred stock issued at prices
below the offering price per share during the twelve month period prior to
the initial filing of the Company's registration statement on Form S-1 have
also been included in the calculation using the treasury stock method and
the anticipated offering price of $12 per share of Common Stock, as if they
were outstanding from the beginning of the period through March 31, 1996.
For the period subsequent to March 31, 1996, common stock equivalents
(stock options) have been excluded as they are anti-dilutive.
41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION
AND RESULTS OF THE COMPANY
Stockholders are referred to a full presentation of Management's Discussion
and Analysis of Financial Condition and Results of Operations of the Company
in the Annual Report for the year ended December 31, 1996 which is being
forwarded to the stockholder's concurrently with this Proxy Statement,
together with the audited financial statements and notes contained therein.
Stockholders are also referred to a full presentation of Management's
Discussion and Analysis of Financial Condition and Results of Operations of
the Company in the Quarterly Report on Form 10-Q for the three months ended
March 31, 1997 and filed with the Securities and Exchange Commission on May
15, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION
AND RESULTS OF MLI
OVERVIEW
Since it's inception in August 1992, MLI has been principally engaged in the
development and manufacture of devices and instrumentation which are utilized
in orthopedic procedures. MLI has also provided contract manufacturing
services to third parties which has been the primary source of net sales since
inception. MLI has a limited history of operations, and has experienced
operating losses, resulting from a substantial level of expenses associated
with research and development, regulatory matters and building manufacturing
capabilities.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1996
Net sales decreased $86,000 to $283,000 in the first quarter of 1997 from
$369,000 in the first quarter of 1996. The decrease was primarily due to
reduced levels of contract manufacturing sales resulting from MLI's continuing
shift of manufacturing resources to the production of proprietary products
which have not yet been released commercially.
Gross profit decreased $167,000 to $13,000 in the first quarter of 1997 from
$180,000 in the first quarter of 1996. As a percentage of net sales, gross
profit decreased to 4.6% in the first quarter of 1997 from 48.8% in the first
quarter of 1996. The decrease was primarily due to an increase in
manufacturing costs attributable to MLI's initial investment in the production
of its proprietary products.
Selling, general and administrative expenses increased $189,000 to $230,000
in the first quarter of 1997 from $41,000 in the first quarter of 1996. The
increase was primarily due to the addition of administrative staff and related
costs, legal costs and promotional costs related to the preparation for the
market release of MLI's proprietary products.
Research and development expenses increased $67,000 to $139,000 in the first
quarter of 1997 from $72,000 in the first quarter of 1996. The increase was
primarily due to costs related to the expanded development effort of
proprietary products including product testing and approval costs, legal costs
and equipment and supply costs.
As a result of the above, MLI incurred a net loss of $364,000 in the first
quarter of 1997 as compared to net income of $60,000 in the first quarter of
1996.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Net sales increased to $1.3 million for the year ended December 31, 1996
from $951,000 for the year ended December 31, 1995. The increase was primarily
due to the expansion of MLI's contract manufacturing customer base and
increased sales to existing customers.
42
<PAGE>
Gross profit increased to $661,000 for the year ended December 31, 1996 from
$494,000 for the year ended December 31, 1995. As a percentage of net sales,
gross profit was 50.6% and 51.9% in 1996 and 1995 respectively. The decrease
in the gross profit margin percentage was a result of a change in the mix of
product sales and pricing pressure due to the competitive nature of contract
manufacturing. The increase in gross profit dollars was due to the increase in
sales volume.
Selling, general and administrative expenses increased to $612,000 for the
year ended December 31, 1996 from $441,000 for the year ended December 31,
1995. The increase was primarily due to the addition of management and staff
personnel in support of MLI's development of its proprietary products.
Research and development expenses increased to $562,000 for the year ended
December 31, 1996 from $386,000 for the year ended December 31, 1995. The
increase was due to product development, regulatory approval, and legal
expenses associated with the expanded effort related to MLI's development of
its proprietary products.
Net interest and investment income increased to $161,000 for the year ended
December 31, 1996 from $22,000 for the year ended December 31, 1995. The
increase was due to a gain recognized on the sale of securities.
Gain on sale of assets increased to $272,000 for the year ended December 31,
1996 from a loss of $11,000 for the year ended December 31, 1995. The increase
was due to a gain recognized on the transfer of patent rights and technology
to a third party.
As a result of the above, the net loss decreased to $45,000 for the year
ended December 31, 1996 from $198,000 for the year ended December 31, 1995.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Net sales decreased to $951,000 for the year ended December 31, 1995 from
$3.8 million for the year ended December 31, 1994. The decrease was primarily
due to the sale of MLI's suture anchor and driver technology to a third party
pursuant to an Asset Purchase Agreement executed on December 5, 1994 (the
"Purchase Agreement"). In 1994 a significant percentage of MLI's revenues were
derived from such suture anchors and drivers.
Gross profit decreased to $494,000 for the year ended December 31, 1995 from
$1.9 million for the year ended December 31, 1994. As a percentage of net
sales, gross profit was 51.9% and 49.0% in 1995 and 1994 respectively. The
decrease in gross profit was due to the decrease in sales volume resulting
from the sale of technology pursuant to the Purchase Agreement (the
"Technology Sale") and the associated change in product mix.
Selling, general and administrative expenses decreased to $441,000 for the
year ended December 31, 1995 from $1.4 million for the year ended December 31,
1994. The decrease was primarily due to a reduction in personnel, facilities
and legal costs associated with the Technology Sale.
Research and development expenses increased to $386,000 for the year ended
December 31, 1995 from $201,000 for the year ended December 31, 1994. The
increase was primarily due to product development costs associated with the
expanded effort related to MLI's development of its proprietary products.
Net interest and investment income increased to $22,000 for the year ended
December 31, 1995 from a net expense of $130,000 for the year ended December
31, 1994. Interest and investment income increased to $64,000 for the year
ended December 31, 1995 from a nominal amount for the year ended December 31,
1994. The increase was due to a gain recognized on the sale of securities.
Interest expense decreased to $41,000 for the year ended December 31, 1995
from $130,000 for the year ended December 31, 1994. The decrease was primarily
due to a reduction of notes payable resulting from proceeds received from the
Technology Sale.
43
<PAGE>
MLI recognized a loss on sale of assets of $11,000 for the year ended
December 31, 1995 compared to a gain of $592,000 for the year ended December
31, 1994. The difference was due to the gain recognized on the Technology Sale
in December, 1994.
A net loss of $198,000 was incurred for the year ended December 31, 1995 as
compared to net income of $497,000 for the year ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
Since it's inception, MLI has financed its operations from the private sale
of equity securities, the proceeds from secured notes payable, the proceeds
from investment income, the sales of operating assets, and income generated
from contract manufacturing.
As of March 31, 1997, MLI had cash of $18,000 as compared to a balance of
$831,000 at December 31, 1996. Cash used in MLI's operations amounted to
$928,000 for the first quarter of 1997 primarily as a result of the net loss
of $364,000 and a decrease in current liabilities of $511,000 representing the
payment of an obligation recorded in 1996 to repurchase shares of MLI's common
and preferred stock.
Cash used for investing activities amounted to $96,000 for the first quarter
of 1997 resulting from investments in capital equipment.
Cash provided by financing activities for the first quarter of 1997 included
proceeds of $228,000 from the sale and issuance of 150,000 shares of common
stock.
44
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited Pro Forma Condensed Combined Balance Sheet as of
March 31, 1997 illustrates the effect of the Acquisition as if the Acquisition
and the Share Issuance had occurred on March 31, 1997 and the unaudited Pro
Forma Condensed Combined Statement of Operations for the year ended December
31, 1996 and the three months ended March 31, 1997 illustrates the effect of
the Acquisition as if the Acquisition and the Share Issuance had occurred on
January 1, 1996.
Under the terms of the Acquisition, the Company will purchase substantially
all of the operating assets and assume substantially all of the operating
liabilities of MLI in exchange for the issuance of 1,885,000 shares of the
Company's Common Stock (the "Share Issuance"). The Acquisition is more fully
described elsewhere in this Proxy Statement.
The Pro Forma Condensed Combined Financial Statements are based on
historical financial statements of the Company and MLI appearing elsewhere
herein or incorporated by reference, after giving effect to the Acquisition
using the purchase method of accounting and the assumptions and adjustments
described in the accompanying notes to the Pro Forma Condensed Combined
Financial Statements. Significant pro forma adjustments recorded on the Pro
Forma Condensed Combined Balance Sheet represent the allocation of the
purchase price to the net assets acquired based upon their estimated fair
value. The adjustments to fair value the net assets acquired totaled
approximately $13.3 million, which primarily relate to the fair value
allocated to in-process research and development. The excess of purchase price
over the estimated fair value of net assets acquired amounted to $981,000
which has been accounted for as goodwill. Adjustments recorded on the Pro
Forma Condensed Combined Statement of Operations relate to additional
amortization expense resulting from the recording of goodwill and to the
elimination of the tax benefit recorded by MLI. The Pro Forma Condensed
Combined Financial Statements do not give effect to any transaction costs
associated with the consummation of the Acquisition, except that the Pro Forma
Condensed Combined Balance Sheet as of March 31, 1997 gives effect to such
costs estimated at approximately $300,000.
The Pro Forma Condensed Combined Financial Statements should be read in
conjunction with the financial statements of MLI and of the Company appearing
elsewhere herein or incorporated by reference. The Pro Forma Condensed
Combined Financial Statements are presented for comparative purposes only and
are not intended to be indicative of actual results had the transactions
occurred as of the dates indicated above or of results which may be attained
in the future.
45
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
INNOVASIVE MEDICINE PRO FORMA PRO FORMA
DEVICES, INC. LODGE, INC. ADJUSTMENTS COMBINED
------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equiva-
lents................. $ 5,126 $ 18 $ -- $5,144
Marketable securities.. 16,272 -- 16,272
Accounts receivable,
net................... 982 202 1,184
Inventories............ 872 157 1,029
Other current assets... 352 13 365
-------- ------ ------- -------
Total current as-
sets................ 23,604 390 23,994
Fixed assets, net........ 1,004 626 1,630
Other assets, net........ 25 75 922 (b) 1,022
-------- ------ ------- -------
$ 24,633 $1,091 $ 922 $26,646
======== ====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.......... $ -- $ 74 $ -- $ 74
Accounts payable....... 678 84 762
Accounts payable to re-
lated party........... 392 -- 392
Accrued liabilities.... 627 85 300(c) 1,012
-------- ------ ------- -------
Total current liabil-
ities............... 1,697 243 300 2,240
-------- ------ ------- -------
Note payable............. -- 514 514
-------- ------ ------- -------
Stockholders' equity:
Preferred stock........ -- 17 (17)(d) --
Common stock........... 1 11 (11)(d) 1
Additional paid-in cap-
ital.................. 39,928 926 (926)(d) 54,254
14,326 (a)
Accumulated deficit.... (16,875) (620) 620 (d) (30,245)
(13,370)(e)
Deferred compensation.. (118) (118)
-------- ------ ------- -------
Total stockholders' eq-
uity.................. 22,936 334 622 23,892
-------- ------ ------- -------
$ 24,633 $1,091 $ 922 $26,646
======== ====== ======= =======
</TABLE>
See accompanying notes to pro forma condensed combined financial statements.
46
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
INNOVASIVE MEDICINE PRO
DEVICES, LODGE, PRO FORMA FORMA
INC. INC. ADJUSTMENTS COMBINED
---------- -------- ----------- --------
<S> <C> <C> <C> <C>
Net sales............................. $ 4,353 $1,306 $ -- $5,659
Cost of sales......................... 1,611 645 2,256
------- ------ ---- -------
Gross profit........................ 2,742 661 3,403
Selling, general and administrative
expenses............................. 4,922 613 68 (f) 5,603
Research and development.............. 2,667 562 3,229
------- ------ ---- -------
Loss from operations................ (4,847) (514) (68) (5,429)
Other income, net..................... 785 445 1,230
------- ------ ---- -------
Net loss before tax benefit......... (4,062) (69) (68) (4,199)
------- ------ ---- -------
Income tax benefit.................... -- 24 (24)(g) --
------- ------ ---- -------
Net loss............................ $(4,062) $ (45) $(92) $(4,199)
======= ====== ==== =======
Pro forma net loss per share........ $ (0.63) $ (0.50)
======= =======
Shares used in computing net loss
per share.......................... 6,465 8,350
======= =======
</TABLE>
See accompanying notes to pro forma condensed combined financial statements.
47
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
INNOVASIVE MEDICINE PRO
DEVICES, LODGE, PRO FORMA FORMA
INC. INC. ADJUSTMENTS COMBINED
---------- -------- ----------- --------
<S> <C> <C> <C> <C>
Net sales............................. $1,663 $283 $ -- $1,946
Cost of sales......................... 510 270 -- 780
------ ----- ---- -------
Gross profit........................ 1,153 13 -- 1,166
Selling, general and administrative
expenses............................. 1,495 230 17 (f) 1,742
Research and development.............. 830 139 -- 969
------ ----- ---- -------
Loss from operations................ (1,172) (356) (17) (1,545)
Other income (expense), net........... 299 (8) -- 291
------ ----- ---- -------
Net loss............................ $ (873) $(364) $(17) $(1,254)
====== ===== ==== =======
Net loss per share.................. $(0.12) $ (0.14)
====== =======
Shares used in computing net loss
per share.......................... 7,261 9,146
====== =======
</TABLE>
See accompanying notes to pro forma condensed combined financial statements.
48
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
1. PURCHASE PRICE
The following is a summary of the purchase price and the allocation of the
purchase price to the assets acquired:
Purchase price:
<TABLE>
<S> <C> <C>
Shares of common stock issued....................... 1,885,000 at $7.60 $14,326
Fair value of liabilities assumed................... 757
Estimated transactions costs........................ 300
-------
Total purchase price.............................. $15,383
=======
Allocation of the purchase price:
Asset value:
Reported value of assets purchased................ $ 1,032
In-process research and development............... 13,370
Purchased goodwill................................ 981
-------
$15,383
=======
</TABLE>
The fair value per share of the common stock to be issued by Company was
calculated by reducing the closing price of the shares, on the day of the
public announcement that the Company intended to acquire the assets of MLI, by
a 25% marketability discount.
2. PRO FORMA ADJUSTMENTS
The following pro forma adjustments are reflected in the unaudited pro forma
condensed combined financial statements:
(a) Adjustment of $14,326 reflects the fair value of the issuance of
1,885,000 shares of the Company's common stock of $14,626 for the net
assets of MLI, net of transaction costs of $300.
(b) Adjustment reflects (1) purchased goodwill of $981 which will be
amortized on a straight-line basis over the estimated useful life of
ten years and (2) the elimination of the recorded value on MLI's books
of $53 related to start-up costs and $6 of deferred tax assets based
upon an assessment of the realizability of these assets to the combined
company.
(c) Adjustment represents the estimated transaction costs.
(d) Adjustment represents the elimination of the MLI equity accounts.
(e) Adjustment reflects the purchased in-process research and development
of $13,370 which will be charged to research and development expense on
the closing date of the acquisition. This charge is reflected as an
increase to the accumulated deficit and has been excluded from the pro
forma condensed combined statement of operations as it is considered a
nonrecurring item.
(f) Adjustment reflects increased amortization due to the purchased
goodwill of $25 for the quarter ended March 31, 1997 and $98 for the
year ended December 31, 1996, net of the elimination of amortization
expense relating to capitalized start-up costs recorded on the books of
MLI of $8 for the quarter ended March 31, 1997 and $30 for the year
ended December 31, 1996.
(g) Adjustment reflects the elimination of the tax benefit recorded on the
books of MLI.
3. PRO FORMA NET LOSS PER SHARE
The pro forma combined net loss per share is based upon the pro forma
weighted average number of common and common equivalent shares outstanding of
the Company adjusted for the issuance of 1,885,000 shares of the Company's
stock as of the beginning of the periods presented.
49
<PAGE>
AMENDMENT TO 1996 OMNIBUS STOCK PLAN
(ITEM 3 OF NOTICE)
On February 4, 1997, the Board of Directors of the Company adopted an
amendment to the 1996 Omnibus Stock Plan (the "Omnibus Plan") increasing the
maximum aggregate number of shares available for issuance thereunder from
250,000 to 800,000 shares. The purpose of the increase in the maximum
aggregate number of shares available for issuance is to permit the continuing
availability of stock options and Common Stock for grant in order to continue
to attract and retain key employees and officers of, and consultants to, the
Company. A copy of the Omnibus Plan as amended is attached hereto as Annex
III.
Approval by stockholders of the Omnibus Plan and the amendment increasing
the number of shares issuable under the Omnibus Plan is sought in order to
meet the stockholder approval requirements of (i) Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), which requires stockholder
approval of any increase in the number of shares that may be issued under an
incentive stock option plan; (ii) Rule 16b-3 under the 1934 Act, which in the
case of certain option plans that have been approved by stockholders, prevents
the grant of options to directors, executive officers and certain other
affiliates from being deemed "purchases" for purposes of the profit recapture
provisions of Section 16(b) of that Act; and (iii) Section 162(m) of the Code,
which among other qualifications requires stockholder approval of any option
plan to exempt the spread (the difference between the exercise price and the
market value at the time of exercise) of options from the limitation on
deductibility under that section. The executive officers of the Company are
eligible to receive options under the Omnibus Plan and will therefore benefit
from approval of this amendment. The Board of Directors recommends approval of
this amendment because it believes that the continuing availability of grants
under the Omnibus Plan is an important factor in the Company's ability to
attract and retain key employees, officers and consultants.
AMENDMENT TO 1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
(ITEM 4 OF NOTICE)
On February 4, 1997, the Board of Directors of the Company adopted an
amendment to the 1996 Non-Employee Directors Stock Option Plan (the "Director
Plan") increasing the maximum aggregate number of shares available for
issuance thereunder from 100,000 to 150,000. The purpose of the increase in
the maximum aggregate number of shares available for issuance is to permit the
continuing availability of non-qualified stock options for grant in order to
continue to attract and retain qualified directors of the Company. A copy of
the Director Plan as amended is attached hereto as Annex IV.
Stockholder approval of the Director Plan as amended is required by Rule
16b-3 under the 1934 Act. The Board of Directors recommends approval of this
amendment so that the Director Plan will be an effective means of attracting
and retaining non-employee directors and further aligning their interests with
those of the stockholders by providing for or increasing their equity
interests in the Company.
DESCRIPTION OF THE COMPANY'S STOCK PLANS SUBJECT TO STOCKHOLDER ACTION
1996 OMNIBUS STOCK PLAN
The Company's 1996 Omnibus Stock Plan (the "Omnibus Plan") was adopted by
the Board of Directors on April 2, 1996 and approved by the stockholders on
April 23, 1996 prior to the Company's initial public offering. The Omnibus
Plan, as amended by the Board, currently provides for the issuance of a
maximum of 800,000 shares of Common Stock, plus such additional number of
shares that become available due to the forfeiture of options granted under
the 1992 Stock Option Plan, (581,700 of which are currently available for
grant) pursuant to the grant of incentive stock options to employees and non-
qualified stock options or restricted stock to employees, consultants,
directors and officers of the Company. The Omnibus Plan will remain in effect
until April 1, 2006, subject to the Boards right to terminate it earlier.
50
<PAGE>
The Omnibus Plan is administered by the Compensation Committee of the Board
of Directors, which consists of two (2) or more members of the Board who are
"non-employee directors" and "outside directors" within the meaning of the
1934 Act and the Code, respectively. Current members are Messrs. Ciffolillo
and Momsen. Subject to the provisions of the Omnibus Plan, the Compensation
Committee has the authority to select the optionees or restricted stock
recipients and determine the terms of the options or restricted stock granted,
including: (i) the number of shares; (ii) the option exercise terms; (iii) the
exercise or purchase price (which in the case of an incentive stock option
cannot be less than the market price of the Common Stock as of the date of
grant); (iv) the type and duration of transfer or other restrictions; and (v)
the time and form of payment for restricted stock and upon exercise of
options.
Generally, an option is not transferable by the optionholder except by will
or by the laws of descent and distribution. No incentive stock option may be
exercised more than 90 days following termination of employment unless the
termination is due to death or disability, in which case the option is
exercisable for a maximum of one year after such termination.
At April 30, 1997, there were outstanding under the Omnibus Plan options
held by participants to purchase an aggregate of 218,300 shares of Common
Stock. The exercise price of options granted to date were $10 per share, and
such options expire between April 2006 and February 2007. Approximately 90
employees, directors and consultants are eligible to receive options under the
Omnibus Plan. The last sale price of the Common Stock on April 30, 1997 as
reported by the Nasdaq National Market was $10 per share.
The following table sets forth the number of shares for which options have
been granted to date under the Omnibus Plan and the Director Plan to each
Named Executive Officer, the current executive officers as a group, the non-
employee directors and the non-executive officer employees. For additional
information as to options granted to the Named Executive Officers during 1996,
see the Option Grants Table above.
<TABLE>
<CAPTION>
OMNIBUS PLAN DIRECTOR PLAN
------------ -------------
<S> <C> <C>
Richard D. Randall........................... 25,000 n/a
James E. Nicholson........................... 10,000 n/a
James V. Barrile............................. 25,000 n/a
Philip H. Heitlinger......................... 15,000 n/a
Karen L. Mattocks............................ 10,000 n/a
Richard B. Caspari........................... 0 n/a
Alan Chervitz................................ 0 n/a
Current executive officers as a group (7 per-
sons)....................................... 115,000 n/a
Non-employee directors (4 persons)........... 0 40,000
Non-executive officer employees (22 per-
sons)....................................... 77,800 n/a
</TABLE>
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The 1996 Non-Employee Director Stock Option Plan (the "Director Plan") was
adopted by the Board of Directors on April 2, 1996 and approved by the
stockholders on April 2, 1996 prior to the Company's initial public offering.
The Director Plan, as amended by the Board, currently provides for the
issuance of up to 150,000 shares of Common Stock of the Company pursuant to
the grant of non-qualified stock options to directors who are not employees of
the Company. At April 30, 1997, there were outstanding under the Director Plan
options held by directors to purchase an aggregate of 40,000 shares of Common
Stock. The exercise prices of options granted to date were $10 per share, and
such options expire in April 2006. Four directors are eligible to receive
options under the Director Plan. This will increase to five if Richard B.
Caspari is elected pursuant to Item 1.
On the date of the first Board meeting after the effectiveness of the
Company's initial public offering on June 6, 1996, each non-employee director
then serving received an option to purchase 10,000 shares of Common Stock,
which will vest over a four-year period at the rate of 25% per year so long as
the optionee remains a director. In addition, each new director who is not an
employee of the Company elected after June 6, 1997 will
51
<PAGE>
receive upon his initial election to the Board of Directors an option to
purchase 10,000 shares of Common Stock, which will vest over a period of four
years at the rate of 25% per year provided that the optionee remains a
director of the Company. At each annual meeting thereafter, each director then
serving will receive 2,500 shares of Common Stock, which will vest over a
four-year period at the rate of 25% per year if the optionee remains a
director. The exercise price per share for all options granted under the
Director Plan will be equal to the market price of the Common Stock as of the
date of grant. Options may not be assigned or transferred except by will or by
the laws of descent and distribution and are exercisable, only to the extent
vested, within 180 days after the optionee ceases to serve as a director of
the Company (except that if a director dies or becomes disabled while he or
she is serving as a director of the Company, the option is exercisable until
the earlier of the scheduled expiration date of the option or one year from
the death or disability).
FEDERAL INCOME TAX INFORMATION
Set forth below is a general summary of the federal income tax consequences
to the Company and to recipients of options under the Company's stock option
plans. The following summary is not intended to be exhaustive, does not
address certain special federal tax provisions, and does not address state,
municipal or foreign tax laws.
Tax Treatment of Incentive Stock Options. Under Section 422 of the Code, an
option holder incurs no federal income tax liability (other than alternative
minimum tax, as described below) on either the grant or exercise of an
incentive stock option ("ISO"). Provided that the stock is held for at least
one year after the date of exercise of the option and at least two years after
its date of grant, any gain realized on the subsequent sale of stock will be
taxed as long-term capital gain. If the stock is disposed of within a shorter
period, the option holder will be taxed, with respect to the gain realized, as
if he or she had then received ordinary compensation income in an amount equal
to the difference between the fair market value of the stock on the date of
exercise of the option and its fair market value on the date on which the
option was granted. The balance of the gain realized will be taxed as capital
gain, long-term or short-term depending on the holding period since the date
of exercise. Unless an optionholder disposes of stock received on exercise of
an option within the calendar year in which exercise occurred, the excess of
the value of the stock at exercise over the option price will increase the
option holders alternative minimum taxable income ("AMTI"). After a
deductible, AMTI is subject to a 26-28% tax rate. The tax is payable only to
the extent that it exceeds the optionholders "regular" tax liability and any
portion of the excess attributable to the exercise of the incentive stock
option is generally creditable against future taxes.
The Company receives no tax deduction on the grant or exercise of an ISO,
but is entitled to a tax deduction if the option holder recognizes ordinary
compensation income on account of a premature disposition of ISO stock in the
same amount and at the same time as the option holder's recognition of income.
Tax Treatment of Non-Qualified Stock Options. Under Section 83 of the Code,
option holders realize no taxable income when a non-qualified stock option
("NSO") is granted. Instead, the difference between the fair market value of
the stock and the option price paid is taxed as ordinary compensation income,
on or after the date on which the option is exercised. The difference is
measured and taxed as of the date of exercise if the stock is not subject at
that time to a "substantial risk of forfeiture," as defined in Section 83. To
the extent that the stock is subject to a substantial risk of forfeiture, the
difference is measured as of the date or dates on which the risk terminates.
The Omnibus Plan permits the Compensation Committee to impose repurchase
rights on stock acquired upon exercise of options that would constitute such a
"substantial risk of forfeiture." If such repurchase rights are imposed, the
option holder would recognize taxable income and incur a tax liability, and
the optionee's holding period for tax purposes would commence, in the year or
years that the substantial risk of forfeiture terminates with respect to the
stock.
Alternatively, an option holder holding an NSO may elect, within thirty days
after the option is exercised, in accordance with Section 83(b), to be taxed
on the difference between the option exercise price and the fair market value
of the stock on the date of exercise even though the stock acquired is subject
to a substantial risk of forfeiture. If the option holder makes this election,
subsequent changes in the value of the Common Stock at the time the forfeiture
provisions lapse will not result in ordinary compensation income to the option
holder.
52
<PAGE>
The Company receives no tax deduction on the grant of an NSO, but is
entitled to a tax deduction when the option holder recognizes taxable income
on or after exercise of the option, in the same amount as the income
recognized by the option holder.
RATIFICATION OF SELECTION OF
INDEPENDENT AUDITORS
(ITEM 5 OF NOTICE)
On the recommendation of the Audit Committee, the Board of Directors has
selected Price Waterhouse LLP, independent certified public accountants, as
auditors of the Company for the fiscal year ending December 31, 1997. This
firm has audited the accounts and records of the Company since 1991. A
representative of Price Waterhouse LLP will be present at the Annual and
Special Meeting to answer questions from stockholders and will have an
opportunity to make a statement if desired.
The selection of independent auditors is not required to be submitted to a
vote of the stockholders. The Board believes, however, it is appropriate as a
matter of policy to request that the stockholders ratify the appointment. If
the stockholders do not ratify the appointment, the Board will reconsider its
selection.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), requires the Company's officers and directors and persons who own more
than ten percent of its Common Stock to file reports with the Securities and
Exchange Commission disclosing their ownership of stock in the Company and
changes in such ownership. Copies of such reports are also required to be
furnished to the Company. Based solely on a review of the copies of such
reports received by it, the Company believes that, during fiscal 1996, all
such filing requirements were complied with, except that Richard D. Randall,
the Chief Executive Officer of the Company, was late in filing a Form 4 in
fiscal year 1996 relating to the purchase of 10,000 shares of Common Stock in
October 1996 and Howard D. Palefsky, a director of the Company, was late in
filing a Form 4 in fiscal year 1996 relating to the purchase of 2,500 shares
of Common Stock in June 1996.
STOCKHOLDER PROPOSALS FOR 1997 MEETING
Proposals of stockholders intended to be presented at the 1998 Annual
Meeting of Stockholders must be presented on or before March 10, 1997 for
inclusion in the proxy materials relating to that meeting. Any such proposals
should be sent to the Company at its principal offices addressed to the Vice
President, Finance and Administration. Other requirements for inclusion are
set forth in Rule 14a-8 under the 1934 Act.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company (File No.
0-28492) pursuant to the Exchange Act are incorporated by reference in this
Proxy statement.
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (including all audited financial statements contained
therein);
2. The Company's Annual Report to Stockholders for the fiscal year ended
December 31, 1996 (including all audited financial statements contained
therein);
3. The Company's Current Report on Form 8-K dated July 23, 1996;
4. The Company's Quarterly Report on Form 10-Q dated May 15, 1997; and
5. The Company's Registration Statement on Form S-1 (Registration No. 333-
3368) filed with the SEC on May 17, 1996.
53
<PAGE>
This Proxy Statement incorporates documents by reference which are not
presented herein or delivered herewith. Such documents (other than exhibits or
schedules to such documents unless such exhibits or documents are specifically
incorporated herein by reference) are available to any person, including any
beneficial owner, to whom this Proxy Statement is delivered, on written or
oral request, without charge, directed to Innovasive Devices, Inc., 734 Forest
Street, Marlboro, Massachusetts 01752-3032, Attention: Chief Financial Officer
(telephone number: (508) 460-8229).
OTHER MATTERS
The Company has no knowledge of any matters to be presented for action by
the stockholders at the Annual and Special Meeting other than as set forth
above. However, the enclosed proxy gives discretionary authority to the
persons named therein to act in accordance with their best judgment in the
event that any additional matters should be presented.
The Company will bear the cost of the solicitation of proxies by management,
including the charges and expenses of brokerage firms and others for
forwarding solicitation material to beneficial owners of Common Stock.
By order of the Board of Directors
Roslyn G. Daum
Clerk
June 6, 1997
The Board hopes that stockholders will attend the meeting. WHETHER OR NOT
YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND RETURN THE
ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. A prompt response will greatly
facilitate arrangements for the meeting, and your cooperation will be
appreciated. Stockholders who attend the meeting may vote their stock
personally even though they have sent in their proxies.
54
<PAGE>
FINANCIAL INFORMATION OF MEDICINE LODGE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report............................................. F- 2
Balance Sheets as of December 31, 1996 and 1995.......................... F- 3
Statements of Operations for each of the years ended December 31, 1996
and 1995................................................................ F- 5
Statement of Changes in Stockholders' Equity for each of the years ended
December 31, 1996 and 1995.............................................. F- 6
Statement of Cash Flows for each of the years ended December 31, 1996 and
1995.................................................................... F- 7
Notes to Financial Statements............................................ F- 8
Condensed Balance Sheet as of March 31, 1997 (unaudited)................. F-11
Condensed Statement of Operations for each of the three month periods
ended March 31, 1997 and 1996 (unaudited)............................... F-12
Condensed Statement of Cash Flows for each of the three month periods
ending March 31, 1997 and 1996 (unaudited).............................. F-13
Notes to Unaudited Condensed Financial Statements........................ F-14
</TABLE>
F-1
<PAGE>
COOK DORIGATTI & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders
Medicine Lodge, Inc.
Logan, Utah
We have audited the accompanying balance sheets of Medicine Lodge, Inc. as
of December 31, 1995 and 1996, and the related statements of operations,
changes in stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Medicine Lodge, Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
Subsequent to December 31, 1996, Medicine Lodge, Inc. agreed to sale
substantially all of its assets and liabilities. See Note 2.
Cook Dorigatti & Company, P.C.
February 13, 1997
632 North Main, Logan, Utah 84321 (801) 750-5566
F-2
<PAGE>
MEDICINE LODGE, INC.
BALANCE SHEETS
DECEMBER 31, 1995, AND 1996
ASSETS
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash................................................. $ 221,192 $ 831,036
Accounts Receivable (Less Allowance for Doubtful Ac-
counts of $18,000 and $25,650, Respectively)........ 129,710 145,708
Income Tax Receivable................................ 92,000 16,000
Deferred Income Tax.................................. 6,000 --
Inventory............................................ 105,648 164,482
Prepaid Expenses..................................... 19,578 --
Note Receivable--Shareholder......................... 27,480 --
---------- ----------
TOTAL CURRENT ASSETS............................... 601,608 1,157,226
---------- ----------
PROPERTY AND EQUIPMENT
Office Furniture and Fixtures........................ 68,708 135,522
Machinery and Equipment.............................. 498,279 735,647
Accumulated Depreciation............................. (188,958) (300,181)
---------- ----------
PROPERTY AND EQUIPMENT--NET........................ 378,029 570,988
---------- ----------
OTHER ASSETS
Deposits............................................. 1,400 --
Deferred Income Taxes................................ 5,000 6,000
Start Up Costs (Net of Accumulated Amortization of
$60,000 and $90,000, Respectively).................. 90,000 60,000
---------- ----------
TOTAL OTHER ASSETS................................. 96,400 66,000
---------- ----------
TOTAL ASSETS..................................... $1,076,037 $1,794,214
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
MEDICINE LODGE, INC.
BALANCE SHEETS--(CONTINUED)
DECEMBER 31, 1995, AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable................................ $ 92,185 $ 122,795
Accrued Expenses and Payroll Taxes.............. 34,420 82,128
Note Payable--Stock Redemption.................. -- 512,338
Franchise Taxes Payable......................... 1,820 1,820
Income Taxes Payable............................ 19,405 --
Deferred Income Taxes........................... 20,000 --
Current Portion of Long Term Liabilities........ 81,850 73,537
---------- ----------
TOTAL CURRENT LIABILITIES..................... 249,680 792,618
LONG TERM LIABILITIES
Notes Payable and Capital Lease Obligation--
Less Current Portion (Notes 3 and 4)........... 454,512 531,691
---------- ----------
TOTAL LIABILITIES............................. 704,192 1,324,309
---------- ----------
STOCKHOLDERS' EQUITY
Series A Convertible Preferred Stock $.01 Par
Value
Authorized--10,000,000 Shares
Issued--2,175,000 and 1,700,000 Shares, Respec-
tively........................................ 21,750 17,000
Common Stock, $.01 Par Value
Authorized--10,000,000 Shares
Issued--325,000 and 971,349 Shares, Respective-
ly............................................ 3,250 9,713
Additional Paid-In Capital...................... 47,539 698,854
Retained Earnings (Deficit)........................ 299,306 (255,662)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY.................... 371,845 469,905
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.. $1,076,037 $1,794,214
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
MEDICINE LODGE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, AND 1996
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
SALES.................................................... $ 951,495 $1,306,303
COST OF SALES............................................ 457,812 645,588
--------- ----------
GROSS PROFIT............................................. 493,683 660,715
--------- ----------
SELLING, GENERAL, ADMINISTRATIVE EXPENSES
Salaries and Wages..................................... 390,810 589,189
Depreciation and Amortization.......................... 162,617 117,259
Insurance.............................................. 18,862 19,029
Research and Development............................... 385,944 562,302
Advertising............................................ 325 9,829
Legal and Accounting................................... 19,613 22,771
Bank Charges........................................... 250 220
Office Supplies........................................ 9,211 16,683
Bad Debts.............................................. 4,000 7,650
Rents.................................................. 40,611 24,819
Operating Supplies..................................... 94,279 116,386
Repairs and Maintenance................................ 9,788 66,503
Shipping............................................... 24,703 26,528
Consulting............................................. 12,181 50,364
Telephone.............................................. 10,068 9,662
Payroll Taxes.......................................... 48,650 52,811
Taxes and Licenses..................................... 22,923 2,255
Employee Benefits...................................... 29,966 34,793
Travel and Entertainment............................... 13,631 22,445
Utilities.............................................. 17,146 16,558
Educational Seminars................................... 799 3,302
Less Overhead Applied to Cost of Sales and Inventory... (489,700) (596,786)
--------- ----------
TOTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES... 826,677 1,174,572
--------- ----------
OPERATING LOSS........................................... (332,994) (513,857)
--------- ----------
OTHER REVENUES AND (EXPENSES)
Interest and Investment Income......................... 63,586 218,497
Gain (Loss) on Sale of Assets.......................... (10,746) 272,448
Other Income........................................... 5,730 10,804
Interest Expense....................................... (41,352) (57,167)
--------- ----------
TOTAL OTHER REVENUES AND (EXPENSES).................. 17,218 444,582
--------- ----------
LOSS BEFORE INCOME TAXES................................. (315,776) (69,275)
INCOME TAX BENEFIT....................................... 117,595 24,000
--------- ----------
NET LOSS................................................. $(198,181) $ (45,275)
========= ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
MEDICINE LODGE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, AND 1996
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
PREFERRED COMMON PAID-IN EARNINGS
STOCK STOCK CAPITAL (DEFICIT) TOTAL
--------- ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at--January 1,
1995....................... $21,750 $3,250 $ 47,539 $ 497,487 $ 570,026
Net Loss.................... -- -- -- (198,181) (198,181)
------- ------ -------- --------- ---------
BALANCE AT--DECEMBER 31,
1995....................... 21,750 3,250 47,539 299,306 371,845
Redemption of 475,000 Pre-
ferred Shares and 19,267
Common Shares............ (4,750) (193) (32,702) (509,693) (547,338)
Issuance of 665,616 Common
Shares (Including 257,653
Shares Under Stock Op-
tion).................... -- 6,656 684,017 -- 690,673
Net Loss.................. (45,275) (45,275)
------- ------ -------- --------- ---------
BALANCE AT--DECEMBER 31,
1996....................... $17,000 $9,713 $698,854 $(255,662) $ 469,905
======= ====== ======== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
MEDICINE LODGE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, AND 1996
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss................................................ $(198,181) $ (45,275)
Adjustments to Reconcile Net (Loss) to
Net Cash Provided by Operating Activities
Bad Debts.............................................. 4,000 7,650
Deferred Income Tax Benefit............................ (137,000) (15,000)
Depreciation and Amortization.......................... 162,617 144,363
(Gain) Loss on Sale of Assets.......................... 10,746 (272,448)
Investment Income...................................... (52,348) (202,915)
(Increase) Decrease in:
Accounts Receivable................................... 374,047 (23,648)
Inventory............................................. (52,418) (58,834)
Income Taxes and Other Current Assets................. (37,133) 99,458
Increase (Decrease) in:
Accounts Payable...................................... (91,074) 30,610
Accrued Expenses...................................... (30,728) 47,708
Income Taxes and Other Taxes Payable.................. (69,225) (19,405)
--------- ---------
NET CASH USED BY OPERATING ACTIVITIES................ (116,697) (307,736)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Property and Equipment..................... (16,148) (310,230)
Proceeds from Disposals of Property, Equipment and
Patents................................................ 31,312 275,356
Proceeds from Sale of Available-for-Sale Securities..... 57,348 202,915
Collections of Notes Receivable......................... 625,000 25,000
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES............ 697,512 193,041
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issue of Common Stock................................... -- 690,673
Payment of Notes Payable................................ (344,702) (481,441)
Payment of Capital Lease Obligation..................... (14,921) (4,979)
Stock Redemption........................................ -- (35,000)
Proceeds from New Debt.................................. -- 555,286
--------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES..... (359,623) 724,539
--------- ---------
NET INCREASE IN CASH..................................... 221,192 609,844
CASH AT BEGINNING OF YEAR................................ -- 221,192
--------- ---------
CASH AT END OF YEAR...................................... $ 221,192 $ 831,036
========= =========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
MEDICINE LODGE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, AND 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Medicine Lodge, Inc. (Company) is a Delaware corporation authorized to
operate in Utah. It develops, manufactures, markets and distributes medical
and orthopaedic products from its engineering, manufacturing, testing,
regulatory approval, production, sterile packaging and market distribution
facilities in Logan, Utah. The Company provides credit in the normal course of
business to customers primarily located within the United States of America.
The Company performs ongoing credit evaluations of its customers and maintains
allowances for doubtful accounts based on factors surrounding the credit risk
of specific customers, historical trends and other information. Credit losses,
when realized, have been within the range of the Company's expectations and,
historically, have not been significant.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
value. Full absorption costing is used for work in process, finished goods and
cost of sales.
Property and Equipment
Property and Equipment are carried at cost. Depreciation of property and
equipment is provided using the straight line method based on useful lives
which range from five to seven years. Depreciation expense for 1995 was
$132,617 and 1996 was $114,363.
Amortization of Start Up Costs
The start up costs of the Company are being amortized on a straight line
basis over sixty months. Amortization expense was $30,000 for both 1995 and
1996.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Cash
For purposes of the statement of cash flows, the Company considers all
short-term debt securities purchased with a maturity of three months or less
to be cash equivalents. There were no cash equivalents at December 31, 1996.
The Company has a concentration of credit risk for cash in banks that exceed
insured limits which amounted to $121,000 and $731,000 at December 31, 1995
and 1996 respectively.
Income Taxes
The Company accounts for income taxes under the Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (FAS 109). FAS 109
requires recognition of deferred tax assets and liabilities for expected
future tax consequences of events that have been included in the financial
statements and tax returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the
F-8
<PAGE>
MEDICINE LODGE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to be
recovered or settled.
Research and Development
Research and development costs are charged to expense as incurred and
amounted to $385,944 in 1995 and $562,302 in 1996. The research and
development costs, respectively, consist of direct labor $203,153 and
$362,656, outside research and development contracting $60,241 and $48,980,
legal expenses and other research and development costs, $122,550 and $150,666
for 1995 and 1996. The Company is currently working on five product lines to
be released in the early part of 1997. The Company plans to manufacture and
market the product lines in the medical supply market. The products are based
on patents currently owned by Medicine Lodge, Inc.
NOTE 2: SUBSEQUENT EVENT-SALE OF ASSETS
Subsequent to year end the Company agreed to sale substantially all of its
assets and liabilities to Innovasive Devices, Inc. The agreement will combine
the companies in a tax-free reorganization in which Medicine Lodge's assets
will be acquired for 1.885 million shares of Innovasive Devices, Inc., common
stock.
The transaction is expected to close during the second calendar quarter of
1997 and is subject to the approval of the shareholders of Innovasive Devices,
Inc. Piper Jaffray, Inc., is serving as financial advisor to Innovasive
Devices, Inc., and has issued a fairness opinion to the Board of Directors of
Innovasive Devices, Inc., with respect to the proposed combination.
NOTE 3: DEBT
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Secured note payable in equal monthly installments of
$10,251.55 per month until May 2001 when the final
payment of $226,916 is due. Interest rate is 8.6%.... $ -- $605,228
Secured note payable in varying monthly installments
plus interest at prime plus 1.5 percent due January
2002. Currently the monthly payment is $8,231 and
interest at December 31, 1995 was 10%................ 441,383 --
Less Current Portion.................................. (57,200) (73,537)
-------- --------
$384,183 $531,691
======== ========
</TABLE>
The following is a summary of principal maturities of long-term debt during
the next five years:
<TABLE>
<S> <C>
1997.............................................................. $ 73,537
1998.............................................................. 80,156
1999.............................................................. 87,371
2000.............................................................. 95,235
2001.............................................................. 268,929
</TABLE>
Interest expense and cash payments for interest were $41,352 for 1995, and
$57,167 for 1996.
F-9
<PAGE>
MEDICINE LODGE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
The fair value of the Company's long-term debt is estimated based on the
current rates offered to the Company for debt of the same remaining
maturities. At December 31, 1995, and 1996, the fair value of the long-term
debt approximates the amounts recorded in the financial statements.
NOTE 4: CAPITAL LEASE
The Company had equipment under a capital lease that originated in 1995 with
a term of 48 months. It was stated on the balance sheet at a capitalized cost
of $109,900. Accumulated depreciation of $30,700 has been recognized at
December 31, 1995. During 1996 the leasing company rolled the lease into an
installment note (See Note 3).
This amount is stated on the balance sheet as follows:
<TABLE>
<CAPTION>
1995 1996
------- -----
<S> <C> <C>
Current Portion............................................. $24,650 $ --
Long-Term Portion........................................... 70,329 --
------- -----
Obligation Under Capital Lease.............................. $94,979 $ --
======= =====
</TABLE>
NOTE 5: INCOME TAXES
The provision (benefit) for income taxes consists of the following
components:
<TABLE>
<CAPTION>
1995 1996
--------- --------
<S> <C> <C>
Current............................................... $ 19,405 $ (9,000)
Deferred.............................................. (137,000) (15,000)
--------- --------
$(117,595) $(24,000)
========= ========
</TABLE>
The Company made net cash payments for income taxes of $107,450 in 1995, and
$7,000 in 1996.
Deferred taxes are attributable to the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. Significant components of
deferred tax assets and liabilities were financial versus tax capitalization
of leasehold improvements on month-to-month leases and installment notes
receivable.
The Company has a current net operating loss of approximately $100,000, that
will be carried back to recover prior taxes paid. Any carry forward will
expire in 2011.
NOTE 6: STOCK OPTIONS
The Company's 1994 Stock Option Plan authorized 250,000 shares and granted
options to purchase 130,380 shares of common stock to certain key employees.
Exercise terms for options granted under this plan were determined at each
grant date. None were exercised during the year, leaving 130,380 granted
options outstanding at year end. These options are exercisable at $.10 per
share and expire in 1999.
F-10
<PAGE>
MEDICINE LODGE, INC.
CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 18 $ 831
Accounts receivable, net of allowance for doubtful
accounts of $18 at March 31, 1997 and $26 at
December 31, 1996.................................. 202 146
Inventories......................................... 157 164
Prepaid expenses.................................... 29 16
------ ------
Total current assets.............................. 406 1,157
Fixed assets, net..................................... 626 571
Other assets, net..................................... 59 66
------ ------
$1,091 $1,794
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 84 $ 123
Other current liabilities........................... 85 596
Current portion of notes payable.................... 74 74
------ ------
Total current liabilities......................... 243 793
------ ------
Notes payable......................................... 514 531
------ ------
Stockholders' equity:
Preferred stock..................................... 17 17
Common stock........................................ 11 10
Additional paid-in capital.......................... 926 699
Accumulated deficit................................. (620) (256)
------ ------
Total stockholders' equity........................ 334 470
------ ------
$1,091 $1,794
====== ======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-11
<PAGE>
MEDICINE LODGE, INC.
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Net sales.................................................. $ 283 $ 369
Cost of sales.............................................. 270 189
--------- --------
Gross profit............................................. 13 180
Selling, general and administrative expenses............... 230 41
Research and development................................... 139 72
--------- --------
Loss from operations..................................... (356) 67
Other expense.............................................. (8) (7)
--------- --------
Net income (loss)........................................ $ (364) $ 60
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-12
<PAGE>
MEDICINE LODGE, INC.
CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income (loss)....................................... $ (364) $ 60
Adjustments to reconcile net income (loss) to net cash
used for operating activities
Depreciation and amortization......................... 48 35
Changes in assets and liabilities:
Accounts receivable, net............................ (56) (138)
Inventories......................................... 7 (15)
Prepaid expenses.................................... (13) --
Accounts payable.................................... (39) (37)
Other current liabilities........................... (511) 3
--------- --------
Net cash used for operating activities.................... (928) (92)
--------- --------
Cash flows from investing activities
Purchases of fixed assets............................... (96) (4)
--------- --------
Cash flows from financing activities
Proceeds from issuance of common stock, net of issuance
costs.................................................. 228 --
Payment of notes payable................................ (17) (22)
--------- --------
Net cash provided by (used for) financing activities...... 211 (22)
--------- --------
Net decrease in cash and cash equivalents................. (813) (118)
Cash and cash equivalents at beginning of period.......... 831 221
--------- --------
Cash and cash equivalents at end of period................ $ 18 $ 103
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-13
<PAGE>
MEDICINE LODGE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Medicine Lodge,
Inc. (MLI) include, in the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
of MLI's financial position at March 31, 1997 and the results of operations
for the three month periods ended March 31, 1997 and 1996. Interim results of
operations are not necessarily indicative of the results to be achieved for
the full year.
The accompanying unaudited condensed financial statements and these notes do
not include all disclosures required by generally accepted accounting
principles for complete financial statements. Accordingly, these statements
should be read in conjunction with the financial statements and accompanying
notes contained in MLI's audited financial statements for the years ended
December 31, 1996 and 1995 included in this Proxy Statement.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Raw materials.......................................... $ 67 $ 57
Work-in-process........................................ 46 69
Finished goods......................................... 44 38
---- ----
Totals................................................. $157 $164
==== ====
</TABLE>
3. COMMON STOCK ISSUANCE (UNAUDITED)
In January 1997, MLI sold and issued 150,000 shares of its common stock. Net
proceeds to MLI from the issuance were approximately $228,000.
F-14
<PAGE>
ANNEX I
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT, dated as of February 4, 1997 (this
"Agreement"), by and among Innovasive Devices, Inc., a Massachusetts
corporation ("Buyer"), Medicine Lodge, Inc., a Delaware corporation (the
"Seller") and the shareholders of the Seller who are signatories to this
Agreement (the "Shareholders").
WHEREAS, Seller is engaged in various business activities, including the
development and manufacture of orthopaedic medical devices (the "Business")
and Buyer wishes to purchase, and Seller wishes to sell, certain of the assets
of Seller relating to the Business, for the consideration set forth below and
the assumption of certain of Seller's liabilities set forth below, subject to
the terms and conditions of this Agreement (the "Purchase").
WHEREAS, it is intended that the Purchase shall qualify for federal income
tax purposes as a reorganization within the meaning of Section 368(a)(1)(C) of
the Internal Revenue Code of 1986, as amended (the "Code") and that this
Agreement shall constitute a "plan of reorganization" for the purposes of
Section 368(a)(1)(C) of the Code;
WHEREAS, it is intended that the Purchase shall be recorded for accounting
purposes as a purchase; and
WHEREAS, Buyer, Seller and the Shareholders desire to make certain
representations, warranties, covenants and agreements in connection with the
Purchase.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the parties hereto,
intending to be legally bound hereby, agree as follows:
ARTICLE I
THE PURCHASE
SECTION 1.1 PURCHASED ASSETS. Based on and subject to the representations
and warranties contained in this Agreement and the terms and conditions
hereof, at the Closing (as hereinafter defined), Seller shall sell, transfer,
convey, assign and deliver to Buyer, and Buyer shall purchase from Seller, all
of Seller's properties and assets (except for those assets described in
Schedule 1.1 which Seller shall retain (the "Excluded Assets")), which shall
include Seller's properties and assets of every kind, nature and description,
whether tangible or intangible, real, personal or mixed and wherever located
relating to the Business, including without limitation the following:
(a) machinery, equipment, furniture, fixtures, leasehold improvements,
computer equipment, software, materials and supplies;
(b) licenses, assignments, patents, patent applications, trademarks,
authorizations, permits, trade secrets, proprietary rights, processes, know-
how, goodwill, copyrights and other intellectual property, including the
Intellectual Property described in Section 4.17 (except that (i) Seller will
retain the name "Medicine Lodge" and the registered tradename and logo
associated therewith but will license the use of such logo to Buyer to the
extent required by Buyer under a fully paid irrevocable license and (ii) Buyer
acknowledges that Seller developed, but has no ownership interest in and
therefore is not transferring, the TSOG technology previously disclosed to
Buyer);
(c) all financial, accounting and operating data, books, records and
accounts, sales and promotional data, advertising materials, credit
information, cost and pricing information, correspondence, manuals, customer
and supplier lists, business plans, projections, studies or reports or other
confidential information relating to the Business;
A1-1
<PAGE>
(d) all rights of Seller under contracts, leases, commitments, purchase and
sale orders and other agreements listed on Schedule 4.16(a) hereto but
excluding the excluded contracts listed on Schedule 1.1; and
(e) cash, accounts receivable, inventory and all other current assets, other
than $15,000, which shall be retained by the Seller.
The foregoing are hereinafter referred to collectively as the "Purchased
Assets." Notwithstanding the foregoing, Buyer may elect at any time prior to
the Purchase, instead of acquiring the Purchased Assets directly, to assign
its rights to purchase the Purchased Assets to any directly or indirectly
owned subsidiary of Buyer, in which case the parties agree to execute an
appropriate amendment to this Agreement to reflect such election or
substitution.
ARTICLE II
PURCHASE PRICE AND PAYMENT
SECTION 2.1 PURCHASE PRICE. The purchase price for the Purchased Assets (the
"Purchase Price") shall be (a) 1,885,000 shares of fully paid and non-
assessable shares of Common Stock, $.0001 par value, of Buyer ("Buyer Common
Stock") and (b) the assumption of the Assumed Liabilities, each payable as set
forth in Section 2.2 below.
SECTION 2.2 METHOD OF PAYMENT. The Purchase Price shall be paid as follows:
(a) On the Closing Date, Buyer shall issue and deliver to Seller a duly
authorized and executed stock certificate representing 1,696,500 shares of
Buyer Common Stock (the "Closing Shares").
(b) Buyer shall issue to Seller a duly authorized and executed stock
certificate (the "Escrow Certificate") representing 188,500 shares of Buyer
Common Stock (the "Escrow Shares") according to the following procedure:
(i) Buyer shall deposit into escrow (the "Escrow") the Escrow Certificate
with an escrow agent to be selected by the parties (the "Escrow Agent")
pursuant to the terms of the Escrow Agreement substantially in the form
attached hereto as Exhibit 2.2(b)(i) (the "Escrow Agreement");
(ii) Seller shall deposit with the Escrow Agent five counterparts of a
duly endorsed stock transfer power for the Escrow Certificate with the
number of shares to be transferred to be left blank; and
(iii) The Escrow Shares will be held and distributed only in accordance
with the terms of this Agreement and the Escrow Agreement.
(c) Buyer shall assume the Assumed Liabilities pursuant to Section 2.3.
SECTION 2.3 ASSUMPTION OF LIABILITIES. (a) At the Closing, Buyer shall
assume and agree to pay when due, perform and discharge in accordance with the
terms thereof, and indemnify and hold Seller and Shareholders harmless from,
all of the liabilities, obligations and commitments of Seller (i) that are
shown on the balance sheet included in the 1996 Financial Statements (as
defined in Section 4.5 below) other than liabilities for Taxes (as defined in
Section 4.11(b) below) which are excluded pursuant to Section 2.3(b), or (ii)
that were incurred in the ordinary course of the Seller's business at any time
prior to the Closing Date unless specifically excluded pursuant to Section
2.3(b) (collectively, the "Assumed Liabilities").
(b) Buyer shall not assume or agree to perform, pay or discharge, and Seller
and Shareholders shall remain unconditionally liable for, all obligations,
liabilities and commitments, fixed or contingent, of Seller other than the
Assumed Liabilities (the "Excluded Liabilities"). Without limiting the
foregoing, the Assumed Liabilities shall not include and the Excluded
Liabilities shall include all of the following liabilities: (i) any
liabilities for
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Taxes (as defined in Section 4.11(b) below) relating to Seller's operations
prior to the Closing or the transactions contemplated by this Agreement, (ii)
costs incurred by the Seller or the Seller's shareholders in connection with
the transactions contemplated hereby which the Seller shall pay prior to
Closing, (iii) liabilities with respect to judgments or pending or threatened
litigation other than those arising in the ordinary course of the Seller's
business and unrelated to the Excluded Liabilities set forth in this Section
2.3(b), (iv) any broker's or finder's fees or commissions incurred by Seller
or the Seller's shareholders, (v) any and all debt due to shareholders,
employees or affiliates of Seller, (vi) liabilities arising out of any
transactions in the equity securities of the Seller or any affiliates of the
Seller, including stock issuances, sales, transfers, redemptions, purchases,
retirements or grants or issuances of options, warrants or other convertible
securities, or (vii) liabilities, obligations and commitments relating to
discharged employees of the Seller.
SECTION 2.4 FURTHER ACTION. If at any time after the Closing Date Buyer
shall consider that any further deeds, assignments, conveyances, agreements,
documents, instruments or assurances in law or, any other things are necessary
or desirable to vest, perfect, confirm or record in Buyer the title to the
Purchased Assets by reason of, or as a result of, the Purchase, or otherwise
to carry out the provisions of this Agreement, the members of the board of
directors and officers of the Seller last in office shall, upon Buyer's
reasonable request and at its expense, execute and deliver any instruments or
assurances, and do all other things necessary or proper to vest, perfect,
confirm or record title to such property, rights, privileges, powers and
franchises in Buyer, and otherwise to carry out the provisions of this
Agreement; provided, however, that the Seller and any director or officer
called upon to render such assistance shall be entitled to the reimbursement
of any costs, fees and expenses incurred upon any request of Buyer.
SECTION 2.5 ALLOCATION. The allocation of the Purchase Price among the
Purchased Assets shall be set forth in a schedule to be agreed upon by the
Seller and the Buyer prior to the Closing. Such allocation will be binding on
each party for federal and state income tax purposes in connection with the
purchase and sale of the Purchased Assets and will be consistently reflected
by the parties in their tax returns.
ARTICLE III
CLOSING
SECTION 3.1 CLOSING. The closing (the "Closing") of the transactions
contemplated by this Agreement shall take place at the offices of Choate, Hall
& Stewart, Exchange Place, 53 State Street, Boston, Massachusetts 02109,
promptly following the date on which the last of the conditions set forth in
Article VIII hereof is fulfilled or waived, or at such other time and place as
Buyer and the Seller shall agree (the date on which the Closing occurs being
the "Closing Date"), but in no event later than June 16, 1997.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SELLER
AND THE SHAREHOLDERS
The Seller represents and warrants to Buyer as follows:
SECTION 4.1 ORGANIZATION AND QUALIFICATION.
(a) The Seller is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has the requisite
corporate power and authority to own, lease and operate its assets and
properties and to carry on its business as it is now being conducted.
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(b) The Seller is qualified to do business and is in good standing as a
foreign corporation in all jurisdictions set forth in Schedule 4.1(b), and to
the knowledge of the Seller, such jurisdictions are the only ones in which the
properties owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure
to be so qualified and in good standing will not have a material adverse
effect on the business, operations, properties, assets, condition (financial
or other), results of operations or prospects of the Seller.
(c) True, accurate and complete copies of the Seller's Certificate of
Incorporation and By-laws, in each case as in effect on the date hereof,
including all amendments thereto, have heretofore been delivered to Buyer.
SECTION 4.2 CAPITALIZATION.
(a) The authorized capital stock of the Seller consists of 5,000,000 shares
of Seller Common Stock, $.01 par value ("Seller Common Stock") and 5,000,000
shares of Seller Preferred Stock $.01 par value ("Seller Preferred Stock"). As
of the date of this Agreement, (i) 1,121,349 shares of Seller Common Stock
were issued and outstanding and (ii) 1,700,000 shares of Seller Preferred
Stock were issued and outstanding, all to the persons listed in Schedule
4.2(a).
(b) Except as set forth in Schedule 4.2(b) hereof, there are no outstanding
subscriptions, options, calls, contracts, commitments, understandings,
restrictions, arrangements, rights or warrants, including any right of
conversion or exchange under any outstanding security, instrument or other
agreement, obligating the Seller to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of the capital stock of the
Seller or obligating the Seller to grant, extend or enter into any such
agreement or commitment.
SECTION 4.3 SUBSIDIARIES. The Seller has no Subsidiaries. As used in this
Agreement, the term "Subsidiary" shall mean any corporation or other entity
which a person directly or indirectly controls or of which such person owns,
directly or indirectly, 50% or more of the stock or other voting interests,
the holders of which are, ordinarily or generally, in the absence of
contingencies (which contingencies have not occurred) or understandings (which
understandings have not yet been required to be performed) entitled to vote
for the election of a majority of the board of directors or any similar
governing body. The Seller is not a partner in any partnership or joint
venture and will not become one prior to the Closing Date. For the purpose of
this Agreement, GCL, L.C. (a Wyoming limited liability company of which E.
Marlowe Goble and Alan Chervitz own 100% of its beneficial interests) shall
not be considered a Subsidiary of the Seller, nor will the Seller be
considered participating in a partnership or joint venture with GCL, L.C.
SECTION 4.4 AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) The Seller has full corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement, and the consummation by the Seller
of the transactions contemplated hereby, have been duly authorized by the
Seller's Board of Directors and shareholders and no other corporate
proceedings on the part of the Seller are necessary to authorize the execution
and delivery of this Agreement and the consummation by the Seller of the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the Seller, and constitutes a valid and binding
agreement of the Seller, enforceable against the Seller in accordance with its
terms, subject to the effect of any bankruptcy, insolvency, fraudulent
conveyance, moratorium, or other similar laws affecting the enforcement of
creditors' rights and remedies generally and general equitable principles
(whether enforcement is considered in a proceeding at law or in equity),
including the discretion of the courts in granting equitable relief.
(b) The execution and delivery of this Agreement by the Seller do not, and
the consummation by the Seller of the transactions contemplated hereby will
not, violate, conflict with or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the
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Purchased Assets under any of the terms, conditions or provisions of (i) the
Certificate of Incorporation or By-Laws of the Seller, (ii) any statute, law,
ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit
or license of any court or governmental authority applicable to the Seller or
any of its properties or assets, or (iii) except as set forth in Schedule
4.4(b), any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument, obligation
or agreement of any kind to which the Seller is now a party or by which the
Seller or any of its properties or assets may be bound or affected.
(c) To the knowledge of the Seller no declaration, filing or registration
with, or notice to, or authorization, consent or approval of, any governmental
or regulatory body or authority is necessary for the execution and delivery of
this Agreement by the Seller or the consummation by the Seller of the
transactions contemplated hereby.
SECTION 4.5 REPORTS AND FINANCIAL STATEMENTS.
(a) The Seller has delivered to Buyer a compiled balance sheet and statement
of operations for the fiscal year ended December 31, 1994, a reviewed balance
sheet and statement of operation for the fiscal year ended December 31, 1995
(the "Annual Financial Statements") and a balance sheet and income statement
for the fiscal year ended December 31, 1996 (the "1996 Financial Statements")
(the Annual Financial Statements and the 1996 Financial Statements are
collectively referred to as the "Seller Financial Statements"). The Annual
Financial Statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis and fairly present the
financial condition of the Seller as of the dates thereof and the results of
its operations for the periods then ended. The 1996 Financial Statements have
been prepared in accordance with generally accepted accounting principles
applied on a basis consistent with the Annual Financial Statements, fairly
present the financial condition of the Seller as of December 31, 1996 and for
the twelve month period then ended, subject to the absence of notes thereto
and normal year-end audit adjustments, none of which is expected to be
material, and have been certified by the President of the Seller.
(b) All of the accounts receivable of the Seller included in the Seller
Financial Statements reflect actual transactions, have arisen in the ordinary
course of business, will not, to the knowledge of the Seller, be subject to
offset or deduction and will, to the knowledge of the Seller, be collectible
at the aggregate recorded amounts thereof net of any reserves established in a
manner consistent with past practices of the Seller, all as reflected in the
Seller Financial Statements.
(c) The Seller's books, records and accounts fairly and accurately reflect
the Seller's transactions and dispositions of assets.
SECTION 4.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed on
Schedule 4.6 hereto and except for any liabilities, obligations or
contingencies which (i) are not material or (ii) have been discharged or paid
in full prior to the date hereof, the Seller did not have at December 31,
1996, and has not incurred since that date, any liabilities or obligations
(whether absolute, accrued, contingent or otherwise) of any nature, except
liabilities, obligations or contingencies which (a) are accrued or reserved
against in the Seller Financial Statements or reflected in the notes thereto,
(b) were incurred after December 31, 1996 in the ordinary course of business
and consistent with past practices or (c) have been discharged or paid in full
prior to the date hereof.
SECTION 4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed on
Schedule 4.7 hereto, since December 31, 1996, to the knowledge of the Seller
there has not been any material adverse change, or any event which would
reasonably be expected to cause a material adverse change, individually or in
the aggregate, to the Business or the Purchased Assets.
SECTION 4.8 LITIGATION. Except as disclosed on Schedule 4.8 hereto, there
are no claims, suits, actions or proceedings pending or, to the knowledge of
the Seller, threatened against the Seller, before or by any court,
governmental department, commission, agency, instrumentality or authority, or
any arbitrator. Except as
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disclosed on Schedule 4.8, the Seller is not subject to any material judgment,
decree, injunction, rule or order of any court, governmental department,
commission, agency, instrumentality or authority, or any arbitrator of which
it has received notice or has knowledge.
SECTION 4.9 NO VIOLATION OF LAW. Except as disclosed on Schedule 4.9 hereto,
to the knowledge of the Seller, the Seller is not in violation of and has not
been given notice or been charged with any violation of, any material law,
statute, order, rule, regulation, ordinance or judgment (including, without
limitation, any applicable environmental law, ordinance or regulation) of any
governmental or regulatory body or authority. Except as disclosed on Schedule
4.9 hereto, to the knowledge of the Seller, no investigation or review by any
governmental or regulatory body or authority is pending, or to the knowledge
of the Seller, threatened, nor has the Seller received notice or has knowledge
that any governmental or regulatory body or authority indicated an intention
to conduct the same. Except as disclosed on Schedule 4.9 hereto, the Seller
has all material permits, licenses, franchises, variances, exemptions, orders
and other governmental authorizations, consents and approvals necessary to
conduct the Business as presently conducted (collectively the "Seller
Permits"). Except as disclosed on Schedule 4.9 hereto, to the knowledge of the
Seller, the Seller is not in violation of the terms of any Seller Permit.
SECTION 4.10 COMPLIANCE WITH AGREEMENTS. To the knowledge of the Seller, the
Seller is not in breach or violation of or in default in the performance or
observance of any term or provision of, and no event has occurred which, with
lapse of time or action by a third party, could result in a default under the
Certificate of Incorporation, By-Laws, similar organizational document of the
Seller or agreements with any of the Seller's shareholders.
SECTION 4.11 TAXES.
(a) The Seller has (i) duly and timely filed with the appropriate
governmental authorities all Tax Returns (as defined in subsection (c) below)
or requests for extensions required to be filed by it, and except as disclosed
on Schedule 4.11(a) hereto, the Seller has not filed for an extension to file
any Tax Returns and such Tax Returns are true, correct and complete in all
material respects, and (ii) duly paid in full or made adequate provision for
the payment of all Taxes (as defined in subsection (b) below) shown to be due
on such Tax Returns. Except as disclosed on Schedule 4.11(a) hereto, the Tax
Returns referred to in clause (i) hereinabove have been examined by the United
States Internal Revenue Service (the "IRS") or the appropriate governmental
authority or the period of assessment of the Taxes in respect of which such
Tax Returns were required to be filed has expired, all deficiencies asserted
or assessments made as a result of such examinations have been paid in full or
are being contested in good faith, without the imposition of any lien by any
taxing authority, and no issues that have been raised by the relevant
governmental authority in connection with the examination of any of the Tax
Returns referred to in clause (i) hereinabove are currently pending. Except as
set forth in Schedule 4.11(a), no claim has been made by any authority in a
jurisdiction where the Seller does not file a Tax Return that the Seller is or
may be subject to Tax in such jurisdiction. No waiver of statutes of
limitation have been given by or requested with respect to any Taxes of the
Seller. The Seller has not agreed to any extension of time with respect to any
Tax deficiency. The liabilities and reserves for Taxes reflected in the Seller
balance sheet as of December 31, 1996 (the "1996 Seller Balance Sheet") are
adequate to cover all Taxes for all periods ending on or prior to December 31,
1996 and there are no liens for Taxes upon any property or asset of the
Seller, except for liens for Taxes not yet due. There are no unresolved issues
of law or fact arising out of a notice of deficiency, proposed deficiency or
assessment from the IRS or any other governmental taxing authority with
respect to Taxes of the Seller which, if decided adversely, singly or in the
aggregate, would have a material adverse effect on the business, operations,
properties, assets, condition (financial or other), results of operations or
prospects of the Seller. The Seller is not a party to any agreement providing
for the allocation or sharing of Taxes with any entity. The Seller has not,
with regard to any assets or property held, acquired or to be acquired by it,
filed a consent to the application of Section 341(f) of the Internal Revenue
Code of 1986, as amended (the "Code"). The Seller has withheld and paid all
Taxes required to have been withheld and paid in connection with amounts paid
or owing to any
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employee, independent contractor, creditors, stockholder, or other third
party. No Tax is required to be withheld pursuant to Section 1445 of the Code
as a result of the transfer contemplated by this Agreement. As a result of the
Purchase, neither the Seller nor Buyer will be obligated to make a payment to
an individual that would be a "parachute payment" to a "disqualified
individual" as those terms are defined in Section 28OG of the Code without
regard to whether such payment is reasonable compensation for personal
services performed or to be performed in the future.
(b) For purposes of this Agreement, the term "Taxes" shall mean all taxes,
charges, fees, levies or other assessments, including, without limitation,
income, gross receipts, excise, property, sales, withholdings, social
security, occupation, use, service, service use, license, payroll, franchise,
transfer and recording taxes, fees and charges, imposed by the United States,
or any state, local or foreign government or subdivision or agency thereof
whether computed on a separate, consolidated, unitary, combined or any other
basis; and such term shall include any interest, fines, penalties or
additional amounts attributable or imposed or with respect to any such taxes,
charges, fees, levies or other assessments.
(c) For purposes of this Agreement, the term "Tax Return" shall mean any
return, report or other document or information required to be supplied to a
taxing authority in connection with Taxes.
SECTION 4.12 EMPLOYEE BENEFIT PLANS; ERISA. Except as disclosed on Schedule
4.12 hereto, at the date hereof, the Seller does not maintain or contribute to
any employee benefit plans, programs, arrangements and practices (such plans,
programs, arrangements and practices of the Seller being referred to as the
"Seller Plans"), including employee benefit plans within the meaning set forth
in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended, and all regulations promulgated thereunder, as in effect from time to
time ("ERISA") or other similar arrangements for the provision of benefits.
The Seller does not have any obligation to create any additional such plan or
to amend any such plan so as to increase benefits thereunder, except as
required under the terms of the Seller Plans or to comply with applicable law.
SECTION 4.13 CERTAIN AGREEMENTS.
(a) Except as set forth in Schedule 4.13(a), as of the date hereof, the
Seller is not a party to any material oral or written (i) agreement with any
executive officer or other key employee of the Seller the benefits of which
are contingent, or the terms of which are materially altered, upon the
occurrence of the transactions contemplated by this Agreement, (ii) employment
or consulting agreement with respect to any employee, director, officer or
consultant of the Seller, or (iii) agreement or plan, including any stock
option plan or agreement, stock appreciation right plan or agreement,
restricted stock plan or agreement, stock purchase plan or agreement, relating
to the issuance, redemption or repurchase of any capital stock or securities
convertible into, exchangeable for or exercisable for any capital stock of the
Seller or with respect to registration rights, pre-emptive rights or rights of
first refusal or first offer relating to the Seller's securities. The Seller
has furnished Buyer with a true and complete list of every employee and
consultant of the Seller and the position, date of hire, rate of salary and
other compensation applicable to such employee or consultant.
(b) Except as set forth in Schedule 4.13(b) hereto, the Seller is not
indebted for money borrowed, either directly or indirectly, from any of its
officers, directors, or any Affiliate (as defined below), in any amount
whatsoever; nor are any of its officers, directors, or affiliates indebted for
money borrowed from the Seller; nor are there any transactions of a continuing
nature between the Seller and any of its officers, directors, or Affiliates
(other than by or through the regular employment thereof by the Seller) not
subject to cancellation which will continue beyond the Closing Date,
including, without limitation, use of the Seller's assets for personal benefit
with or without adequate compensation.
(c) Except as disclosed on Schedule 4.13(c) hereto, neither the Seller nor,
to the knowledge of the Seller or any of the Shareholders, any of the Seller's
shareholders, directors, officers, employees or consultants who will become
directors, officers, employees or consultants of the Buyer (including without
limitation Alan Chervitz,
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E. Marlowe Goble, Richard B. Caspari, Stephen J. Snyder, T. Wade Fallin and
Daniel Justin), is a party to any agreement in the nature of a restriction on
competitive activity or any similar restriction which could preclude, restrain
or restrict the activities of the Buyer if it conducts the Business as
presently conducted or any activities of any such person in his or her
capacity as a director, officer, employee or consultant of the Buyer.
(d) Except as disclosed on Schedule 4.13 (d), the Seller is not a party to
any contract or agreement relating to the distribution, sale, manufacturing or
marketing by third parties of the Seller's products or products licensed by
the Seller or to any agreement pursuant to which the Seller distributes,
sells, manufactures or markets products owned or licensed by third parties.
SECTION 4.14 LABOR CONTROVERSIES. The Seller is not a party to any
collective bargaining agreements. There are no controversies pending or, to
the knowledge of the Seller, threatened between the Seller and any of its
employees. To the knowledge of the Seller, there are no organizational efforts
presently being made involving any of the presently unorganized employees of
the Seller. To the knowledge of the Seller, it has complied in all material
respects with all laws relating to the employment of labor, including, without
limitation, any provisions thereof relating to wages, hours, collective
bargaining, and the payment of social security and similar taxes. No person
has, to the knowledge of the Seller, asserted that the Seller is liable for
any arrears of wages or any taxes or penalties for failure to comply with any
of the foregoing.
SECTION 4.15 ENVIRONMENTAL MATTERS. To the knowledge of the Seller, the
Seller is and at all times has been in material compliance with all
requirements of Environmental Laws (as defined below) applicable to the Seller
in connection with the ownership, operation and conditions of the Business.
The Seller has not to its knowledge and is not aware that any other person
has, released, transported or arranged for the disposal of any hazardous
substance at any facility, location or site. To the knowledge of the Seller no
conditions exist or have occurred as a result of any action taken (or the
failure to take action) by the Seller which could result in damages, response
or remedial costs, fines, penalties, sanctions or equitable relief under any
Environmental Laws. As used in this Section 4.15, "Environmental Laws" means
any federal, state or local statute, regulation, ordinance, permit, order,
judgment, decree or decision relating to health, safety or the environment.
"Release" means any spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, dumping, active disposal or
passive disposal (including the abandonment or discarding of barrels,
containers or other closed receptacles containing any hazardous substances).
"Hazardous Substance" means (a) any "hazardous substance" as defined in the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended, ("CERCLA") and any implementing regulations, (b) any hazardous or
toxic substance, waste or material within the meaning of any other federal,
state or local statute, regulation, ordinance or decision, (c) any pollutant,
contaminant or special waste regulated by any Environmental Laws, or (d)
petroleum, crude oil or any fraction thereof.
SECTION 4.16 CONTRACTS, ETC.
(a) Schedule 4.16(a) hereto lists all contracts, agreements, commitments and
other instruments (whether oral or written) to which the Seller is a party
that (i) involve an expenditure by the Seller or require the performance of
services or delivery of goods to, by, through, on behalf of or for the benefit
of the Seller, which in each case, relates to a contract, agreement,
commitment or instrument that requires payments in excess of $10,000 per year,
(ii) involve an obligation for the performance of services or delivery of
goods by the Seller that cannot, or in reasonable probability will not, be
performed within thirty days from the dates as of which these representations
are made or (iii) are material contracts not made in the ordinary course of
business (collectively, the "Material Contracts").
(b) All of the Material Contracts are valid and binding upon the Seller and,
to the Seller's knowledge, the other parties thereto (subject, in the case of
the other parties thereto to the effect of any bankruptcy, insolvency,
fraudulent conveyance, moratorium, or other similar laws affecting the
enforcement of creditors' rights and remedies generally and general equitable
principles (whether enforcement is considered in a proceeding at law or in
equity), including the discretion of the courts in granting equitable relief)
and are in full force and effect
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and, to the knowledge of the Seller, enforceable in accordance with their
terms. Neither the Seller nor, to the Seller's knowledge, any other party to
any such contract, agreement, commitment or other instrument has breached any
provision of, and, to the Seller's knowledge, no event has occurred which,
with the lapse of time or action by a third party, could result in a default
under the terms thereof which, alone or in the aggregate, would provide the
basis for a claim against the Seller in excess of $10,000.
SECTION 4.17 INTELLECTUAL PROPERTY RIGHTS.
(a) Schedule 4.17(a) hereto sets forth a complete and correct list and
summary description of all trademarks, tradenames, service marks, service
names, brand names, registrations thereof and applications therefor, owned or
licensed by the Seller or used in the Business, together with a complete list
of all licenses granted by or to the Seller with respect to any of the above.
All such trademarks, tradenames, service marks, service names and brand names
listed on Schedule 4.17(a) are owned by the Seller, free and clear of all
liens, claims, security interests and encumbrances of any nature whatsoever.
The Seller is not currently in receipt of any written or, to its knowledge,
oral notice of any violation or infringement of any trademark, tradename,
service mark, copyright, patent, trade secret, know-how or other intangible
asset. The Seller is not knowingly violating or infringing the rights of
others in any trademark, tradename, service mark, copyright, patent, trade
secret, know-how or other intangible asset.
(b) (i) Schedule 4.17(b)(i) contains a complete and accurate list which,
without extensive or revealing descriptions, sets forth the Seller's owned or
licensed intellectual property, including without limitation all inventions,
patents, patent applications, copyrights, trade secrets, know-how, computer
software programs and routines and other technical data (collectively, the
"Intellectual Property"). The specific location of substantially all of the
Intellectual Property's documentation and its complete description,
specifications, charts, procedures and other material relating to it are also
set forth in Schedule 4.17(b)(i). The documentation relating to each item of
Intellectual Property pertaining to an existing product (as distinguished from
products or technologies under development) is in all material respects
current, accurate and sufficient in detail and content to identify and
describe such item of Intellectual Property to a reasonable extent and to
allow its full and proper use by an individual experienced in the manufacture
of orthopaedic devices, after a reasonable training period, to use the same in
all material respects. The Seller is not, knowingly, nor has it received
written or, to its knowledge, oral notice of a claim that it is infringing
upon or otherwise acting in contravention of any known right or claimed right
of any person under or with respect to any inventions, patents, copyrights,
trade secrets, know how, computer software programs and routines and other
technical data or other intellectual property rights of any such person with
respect to the Intellectual Property. To the knowledge of the Seller, all of
the Intellectual Property is currently protectable and is not part of the
public knowledge or literature, nor has it been used, divulged or appropriated
for the benefit of any past or present employees or other persons, or to the
detriment of the Seller except as disclosed on Schedule 4.17(b)(i). To the
knowledge of the Seller, the Seller is the sole owner or licensee of each item
of Intellectual Property, free and clear of any liens, charges or encumbrances
(including without limitation any legal or equitable claims of others), except
as disclosed on Schedule 4.17(b)(i). The Seller has taken reasonable measures
to protect the secrecy, confidentiality and value of the Intellectual
Property. The status of the Seller's U.S. patents and corresponding foreign
cases are described on Schedule 4.17(b)(i) hereto. Except as disclosed on
Schedule 4.17(b)(i) hereto, the Seller has not filed patent applications in
any other jurisdictions and the Seller has not filed for copyright
registrations in the United States or in any other jurisdiction. To the
Seller's knowledge, except pursuant to the patent application process in the
U.S., and corresponding foreign applications, no item of Intellectual Property
has been put into the public domain. Except as disclosed on Schedule
4.17(b)(i), the Seller does not have knowledge of, and has not received
written notice that, any past or present employee or other person claims any
right to the Intellectual Property.
(ii) The transactions contemplated herein will not cause a breach or default
under any licenses, leases or similar agreements relating to the Intellectual
Property or impair Buyer's or the Seller's ability to use the Intellectual
Property subsequent to the Closing Date in the same manner as such
Intellectual Property is currently being used by the Seller.
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SECTION 4.18 CUSTOMERS. Schedule 4.18 attached hereto sets forth a true and
correct list of each customer of the Seller that, within the preceding twelve
months, accounted for an aggregate amount of the Seller's gross revenues equal
to 10% or more of the Seller's gross revenues. Except as disclosed on
Schedule 4.18, the Seller has not received any written or, to its knowledge,
oral notice that any such customer of the Seller intends to terminate its
relationship with the Seller.
SECTION 4.19 BROKERS AND FINDERS. The Seller has not employed any investment
banker, broker, finder, consultant, or intermediary in connection with the
transactions contemplated by this Agreement which would be entitled to any
investment banking, brokerage, finder's or similar fee or commission in
connection with this Agreement or the transactions contemplated hereby.
SECTION 4.20 INSURANCE. Schedule 4.20 hereto sets forth a true and correct
list of all insurance policies covering the Purchased Assets or the Business
(indicating the insurer, type, amount and term of coverage) and additional
named insureds with respect to each such policy and identifies all claims
pending under any of such insurance policies. All of these policies are in
full force and effect and all premiums due thereon have been paid or accrued
and there are no retroactive experience-based premium adjustment features in
any policy, except as disclosed on Schedule 4.20.
SECTION 4.21 DISCLOSURE. No statement contained herein or in any
certificate, schedule, list, exhibit or other instrument furnished to Buyer
pursuant to the provisions hereof contains or will contain any untrue
statement of any material fact or omits or will omit to state a material fact
necessary in order to make the statements contained herein or therein not
misleading.
SECTION 4.22 PURCHASED ASSETS. There are no claims, liabilities, liens,
pledges, charges, licenses or encumbrances (collectively, "Encumbrances") of
any kind affecting the Purchased Assets except for those set forth on Schedule
4.22 attached hereto and other Encumbrances incidental to the conduct of the
Business or the Purchased Assets which were not incurred in connection with
the borrowing of money or the obtaining of credit and which do not materially
detract from the value of the Purchased Assets or materially affect the use
thereof in the operation of the Business (the "Permitted Encumbrances").
Seller is, and at the Closing will be, the sole and lawful owner of the
Purchased Assets, and has and will convey to Buyer good and marketable title
and all proprietary rights and interests in and to the Purchased Assets, free
and clear of all Encumbrances of any kind (including claims for taxes) except
for the Permitted Encumbrances. The Seller will convey to the Buyer good and
marketable title to the Purchased Assets, free and clear of all Encumbrances
of any kind or nature whatsoever, except for the Permitted Encumbrances. The
Purchased Assets include all assets owned by the Seller which are currently
used in the Business or necessary for the operation of the Business as
currently conducted and include all assets reflected on the 1996 Financial
Statements, except materials and supplies consumed and accounts receivable
paid in the ordinary course of business, and other than the Excluded Assets.
All Purchased Assets owned or leased by Seller are in the possession or under
the control of Seller.
SECTION 4.23 FIXED PURCHASED ASSETS. All buildings, machinery and equipment
of Seller are in working order and good repair (normal wear and tear
excepted), have been properly maintained, in accord with industry practice, to
the knowledge of the Seller conform with all applicable ordinances,
regulations and zoning and other applicable laws, and there is no pending or,
to the knowledge of Seller, threatened condemnation of any of the Purchased
Assets.
SECTION 4.24 LEASEHOLD PROPERTY. Except as provided on Schedule 4.24, the
leases described on Schedule 4.24 (the "Leases") demising the premises
identified therein (the "Leasehold Property"), together with all of the right,
title and interest of Seller in and to all buildings, facilities, fixtures and
other improvements located on the Leasehold Property and all other privileges,
easements and appurtenances appertaining to the Leases, the Leasehold Property
or to any of the improvements located thereon, constitute all of the real
property
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occupied by Seller in connection with the conduct of the Business. Seller does
not own or lease any other real property. To the knowledge of the Seller,
Seller has maintained the Leasehold Property in accordance with and made all
necessary repairs to the Leasehold Property required under the Leases and is
in compliance with all of the terms and provisions of the Leases. Seller
enjoys peaceful and undisturbed possession under all of the Leases.
SECTION 4.25 INVENTORY. Schedule 4.25 hereto sets forth a complete and
accurate list of all inventory (the "Inventory") owned by Seller as of
December 31, 1996. To the knowledge of the Seller, except as set forth in
Schedule 4.25, the Inventory does not include any items obsolete or of a
quality or quantity not useable or saleable in the normal course of the
Business. The amount of the Inventory is sufficient to conduct the Business
consistent with Seller's past practices.
SECTION 4.26 WARRANTIES. Except as set forth in Schedule 4.26 there are no
existing or, to the knowledge of Seller, threatened claims against Seller
alleging breach of warranty or other problems with respect to services
rendered or products sold by Seller, or alleging any failure of any such
product to meet specifications other than those occurring in the ordinary
cause of business at normal and customary levels consistent with industry
experience. Schedule 4.26 also sets forth a true and correct copy of any and
all express warranties or guaranties made by Seller to customers in connection
with the sale of products.
SECTION 4.27 SELLER'S INVESTMENT. With respect to the Closing Shares and
Escrow Shares, Seller represents and warrants as follows:
(a) Except as required by law, the Closing Shares and the Escrow Shares to
be acquired by Seller and to be distributed to the Shareholders upon the
liquidation of the Seller pursuant to this Agreement are being acquired by
Seller solely for its own account, for investment purposes only and with no
present intention of distributing, selling or otherwise disposing of them in
connection with a distribution, other than the distribution by the Seller to
Shareholders and any distribution effected pursuant to an effective
registration statement filed under the Securities Act of 1933, as amended (the
"Act") or an exemption from the provisions of the Act.
(b) Seller is able to bear the economic risk of an investment in the Closing
Shares and the Escrow Shares acquired by it pursuant to this Agreement and can
afford to sustain a total loss on such investment and has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of the proposed investment and therefore has the capacity
to protect its own interests in connection with the purchase of the Closing
Shares and the Escrow Shares.
(c) Seller understands that the Closing Shares and the Escrow Shares may not
be sold, transferred or otherwise disposed of without registration under the
Securities Act of 1933 (the "Act") and any state securities laws, or the
availability of an exemption therefrom, and that in the absence of an
effective registration statement covering the Closing Shares and the Escrow
Shares or an available exemption from registration, the Closing Shares and the
Escrow Shares may be required to be held indefinitely. Seller is aware that
the Closing Shares and the Escrow Shares to be issued hereunder may not be
sold pursuant to Rule 144 promulgated under the Act unless all of the
conditions of that Rule are met. Among the conditions for use of Rule 144 is
the availability of current information to the public about the Buyer. Seller
represents that, in the absence of an effective registration statement
covering the Closing Shares and the Escrow Shares, it shall sell, transfer or
otherwise dispose of the Closing Shares and the Escrow Shares only in a manner
consistent with the representations set forth herein.
Each Shareholder represents and warrants to Buyer, only as to himself, as
follows:
SECTION 4.28 SHAREHOLDER AUTHORITY; NON-CONTRAVENTION. He has full power and
authority to execute and deliver this Agreement and the Registration Rights
Agreement (as referred to in Section 8.1(c) below) and to perform all of his
obligations contained herein and therein, and to execute, deliver and perform
all of the obligations contained in all other instruments or agreements
required hereby or incident or collateral hereto. This Agreement and the
Registration Rights Agreement constitute, and each other instrument, agreement
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and obligation to be executed and delivered by such Shareholder in accordance
herewith will constitute, the valid and legally binding obligation of such
Shareholder and will be enforceable against such Shareholder in accordance
with their respective terms. The execution, delivery and performance by such
Shareholder of this Agreement, the Registration Rights Agreement and the
agreements and instruments provided for herein, and the consummation by such
Shareholder of the transactions contemplated hereby and thereby, will not,
with or without the giving of notice and/or the passage of time, (i) violate
the provisions of any law, rule or regulation applicable to such Shareholder;
(ii) violate any judgment, decree, order or award of any court, governmental
body or arbitrator; or (iii) conflict with or result in a breach, modification
or termination of any term or provision of, or constitute a default under, or
cause any acceleration under, any indenture, mortgage, lease, order, judgment,
decree, license, permit, or deed or any other instrument or agreement to which
such Shareholder is a party or by which such Shareholder may be bound, or to
such Shareholder's knowledge, any rule or regulation of any court or
governmental or regulatory body.
SECTION 4.29 SHAREHOLDERS' INVESTMENT. With respect to the Closing Shares
and Escrow Shares which may be distributed to the Shareholders, each
Shareholder represents and warrants as to himself only as follows:
(a) Except as required by law, the Closing Shares and the Escrow Shares to
be acquired by the Shareholder upon the liquidation of the Seller are being
acquired by the Shareholder solely for his own account, for investment
purposes only and with no present intention of distributing, selling or
otherwise disposing of them in connection with a distribution, other than the
distribution by the Shareholder to Shareholders and any distribution effected
pursuant to an effective registration statement filed under the Act.
(b) Shareholder is able to bear the economic risk of an investment in the
Closing Shares and the Escrow Shares acquired by him upon liquidation of the
Seller and can afford to sustain a total loss on such investment and has such
knowledge and experience in financial and business matters that he is capable
of evaluating the merits and risks of the proposed investment and therefore
has the capacity to protect his own interests in connection with the purchase
of the Closing Shares and the Escrow Shares.
(c) Shareholder understands that the Closing Shares and the Escrow Shares
may not be sold, transferred or otherwise disposed of without registration
under the Securities Act of 1933 (the "Act") and any state securities laws, or
the availability of an exemption therefrom, and that in the absence of an
effective registration statement covering the Closing Shares and the Escrow
Shares or an available exemption from registration, the Closing Shares and the
Escrow Shares may be required to be held indefinitely. Shareholder is aware
that the Closing Shares and the Escrow Shares to be issued hereunder may not
be sold pursuant to Rule 144 promulgated under the Act unless all of the
conditions of that Rule are met. Among the conditions for use of Rule 144 is
the availability of current information to the public about the Buyer.
Shareholder represents that, in the absence of an effective registration
statement covering the Closing Shares and the Escrow Shares, he shall sell,
transfer or otherwise dispose of the Closing Shares and the Escrow Shares only
in a manner consistent with the representations set forth herein.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to the Seller and the Shareholders as follows:
SECTION 5.1 ORGANIZATION AND QUALIFICATION. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has the requisite corporate power and
authority to own, lease and operate its assets and properties and to carry on
its business as it is now being conducted. Buyer is qualified to do business
and is in good standing as a foreign corporation in all jurisdictions
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set forth in Schedule 5.1, and to the knowledge of the Buyer, such
jurisdictions are the only ones in which the properties owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary, except where the failure to be so qualified and in
good standing will not have a material adverse effect on the business,
operations, properties, assets, condition (financial or other), results of
operations or prospects of Buyer on a consolidated basis. True, accurate and
complete copies of Buyer's Articles of Organization and By-laws, as in effect
on the date hereof, including all amendments thereto, have heretofore been
delivered to the Seller.
SECTION 5.2 CAPITALIZATION.
(a) The authorized capital stock of Buyer consists of (i) 15,000,000 shares
of Buyer Common Stock of which 7,265,405 shares are issued and outstanding as
of the date of this Agreement and (ii) 1,000,000 shares of preferred stock,
$.01 par value per share, of which none is issued and outstanding as of the
date of this Agreement. All of the issued and outstanding shares of Common
Stock are validly issued and are fully paid, nonassessable and free of
preemptive rights. Buyer Common Stock is listed on the Nasdaq National Market.
(b) Schedule 5.2 lists all written or oral outstanding subscriptions,
options, calls, contracts, commitments, understandings, restrictions,
arrangements, rights or warrants, including any right of conversion or
exchange under any outstanding security, instrument or other agreement,
obligating the Buyer to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of the capital stock of the Buyer or
obligating the Buyer to grant, extend or enter into any such agreement or
commitment.
SECTION 5.3 AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) Buyer has full corporate power and authority to enter into this
Agreement and subject to receipt of the approval of the Buyer's stockholders
referred to in Section 8.2(m), to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement, and the consummation by
Buyer of the transactions contemplated hereby, have been duly authorized and
approved by Buyer's Board of Directors, and no other corporate proceedings on
the part of Buyer are necessary to authorize the execution and delivery of
this Agreement and the consummation by Buyer of the transactions contemplated
hereby other than such stockholder approval. This Agreement has been duly and
validly executed and delivered by Buyer, and constitutes a valid and binding
agreement of Buyer enforceable against it in accordance with its terms.
(b) Except as disclosed on Schedule 5.3(b) hereto, the execution and
delivery of this Agreement by Buyer do not, and the consummation by Buyer of
the transactions contemplated hereby will not, violate, conflict with or
result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination of, or accelerate the performance required
by, or result in a right of termination or acceleration under, or result in
the creation of any lien, security interest, charge or encumbrance upon any of
the properties or assets of Buyer under any of the terms, conditions or
provisions of (i) Buyer's Articles of Organization or By-Laws, (ii) any
statute, law, ordinance, rule, regulation, judgment, decree, order,
injunction, writ, permit or license of any court or governmental authority
applicable to Buyer or any of its properties or assets, or (iii) any note,
bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, contract, lease or other instrument, obligation or agreement of
any kind to which Buyer is now a party or by which Buyer or any of its
properties or assets may be bound.
(c) Except for (i) filings with any state blue sky authorities, and (ii)
filings with the Securities and Exchange Commission (the "SEC") and the Nasdaq
National Market (the filings referred to in clauses (i) and (ii) are
collectively referred to as the "Buyer Required Statutory Filings"), no
declaration, filing or registration with, or notice to, or authorization,
consent or approval of, any governmental or regulatory body or authority is
necessary for the execution and delivery of this Agreement by Buyer or the
consummation by Buyer of the transactions contemplated hereby.
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SECTION 5.4 REPORTS AND FINANCIAL STATEMENTS. Since June 6, 1996, Buyer has
filed with the SEC, all material forms, statements, reports and documents
(including all exhibits, amendments and supplements thereto) required to be
filed by it under each of the Securities Act and the Exchange Act and the
respective rules and regulations thereunder. Since June 6, 1996, there have
been no stoppages in trading of Buyer Common Stock on the Nasdaq National
Market. Buyer has previously delivered to the Seller copies of its (a)
Prospectus dated June 6, 1996 (the "Buyer Prospectus") as filed with the SEC,
and (b) Buyer's Quarterly Reports on Form 10-Q for the quarters ended June 30,
1996 and September 30, 1996 (the "Buyer 10-Qs") (the documents referred to in
clauses (a) and (b) are collectively referred to as the "Buyer SEC Reports").
As of their respective dates, the Buyer SEC Reports did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
financial statements and unaudited interim financial statements of Buyer
included in such reports (the "Buyer Financial Statements") have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis (except as may be indicated therein or in the notes thereto)
and fairly present the financial condition of Buyer as of the dates thereof
and the results of Buyer's operations and changes in financial condition for
the periods then ended, subject, in the case of the unaudited interim
financial statements, to the absence of notes thereto and normal year-end and
audit adjustments and any other adjustments described therein, which are not
expected to be material.
SECTION 5.5 ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed on
Schedule 5.5 hereto or in the Buyer Prospectus or the Buyer 10-Qs, or as
expressly disclosed and described in any of the schedules hereto, Buyer did
not have at September 30, 1996, and has not incurred since that date, any
liabilities or obligations (whether absolute, accrued, contingent or
otherwise) of any nature, (a) except liabilities, obligations or contingencies
(i) which are accrued or reserved against in the Buyer Financial Statements or
reflected in the notes thereto or (ii) which were incurred after September 30,
1996 and were incurred in the ordinary course of business and consistent with
past practices and (b) except for any liabilities, obligations or
contingencies which (i) would not, in the aggregate, have a material adverse
effect on the business, operations, properties, assets, condition (financial
or other), results of operations or prospects of Buyer on a consolidated basis
or (ii) have been discharged or paid in full prior to the date hereof.
SECTION 5.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed on any
of the schedules hereto, from September 30, 1996 through the date hereof,
there has not been any material adverse change in the business, operations,
properties, assets, liabilities, condition (financial or other), results of
operations or prospects of Buyer.
SECTION 5.7 BROKERS AND FINDERS. Except for the fees and expenses payable to
Piper Jaffray, Inc., which fees and expenses will be paid by Buyer, Buyer has
not employed any investment banker, broker, finder, consultant or intermediary
in connection with the transactions contemplated by this Agreement which would
be entitled to any investment banking, brokerage, finder's or similar fee or
commission in connection with this Agreement or the transactions contemplated
hereby.
SECTION 5.8 BUYER COMMON STOCK. The Closing Shares and the Escrow Shares
have been duly authorized, and when issued in accordance with the terms of
this Agreement, will be validly issued, fully paid and non-assessable.
SECTION 5.9 NO VIOLATION OF LAWS. Except as disclosed in the reports and
financial statements referred to in Section 5.4, the business of Buyer is not
and has not been conducted in violation of any law, ordinance or regulation of
any governmental entity or authority, except for violations which,
individually, or in the aggregate, would not have a material adverse effect on
the business of Buyer taken as a whole. As of the date hereof, to the
knowledge of Buyer, no investigation of any governmental entity with respect
to Buyer is pending or threatened which would, in the aggregate, have a
material adverse effect on Buyer.
SECTION 5.10 LITIGATION. Except as disclosed on Schedule 5.10 hereto, the
Buyer Prospectus or the Buyer 10-Qs, or as expressly disclosed and described
in any of the Schedules hereto, there are no claims, suits,
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actions or proceedings pending or, to the knowledge of Buyer, threatened
against Buyer, before or by any court, governmental department, commission,
agency, instrumentality or authority, or any arbitrator. Except as disclosed
as aforesaid, Buyer is not subject to any judgment, decree, commission,
agency, instrumentality or authority or any arbitrator of which it has
received notice.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE CLOSING
SECTION 6.1 CONDUCT OF BUSINESS BY THE SELLER PENDING THE PURCHASE. Except
as otherwise contemplated by this Agreement, after the date hereof and prior
to the Closing Date or earlier termination of this Agreement, unless Buyer
shall otherwise consent in writing, which consent shall not be unreasonably
withheld, the Seller shall:
(a) maintain its corporate existence and conduct the Business only in the
ordinary and usual course of business and consistent with past practice except
as set forth on Schedule 6.1(a);
(b) not (i) amend or propose to amend its Certificate of Incorporation or
By-Laws, (ii) split, combine or reclassify its outstanding capital stock or
declare, set aside or pay any dividend or distribution payable in cash, stock,
property or otherwise, (iii) spin-off any assets or businesses, (iv) engage in
any transaction for the purpose of effecting a recapitalization of the Seller
or (v) engage in any transaction or series of related transactions which has a
similar effect to any of the foregoing; provided, however, that current
holders of the Seller's preferred stock may convert such stock to the Seller's
Common Stock in accordance with applicable conversion terms and conditions and
the Seller may issue such Common Stock as is necessary to honor such
conversion;
(c) except pursuant to the exercises of currently outstanding stock options
for the purchase of Seller's securities, not issue, sell, pledge or dispose
of, or agree to issue, sell, pledge or dispose of, any additional shares of,
or any options, warrants or rights of any kind to acquire any shares of the
Seller's capital stock of any class or any debt or equity securities
convertible into or exchangeable for such capital stock or amend or modify the
terms and conditions of any of the foregoing except to issue shares upon
exercise of presently outstanding options;
(d) not (i) incur any indebtedness for borrowed money, issue any debt
securities, make any voluntary prepayment on indebtedness for borrowed money,
make any loans or advances to any person or entity or assume, guarantee or
endorse or otherwise become responsible for the obligation of any other person
or entity except in the ordinary course of business consistent with past
practice, and except for borrowings from the Buyer as set forth in the
Seller's financial plan (the "Financial Plan") attached hereto as
Exhibit 6.1(d), which borrowings will be made from the Buyer to the Seller at
a rate of Prime plus 1% and on other prevailing commercially reasonable terms
and conditions, (ii) redeem, purchase, acquire or offer to purchase or acquire
any shares of its capital stock, (iii) take or fail to take any action which
action or failure to take action would cause the Seller or its stockholders
(except to the extent that any stockholders receive cash in lieu of fractional
shares) to recognize gain or loss for federal income tax purposes as a result
of the consummation of the Purchase, (iv) make any acquisition of any assets
or businesses except for capital expenditures made in accordance with the
Financial Plan, (v) sell any assets or businesses, or (vi) enter into any
contract, agreement, commitment or arrangement with respect to any of the
foregoing;
(e) use all reasonable efforts to preserve intact its business organization
and goodwill, and preserve the goodwill and business relationships with
suppliers, distributors, customers, and others having business relationships
with the Seller and not engage in any action, directly or indirectly, with the
intent to impact adversely the transactions contemplated by this Agreement;
(f) confer on a regular basis with one or more representatives of Buyer to
report on material operational matters and the general status of ongoing
operations;
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(g) not enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers, consultants or
employee or terminate the services of any present employee, consultant or
agent except for good cause shown;
(h) not increase the rate of remuneration payable to any of its directors,
officers, employees, shareholders, consultants or other representatives, or
agree to do so;
(i) Except as set forth on Schedule 6.1(i), not adopt, enter into or amend
any bonus, profit sharing, compensation, stock option, pension, retirement,
deferred compensation, health care, employment or other employee benefit plan,
agreement, trust, fund or arrangement for the benefit or welfare of any
employee or retiree, except as required to comply with changes in applicable
law;
(j) use best efforts to keep in working condition and good order and repair
all of its material equipment, fixtures, inventory and other properties,
normal wear and tear excepted;
(k) maintain its books, accounts and records in its usual, regular and
ordinary manner and post all entries therein in compliance with accepted
practice and applicable law;
(l) pay and discharge when due all taxes, assessments and governmental
charges imposed upon it or any of its properties, or upon the income or profit
therefrom, except for those being contested in good faith;
(m) operate in such a manner as to assure that the representations and
warranties of Seller set forth in this Agreement will be true and correct in
all material respects as of the Closing Date;
(n) not change its method of management or operations;
(o) not modify, amend, cancel or terminate any Material Contract (or waive
any material rights thereunder), including the making of any substantial
prepayment on any existing obligation, except in the ordinary and usual course
of such business consistent with past practice;
(p) not make any material change in the accounting methods or practices
employed by Seller, as at the date hereof;
(q) not settle or compromise any suit or claim or threatened suit or claim
relating to the transactions contemplated hereby;
(r) other than as permitted by subsection (d) above, not enter into or
commit to enter into any contract, agreement, arrangement or understanding
having a term longer than six months unless such contract, agreement,
arrangement or understanding may be cancelled by the Seller without penalty on
not more than thirty days' notice or is not described in the Financial Plan;
and
(s) not use any device in human clinical trials or in commercial sales based
upon a regulatory exemption promulgated by the Federal Drug Administration
(the "FDA") unless and until such Seller's practice has been approved by the
Buyer or FDA or Institutional Review Board clearance has been obtained.
SECTION 6.2 CONDUCT OF BUSINESS BY THE BUYER PENDING THE PURCHASE.
Except as otherwise contemplated by this Agreement, after the date hereof
and prior to the Closing Date or earlier termination of this Agreement, unless
Seller shall otherwise consent in writing, which consent shall not be
unreasonably withheld, the Buyer shall:
(a) except pursuant to the exercises of currently outstanding stock options
for the purchase of Seller's securities, not issue, sell, pledge or dispose
of, or agree to issue, sell, pledge or dispose of, any additional shares of,
or any options, warrants or rights of any kind to acquire any shares of the
Seller's capital stock of any class or any debt or equity securities
convertible into or exchangeable for such capital stock or amend or modify the
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terms and conditions of any of the foregoing except to issue shares upon
exercise of presently outstanding options, except for options to purchase up
to 225,000 shares of Buyer Common Stock which may be granted under the Buyer's
1996 Omnibus Stock Plan and the 1996 Non- Employee Director Stock Option Plan;
and
(b) not increase the rate of remuneration payable to any of its directors,
officers, employees, shareholders, consultants or other representatives, or
agree to do so;
SECTION 6.3 ACQUISITION TRANSACTIONS. After the date hereof and prior to the
Closing Date or earlier termination of this Agreement, unless Buyer shall
otherwise agree in writing, the Seller shall not initiate, solicit, negotiate,
encourage, enter into or provide confidential information to facilitate, and
the Seller shall cause any officer, director or employee of, or any attorney,
accountant or other agent retained by, the Seller not to initiate, solicit,
negotiate, encourage, enter into or provide confidential information to
facilitate, any proposal, agreement or offer to acquire all or any substantial
part of the Business or Purchased Assets, or capital stock of the Seller,
whether by merger, purchase of assets, tender offer or otherwise, whether for
cash, securities or any other consideration or combination thereof (such
transactions being referred to herein as "Acquisition Transactions").
ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.1 ACCESS TO INFORMATION. The Seller shall afford to Buyer and its
respective accountants, counsel, financial advisors and other representatives
(the "Buyer Representatives") full access during normal business hours
throughout the period prior to the Closing Date to all of the properties,
books, contracts, commitments and records (including, but not limited to, Tax
Returns) of the Seller and, during such period, shall furnish promptly such
information concerning the Seller's business, properties and personnel as
Buyer shall reasonably request at Buyer's expense; provided, however, that, no
investigation pursuant to this Section 7.1 shall affect any representation or
warranty made herein or the conditions to the obligations of the respective
parties to consummate the transactions contemplated hereby. All non-public
documents and information furnished to Buyer or to the Seller, as the case may
be, in connection with the transactions contemplated by this Agreement shall
be deemed to have been received pursuant to and shall be subject to the
provisions of the Confidentiality Agreement, except that Buyer and the Seller
may disclose such information as may be necessary in connection with the Buyer
Required Statutory Filings. The Seller shall promptly advise Buyer and Buyer
shall promptly advise the Seller in writing of any change or the occurrence of
any event after the date of this Agreement having, or which, insofar as can
reasonably be foreseen, in the future may have, any material adverse effect on
the business, operations, properties, assets, condition (financial or other),
results of operations or prospects of the Seller or Buyer, as the case may be,
on a consolidated basis.
SECTION 7.2 EXPENSES. Subject to Section 9.5, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses, provided that the
costs and expenses related to this transaction of the Seller and of the
Shareholders shall be paid by the Seller.
SECTION 7.3 AGREEMENT TO COOPERATE. Subject to the terms and conditions
herein provided, each of the parties hereto shall cooperate and use their
respective best efforts to take, or cause to be taken, all action and to do,
or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, including using its reasonable
efforts to obtain all necessary or appropriate waivers, consents and approvals
to effect all necessary registrations, filings and submissions and to lift any
injunction or other legal bar to the consummation of the Purchase.
SECTION 7.4 PUBLIC STATEMENTS. The parties shall consult with each other
prior to issuing any press release or any written public statement with
respect to this Agreement or the transactions contemplated hereby and shall
not issue any such press release or written public statement prior to
obtaining written consent of the
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other party, provided, however, that if the Seller has had an opportunity to
review any proposed press release or written public statement proposed to be
released by the Buyer as the result of any applicable law, rule, regulation or
policy of the SEC or the Nasdaq National Market and the Seller has failed to
approve or comment on such release or public statement in a timely way so as
to avoid a violation of such law, rule, regulation or policy by the Buyer, the
Buyer may release such press release or written public statement without the
Seller's consent.
SECTION 7.5 MAINTENANCE OF INSURANCE. From and after the date hereof and
until the Closing Date, the Seller shall maintain in full force and effect all
of its presently existing insurance coverage or insurance comparable to such
existing coverage.
SECTION 7.6 BOARD REPRESENTATION. So long as the Seller or its current
shareholders own in the aggregate at least 10% but less than 15% of the issued
and outstanding shares of Buyer Common Stock, the Seller (or, if the Closing
Shares have been distributed, the Seller's shareholders owning a majority of
the Closing Shares and the Escrow Shares) shall have the right to nominate one
member of the Board of Directors of the Buyer (the "Board"). If the Seller or
its current shareholders own in the aggregate 15% or more of the issued and
outstanding shares of Buyer Common Stock, the Seller or such shareholders as
the case may be shall have the right to nominate two members of the Board. In
no event shall this Agreement entitle the Seller or such shareholders to
nominate more than two members of the Board. As of the Closing Date, the
Seller shall have the right to nominate two such members, who shall be Richard
Caspari and Alan Chervitz. Dr. Caspari shall be nominated for an initial term
of three years and Alan Chervitz shall be nominated for an initial term of two
years, for election at the Buyer's 1997 annual meeting of its stockholders.
The Buyer will use its best efforts to cause the nominees of the Seller or its
shareholders, as the case may be, to be elected to the Board at the Buyer's
1997 annual meeting of its stockholders and for so long as the Seller or
shareholders have the right to nominate directors of the Buyer pursuant to
this Section 7.6. The compensation of the nominees to the Board designated by
the Seller or the shareholders of the Seller, as the case may be, shall be
commensurate with that afforded to other non-employee members of the Board.
SECTION 7.7 PROXY STATEMENT/STOCKHOLDERS MEETING. As promptly as practicable
after the execution of this Agreement, Buyer shall prepare and file with the
Securities and Exchange Commission (the "SEC") a preliminary form of a proxy
statement (the "Proxy Statement") and other proxy materials related thereto in
connection with a special meeting of the Buyer's stockholders to be held to
approve the Purchase. The Proxy Statement shall include the recommendation of
the Board of Directors of Buyer in favor of the Purchase. As promptly as
practicable after comments are received from the SEC thereon and after the
furnishing by Seller and Buyer of all information required by such comments to
be contained therein, Buyer shall call and hold a meeting of its stockholders
(the "Stockholders Meeting") for the purpose of voting upon the approval of
the Purchase. Buyer shall use reasonable efforts to solicit from its
stockholders proxies in favor of the approval of the Purchase, and shall take
all other action necessary or advisable to secure the vote or consent of
stockholders required by Massachusetts law to obtain such approvals. Seller
and Shareholders will cooperate with Buyer in providing any required
information to be included in the Proxy Statement which relates to Seller or
Shareholders.
SECTION 7.8 CERTAIN MATTERS RELATING TO EMPLOYEES. For the purpose of the
Buyer's vacation policies, any of Seller's employees who are employed by the
Buyer after the Closing will be credited with their employment period with the
Seller as set forth on Schedule 7.8. For the purposes of the Buyer's 40l(k)
plan and stock option policies, any of Seller's employees who are employed by
the Buyer after the Closing will be treated as new employees of the Buyer. To
the extent permitted by the Buyer's health insurance policies, the employees
of the Seller who are employed by the Buyer after the Closing shall be
entitled to health insurance coverage from the date of their employment by the
Buyer.
SECTION 7.9 MONTHLY REPORTS. During the period prior to the Closing, Seller
shall furnish to Buyer as soon as available but in any event no later than 30
days after the end of each monthly accounting period financial statements of
Seller including a balance sheet as at the end of such accounting period and a
statement of income for such accounting period, prepared in reasonable detail
and in accordance with generally accepted principles consistently applied.
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SECTION 7.10 NON-COMPETITION. Seller agrees that it will not, for a period
of four (4) years from the Closing Date, directly or indirectly (i) own,
operate or perform services (as advisor or otherwise) for any person, firm,
corporation, business or other organization or enterprise engaged, directly or
indirectly, in the development, manufacture or sale of devices used in sports
medicine or arthroscopy, or (ii) interfere with, disrupt or attempt to disrupt
the relationship between the Buyer or any of its affiliates and any of their
respective licensees, customers or suppliers with respect to the Business.
Seller expressly waives any right to assert inadequacy of consideration as a
defense to enforcement of the non-competition provisions of this Section 7.10
should such ever become necessary.
SECTION 7.11 USE OF NAME. Seller agrees that neither it nor any of its
affiliates will use the name "Medicine Lodge" and the registered tradename and
logo associated therewith in the fields of sports medicine and arthroscopy.
SECTION 7.12 LICENSING. Except pursuant to the agreements described on
Schedule 7.12 attached hereto, to the extent a Shareholder is an inventor of
any of the technology described on Schedule 4.17(b)(i) attached hereto, such
Shareholder and the Seller agree not to license such technology to any other
person or entity other than to the Buyer.
ARTICLE VIII
CONDITIONS
SECTION 8.1 CONDITIONS TO OBLIGATIONS OF THE SELLER TO EFFECT THE
PURCHASE. Unless waived by the Seller, the obligation of the Seller to effect
the Purchase shall be subject to the fulfillment at or prior to the Closing
Date of the following conditions:
(a) Buyer shall have performed in all material respects its agreements
contained in this Agreement required to be performed on or prior to the
Closing Date and the representations and warranties of Buyer contained in this
Agreement shall be true and correct in all material respects on and as of (i)
the date made and (ii) the Closing Date (except in the case of representations
and warranties expressly made solely with reference to a particular date); and
the Seller shall have received a certificate of the President or Vice
President of Buyer to that effect;
(b) The Seller shall have received an opinion from Choate, Hall & Stewart,
counsel to Buyer, dated the Closing Date, substantially in the form of Exhibit
8.1(b) hereto;
(c) Buyer and the Shareholders shall have entered into a Registration Rights
Agreement in substantially the form attached hereto as Exhibit 8.1(c);
(d) Buyer shall have issued and delivered the Closing Shares, issued the
Escrow Shares and delivered the Escrow Shares to the Escrow Agent;
(e) Buyer shall have entered into Stock Option Agreements in the forms set
forth in Exhibit 8.1(e) hereto with certain employees and consultants of the
Seller named in Exhibit 8.1(e) who are to become employees of or consultants
to the Buyer following the Purchase;
(f) All consents, orders, and approvals legally required for the
consummation of the transactions contemplated hereby shall have been obtained
and be in effect at the Closing Date without any material limitations or
conditions;
(g) Seller and its shareholders shall have received an opinion of Choate,
Hall & Stewart, Counsel to the Buyer, to the effect that the Purchase will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a)(1)(C) of the Code, to be based upon customary
representations of the Seller, the Seller's shareholders, and the Buyer.
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(h) No change shall have occurred or be threatened which, nor shall Seller
have become aware of any fact that, would reasonably be expected to have a
material adverse effect on the business or financial condition of the Buyer,
taken as a whole;
(i) The Agreement and the Purchase shall have been approved by the requisite
vote of the stockholders of the Buyer;
(j) A lease in the form of Exhibit 8.1(j) hereto shall have been entered
into by the Buyer as Tenant with respect to the real property currently
occupied by the Seller at 152 South 600 West, Logan, UT; and
(k) The Buyer shall have either (i) assumed the Seller's outstanding debt to
Zions Credit Corporation as reflected on the Seller's 1996 Financial
Statements and secured the release of the personal guarantees on such debt by
Dr. and Mrs. Goble or (ii) repaid such debt in full.
SECTION 8.2 CONDITIONS TO OBLIGATIONS OF BUYER TO EFFECT THE
PURCHASE. Unless waived by Buyer, the obligations of Buyer to effect the
Purchase shall be subject to the fulfillment at or prior to the Closing Date
of the additional following conditions:
(a) The Seller and Shareholders shall have performed in all material
respects their respective agreements contained in this Agreement required to
be performed on or prior to the Closing Date and the representations and
warranties of the Seller and the Shareholders contained in this Agreement
shall be true and correct in all material respects on and as of (i) the date
made and (ii) the Closing Date (except in the case of representations and
warranties expressly made solely with reference to a particular date); and
Buyer shall have received a Certificate of the President or of a Vice
President of the Seller and the Shareholders to that effect;
(b) Buyer shall have received an opinion from Parsons, Behle & Latimer,
counsel to the Seller, dated the Closing Date, substantially in the form of
Exhibit 8.2(b) hereto;
(c) Buyer shall have received an opinion from Williams, Mullen, Christian &
Dobbins, counsel to the Seller, dated the Closing Date, substantially in the
form of Exhibit 8.2(c) hereto;
(d) All consents, orders, and approvals legally or contractually required
for the consummation of the transactions contemplated hereby shall have been
obtained and be in effect at the Closing Date without any material limitations
or conditions;
(e) The Seller shall have furnished to Buyer such additional certificates as
Buyer may have reasonably requested as to any of the conditions set forth in
this Section 8.2;
(f) The employees of the Seller identified in Schedule 8.2(f1) hereto by
Buyer shall have executed Employment Agreements in form and substance attached
hereto as Exhibit 8.2(f2) and all existing agreements between the Seller and
such employees shall have been cancelled or terminated;
(g) The consultants to the Seller identified in Schedule 8.2(g1) hereto by
Buyer shall have executed Consulting Agreements in form and substance attached
hereto as Exhibit 8.2(g2) and all existing agreements between the Seller and
such consultants shall have been cancelled or terminated;
(h) The Seller shall have obtained and delivered to Buyer a Phase I
Environmental Report ("Phase I Reports") for each facility or property on
which the Seller or any of its affiliates owns or operates, prepared by a
reputable environmental consultant; and such Phase I Reports shall indicate
that there is no evidence that any Releases have occurred;
(i) A lease in the form of Exhibit 8.1(j) hereto shall have been entered
into by GCL, L.C. as Lessor with respect to the real property currently
occupied by the Seller at 152 South 600 W. Logan, UT;
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(j) To the extent required by Buyer, Seller shall have obtained and
delivered to Buyer tax clearance certificates from the Department of Revenue
of the State of Utah and tax lien waivers from all other jurisdictions in
which Purchased Assets are located and which provide tax lien waivers; at
Closing Seller may deliver a certificate executed by its President certifying
the absence of tax liens, with tax lien waivers to be delivered as soon as
practicable thereafter;
(k) No change shall have occurred or be threatened which, nor shall Buyer
have become aware of any fact that, would reasonably be expected to have a
material adverse effect on the Purchased Assets or the Business, taken as a
whole;
(l) The Agreement and the Purchase shall have been approved by the requisite
vote of the stockholders of the Buyer;
(m) All of the outstanding stock options and warrants issued by the Seller
shall have terminated or been exercised;
(n) The Seller shall have delivered to the Buyer audited financial
statements of the Seller for the fiscal years ended December 31, 1995 and
1996; and
(o) The shareholders of the Seller who are not signatories to this Agreement
shall have delivered to the Buyer a certificate confirming to the Buyer the
representations and warranties set forth in Section 4.28 and 4.29 of this
agreement.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.1 TERMINATION. This Agreement may be terminated at any time prior
to the Closing Date:
(a) by mutual consent of Buyer and the Seller;
(b) by either Buyer or the Seller, so long as such party has not breached
its obligations hereunder (except for such breaches as are clearly
immaterial), after June 16, 1997, if the Purchase shall not have been
consummated on or before June 16, 1997 (the "Termination Date");
(c) by either Buyer or the Seller if any governmental entity shall have
issued an order, decree or ruling or taken any other action permanently
enjoining, restraining or otherwise prohibiting the Purchase and such order,
decree, ruling or other action shall have become final and nonappealable;
(d) unilaterally by Buyer or the Seller (i) if the other (A) fails to
perform any covenant or agreement in this Agreement in any material respect,
and does not cure the failure, in all material respects within fifteen
business days after the terminating party delivers written notice specifically
enumerating the alleged failure or (B) fails to fulfill or complete a
condition to the obligations of that party (which condition is not waived) by
reason of a breach by that party of its obligations hereunder or (ii) if any
condition to the obligations of that party is not satisfied (other than by
reason of a breach by that party of its obligations hereunder), and the
condition is not satisfied prior to July 15, 1997.
SECTION 9.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement by either Buyer or the Seller, as provided in Section 9.1, this
Agreement shall forthwith become void and there shall be no further obligation
on the part of either the Seller, Buyer or their respective officers or
directors (except as set forth in this Section 9.2 and in Sections 7.1 (with
respect to confidential and non-public information), 7.4, and 9.5 which shall
survive such termination). Nothing in this Section 9.2 shall relieve any party
from liability for any breach of this Agreement.
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SECTION 9.3 AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto and in compliance
with applicable law.
SECTION 9.4 WAIVER. At any time prior to the Closing Date, the parties
hereto may (i) extend the time for the performance of any of the obligations
or other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document to be delivered by the other party pursuant thereto and (iii) waive
compliance by the other party with any of the agreements or conditions
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid if set forth in an instrument in writing
signed by such party.
SECTION 9.5 EXPENSE REIMBURSEMENT; DAMAGES. Except as provided below,
whether or not the Purchase is consummated, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall
be paid by the party incurring such expenses, provided that the costs and
expenses of the Seller and of the Shareholders related to this transaction
shall be paid by the Seller provided, however, that the Seller and the
Shareholders agree that the Seller shall not pay for any costs and expenses
which relate to personal matters of its shareholders including estate or tax
planning for the shareholders. In the event that this Agreement is
unilaterally terminated by Buyer or the Seller pursuant to Sections
9.1(c)(i)(A) or (B), hereof, the nonperforming or breaching party shall
promptly pay all reasonable documented costs and expenses of the other party
incurred in connection with the negotiation and performance of this Agreement,
which payment shall be in addition to any other legal or equitable remedies
that may be available to the nonbreaching or performing party.
ARTICLE X
INDEMNIFICATION; ESCROW
SECTION 10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties in this Agreement shall survive the Purchase for a period of
one (1) year from and after the Closing Date, provided, however, that (a) the
representation and warranty contained in Section 4.11 shall survive until the
expiration of the statute of limitations for the final tax return of the
Seller covering periods ending on and prior to the Closing Date and (b) any
claims based upon common law fraud shall expire at the time the applicable
statute of limitations expires.
SECTION 10.2 SELLER INDEMNIFICATION. Subject to the procedures and
limitations set forth in this Article X, the Seller agrees to indemnify and
hold harmless Buyer and its respective officers, directors, employees and
controlling persons ("Buyer Indemnitees"), from and against any and all
actions, suits, claims, proceedings, costs, losses, damages, judgments,
amounts paid in settlement in accordance with Section 10.7 and reasonable
expenses (including, without limitation, reasonable attorneys' fees and
disbursements) (hereinafter collectively referred to as a "Buyer Loss" or
"Buyer Losses") suffered or incurred by Buyer or the Buyer Indemnitees to the
extent relating to or arising out of any inaccuracy in or breach, violation or
nonobservance of the representations, warranties, covenants or agreements made
by the Seller or the Shareholders ("Seller Breaches"), or the failure of the
Seller to discharge the Excluded Liabilities of the Seller referred to in
Section 2.3(b).
SECTION 10.3 BUYER INDEMNIFICATION. Subject to the procedures and
limitations set forth in this Article X, the Buyer agrees to indemnify and
hold harmless Seller and its respective officers, directors, employees and
controlling persons and all of the Seller's shareholders ("Seller
Indemnitees"), from and against any and all actions, suits, claims,
proceedings, costs, losses, damages, judgments, amounts paid in settlement in
accordance with Section 10.7 and reasonable expenses (including, without
limitation, reasonable attorneys' fees and disbursements) (hereinafter
collectively referred to as a "Seller Loss" or "Seller Losses") suffered or
incurred by Seller or the Seller Indemnitees to the extent relating to or
arising out of (i) any inaccuracy in or breach, violation or nonobservance of
the representations, warranties, covenants or agreements made by the Buyer, or
(ii) the failure of Buyer to discharge the Assumed Liabilities from and after
the Closing Date.
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SECTION 10.4 LIMITATIONS ON INDEMNIFICATION. Notwithstanding any provision
contained in this Article X to the contrary, Buyer and Buyer Indemnitees may
seek to recover from the Seller Buyer Losses arising from Seller Breaches only
if such Buyer Losses exceed $150,000, and only such Buyer Losses exceeding
$150,000 shall be recoverable from Seller. Nothing contained in this Section
10.4 shall limit the Buyer's right to recover Buyer Losses arising out of the
Seller's failure to discharge the Excluded Liabilities.
SECTION 10.5 ESCROW. Upon consummation of the Purchase, ten (10%) percent of
the shares of Buyer Common Stock issuable to the Seller in the Purchase shall
be deposited into the Escrow with the Escrow Agent in accordance with the
Escrow Agreement set forth in Exhibit 2.2(b)(i) hereto and shall be available
to Buyer and the Buyer Indemnitees to satisfy indemnified claims pursuant to
this Article X. The Escrow shall terminate and the shares remaining on deposit
therein shall be remitted to Seller at the end of the one-year survival period
described in Section 10.1, except to the extent necessary to resolve claims
made by Buyer and the Buyer Indemnitees in writing prior to the end of such
survival period.
SECTION 10.6 INDEMNIFICATION LIMITATION. Except as hereinafter set forth in
this Section 10.6, all Buyer Losses will be paid out of the Escrow, and the
Seller and the Seller's shareholders shall have no liability to Buyer or Buyer
Indemnitees for any Buyer Losses that exceed the Escrow. In the event of any
Buyer Loss arising as the result of a breach of the representation or warranty
set forth in Section 4.11 or as a result of common law fraud which occurs
after the termination of the Escrow, the Buyer and Buyer Indemnitees shall
have the right to recover indemnification from the Seller so long as a claim
is made in writing to the Seller prior to the expiration of the applicable
survival period. Notwithstanding anything to the contrary herein, Buyer Losses
arising from the Seller's failure to discharge Excluded Liabilities shall be
payable out of the Escrow to the extent that the Escrow is not required to be
used for Buyer Losses arising out of Seller Breaches and thereafter shall be
recoverable directly from the Seller or its shareholders.
SECTION 10.7 NOTICE OF INDEMNIFIABLE LOSS. Each indemnified party (the
"Indemnified Party") shall provide written notice to the indemnifying party
(the "Indemnifying Party") of any claim with respect to which it seeks
indemnification promptly after the discovery by the Indemnified Party of any
matters giving rise to a claim for indemnification, provided that the failure
of the Indemnified Party to give notice as provided herein shall not relieve
the Indemnifying Party of its obligation under this Article X, except if and
to the extent the Indemnifying Party has been materially prejudiced thereby.
Provided that the Indemnifying Party has agreed to indemnify the Indemnifying
Party with respect to the noticed claim, the Indemnified Party shall have the
control of all litigation for which indemnity is available pursuant to this
Article X. The Indemnifying Party shall not, without the Indemnified Party's
prior written consent, which shall not be unreasonably withheld, settle or
compromise any action, suit, claim or proceeding to which an Indemnified Party
is a party or consent to entry of any judgment in respect thereof. The
Indemnifying Party further agrees that it will not, without the Indemnified
Party's prior written consent, settle or compromise any claim or proceeding in
respect of which indemnification may be sought hereunder unless such
settlement or compromise includes unconditional release of the Indemnified
Party or Parties from all liability arising out of such action, suit, claim or
proceeding.
SECTION 10.8 VALUATION OF ESCROWED SHARES. In the event that the Buyer has
made a written claim for indemnification pursuant to this Article X, the
Escrow Agent shall, pursuant to the Escrow Agreement, reserve a number of
Escrowed Shares equal to the estimated Buyer Loss incurred by the Buyer or
Buyer Indemnitees as set forth in Buyer or Buyer Indemnitees' indemnification
claim based on the value of the Escrowed Shares at the time that the claim is
made. For the purpose of this Section 10.8, the value of each Escrowed Share
at the time a claim is made shall be equal to the average closing price of the
Buyer's Common Stock for the 30 trading days preceding the date of the claim.
Notwithstanding the foregoing, the Company may make adjustments to such claim
upon receipt of additional facts and the Company may submit an amended claim
notice requesting the Escrow Agent to reserve additional Reserved Shares to
satisfy any increases in the amount of such claim, which shares the Escrow
Agent shall reserve. At the time a claim is resolved, the number of reserved
Escrowed Shares that shall be deemed to resolve the claimed Buyer Loss shall
be determined based on the value of the reserved Escrowed Shares as of the
date the claim is resolved, with each reserved Escrowed Share having a value
equal
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to the average closing price of the Buyer's Common Stock for the 30 trading
days preceding the date the claim is resolved. Notwithstanding the foregoing,
the number of Escrowed Shares deemed necessary to resolve a Buyer Loss shall
in no event exceed the number of Escrowed Shares actually reserved by the
Escrow Agent with respect to such Buyer Loss at the time the claim relating to
such Buyer Loss is made or amended in accordance with this section. If a Buyer
Loss relates to an Excluded Liability, the number of shares to be reserved
shall be determined immediately prior to the termination of the Escrow after
determining how many Escrowed Shares remain available to satisfy Buyer Losses
after reservation for Buyer Losses arising from Seller Breaches.
SECTION 10.9 RIGHTS AND OBLIGATIONS OF THE SHAREHOLDERS. In the event that
the Seller distributes the Closing Shares to the Seller's shareholders,
whether or not in a liquidating transaction, the rights and the obligations of
the Seller hereunder shall inure to the benefit of and be an obligation of
such shareholders. Notwithstanding the foregoing, in no event will the amount
indemnifiable by any particular such shareholder for Buyer Losses arising from
Seller Breaches exceed an amount equal to the value of the number of Escrowed
Shares allocable to the account of such shareholder based upon such
shareholder's pro rata equity interest in the Seller, except for claims of
common law fraud. The amount indemnifiable by the shareholders of the Seller
for Buyer Losses arising out of the failure of the Seller to discharge
Excluded Liabilities shall be allocated among the Seller's shareholders based
upon their pro rata equity interest in the Seller.
ARTICLE XI
DEFINITIONS
(a) The following terms are first defined in the sections indicated below:
Annual Financial Statements: 4.5(a)
Business: preamble
Buyer Common Stock: 2.2(a)
Buyer: preamble
Buyer Common Stock: 3.1(a)
Buyer Financial Statements: 5.4
Buyer Indemnitees: 10.2
Buyer Prospectus: 5.4
Buyer Required Statutory Filings: 5.3(c)
Buyer Representatives: 7.1
Buyer SEC Reports: 5.4
Buyer 10-Qs: 5.4
CERCLA: 4.15
Closing: 3.1
Closing Date: 3.1
Closing Shares: 2.2(a)
Code: 4.11(a)
Encumbrances: 4.24
Environmental Laws: 4.15
ERISA: 4.12
Escrow: 2.2(b)(i)
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Escrow Agent: 2.2(b)(i)
Escrow Agreement: 2.2(b)(i)
Escrow Certificate: 2.2(b)
Escrow Shares: 2.2(b)
Financial Plan: 6.1(d)
Hazardous Substance: 4.15
Intellectual Property: 4.17(b)
IRS: 4.11(a)
Loss or Losses: 10.2
Material Contracts: 4.16(a)
1996 Financial Statement: 4.5(a)
Permitted Encumbrances: 4.24
Purchase: preamble
1996 Seller Balance Sheet: 4.11(a)
Phase I Reports: 8.2(g)
Release: 4.15
SEC: 5.3(c)
Seller: preamble
Seller Breaches: 10.2
Seller Common Stock: 4.2(a)
Seller Permits: 4.9
Seller Plans: 4.12
Seller Preferred Stock: 4.2(a)
Subsidiary: 4.3
Taxes: 4.11(b)
Termination Date: 9.1(b)
(b) For the purposes of this Agreement, the term "knowledge" shall mean
information actually known or which reasonably should have been known after
due inquiry. The "knowledge of the Seller" or words of similar import shall
mean the knowledge of Richard B. Caspari, Alan Chervitz, T. Wade Fallin and E.
Marlowe Goble.
(c) For the purposes of this Agreement, a matter shall be deemed to be
"material" if (i) it involves or could be reasonably expected to involve a
loss or payment of $5,000 or more and (ii) it has not occurred in the ordinary
course of a party's business consistent with past practice, or, in the case of
the Seller, is inconsistent with the Seller's Financial Plan.
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ARTICLE XII
POST-CLOSING AGREEMENTS
SECTION 12.1 PROPRIETARY INFORMATION. Subsequent to the Closing, all
confidential or proprietary information furnished by either party pursuant to
the Purchase and the other transactions contemplated hereby shall be kept in
strict confidence and shall not be used or disclosed by the receiving party or
any recipient, and the receiving party shall cause each such recipient to
return to disclosing party all copies of documents or records furnished
hereunder; provided, however, that the restriction on disclosure and use of
such confidential or proprietary information shall not apply to information
which (a) is lawfully and independently obtained by the receiving party from a
third party or is disclosed or used by the receiving party only to the extent
permitted by restrictions imposed by such third party, (b) was known by the
receiving party prior to its disclosure by disclosing party, (c) is in the
public domain or enters into the public domain through no fault of the
receiving party, or (d) is independently developed by the receiving party
without reference to information provided by disclosing party. No
investigation or findings of either party shall diminish or affect the
representations and warranties of either party in this Agreement or relieve
either party of any of its obligations hereunder.
SECTION 12.2 BANK ACCOUNTS. Following the Closing, at Buyer's election,
Seller shall cooperate with Buyer in causing any funds held in any Seller bank
accounts (including without limitation with respect to escrow and deposits)
existing as of the Closing to be transferred to such accounts as Buyer shall
direct and to cause such existing bank accounts to be closed out. Seller shall
cooperate with Buyer in causing all obligors of Seller in connection with the
Business and the Purchased Assets to make payments after the Closing Date to
such accounts as Buyer shall direct. Seller hereby authorizes Buyer to endorse
Seller's name on and collect for Buyer's account any checks received in
payment of any accounts included in the Purchased Assets. If payments for any
such amounts are received by Seller, it will promptly turn over the same to
Buyer.
SECTION 12.3 COOPERATION IN LITIGATION. Each party hereto will fully
cooperate with the others in the defense or prosecution of any litigation or
proceeding already instituted or which may be instituted hereafter against or
by such party relating to or arising out of the conduct of the Business in the
ordinary course prior to or after the Closing Date (other than litigation
arising out of the transactions contemplated by this Agreement or litigation
arising out of or in connection with the Excluded Liabilities). The party
requesting such cooperation shall pay the out-of-pocket expenses (including
legal fees and disbursements) of the party providing such cooperation
(including the time charges for any persons who are not employees of the
cooperating party who provide assistance to the requesting party at its
request), but shall not be responsible to reimburse the party providing such
cooperation for time spent in such cooperation by its employees while
assisting in the defense or prosecution of any such litigation or proceeding.
SECTION 12.4 FURTHER ASSURANCES. At any time and from time to time after the
Closing, upon request and without further consideration, either party promptly
shall execute and deliver such instruments of sale, transfer, conveyance,
assignment and confirmation and take such other action as may reasonably
requested to more effectively transfer, convey and assign to Buyer, and to
confirm Buyer's title to, all of the Purchased Assets, to put Buyer in actual
possession and operating control thereof, to assist Buyer in exercising all
rights with respect thereto and to carry out the purpose and intent of this
Agreement.
SECTION 12.5 BOOKS AND RECORDS. Buyer shall retain after the Closing Date
all books and records pertaining to the Business, except Seller's minute
books, stock records and tax returns (with respect to which Buyer's duly
authorized representatives shall have access during normal operating hours and
upon reasonable notice following the Closing). After the Closing, Seller's
duly authorized representatives shall be entitled at all reasonable times to
have access to and to make copies of all such books and records to the extent
necessary in connection with the preparation and filing of Seller's tax
returns or in connection with the Excluded Liabilities. In the event Buyer
desires to destroy within two years after Closing any of such books and
records that may be required in connection with the preparation or audit of
the tax returns of Seller, Buyer shall first give Seller 90 days' written
notice and Seller shall within 90 days of such notice have the right to remove
and retain said books and records, and any books and records not so removed by
Seller may thereafter be destroyed by Buyer.
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<PAGE>
SECTION 12.6 INSURANCE. Following the Closing, Seller, shall cooperate with
Buyer in causing (to the extent requested by Buyer) all existing insurance
policies of Seller insuring the Purchased Assets or the Business to be
transferred to Buyer as permitted under the policies and, prior to such
transfer, Seller shall not cancel or permit to be terminated or lapse any of
the Insurance Policies. Seller shall immediately notify Buyer if Seller
receives a notice of cancellation or termination with respect to any such
Insurance Policy or that the insurer under any such policy is denying
liability with respect to a claim thereunder or defending under a reservation
of rights clause. To the extent that there is available insurance under
policies maintained by Seller or Shareholders in respect of claims brought
pursuant to Article 11, Seller or Shareholders, as the case may be, shall (i)
submit such claims to the insurer under such policies, (ii) attempt in good
faith to recover the maximum amount available under such policies and apply
the proceeds to the payment of such claims and (iii) use best efforts to cause
the insured under such policies to perform its obligations thereunder. To the
extent that after the Closing there is available insurance under policies
maintained by Buyer in respect of claims brought pursuant to Article 11, the
Buyer shall (i) submit such claims to the insurer under such policies, (ii)
attempt in good faith to recover the maximum amount available under such
policies and apply the proceeds to the payment of such claims and (iii) use
best efforts to cause the insured under such policies to perform its
obligations thereunder. To the extent that Buyer shall become liable or suffer
any damage with respect to any matter which was covered by insurance
maintained by the Seller on or prior to the Closing Date, Seller agrees that
the Buyer shall be and hereby is, to the extent permitted under such policies
and to the extent consistent with Article 11 hereof, subrogated to the rights
of the Seller under such insurance coverage.
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<PAGE>
ARTICLE XIII
GENERAL PROVISIONS
SECTION 13.1 NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, mailed by
registered or certified mail (return receipt requested) or sent via facsimile
to the parties at the following addresses (or at such other address for a
party as shall be specified by like notice):
(a) If to Buyer to:
Innovasive Devices, Inc.
734 Forest Street
Marlborough, MA 01752-3032
Attn: Richard Randall
Fax: 508-460-8997
with a copy to:
Choate, Hall & Stewart
Exchange Place
53 State Street
Boston, Massachusetts 02109
Attention: Roslyn G. Daum, Esq.
Fax: (617) 248-4000
(b) if to the Seller, to:
Medicine Lodge, Inc.
152 South 600 West
Logan, UT 84321
Attn: Alan Chervitz
Fax: 801-753-7698
with a copy to:
Williams, Mullen, Christian & Dobbins
P.O. Box 1320
Richmond, Virginia 23210-1320
Attention: Theodore L. Chandler, Jr., Esq.
Fax: (804) 783-5456
SECTION 13.2 INTERPRETATION. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 13.3 MISCELLANEOUS. This Agreement (including the documents and
instruments referred to herein) (i) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and
oral, among the parties, or any of them, with respect to the subject matter
hereof; (ii) shall not be assigned by operation of law or otherwise; and (iii)
shall be governed in all respects, including validity, interpretation and
effect, by the laws of The Commonwealth of Massachusetts (without giving
effect to the provisions thereof relating to conflicts of law).
SECTION 13.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
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<PAGE>
SECTION 13.5 PARTIES IN INTEREST. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
[The rest of this page has been left blank intentionally and the signature
pages follow.]
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<PAGE>
IN WITNESS WHEREOF, the Shareholders, and Buyer and Seller by their
respective officers thereunto duly authorized, have caused this Agreement to
be signed as of the date first written above.
INNOVASIVE DEVICES, INC
s/Richard Randall
By: _________________________________
Richard Randall
President
MEDICINE LODGE, INC
s/Alan Chervitz
By: _________________________________
Alan Chervitz
President
SHAREHOLDERS:
s/E. Marlowe Goble, M.D.
_____________________________________
s/Alan Chervitz
_____________________________________
s/T. Wade Fallin
_____________________________________
s/Richard B. Caspari, M.D.
_____________________________________
s/Judith B. Caspari
_____________________________________
s/Stephen J. Snyder, M.D.,
individually
_____________________________________
s/Stephen J. Snyder, as Trustee of
the Stephen J. Snyder and Lee Ann
Snyder Family Trust
_____________________________________
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<PAGE>
ANNEX II
PIPER JAFFRAY COMPANY
Piper Jaffray Companies, Inc.
222 South Ninth Street
Minneapolis, MN 55402-3804
612-342-6000
February 4, 1997
The Board of Directors
Innovasive Devices, Inc.
734 Forest Street
Marlborough, MA 01752
Attention:Richard D. Randall
President and Chief Executive Officer
Members of the Board:
In connection with the proposed purchase transaction ("Transaction") whereby
Innovasive Devices, Inc. ("Innovasive Devices") will acquire substantially all
of the assets (the "Purchased Assets") and liabilities related to the
orthopedic medical device business (the "Business") of MedicineLodge, Inc.
("MedicineLodge") pursuant to an Asset Purchase Agreement (the "Agreement") by
and between Innovasive Devices, MedicineLodge, and the shareholders of
MedicineLodge, you have requested our opinion as to the fairness, from a
financial point of view, to Innovasive Devices of the consideration to be paid
by Innovasive Devices in the Transaction. As more specifically detailed in the
Agreement, Innovasive Devices shall issue 1,885,000 shares of its Common
Stock, par value $.0001 per share, and shall assume certain operating
liabilities and other obligations of MedicineLodge, as specified in the
Agreement, in exchange for the Purchased Assets in a tax free transaction
under Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended
(the "Code").
Piper Jaffray Inc., as a customary part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, underwriting and secondary distributions of
securities, private placements and valuations for estate, corporate and other
purposes. For our services in rendering this opinion, Innovasive Devices will
pay us a fee and indemnify us against certain liabilities. The fee is not
contingent upon the consummation of the Transaction. Piper Jaffray makes a
market in the Common Stock of Innovasive Devices and also provides research
coverage for Innovasive Devices. Piper Jaffray acted as co-manager of the
initial public offering of Innovasive Devices' Common Stock in 1996. In the
ordinary course of its business, we and our affiliates may actively trade
securities of Innovasive Devices for our own account or the account of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
In arriving at our opinion, we have undertaken such review, analyses and
inquiries as we deemed necessary and appropriate under the circumstances.
Among other things, we have reviewed (i) a draft of the Agreement dated
January 28, 1997, (ii) certain proprietary information relative to
MedicineLodge and the Purchased Assets, (iii) certain internal financial
information of MedicineLodge on a stand-alone and "as combined" basis
resulting from the Transaction prepared for financial planning purposes and
furnished by the management of MedicineLodge, (iv) to the extent publicly
available, the financial terms of certain acquisition transactions involving
companies operating in industries deemed similar to that in which the Business
operates, (v) certain publicly available information relative to Innovasive
Devices, (vi) certain internal financial information of
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Innovasive Devices and the combined company resulting from the Transaction
(the "Combined Company") prepared for financial planning purposes and
furnished by the management of Innovasive Devices, and (vii) certain financial
and securities data of Innovasive Devices and companies deemed similar to
Innovasive Devices. We had discussions with members of the management of (a)
Innovasive Devices concerning the financial condition, current operating
results and business outlook for Innovasive Devices and the Combined Company
and Innovasive Devices' plans relating to the Combined Company, and (b)
MedicineLodge concerning the financial condition, current operating results
and business outlook for MedicineLodge and the Combined Company.
We have relied upon and assumed the accuracy, completeness and fairness of the
financial statements and other information provided to us by Innovasive
Devices, MedicineLodge or otherwise made available to us, and have not assumed
responsibility independently to verify such information. We have relied
further upon the assurances of the managements of Innovasive Devices and
MedicineLodge that the information provided to us as set forth above by
Innovasive Devices and MedicineLodge has been prepared on a reasonable basis,
and, with respect to financial planning data and other business outlook
information, reflects the best currently available estimates, and that they
are not aware of any information or facts that would make the information
provided to us incomplete or misleading. For purpose of this opinion, we have
assumed that neither Innovasive Devices nor MedicineLodge is a party to any
pending transaction including external financing, recapitalizations,
acquisitions or merger discussions, other than the Transaction or the ordinary
course of business. We have assumed that the transactions contemplated by the
Agreement will constitute a "reorganization" within the meaning of Section
368(a)(l)(c) of the Code. We have also assumed that the Purchased Assets
include all assets which are used in the Business or necessary for the
operation of the Business as conducted by MedicineLodge.
In arriving at our opinion, with your consent, our analyses of MedicineLodge
have assumed that the Purchased Assets and Assumed Liabilities represent
substantially all of the operations of MedicineLodge as a going concern.
Accordingly, such analyses did not undertake to consider specific assets or
liabilities of MedicineLodge, but rather involved consideration of the
business of MedicineLodge as a whole on a going concern basis. Without
limiting the generality of the foregoing, we have not performed any appraisals
or valuations of the Purchased Assets or any specific assets or liabilities of
Innovasive Devices or MedicineLodge, and we express no opinion regarding the
liquidation value of any entity or assets.
This opinion is necessarily based upon the information available to us and
facts and circumstances as they exist and are subject to evaluation on the
date hereof, events occurring after the date hereof could materially affect
the assumptions used in preparing this opinion. We are not expressing any
opinion herein as to the price at which shares of Innovasive Devices Common
Stock have traded or may trade at any future time.
This opinion is directed to the Board of Directors of Innovasive Devices and
is not intended to be and does not constitute a recommendation to any
stockholder as to how such stockholder should vote with respect to the
Transaction. We were not requested to opine as to, and this opinion does not
address, the basic business decision to proceed with or effect the
Transaction. This opinion shall not be published or otherwise used, nor shall
any public references to us be made, without our prior written approval.
Based upon and subject to the foregoing and based upon such other factors as
we consider relevant, it is our opinion that the consideration proposed to be
paid by Innovasive Devices in the Transaction is fair, from a financial point
of view, to Innovasive Devices as of the date hereof.
Sincerely,
/s/ Piper Jaffray Inc.
PIPER JAFFRAY INC.
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<PAGE>
ANNEX III
INNOVASIVE DEVICES, INC.
1996 OMNIBUS STOCK PLAN
----------------
1. Purpose. This 1996 Omnibus Stock Plan (the "Plan") of Innovasive Devices,
Inc. (the "Company") is intended to provide incentives (a) to the officers and
other employees of the Company, its parent (if any) and any present or future
subsidiaries of the Company (collectively, "Related Corporations") by
providing them with opportunities to purchase stock in the Company pursuant to
options which qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), granted hereunder
("ISO" or "ISOs"); (b) to directors, officers, employees and consultants of
the Company and Related Corporations by providing them with opportunities to
purchase stock in the Company pursuant to options granted hereunder which do
not qualify as ISOs ("Non-Qualified Option" or "Non-Qualified Options"); and
(c) to directors, officers, employees and consultants of the Company and
Related Corporations by providing them with opportunities to make direct
purchases of restricted stock in the Company ("Restricted Stock"). Both ISOs
and Non-Qualified Options are referred to hereafter individually as an
"Option" and collectively as "Options." As used herein, the terms "parent" and
"subsidiary" mean "parent corporation" and "subsidiary corporation" as those
terms are defined in Section 424 of the Code.
2. Administration of the Plan. (a) The Plan shall be administered by the
Board of Directors of the Company (the "Board"). The Board may appoint a
Compensation Committee (the "Committee") of two or more of its members to
administer this Plan. In the event the Company registers any class of any
equity security pursuant to Section 12 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), each member of the Committee shall be a "non-
employee director" as defined in Rule 16b-3 under the Exchange Act and each
shall be an "outside director" within the meaning of Section 162(m) of the
Code. Subject to ratification of the grant of each Option or Restricted Stock
by the Board (if so required by applicable state law), and subject to the
terms of the Plan, the Committee, if so appointed, shall have the authority to
(i) determine the employees of the Company and Related Corporations (from
among the class of employees eligible under paragraph 3 to receive ISOs) to
whom ISOs may be granted and to determine (from among the class of individuals
and entities eligible under paragraph 3 to receive Non-Qualified Options and
Restricted Stock) to whom Non-Qualified Options or Restricted Stock may be
granted; (ii) determine the time or times at which Options or Restricted Stock
may be granted; (iii) determine the option price of shares subject to each
Option, which price with respect to ISOs shall not be less than the minimum
specified in paragraph 7, and the purchase price of Restricted Stock; (iv)
determine whether each Option granted shall be an ISO or a Non-Qualified
Option; (v) determine (subject to paragraph 7) the time or times when each
Option shall become exercisable and the duration of the exercise period; (vi)
determine whether restrictions such as repurchase options are to be imposed on
shares subject to Options and to Restricted Stock, and the nature of such
restrictions, if any; (vii) establish, amend and waive the terms and
conditions of individual options and purchase authorizations granted
hereunder, including, without limitation, terms and conditions relating to
vesting, exercisability and effect of termination of employment by the
Company; and (viii) interpret the Plan and prescribe and rescind rules and
regulations relating to it. If the Committee determines to issue a Non-
Qualified Option, it shall take whatever actions it deems necessary, under
Section 422 of the Code and the regulations promulgated thereunder, to ensure
that such Option is not treated as an ISO. The interpretation and construction
by the Committee of any provisions of the Plan or of any Option or
authorization or agreement for Restricted Stock granted under it shall be
final unless otherwise determined by the Board. The Committee may from time to
time adopt such rules and regulations for carrying out the Plan as it may deem
best. No member of the Board or the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any Option or
Restricted Stock granted under it.
(b) The Committee may select one of its members as its chairman, and shall
hold meetings at such time and places as it may determine. Acts by a majority
of the Committee, or acts reduced to or approved in writing
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<PAGE>
by a majority of the members of the Committee, shall be the valid acts of the
Committee. All references in this Plan to the Committee shall mean the Board
if there is no Committee so appointed. From time to time the Board may
increase the size of the Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies however caused or remove all members of the Committee
and thereafter directly administer the Plan.
3. Eligible Employees and Others. ISOs may be granted to any officer or
other employee of the Company or any Related Corporation. Those directors of
the Company who are not employees may not be granted ISOs under the Plan. Non-
Qualified Options and Restricted Stock may be granted to any director (whether
or not an employee), officer, employee or consultant of the Company or any
Related Corporation. The Committee may take into consideration an optionee's
individual circumstances in determining whether to grant an ISO or a Non-
Qualified Option or Restricted Stock. Granting of any Option or Restricted
Stock to any individual or entity shall neither entitle that individual or
entity to, nor disqualify him from, participation in any other grant of
Options or Restricted Stock.
4. Stock. The stock subject to Options and Restricted Stock shall be
authorized but unissued shares of Common Stock of the Company, par value
$.0001 per share (the "Common Stock"), or shares of Common Stock re-acquired
by the Company in any manner. The aggregate number of shares which may be
issued pursuant to the Plan is 800,000 plus such additional number of shares
as may become available due to the forfeiture of options granted under the
1992 MinVasive Devices Stock Option Plan, subject to adjustment as provided in
paragraph 14. Any such shares may be issued as ISOs, Non-Qualified Options or
Restricted Stock so long as the aggregate number of shares so issued does not
exceed such number, as adjusted. If any Option granted under the Plan shall
expire or terminate for any reason without having been exercised in full or
shall cease for any reason to be exercisable in whole or in part, or if any
Restricted Stock shall be reacquired by the Company by exercise of its
repurchase option, the shares subject to such expired or terminated Option and
reacquired shares of Restricted Stock shall again be available for grants of
Options or Restricted Stock under the Plan.
5. Individual Participant Limitation. Any other provision of this Plan
notwithstanding, the number of shares of Common Stock for which options or
purchase authorizations may be granted in any single fiscal year of the
Company to any participant shall not exceed 250,000 shares (the "Individual
Limit"). For purposes of the foregoing limitation, if any option or purchase
authorization is cancelled, the cancelled option or purchase authorization
shall continue to be counted against the Individual Limit; if after grant the
exercise price of an option or purchase authorization is modified, the
transaction shall be treated as the cancellation of the option or purchase
authorization and the grant of a new option or purchase authorization. In any
such case, both the option or purchase authorization that is cancelled and the
option or purchase authorization deemed to be granted shall be counted against
the Individual Limit.
6. Grants Under the Plan. Options or Restricted Stock may be granted under
the Plan at any time on or after April 2, 1996 and prior to April 2, 2006. The
date of grant of an Option under the Plan will be the date specified by the
Committee at the time it awards the Option; provided, however, that such date
shall not be prior to the date of award. The Committee shall have the right,
with the consent of the optionee, to convert an ISO granted under the Plan to
a Non-Qualified Option pursuant to paragraph 16.
7. Minimum Option Price: ISO Limitations. (a) The price per share specified
in the agreement relating to each ISO granted under the Plan shall not be less
than the fair market value per share of Common Stock on the date of such
grant. In the case of an ISO to be granted to an employee owning stock
possessing more than ten percent of the total combined voting power of all
classes of stock of the Company or any Related Corporation, the price per
share specified in the agreement relating to such ISO shall not be less than
110 percent of the fair market value of Common Stock on the date of grant.
(b) In no event shall the aggregate fair market value (determined at the
time the option is granted) of Common Stock for which ISOs granted to any
employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company and any Related
Corporation) exceed $100,000.
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<PAGE>
(c) If, at the time an Option is granted under the Plan, the Company's
Common Stock is publicly traded, "fair market value" shall be determined as of
the last business day for which the prices or quotes discussed in this
sentence are available prior to the date such Option is granted and shall mean
(i) the average (on that date) of the high and low prices of the Common Stock
on the principal national securities exchange on which the Common Stock is
traded, if such stock is then traded on a national securities exchange; or
(ii) the last reported sale price (on that date) of the Common Stock on the
Nasdaq National Market, if the Common Stock is not then traded on a national
securities exchange; or (iii) the closing bid price (or average of bid prices)
last quoted (on that date) by an established quotation service for over-the-
counter securities, if the Common Stock is not reported on the Nasdaq National
Market or on a national securities exchange. However, if the Common Stock is
not publicly traded at the time an Option is granted under the Plan, "fair
market value" shall be deemed to be the fair value of the Common Stock as
determined by the Committee after taking into consideration all factors which
it deems appropriate, including, without limitation, recent sale and offer
prices of the Common Stock in private transactions negotiated at arm's length.
8. Option Duration. Subject to earlier termination as provided in paragraphs
10 and 11, each Option shall expire on the date specified by the Committee,
but not more than ten years from the date of grant and in the case of ISOs
granted to an employee owning stock possessing more than ten percent of the
total combined voting power of all classes of stock of the Company or any
Related Corporation, not more than five years from date of grant. Subject to
earlier termination as provided in paragraphs 10 and 11, the term of each ISO
shall be the term set forth in the original instrument granting such ISO,
except with respect to any part of such ISO that is converted into a Non-
Qualified Option pursuant to paragraph 16.
9. Exercise of Option. Subject to the provisions of paragraphs 10 through
13, each Option granted under the Plan shall be exercisable as follows:
(a) The Option shall either be fully exercisable on the date of grant or
shall become exercisable thereafter in such installments as the Committee may
specify.
(b) Once an installment becomes exercisable it shall remain exercisable
until expiration or termination of the Option, unless otherwise specified by
the Committee.
(c) Each Option or installment may be exercised at any time or from time to
time, in whole or in part, for up to the total number of shares with respect
to which it is then exercisable.
(d) The Committee shall have the right to accelerate the date of exercise of
any installment; provided that the Committee shall not accelerate the exercise
date of any installment of any Option granted to any employee as an ISO (and
not previously converted into a Non-Qualified Option pursuant to paragraph 16)
if such acceleration would violate the annual vesting limitation contained in
Section 422(d) of the Code, which provides generally that the aggregate fair
market value (determined at the time the option is granted) of the stock with
respect to which ISOs granted to any employee are exercisable for the first
time by such employee during any calendar year (under all plans of the Company
and any Related Corporation) shall not exceed $100,000.
10. Termination of Employment. If an ISO optionee ceases to be employed by
the Company or any Related Corporation other than by reason of death or
disability as provided in paragraph 11, no further installments of his ISOs
shall become exercisable, and his ISOs shall terminate after the passage of 90
days from the date of termination of his employment, but in no event later
than on their specified expiration dates except to the extent that such ISOs
(or unexercised installments thereof) have been converted into Non-Qualified
Options pursuant to paragraph 16. Leave of absence with the written approval
of the Committee shall not be considered an interruption of employment under
the Plan, provided that such written approval contractually obligates the
Company or any Related Corporation to continue the employment of the employee
after the approved period of absence. Employment shall also be considered as
continuing uninterrupted during any other bona fide leave of absence (such as
those attributable to illness, military obligations or governmental service)
provided that the period of such leave does not exceed 90 days or, if longer,
any period during which such optionee's right to
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<PAGE>
reemployment is guaranteed by statute. Nothing in the Plan shall be deemed to
give any grantee of any Option or Restricted Stock the right to be retained in
employment or other service by the Company or any Related Corporation for any
period of time. ISOs granted under the Plan shall not be affected by any
change of employment within or among the Company and Related Corporations, so
long as the optionee continues to be an employee of the Company or any Related
Corporation. In granting any Non-Qualified Option, the Committee may specify
that such Non-Qualified Option shall be subject to the restrictions set forth
herein with respect to ISOs, or to such other termination or cancellation
provisions as the Committee may determine. Notwithstanding the provisions in
this paragraph 10, the Committee may, in its sole discretion, establish
different terms and conditions pertaining to the effect of a participant's
termination of employment by the Company.
11. Death; Disability; Dissolution. If an optionee ceases to be employed by
the Company and all Related Corporations by reason of his death, any Option of
his may be exercised, to the extent of the number of shares with respect to
which he could have exercised it on the date of his death, by his estate,
personal representative or beneficiary who has acquired the Option by will or
by the laws of descent and distribution, at any time prior to the earlier of
the Option's specified expiration date or one year from the date of the
optionee's death.
If an optionee ceases to be employed by the Company and all Related
Corporations by reason of his disability, he shall have the right to exercise
any Option held by him on the date of termination of employment, to the extent
of the number of shares with respect to which he could have exercised it on
that date, at any time prior to the earlier of the Option's specified
expiration date or one year from the date of the termination of the optionee's
employment. For the purposes of the Plan, the term "disability" shall have the
meaning assigned to it in Section 22(e)(3) of the Code or any successor
statute.
In the case of a partnership, corporation or other entity holding a Non-
Qualified Option, if such entity is dissolved, liquidated, becomes insolvent
or enters into a merger or acquisition with respect to which such optionee is
not the surviving entity, such Option shall terminate immediately.
12. Assignability. Unless otherwise approved by the Board, no Non-Qualified
Option shall be assignable or transferable by the optionee except by will or
by the laws of descent and distribution or pursuant to a qualified domestic
relations order, and during the lifetime of the Optionee each Option shall be
exercisable only by him. No ISO shall be assignable or transferable by the
optionee except by will or by the laws of descent and distribution, and during
the lifetime of the Optionee each Option shall be exercisable only by him.
13. Terms and Conditions of Options. Options shall be evidenced by
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 12 hereof and may contain such
other provisions as the Committee deems advisable that are not inconsistent
with the Plan, including transfer and repurchase restrictions applicable to
shares of Common Stock issuable upon exercise of Options. The Committee may
from time to time confer authority and responsibility on one or more of its
own members and/or one or more officers of the Company to execute and deliver
such instruments. The proper officers of the Company are authorized and
directed to take any and all action necessary or advisable from time to time
to carry out the terms of such instruments.
14. Adjustments. Upon the happening of any of the following described
events, an optionee's rights with respect to Options granted to him hereunder
shall be adjusted as hereinafter provided:
(a) In the event the Company is merged into or consolidated with another
corporation under circumstances where the Company is not the surviving
corporation or if the Company is liquidated or sells or otherwise disposes of
all or substantially all of its assets to another corporation while
unexercised options remain outstanding under the Plan, (i) subject to the
provisions of clauses (iii), (iv) and (v) below, after the effective date of
such merger, consolidation or sale, as the case may be, each holder of an
outstanding option shall be entitled, upon exercise of such option, to receive
in lieu of shares of Common Stock, shares of such stock or other securities as
the holders of shares of Common Stock received pursuant to the terms of the
merger, consolidation or sale; or (ii) the Board
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<PAGE>
may waive any discretionary limitations imposed with respect to the exercise
of the option so that all options from and after a date prior to the effective
date of such merger, consolidation, liquidation or sale, as the case may be,
specified by the Board, shall be exercisable in full; or (iii) all outstanding
options may be cancelled by the Board as of the effective date of any such
merger, consolidation, liquidation or sale, provided that notice of such
cancellation shall be given to each holder of an option, and each such holder
thereof shall have the right to exercise such option in full (without regard
to any discretionary limitations imposed with respect to the option) during a
30-day period preceding the effective date of such merger, consolidation,
liquidation or sale; or (iv) all outstanding options may be cancelled by the
Board as of the date of any such merger, consolidation, liquidation or sale,
provided that notice of such cancellation shall be given to each holder of an
option and each such holder thereof shall have the right to exercise such
option but only to the extent exercisable in accordance with any discretionary
limitations imposed with respect to the option prior to the effective date of
such merger, consolidation, liquidation or sale; or (v) the Board may provide
for the cancellation of all outstanding options and for the payment to the
holders thereof of some part or all of the amount by which the value thereof
exceeds the payment, if any, which the holder would have been required to make
to exercise such option.
(b) In the event the Company shall issue any of its shares as a stock
dividend upon or with respect to the shares of stock of the class which shall
at the time be subject to option hereunder, each optionee upon exercising an
Option shall be entitled to receive (for the purchase price paid upon such
exercise) the shares as to which he is exercising his Option and, in addition
thereto (at no additional cost), such number of shares of the class or classes
in which such stock dividend or dividends were declared or paid, and such
amount of cash in lieu of fractional shares, as he would have received if he
had been the holder of the shares as to which he is exercising his Option at
all times between the date of grant of such Option and the date of its
exercise.
(c) Notwithstanding the foregoing, any adjustments made pursuant to
subparagraph (a) or (b) shall be made only after the Committee, after
consulting with counsel for the Company, determines whether such adjustments
with respect to ISOs will constitute a "modification" of such ISOs as that
term is defined in Section 424 of the Code, or cause any adverse tax
consequences for the holders of such ISOs. No adjustments shall be made for
dividends paid in cash or in property other than securities of the Company.
(d) No fractional shares shall actually be issued under the Plan. Any
fractional shares which, but for this subparagraph (d), would have been issued
to an optionee pursuant to an Option, shall be deemed to have been issued and
immediately sold to the Company for their fair market value, and the optionee
shall receive from the Company cash in lieu of such fractional shares.
(e) Upon the happening of any of the foregoing events described in
subparagraphs (a) or (b) above, the class and aggregate number of shares set
forth in paragraph 4 hereof which are subject to Options which previously have
been or subsequently may be granted under the Plan shall also be appropriately
adjusted to reflect the events specified in such subparagraphs. The Committee
shall determine the specific adjustments to be made under this paragraph 14,
and subject to paragraph 2, its determination shall be conclusive.
15. Means of Exercising Options. An Option (or any part or installment
thereof) shall be exercised by giving written notice to the Company at its
principal office address. Such notice shall identify the Option being
exercised and specify the number of shares as to which such Option is being
exercised, accompanied by full payment of the purchase price therefor (i) in
United States dollars in cash or by check, (ii) at the discretion of the
Committee, through delivery of shares of Common Stock having fair market value
equal as of the date of the exercise to the cash exercise price of the Option,
(iii) at the discretion of the Committee, by delivery of the optionee's
personal recourse note bearing interest payable not less than annually at no
less than 100% of the lowest applicable Federal rate, as defined in Section
1274(d) of the Code, (iv) at the discretion of the Committee, by delivery to
the Company of irrevocable instructions to a broker to (a) either sell the
shares subject to the option or purchase authorization being exercised or hold
such shares as collateral for a margin loan and (b) promptly deliver to the
Company the amount of the sale or loan proceeds required to pay the exercise
price or purchase price, as the case may be, or (v) at the discretion of the
Committee, by any combination of (i), (ii), (iii)
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and (iv) above. If the Committee exercises its discretion to permit payment of
the exercise price of an ISO by means of the methods set forth in clauses
(ii), (iii) or (iv) of the preceding sentence, such discretion shall be
exercised in writing at the time of the grant of the ISO in question. The
holder of an Option shall not have the rights of a shareholder with respect to
the shares covered by his Option until the date of issuance of a stock
certificate to him for such shares. Except as expressly provided above in
paragraph 14 with respect to change in capitalization and stock dividends, no
adjustment shall be made for dividends or similar rights for which the record
date is before the date such stock certificate is issued.
16. Conversion of ISOs into Non-Qualified Options: Termination of ISOs. The
Committee, at the written request of any optionee, may in its discretion take
such actions as may be necessary to convert such optionee's ISOs (or any
installments or portions of installments thereof) that have not been exercised
on the date of conversion into Non-Qualified Options at any time prior to the
expiration of such ISOs, regardless of whether the optionee is an employee of
the Company or a Related Corporation at the time of such conversion. Such
actions may include, but not be limited to, extending the exercise period or
reducing the exercise price of the appropriate installments of such Options.
At the time of such conversion, the Committee (with the consent of the
optionee) may impose such conditions on the exercise of the resulting Non-
Qualified Options as the Committee in its discretion may determine, provided
that such conditions shall not be inconsistent with this Plan. Nothing in the
Plan shall be deemed to give any optionee the right to have such optionee's
ISOs converted into Non-Qualified Options and no such conversion shall occur
until and unless the Committee takes appropriate action. The Committee, with
the consent of the optionee, may also terminate any portion of any ISO that
has not been exercised at the time of such termination.
17. Restricted Stock. Each grant of Restricted Stock under the Plan shall be
evidenced by an instrument (a "Restricted Stock Agreement") in such form as
the Committee shall prescribe from time to time in accordance with the Plan
and shall comply with the following terms and conditions, and with such other
terms and conditions as the Committee, in its discretion, shall establish:
(a) The Committee shall determine the number of shares of Common Stock to be
issued to an eligible person pursuant to the grant of Restricted Stock, and
the extent, if any, to which they shall be issued in exchange for cash, other
consideration, or both.
(b) Shares issued pursuant to a grant of Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise disposed of, except by will or the
laws of descent and distribution or as otherwise determined by the Committee
in the Restricted Stock Agreement, for such period as the Committee shall
determine, from the date on which the Restricted Stock is granted (the
"Restricted Period"). The Company will have the option to repurchase the
Common Stock at such price as the Committee shall have fixed in the Restricted
Stock Agreement, which option will be exercisable (i) if the Participant's
continuous employment or performance of services for the Company and the
Related Corporations shall terminate prior to the expiration of the Restricted
Period, (ii) if, on or prior to the expiration of the Restricted Period or the
earlier lapse of such repurchase option, the Participant has not paid to the
Company an amount equal to any federal, state, local or foreign income or
other taxes which the Company determines is required to be withheld in respect
of such Restricted Stock or (iii) under such other circumstances as determined
by the Committee in its discretion. Such repurchase option shall be
exercisable on such terms, in such manner and during such period as shall be
determined by the Committee in the Restricted Stock Agreement. Each
certificate for shares issued as Restricted Stock shall bear an appropriate
legend referring to the foregoing repurchase option and other restrictions;
shall be deposited by the stockholder with the Company, together with a stock
power endorsed in blank; or shall be evidenced in such other manner permitted
by applicable law as determined by the Committee in its discretion. Any
attempt to dispose of any such shares in contravention of the foregoing
repurchase option and other restrictions shall be null and void and without
effect. If shares issued as Restricted Stock shall be repurchased pursuant to
the repurchase option described above, the stockholder, or in the event of his
death, his personal representative, shall forthwith deliver to the Secretary
of the Company the certificates for the shares, accompanied by such instrument
of transfer, if
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any, as may reasonably be required by the Secretary of the Company. If the
repurchase option described above is not exercised by the Company, such
repurchase option and the restrictions imposed pursuant to the first sentence
of this subparagraph (b) shall terminate and be of no further force and
effect.
(c) If a person who has been in continuous employment or performance of
services for the Company or a Related Corporation since the date on which
Restricted Stock was granted to him shall, while in such employment or
performance of services, die, or terminate such employment or performance of
services by reason of disability or by reason of early, normal or deferred
retirement under an approved retirement program of the Company or a Related
Corporation (or such other plan or arrangement as may be approved by the
Committee in its discretion, for this purpose) and any of such events shall
occur after the date on which the Restricted Stock was granted to him and
prior to the end of the Restricted Period, the Committee may determine to
cancel the repurchase option (and any and all other restrictions) on any or
all of the shares of Restricted Stock; and the repurchase option shall become
exercisable at such time as to the remaining shares, if any.
18. Term and Amendment of Plan. This Plan was adopted by the Board on April
2, 1996 and approved by the stockholders of the Company on April 23, 1996. The
Plan shall expire on April 1, 2006 (except as to Options and Restricted Stock
outstanding on that date). The Board may terminate or amend the Plan in any
respect at any time, except that any amendment that (a) increases the total
number of shares that may be issued under the Plan (except by adjustment
pursuant to paragraph 14); (b) changes the class of persons eligible to
participate in the Plan, or (c) materially increases the benefits to
participants under the Plan, shall be subject to approval by stockholders
obtained within 12 months before or after the Board adopts a resolution
authorizing any of the foregoing amendments, and shall be null and void if
such approval is not obtained. Termination or any modification or amendment of
the Plan shall not, without consent of a participant, affect his rights under
any Option or Restricted Stock previously granted to him.
19. Application of Funds. The proceeds received by the Company from the sale
of shares pursuant to Options and Restricted Stock authorized under the Plan
shall be used for general corporate purposes.
20. Governmental Regulation. The Company's obligation to sell and deliver
shares of the Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such shares.
21. (a) Withholding Taxes; Delivery of Shares. The Company's obligation to
deliver shares of Common Stock upon exercise of an option or purchase
authorization, in whole or in part, shall be subject to the participant's
satisfaction of all applicable federal, state and local income and employment
tax withholding obligations. The participant may satisfy the obligation, in
whole or in part, by electing to (1) have the Company withhold shares of
Common Stock or (2) deliver to the Company already-owned shares of Common
Stock having a value equal to the amount required to be withheld; provided,
however, that participants who are subject to the requirements of Section 16
of the Exchange Act ("Section 16 Persons") shall not have the benefit of the
foregoing election but rather the Company shall, in all cases where tax
withholding is required with respect to such participants, withhold shares of
Common Stock having a value equal to such withholding obligations. The value
of shares to be withheld or delivered shall be based on the fair market value
of the shares on the date the amount of tax to be withheld is to be determined
(the "Tax Date"). The election by a participant who is not a Section 16 Person
to have shares withheld for this purpose will be subject to the following
restrictions: (1) the election must be made prior to the Tax Date, (2) the
election must be irrevocable and (3) the election will be subject to the
disapproval of the Committee.
(b) Withholding of Additional Income Taxes. The Company may, in accordance
with the Code, upon exercise of a Non-Qualified Option or the purchase of
Common Stock for less than its fair market value or the lapse of restrictions
on Restricted Stock or the making of a Disqualifying Disposition (as defined
in paragraph 22), require the employee to pay additional withholding taxes in
respect of the amount that is considered compensation includable in such
person's gross income.
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22. Notice to Company of Disqualifying Disposition. Each employee who
receives ISOs shall agree to notify the Company in writing immediately after
the employee makes a disqualifying disposition of any Common Stock received
pursuant to the exercise of an ISO (a "Disqualifying Disposition").
Disqualifying Disposition means any disposition (including any sale) of such
stock before the later of (a) two years after the employee was granted the ISO
under which he acquired such stock or (b) one year after the employee acquired
such stock by exercising such ISO. If the employee has died before such stock
is sold, these holding period requirements do not apply and no Disqualifying
Disposition will thereafter occur.
23. Governing Laws; Construction. The validity and construction of the Plan
and the instruments evidencing Options and Restricted Stock shall be governed
by the laws of the Commonwealth of Massachusetts. In construing this Plan, the
singular shall include the plural and the masculine gender shall include the
feminine and neuter, unless the context otherwise requires.
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ANNEX IV
INNOVASIVE DEVICES, INC.
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. Purpose. This 1996 Non-Employee Director Stock Option Plan (hereinafter,
the "Plan") is intended to promote the interests of Innovasive Devices, Inc.,
a Massachusetts corporation (the "Company"), by providing an inducement to
obtain and retain the services of qualified persons who are not employees or
officers of the Company to serve as members of its Board of Directors (the
"Board").
2. Available Shares. The total number of shares of Common Stock, par value
$.0001 per share, of the Company (the "Common Stock") for which options may be
granted under the Plan shall not exceed 150,000 shares, subject to adjustment
in accordance with paragraph 10 of the Plan. Shares subject to the Plan are
authorized but unissued shares or shares that were once issued and
subsequently reacquired by the Company. If any options granted under the Plan
are surrendered before exercise or lapse without exercise, in whole or in
part, the shares reserved therefor shall continue to be available under the
Plan.
3. Administration. The Plan shall be administered by the Board or by the
Compensation Committee appointed by the Board (the "Committee"). In the event
the Board fails to appoint or refrains from appointing a Committee, the Board
shall have all power and authority to administer the Plan. In such event, the
word "Committee" wherever used herein shall be deemed to mean the Board. The
Committee shall, subject to the provisions of the Plan, have the power to
construe the Plan, to establish, amend and waive the terms and conditions of
individual options and purchase authorizations granted hereunder, including,
without limitation, terms and conditions relating to vesting, exercisability,
and effect of termination of employment by the Company, and to adopt and amend
such rules and regulations for the administration of the Plan as it may deem
desirable.
Effective on and after June 6, 1996, the date the Company first registered
its Common Stock under Section 12 of the Securities Exchange Act of 1934 (the
"Exchange Act"), the selection of any director of the Company to whom Options
may be granted pursuant to the Plan, the determination of the number of shares
of Common Stock which may be covered by Options granted to any such director
pursuant to the Plan, the specification of the price at which shares of Common
Stock may be purchased pursuant to Options granted to any such director
pursuant to the Plan and the time or times at which Options may be granted to
any such director pursuant to the Plan shall be made solely by (i) a committee
of two or more non-employee directors (as defined in Rule 16b-3(b)(3)(i) under
the Exchange Act as adopted by the Securities and Exchange Commission
effective as of August 15, 1996 or as effective from time to time thereafter)
or (ii) the Board.
4. Granting of Options.
(a) Annual Grants. At each annual meeting of the Board and during the term
of the Plan, each person who is then serving on the Board and who is not a
current employee or officer of the Company shall automatically be granted an
option to purchase 2,500 shares of Common Stock, subject to the availability
of shares under the Plan, provided that such person has not received at such
annual meeting a grant pursuant to Section 4(b).
(b) Initial Grants. Each new director who is not a current employee or
officer of the Company shall receive upon his initial election to the Board of
Directors an option to purchase 10,000 shares of Common Stock.
Except for the specific options referred to above, no other options shall be
granted under the Plan.
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<PAGE>
5. Option Price. The purchase price of the stock covered by an option
granted pursuant to the Plan shall be 100% of the fair market value of such
shares on the day the option is granted. The option price will be subject to
adjustment in accordance with the provisions of paragraph 10 of the Plan. For
purposes of the Plan, if, at the time an option is granted under the Plan, the
Company's Common Stock is publicly traded, "fair market value" shall be
determined as of the last business day for which the prices or quotes
discussed in this sentence are available prior to the date such option is
granted and shall mean (i) the average (on that date) of the high and low
prices of the Common Stock on the principal national securities exchange on
which the Common Stock is traded, if the Common Stock is then traded on a
national securities exchange; (ii) the last reported sale price (on that date)
of the Common Stock on the Nasdaq National Market, if the Common Stock is not
then traded on a national securities exchange; or (iii) the closing bid price
(or average of bid prices) last quoted (on that date) by an established
quotation service for over-the-counter securities, if the Common Stock is not
reported on the Nasdaq National Market or on a national securities exchange.
If, at the time an option is granted under the Plan, the Company's stock is
not publicly traded, "fair market value" shall be the fair market value on the
date the option is granted as determined by the Board in good faith.
6. Period of Option. Unless sooner terminated in accordance with the
provisions of paragraph 8 of the Plan, an option granted hereunder shall
expire on the date which is ten (10) years after the date of grant of the
option.
7. Vesting of Shares and Non-transferability of Options.
(a) Vesting. Options granted under the Plan shall not be exercisable until
they become vested. Options granted under the Plan shall vest in the Optionee
and thus become exercisable by the Optionee in four annual installments of 25%
each on the first, second, third and fourth anniversaries of the date of
grant.
(b) Legend on Certificates. The certificates representing such shares shall
carry such appropriate legend and such written instructions shall be given to
the Company's transfer agent as may be deemed necessary or advisable by
counsel to the Company in order to comply with the requirements of the
Securities Act of 1933 or any state securities laws.
(c) Non-transferability. Any option granted pursuant to the Plan shall not
be assignable or transferable other than by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order, and shall be
exercisable during the optionee's lifetime only by him or her.
8. Termination of Option Rights.
(a) In the event an optionee ceases to be a member of the Board for any
reason, including death or permanent disability, any then unexercised portion
of options granted to such optionee shall, to the extent not then vested,
immediately terminate and become void; any portion of an option which is then
vested but has not been exercised at the time the optionee so ceases to be a
member of the Board may be exercised, to the extent it is then vested, by the
optionee within 180 days of the date the optionee ceased to be a member of the
Board, or, in the event of death or permanent disability, within one year of
the date of death or permanent disability; and all options shall terminate
after the 180-day or one year period, as the case may be, has expired.
(b) Notwithstanding the provisions in this paragraph 8, the Committee may,
in its sole discretion, establish different terms and conditions pertaining to
the effect of a participant's termination of employment by the Company.
9. Exercise of Option. Subject to the terms and conditions of the Plan and
the option agreements, an option granted hereunder shall, to the extent then
exercisable, be exercisable in whole or in part by giving written notice to
the Company at its principal office address, stating the number of shares with
respect to which the option is being exercised, accompanied by payment in full
for such shares. Payment may be (a) in United States dollars in cash or by
check, (b) in whole or in part in shares of Common Stock of the Company
already owned by the person or persons exercising the option or shares subject
to the option being exercised (subject to such
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restrictions and guidelines as the Board may adopt from time to time), valued
at fair market value determined in accordance with the provisions of paragraph
5 or (c) consistent with applicable law, through the delivery of an assignment
to the Company of a sufficient amount of the proceeds from the sale of the
Common Stock acquired upon exercise of the option and an authorization to the
broker or selling agent to pay that amount to the Company, which sale shall be
at the participant's direction at the time of exercise. There shall be no such
exercise at any one time as to fewer than one hundred (100) shares or all of
the remaining shares then purchasable by the person or persons exercising the
option, if fewer than one hundred (100) shares. The Company's transfer agent
shall, on behalf of the Company, prepare a certificate or certificates
representing such shares acquired pursuant to exercise of the option, shall
register the optionee as the owner of such shares on the books of the Company
and shall cause the fully executed certificates(s) representing such shares to
be delivered to the optionee as soon as practicable after payment of the
option price in full. The holder of an option shall not have any rights of a
stockholder with respect to the shares covered by the option except to the
extent that one or more certificates for such shares shall be delivered to him
or her upon the due exercise of the option.
10. Adjustments Upon Changes in Capitalization and Other Matters. Upon the
occurrence of any of the following events, an optionee's rights with respect
to options granted to him or her hereunder shall be adjusted as hereinafter
provided:
(a) Stock Dividends. In the event the Company shall issue any of its shares
as a stock dividend upon or with respect to the shares of stock of the class
which shall at the time be subject to option hereunder, each optionee upon
exercising an Option shall be entitled to receive (for the purchase price paid
upon such exercise) the shares as to which he is exercising his Option and, in
addition thereto (at no additional cost), such number of shares of the class
or classes in which such stock dividend or dividends were declared or paid,
and such amount of cash in lieu of fractional shares, as he would have
received if he had been the holder of the shares as to which he is exercising
his Option at all times between the date of grant of such Option and the date
of its exercise.
(b) Merger; Consolidation; Liquidation; Sale of Assets. In the event the
Company is merged into or consolidated with another corporation under
circumstances where the Company is not the surviving corporation or if the
Company is liquidated or sells or otherwise disposes of all or substantially
all of its assets to another corporation while unexercised options remain
outstanding under the Plan, (i) subject to the provisions of clauses (iii),
(iv) and (v) below, after the effective date of such merger, consolidation or
sale, as the case may be, each holder of an outstanding option shall be
entitled, upon exercise of such option, to receive in lieu of shares of Common
Stock, shares of such stock or other securities as the holders of shares of
Common Stock received pursuant to the terms of the merger, consolidation or
sale; or (ii) the Board may waive any discretionary limitations imposed with
respect to the exercise of the option so that all options from and after a
date prior to the effective date of such merger, consolidation, liquidation or
sale, as the case may be, specified by the Board, shall be exercisable in
full; or (iii) all outstanding options may be cancelled by the Board as of the
effective date of any such merger, consolidation, liquidation or sale,
provided that notice of such cancellation shall be given to each holder of an
option, and each such holder thereof shall have the right to exercise such
option in full (without regard to any discretionary limitations imposed with
respect to the option) during a 30-day period preceding the effective date of
such merger, consolidation, liquidation or sale; or (iv) all outstanding
options may be cancelled by the Board as of the date of any such merger,
consolidation, liquidation or sale, provided that notice of such cancellation
shall be given to each holder of an option and each such holder thereof shall
have the right to exercise such option but only to the extent exercisable in
accordance with any discretionary limitations imposed with respect to the
option prior to the effective date of such merger, consolidation, liquidation
or sale; or (v) the Board may provide for the cancellation of all outstanding
options and for the payment to the holders thereof of some part or all of the
amount by which the value thereof exceeds the payment, if any, which the
holder would have been required to make to exercise such option.
(c) Issuance of Securities. Except as expressly provided herein, no issuance
by the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of shares subject
to options. No adjustments shall be made for dividends paid in cash or in
property other than securities of the Company.
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(d) No Fractional Shares. No fractional shares shall actually be issued
under the Plan. Any fractional shares which, but for this subparagraph (d),
would have been issued to an optionee pursuant to an Option, shall be deemed
to have been issued and immediately sold to the Company for their fair market
value, and the optionee shall receive from the Company cash in lieu of such
fractional shares.
(e) Adjustments. Upon the happening of any of the foregoing events, the
class and aggregate number of shares set forth in paragraph 2 of the Plan that
are subject to options which previously have been or subsequently may be
granted under the Plan shall also be appropriately adjusted to reflect such
events. The Board shall determine the specific adjustments to be made under
this paragraph 10 and its determination shall be conclusive.
11. Restrictions on Issuance of Shares. Notwithstanding the provisions of
paragraphs 4 and 9 of the Plan, the Company shall have no obligation to
deliver any certificate or certificates upon exercise of an option until one
of the following conditions shall be satisfied:
(i) The shares with respect to which the option has been exercised are at
the time of the issue of such shares effectively registered under
applicable Federal and state securities laws as now in force or hereafter
amended; or
(ii) Counsel for the Company shall have given an opinion that such shares
are exempt from registration under Federal and state securities laws as now
in force or hereafter amended; and the Company has complied with all
applicable laws and regulations with respect thereto, including without
limitation all regulations required by any stock exchange upon which the
Company's outstanding Common Stock is then listed.
12. Representation of Optionee. If requested by the Company, the optionee
shall deliver to the Company written representations and warranties upon
exercise of the option that are necessary to show compliance with Federal and
state securities laws, including representations and warranties to the effect
that a purchase of shares under the option is made for investment and not with
a view to their distribution (as that term is used in the Securities Act of
1933).
13. Option Agreement. Each option granted under the provisions of the Plan
shall be evidenced by an option agreement, which agreement shall be duly
executed and delivered on behalf for the Company and by the optionee to whom
such option is granted. The option agreement shall contain such terms,
provisions and conditions not inconsistent with the Plan as may be determined
by the officer executing it.
14. Term and Amendment of Plan. The Plan was adopted by the Board on April
2, 1996 and approved by the stockholders of the Company on April 2, 1996.
Options may no longer be granted under the Plan after April 1, 2006, and the
Plan shall terminate when all options granted or to be granted hereunder are
no longer outstanding. The Board may at any time terminate the Plan or make
such modification or amendment thereof as it deems advisable; provided,
however, that the Board may not, without approval by the stockholders, (a)
increase the maximum number of shares for which options may be granted under
the Plan (except by adjustment pursuant to Section 11), (b) materially modify
the requirements as to eligibility to participate in the Plan, (c) materially
increase benefits accruing to option holders under the Plan or (d) amend the
Plan in any manner which would cause Rule 16b-3 to become inapplicable to the
Plan; and provided further that the provisions of the Plan specified in Rule
16b-3(d) (or any successor or amended provision thereof) under the Securities
Exchange Act of 1934 (including without limitation, provisions as to
eligibility, amount, price and timing of awards) may not be amended more than
once every six months, other than to comport with changes in the Internal
Revenue Code, the Employee Retirement Income Security Act or the rules
thereunder. Termination or any modification or amendment of the Plan shall
not, without consent of a participant, affect his or her rights under an
option previously granted to him or her.
15. Compliance with Regulations. It is the Company's intent that the Plan
comply with all respects with Rule 16b-3 under the Securities Exchange Act of
1934 (or any successor or amended version thereof) and any
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applicable Securities and Exchange Commission interpretations thereof. If any
provision of the Plan is deemed not to be in compliance with Rule 16b-3, the
provision shall be null and void.
16. Governing Law. The validity and construction of the Plan and the
instruments evidencing options shall be governed by the laws of The
Commonwealth of Massachusetts, without giving effect to the principles of
conflicts of law thereof.
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