UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
--------------- -----------------
Commission file number: 000-28460
Fusion Medical Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware 96662349
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1615 Plymouth Street, Mountain View, California 94043
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (650) 903-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant, based upon the closing sales price of the Common Stock on March 12,
1998 as reported on the Nasdaq National Market, was approximately $7,960,000.
Shares of Common Stock held by each executive officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. The determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 12, 1998, the Registrant had 7,138,326 shares of Common Stock
outstanding.
--------------------------
DOCUMENTS INCORPORATED BY REFERENCE
The information called for in Part III is incorporated by reference from
the Proxy Statement relating to the Annual Meeting of Stockholders of the
Registrant to be held on May 21, 1998.
Fusion Medical Technologies, Inc.
INDEX
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Page
Number
<S> <C> <C>
PART I
Item 1. Business..................................................... 3
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................... 15
Item 6. Selected Financial Data..................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................. 17
Item 8. Financial Statements and Supplementary Data................. 25
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 26
PART III
Item 10. Directors and Executive Officers of the Registrants........ 26
Item 11. Executive Compensation..................................... 26
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................ 26
Item 13. Certain Relationships and Related Transactions............. 26
PART IV
Item 14. Exhibits, Financial Statement Schedules.................... 27
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PART I
Item 1. Business.
The Business section and other parts of this Report on Form 10-K contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations ---
Factors Affecting Future Operating Results and Market Price of Common Stock"
commencing on page 23.
The Company
Fusion Medical Technologies, Inc. ("Fusion" or the "Company") was
incorporated in Delaware in 1993. Fusion is developing surgical sealants
designed to treat surgical wounds in a wide variety of organs and blood vessels,
initially targeting cardiac, vascular, orthopedic, and neurosurgery
applications. The Company believes its sealants have the potential to reduce
the time spent in the operating room controlling bleeding and post-operative
complications, thereby reducing hospital costs.
The Company is developing "FloSeal Matrix", a collagen-based gel with
unique physical properties which is mixed with thrombin, a proven blood clotting
enzyme, to create an effective topical agent for sealing problematic bleeding
that can occur in a wide variety of surgeries. In an initial series of thirty-
five surgery patients completed in February 1998, this hemostatic sealant
successfully stopped bleeding in 72 of 74 discrete applications. The Company
expects "FloSeal Matrix" to enter United States clinical trials under and
Investigational Device Exemption ("IDE") in March 1998.
Background
Over 20 million surgical procedures are performed annually in the United
States. Effective closure of surgical wounds and control of bleeding is
critical to restoring the physical integrity and function of injured or diseased
tissue, and ultimately to ensuring the success of the surgical procedure.
Failure to close surgical wounds completely can result in serious or possibly
life-threatening complications, including blood loss, infection, excessive
scarring, and air and fluid leakage. A variety of devices have been developed
to assist the physician with the surgical closure and sealing of tissue,
including sutures, staples, and commercial fibrin glues (which are currently
available only outside the United States).
Historically, the most common method of wound closure has been the use of
sutures ("stitches"), which mechanically approximate the tissues on either side
of an incision or wound to facilitate healing. In the 1960s, surgical stapling
was introduced to reduce the time-consuming and cumbersome aspects of suturing.
This technique also draws together tissue, but instead of a suture, uses a
staple to maintain approximation. Industry sources estimate that the worldwide
market for sutures and staples is approximately $2.5 billion.
Sutures and staples, however, have a number of limitations when applied to
certain organs and vessels. They do not have inherent sealing capabilities and,
as a result, cannot always eliminate bleeding from the wound site. For example,
once a surgeon creates a vascular anastomosis (the joining of two tubular
structures, like blood vessels) using sutures, blood leakage can occur because
the arterial system is under high pressure. Surgeons may be reluctant to add
additional sutures,
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because they may compromise the integrity of the anastomosis and lead to a
stricture, the narrowing of the artery itself. Additionally, fragile or friable
tissues often lack the basic structural integrity to support sutures and
staples. As a result, sutures and staples can pull through these tissues,
causing damage to the organ and increasing the risk of post-operative
complications. Solid abdominal organs, like the liver and spleen, are
especially difficult to seal with sutures. Diffuse bleeding (usually an oozing,
low level bleeding) across an area, which can occur following a dissection of
adhesions (scar tissue) in a re-do procedure, is not well suited for control by
additional sutures. Finally, sutures and staples can also be difficult to
place, particularly when used in endoscopic or minimally invasive surgical
procedures where the surgeon is operating in the limited space provided by body
cavities through ports or trocars (devices which provide access to the surgical
target tissue through minimally-sized incisions).
In recent years, numerous products, including topical hemostats and fibrin
glues, have been used, often in conjunction with sutures and staples, to control
bleeding. However, these products are generally ineffective on actively
bleeding tissue surfaces. Topical hemostats in sponge or strip form may require
manual pressure to be effective and are generally removed prior to closing the
surgical incision. They can also be awkward and difficult to place precisely.
Commercially available fibrin glues are derived from pooled human blood plasma
and, because of concerns about possible viral transmission, have yet to be
approved for use in the United States. Despite these limitations, industry
sources estimate that worldwide sales of hemostatic agents were approximately
$300 million in 1997. Sales of commercial fibrin glues outside the United
States were approximately $270 million in 1997. The Company estimates that
approximately 60% to 70% of the fibrin glue applications are for the control of
bleeding. While fibrin glues can be produced from a patient's own blood
(autologous glues), these glues typically adhere to tissue less effectively than
commercially available glues, take approximately an hour to prepare, and thus
must be mixed prior to surgery, irrespective of whether or not they are actually
used in the procedure.
The limitations of current sealant products have been particularly
pronounced in procedures involving anastomoses and in certain minimally invasive
surgeries.
Vascular Anastomosis
- --------------------
Anastomosis is the surgical technique in which two vessels or hollow
tubular organs are joined. The most common type of anastomoses are those
performed to join blood vessels, in such procedures as Coronary Artery Bypass
Graft ("CABG") surgery and abdominal aortic aneurysm repair. Government and
industry sources estimate that approximately 650,000 procedures requiring
vascular anastomoses were performed in 1995. Anastomoses are typically
performed with a single layer of sutures and are technically demanding, since
they are immediately challenged by blood flow under high pressure within the
arterial system. Post-operative bleeding from anastomoses can be catastrophic,
necessitating immediate re-operation to stop dangerous hemorrhaging.
Minimally Invasive Surgery
- --------------------------
Minimally invasive surgery ("MIS") entails operating through trocars or
ports placed through small incisions. As a result of the multiple benefits of
MIS, there has been a marked trend toward adoption of MIS in place of
traditional open procedures. While the conversion of an open procedure to a
minimally invasive procedure involves specific limitations and challenges, the
single largest impediment to conversion, according to several independent
marketing studies, has been the difficulty of reliably suturing and stapling
surgical wounds in the limited spaces encountered when operating through ports
or trocars. The Company believes its products may supplement the use of sutures
or staples, particularly to control bleeding. Moreover, its products may
prevent the intra-
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operative conversion of MIS procedures back to an open approach due to
problematic bleeding that cannot be controlled using conventional means.
Fusion Products
Fusion has developed proprietary surgical sealant products which the
Company believes have broad application in various surgical specialties. The
Company's products are designed to treat surgical wounds in a wide variety of
organs and blood vessels by forming a flexible seal across the targeted tissue.
Its hemostatic sealant product, "FloSeal Matrix", has been designed to be easily
applied to the targeted tissue to seal active bleeding. It can be used in areas
that are difficult to access for sutures or staples and may provide surgeons
with an additional margin of safety in the control of bleeding.
"FloSeal Matrix" Hemostatic Sealant
- ---------------------- -----------
"FloSeal Matrix" consists of a proprietary, collagen-based gel with a
unique physical structure and thrombin, a commercially available clotting
enzyme. Mixed in the operating room prior to use, these components create a
highly effective matrix that holds thrombin on the surface of small gel
particles and presents a very large surface area of thrombin to blood flowing
around the particles. The product and the blood interact to generate a strong
clot at the tissue surface which stops further bleeding. "FloSeal Matrix"
adheres to the underlying wound surface, swells due to the absorption of blood
or fluids, forms a structural matrix, and applies beneficial pressure to the
bleeding site. The sealant is easily delivered to the targeted site of bleeding
from a syringe or other specialized delivery device without the need for an
outside energy source. Excess material can be removed without restarting
bleeding. The remaining sealant is incorporated into the clot and is left in
the body. It is bio-resorbed within approximately 30 days.
"FloSeal Matrix" is designed for use as a hemostatic sealant in wet,
actively bleeding environments, in which fibrin glues and conventional hemostats
do not generally work effectively. When applied to actively bleeding surfaces,
including arteries under pulsatile pressure, "FloSeal Matrix" is designed to
stop bleeding within several minutes.
In a series of applications evaluations in 35 patients in Canada and the
Netherlands, "FloSeal Matrix" successfully sealed a variety of bleeding
conditions during surgery. As a result, the Company believes a significant
opportunity exists for the product in cardiovascular surgery, including
minimally invasive CABG anastomoses; in vascular surgery, especially with
synthetic grafts, and in other applications such as orthopedic back surgeries
where it is necessary to retain visibility and control oozing bleeding. Other
target applications, such as neurosurgery, are appropriate where conventional
means of achieving hemostasis (sutures, staples, electrocautery, topical
hemostats, etc.) either are ineffective, or cannot be used due to concerns about
tissue damage. In the series of 35 surgical patients, "FloSeal Matrix"
successfully stopped bleeding in 72 of 74 discrete applications. Bleeding
conditions ranged from moderate to severe, which normally require surgical
intervention with suture or clips. Both applications where "FloSeal Matrix"
could not stop bleeding required additional sutures to control the bleeding.
Success in a variety of surgical procedures ranging from endarterectomies, to
pediatric heart reconstruction, to spinal discectomies may indicate "FloSeal
Matrix" broad potential. In a large majority of cases (86%), the patients had
impaired coagulation resulting from treatment with heparin, coumadin,
ticlopidine, aspirin or other anti-coagulant drug regimens that prevent unwanted
blood clot formation during surgery, from extended use of heart-lung machines
which degrade platelet function, or from hemophilia.
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The Company expects "FloSeal Matrix" to enter United States clinical trials
under an Investigational Device Exemption ("IDE") in March 1998. As currently
configured, the trials will require approximately 300 patients, 50% treated with
"FloSeal Matrix" and 50% treated with a standard control. The trials will be
conducted at 10 medical centers and will include three surgical specialties,
cardiac, vascular and orthopedic (back). The indication sought will be a broad
hemostasis claim. The Company currently expects this trial to be completed and
a Pre Market Approval ("PMA") submitted to the FDA late in 1998 or early in
1999.
The Company currently plans to use data from its United States clinical
trial for a regulatory submission in Europe in support of a CE Mark clearance.
In addition, the Company plans to do smaller specialty clinical trials in
support of United States clearances in market subsegments.
The Company believes "FloSeal Matrix" products will offer the following key
benefits:
. Effective Sealing of Bleeding Tissue. The two components of the Company's
------------------------------------
"FloSeal Matrix" hemostatic sealant -- gelatin granules and topical thrombin -
rapidly generate a stable clot and physically seal wound sites. By conforming
to and swelling at the site, the gelatin granules help establish and maintain
contact with the underlying tissue, even in actively bleeding wounds. Thrombin
acts at the end of the normal clotting cascade, enzymatically converting
fibrinogen in the patient's blood into fibrin monomers, which then polymerize to
form a fibrin clot, incorporating the gelatin particles. The resulting gelatin
and fibrin matrix remains in place at the tissue surface and provides a sealing
effect at the wound site.
. Ease of Use."FloSeal Matrix" is typically mixed in less than two minutes.
------------
In the current configuration, surgeons easily apply the gel to the bleeding site
with a single-barrel syringe-based delivery system. No outside energy is
required and thus no energy source is needed to be scheduled into the operating
room. Minimal training is necessary. Based on initial cases, the Company
believes that surgeons will quickly learn how to use the product effectively.
. Broad Applicability. Independent market research confirms that
--------------------
problematic bleeding is encountered in a broad variety of surgical specialties.
To date, "FloSeal Matrix" has been used successfully in vascular anastomoses,
where the bleeding is under high pressure and the patients are often treated
with agents that impair the normal coagulation process and make bleeding more
difficult to control. With this experience, the Company believes that its
product will have broad applicability in other specialties as well.
. Safety. The materials used in "FloSeal Matrix", are derived from
-------
naturally occurring biomaterials that have a safe history of use in humans.
. Resorption. The Company's "FloSeal Matrix" is resorbed by the body.
-----------
This feature enables surgeons to leave residual material behind without concern
that it may lead to post-operative complications. The Company's technology
permits Fusion to modify the resorption period of its products to suit a variety
of surgical applications. The Company's hemostatic sealant is largely resorbed
by the body over a period of 30 days, which corresponds to the natural wound
healing process.
. Utility in Minimally Invasive Surgery. The Company's "FloSeal Matrix"
--------------------------------------
technology is compatible with instruments and techniques used in minimally
invasive surgeries.
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Fusion Liquid Adhesive (glue)
- -----------------------------
In an earlier research stage, Fusion Liquid Adhesive is a two-component
collagen-based glue, which can be used to adhere tissue planes and to seal fluid
leaks. Based on results in animal models, this product may have considerable
utility in intestinal surgery for sealing bowel anastomoses and in cranial and
back surgery for sealing dura mater. Its adherence capabilities should serve
well in aortic surgery for chronic and acute dissection, and in gluing tissue
planes in plastic surgery. It could also be used for sealing air leaks in
pulmonary surgery for cancer or emphysema.
Research and Development
The Company's research and development activities are focused on enhancing
and expanding the applications of the flowable gel technology platform
(including "FloSeal Matrix" and related line extensions), and developing other
liquid sealants to broaden the potential markets for the Company's products.
The Company has established an active dialogue with surgeons to ascertain the
most desirable product enhancements for "FloSeal Matrix".
Sales and Marketing
Fusion's current marketing efforts are directed at identifying and
confirming target applications for "FloSeal Matrix" and at defining user
requirements for potential product enhancements and specific end-user
applications. The Company is conducting discussions with prospective
distribution partners to provide sales, marketing and distribution functions in
both the United States and international markets. The Company believes these
prospective distribution partners have well-established, proven distribution
capabilities with respect to the targeted surgical customers and offer an
efficient means to sell "FloSeal Matrix" in broad, diffuse markets in shorter
time frames.
Manufacturing
The Company's manufacturing operations are located in a portion of a 13,200
square foot in-house facility in Mountain View, California. Fusion acquires raw
materials and product components from suppliers, processes the raw materials
internally to the appropriate form and compositions, packages kits, arranges for
sterilization by a third party and then packages the products for shipment. The
Company acquires several raw materials and components of its product from single
suppliers. Generally, the Company believes that there are alternative suppliers
of equivalent materials available and that the Company could substitute
suppliers with only minimal regulatory consequences from this substitution.
However, there can be no assurance that such substitute supplies will be
available or that such substitutions could be made in a timely manner, on
commercially reasonable terms, if at all. In the event the Company is unable to
acquire sufficient supplies from current sources or locate alternate sources on
commercially reasonable terms, the Company may not be able to manufacture its
products on a timely and cost-competitive basis, or at all. This would have a
material adverse effect on the Company's business, financial condition and
results of operations.
In the case of hide (the raw material which is processed into a proprietary
form of gel), there are only a few suppliers that could currently meet the
Company's requirements. The Company currently relies exclusively on one supplier
of hide and expects to continue to do so through at least the end of 1999.
Fusion and this supplier have entered into a supply agreement for 1998. However,
there can be no assurance that the Company would be able to secure sufficient
inventory of hide to
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produce sufficient product to meet its customers' needs. A transition to
alternate arrangements would involve additional costs and delays in production.
There can be no assurance that such transition would be successfully achieved on
a cost-effective or timely basis, if at all, or that the Company would be
successful in entering into alternate arrangements on commercially reasonable
terms, if at all.
Sterilization of the Company's products is out-sourced to a single
provider. While the Company believes alternative sterilization providers are
readily available, there can be no assurance that such providers would be
available or that such a transition could be made in a timely, cost-effective
manner. Although the Company has taken the actions that it believes are
reasonable to assure that its contract manufacturer and suppliers are in
compliance with applicable regulations, there can be no assurance that the FDA
or a state, local or foreign regulator will not take action against a contract
manufacturer or supplier.
Patents and Proprietary Rights
The Company has pursued its own patents covering its technologies in
various forms. In addition, the Company has licensed additional technology to
further broaden its patent portfolio. The Company owns three and has licensed
three issued United States patents, and has 20 pending United States patent
applications related to its technology and products. There can be no assurance
that the pending patent applications will issue or that the issued patent or any
patents which may issue will provide any competitive advantages for the
Company's products or that they will not be successfully challenged, invalidated
or circumvented in the future. The Company has filed certain corresponding
patent applications in certain foreign countries and may file additional patent
applications outside the United States. The Company believes that obtaining
foreign patents may be more difficult than obtaining domestic patents because of
differences in patent laws and believes the protection provided by foreign
patents, if obtained, and any other foreign intellectual property protection may
be weaker than that provided domestically. In addition, there can be no
assurance that competitors will not seek to apply for and obtain patents that
will prevent, limit or interfere with the Company's ability to make, use and
sell its products either in the United States or in international markets. A
number of medical device and other companies, universities and research
institutions have filed patent applications or have issued patents relating to
compositions and methods for wound closure. The medical device industry has
been characterized by extensive litigation regarding patents and other
intellectual property rights. Many companies in the medical device industry
have employed intellectual property litigation to gain a competitive advantage,
and there can be no assurance that suit will not be brought against the Company
in the future. Moreover, litigation or interference proceedings associated with
enforcing or defending patents or trade secrets is expensive and can divert the
efforts of technical and management personnel.
The Company's policy is to execute confidentiality agreements with its
employees and consultants upon the commencement of an employment or consulting
relationship with the Company. These agreements generally require that all
confidential information developed or made known to the individual by the
Company during the course of the individual's relationship with the Company be
kept confidential and not disclosed to third parties. These agreements also
generally provide that inventions conceived by the individual in the course of
rendering services to the Company shall be the exclusive property of the
Company. There can be no assurance that such agreements will not be breached,
that the Company would have adequate remedies for any breach or that the
Company's trade secrets will not be otherwise become known to or be
independently developed by competitors.
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An adverse determination in litigation or interference proceedings to which
the Company may become a party could subject the Company to significant
liabilities to third parties, require disputed rights to be licensed from third
parties or require the Company to cease using such technology. Although patent
and intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms, if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses on satisfactory terms, if at all, could prevent the Company
from manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
Government Regulation
United States
The research, development, manufacture, labeling, distribution and
marketing of the Company's products are subject to extensive and rigorous
regulation by the FDA and, to varying degrees, by state and foreign regulatory
agencies. The Company's products are regulated in the United States as medical
devices by the FDA under the Federal Food, Drug, and Cosmetic Act (the "FDC
Act") and require clearance or approval by the FDA prior to commercialization.
In addition, material changes or modifications to labeling, manufacturing and
design also are subject to regulatory review and clearance or approval. Under
the FDC Act, the FDA regulates the research, clinical testing, manufacturing,
safety, labeling, storage, record keeping, advertising, distribution, sale and
promotion of medical devices in the United States. In addition, the FDA has
promulgated regulations, effective June 1997, to extend its oversight of medical
devices to design and development activities. The testing for, preparation of
and subsequent review of applications by the FDA and foreign regulatory
authorities is expensive, lengthy and uncertain. The failure by the Company to
comply with FDA requirements could result in warning letters, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, the government's refusal to grant pre-market clearance
or pre-market approval for devices and criminal prosecution.
The FDA also has the authority to require clinical testing of certain
medical devices. If clinical testing of a device is required and if the device
presents a "significant risk," an application for an investigational device
exemption ("IDE") must be cleared prior to commencing clinical trials. The IDE
application must be supported by data, typically including the results of
laboratory and animal testing. If the IDE application is cleared by the FDA,
clinical trials may begin at a specific number of investigational sites with a
maximum number of patients, as cleared by the agency. Sponsors of clinical
trials are permitted to sell those devices distributed in the course of the
study provided such costs do not exceed recovery of the costs of manufacture,
research, development and handling. The clinical trials must be conducted under
the auspices of an institutional review board ("IRB") pursuant to FDA
regulations.
Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA clearance of a
510(k) or approval of a PMA application. If a medical device manufacturer or
distributor can establish, among other things, that a device is "substantially
equivalent" in intended use and technological characteristics to certain legally
marketed devices, for which the FDA has not required a PMA, the manufacturer or
distributor may seek clearance from the FDA to market the device by filing a
510(k). The 510(k) will need to be supported by appropriate data establishing
to the satisfaction of the FDA the claim of
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substantial equivalence to the predicate device. In recent years, the FDA has
been requiring a more rigorous demonstration of substantial equivalence.
Following submission of the 510(k), the manufacturer or distributor may not
place the device into commercial distribution unless and until an order is
issued by the FDA finding the product to be substantially equivalent. In
response to a 510(k), the FDA may declare that the device is substantially
equivalent to another legally marketed device, for which FDA had not required a
PMA, and allow the proposed device to be marketed in the United States. The
FDA, however, may require further information, including clinical data, to make
a determination regarding substantial equivalence, or may determine that the
proposed device is not substantially equivalent and requires a PMA. Such a
request for additional information or determination that the device is not
substantially equivalent would delay market introduction of the products that
are the subject of the 510(k).
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent to a legally marketed device for
which the FDA has not required a PMA, the manufacturer or distributor must seek
pre-market approval of the proposed device through submission of a PMA. A PMA
must be supported by extensive data, including, laboratory, pre-clinical and
clinical trial data to prove the safety and effectiveness of the device as well
as extensive manufacturing information. The PMA process can be lengthy,
expensive and uncertain and is typically longer than that required for a 510(k).
If granted, approval of the PMA may include significant limitations on the
indicated uses for which a product may be marketed.
The Company received a 510(k) clearance to market its RapiSeal patch in
lung surgeries in June 1996 and to treat bleeding in liver/spleen surgeries in
March 1997. PMA approval may be required for its "FloSeal Matrix" and other
liquid sealant products. There can be no assurance that the Company will be
able to obtain necessary 510(k) clearances or PMA approvals to market its
products for the intended uses on a timely basis, if at all. Moreover,
regulatory clearances and approvals, if obtained, may include significant
limitations on the indicated uses for which a product may be marketed. Delays
in receipt of or failure to receive such approvals or clearances, the loss of
previously obtained approvals or clearances, or failure to comply with existing
or future regulatory requirements would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business-Products."
The Company is also required to register as a medical device manufacturer
with the FDA and state agencies, such as the California Department of Health
Services ("CDHS"), and to list its products with the FDA. As such, the Company
will be inspected by both the FDA and CDHS for compliance with Quality System
Regulations ("QSR"), which incorporate the FDA's former Good Manufacturing
Practices regulations, and other applicable regulations. These regulations
require that the Company manufacture its products and maintain its documents in
a prescribed manner. Prior to approval of a PMA, the FDA will conduct an
inspection of the Company's manufacturing facility to assure compliance with
QSR. The FDA has not inspected the Company for QSR compliance. In August
1995, the Company's Mountain View facility was inspected by the CDHS with no
violative observations, and the Company was subsequently granted a California
medical device manufacturing license.
The Company is required to provide information to the FDA on death or
serious injuries that its medical devices have allegedly caused or contributed
to, as well as product malfunctions that would likely cause or contribute to
death or serious injury if the malfunction were to recur. In addition, the FDA
prohibits the marketing of approved devices for uses other than those
specifically cleared for marketing by the FDA, except in certain limited
situations as permitted by the FDA Modernization Act of 1997. If the FDA
believes that a Company is not in compliance with the law or regulations, it can
institute proceedings to detain or seize products, issue a recall, enjoin future
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violations and assess civil and criminal penalties against the Company, its
officers and its employees. Failure to comply with the regulatory requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The promotion of most products regulated by the FDA is subject to both FDA
and Federal Trade Commission jurisdiction. The Company is also subject to
regulation by the Occupational Safety and Health Administration and by other
government entities. Regulations regarding the manufacture and sale of the
Company's products are subject to change. The Company cannot predict what
impact, if any, such changes might have on its business, financial condition or
results of operations.
International
Medical Devices
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain clearance required by foreign countries may be longer or
shorter than that required for FDA clearance, and requirements for licensing may
differ significantly from FDA requirements. Some countries have historically
permitted human studies earlier in the product development cycle than
regulations in the United States permit. Other countries, such as Japan, have
requirements similar to those of the United States. This disparity in the
regulation of medical devices may result in more rapid product clearance in
certain countries than in others.
The European Union has promulgated rules which require that medical devices
receive by mid-1998 the right to affix the CE Mark, an international symbol of
adherence to quality assurance standards and compliance with the European Union
Medical Devices Directive (the "Directive"). The ISO 9000 series of standards
for quality operations have been developed to ensure that companies know the
standards of quality to which they must adhere to receive European Union
certification. The Company received ISO 9001 qualification of its processes in
February 1997.
Once a manufacturer has satisfactorily completed the regulatory compliance
tasks required by the Directive and received favorable determinations by the
Notified Body, it is then eligible to affix the CE Mark on its products. The
quality system will be subject to periodic audit and re-certification, and
serious adverse events must be reported to the authorities in the country where
the incident takes place. If such incidents occur, the manufacturer may be
required to take remedial action, including withdrawal of the product from the
EU market. New products may be required to undergo similar testing and
7inspection, prior to being eligible for CE Marking.77
While additional pre-market approvals are not required by individual
countries, practical complications and various other differences have arisen
among member countries, such as labeling requirements and additional scientific
information. Moreover, since the Directive does not cover reimbursement and
distribution practices, differences may occur in these and other areas as well.
An unapproved PMA device may be exported to any country, without prior FDA
approval, provided the unapproved product is in compliance with the laws of that
country and has been approved in a listed country, as defined in Section 802 of
the FDC Act. An unapproved PMA device, intended only for investigational use in
a listed country, may be exported in accordance with the laws of that country
and is exempt from the investigational device provisions of the FDC Act. An
exporter must notify the FDA upon commencing export of an unapproved PMA device.
An unapproved 510(k) device may be exported to any country without prior FDA
approval, provided the
11
<PAGE> 11
device accords to the specifications of the foreign purchaser, is not in
conflict with the laws of the importing country, is labeled for export, and is
not offered for sale in domestic commerce. PMA and 510(k) devices that have
been cleared by the FDA do not require FDA export approval or notification.
Medicinal Products
In 1993, legislation was adopted which established a very new and amended
system for the registration of medicinal products in the European Union ("EU").
A significant purpose of this system is to prevent the existence of essentially
separate national approval systems which have been a major obstacle to
harmonization. One of the most significant features of this new system is the
establishment of a new European Agency for the Evaluation of Medicinal Products
("EMEA"). Under this new system, marketing authorization, broadly speaking, may
be submitted through either a centralized, or mutual recognition process.
The centralized procedure is administered by the EMEA; this procedure is
mandatory for the approval of biotechnology products and available at the
applicant's option for other products that are innovative. The centralized
procedure provides for the first time in the EU for the grant of a single
marketing authorization which is valid in all EU Member States.
As of January 1995, a mutual recognition procedure is available at the
request of the applicant for all medicinal products which are not subject to the
centralized procedure, under the so-called "decentralized procedure." For
products that do not use the centralized procedure, the decentralized procedure
became mandatory beginning in January 1, 1998. The decentralized procedure
creates a new system for mutual recognition of national approvals and
establishes procedures for coordinated EU action on product suspensions and
withdrawals. Under this procedure, the holder of a national marketing
authorization for which mutual recognition is sought may submit an application
to one or more Member States, certifying that identical dossiers are being
submitted to all Member States for which recognition is sought. Within 90 days
of receiving the application and assessment report, each Member State must
decide whether to recognize the approval. The procedure encourages Member
States to work with applicants and other regulatory authorities to resolve
disputes concerning mutual recognition. If such disputes cannot be resolved
within the 90-day period provided for review, the application will be subject to
a binding arbitration procedure.
In certain countries, the sales price of a product must also be approved.
The pricing review period often begins after market approval is granted. No
assurance can be given that, even if a product is approved by a regulatory
authority, satisfactory prices will be approved for such product.
Third Party Reimbursement
In the United States, health care providers that purchase medical devices,
such as "FloSeal Matrix", generally rely on third party payors, principally
federal Medicare, state Medicaid and private health insurance plans, to
reimburse all or part of the cost of the procedure in which the medical device
is being used. The Company's success will be dependent, in part, upon its
ability to obtain satisfactory third-party reimbursement from health care payors
for surgical procedures that may use its products.
The Company anticipates that in a prospective payment system, such as the
Diagnostic Related Group system utilized by Medicare and in many managed care
systems used by private health care payors, the cost of the Company's products
will be incorporated into the overall cost of the procedure, and that there will
not be separate additional reimbursement for the Company's
12
<PAGE> 12
products. Regardless of the type of reimbursement system, the Company believes
that surgeon advocacy of its products will be required to obtain reimbursement.
While the Company believes that its products offer clinical benefits and just as
importantly, cost savings which could encourage use under a case-based
prospective payment scheme, there can be no assurance that any reimbursement
will be sufficient to achieve profitability.
Market acceptance of the Company's products in international markets will
be dependent in part upon the availability of reimbursement within the
prevailing health care payment systems for the procedures in which they are
used. Reimbursement and health care payment systems in international markets
vary significantly by country and include both government-sponsored health care
and private insurance. The Company intends to seek international reimbursement
approvals. There can be no assurance that any such approvals will be obtained
in a timely manner, if at all, and failure to receive international
reimbursement approvals could have a material adverse effect on market
acceptance of the Company's products in the international markets in which such
approvals are sought. Failure by physicians, hospitals and other users of the
Company's products to obtain sufficient reimbursement from health care payors
for procedures in which the Company's products are used or adverse changes in
governmental and private third-party payors' policies toward reimbursement for
such procedures would have a material adverse effect on the Company's business,
financial condition and results of operations.
Competition
The surgical sealant market is highly competitive, and the Company expects
competition in its targeted markets to intensify. Direct product competition
includes topical hemostatic agents, cryoprecipitates and fibrin glues. Several
large companies involved in medical technology and hospital supply may be
developing products that would compete with the Company's products. The Company
is also aware of several potential competitors that are working on biological
tissue sealants. Many of these competitors or potential competitors have
greater name recognition, broader product lines, greater distribution
capabilities, substantially greater capital resources and larger marketing,
research and development staffs than the Company. There can be no assurance
that the Company can effectively compete against such competitors or potential
competitors. In addition, there can be no assurance that the Company's current
competitors or other companies will not succeed in developing technologies and
products that are more effective than the Company's or that would render the
Company's technology or products obsolete or not competitive.
The Company believes that the primary competitive factors in the wound
closure market are effectiveness, price and ease of use. In addition, the
length of time required for products to be developed and to receive regulatory
and reimbursement approval, and proprietary position are important competitive
factors. The Company believes it is positioned to compete favorably with
respect to these factors, although there can be no assurance that it will be
able to do so.
Product Liability and Insurance
The development, manufacture and sale of medical products entail
significant risk of product liability claims. The Company faces an inherent
business risk of financial exposure to product liability claims in the event
that use of its products results in personal injury or death, and there can be
no assurance that the Company will not experience losses due to product
liability claims. The Company currently maintains product liability insurance
coverage with a limit of $3.0 million on a claims-made basis; however, there can
be no assurance that existing coverage limits of the Company's product liability
insurance will be adequate. Increased product liability coverage may be
required if any potential products are successfully commercialized. Product
liability insurance is expensive and in the future may not be available to the
Company on acceptable terms, if at all. Any
13
<PAGE> 13
product liability claims or series of claims brought against the Company,
regardless of their merit or eventual outcome, could have a material adverse
effect on the Company's business, financial condition and results of operations.
Employees
As of March 12, 1998, the Company had 47 employees, 20 of whom were engaged
in research and development, 3 in regulatory affairs, 14 in operations, 3 in
marketing, and 7 in finance and administration. The Company also had consulting
arrangements with 26 persons. No employees are covered by collective bargaining
agreements, and the Company believes it maintains good relations with its
employees.
Item 2. Properties.
Facilities
The Company leases 13,200 square feet in Mountain View, California, which
comprise the majority of the Company's office, manufacturing and warehousing
space. The lease for this facility extends through December 31, 1998. The
Company also leases 7,051 square feet in Mountain View, California, which house
the Company's marketing offices and additional administrative offices. Effective
May 1, 1998, this space will be reduced to 2,404 square feet with the lease
continuing through October 1999. The Company believes that its existing
facilities will be sufficient for its basic clinical manufacturing and office
requirements through 1998.
The Company currently is negotiating to extend the Lease of its Plymouth
Street facility for up to one year. In addition, the Company must secure and
build out additional facilities to prepare for commercial production of
"FloSeal". The Company anticipates having to secure these additional facilities
and begin installation of production equipment in the first half of 1999.
The Company's manufacturing facilities are subject to QSR, international
quality standards and other regulatory requirements. Difficulties encountered
by the Company in manufacturing scale-up or failure by the Company to implement
and maintain its facilities in accordance with QSR, international quality
standards or other regulatory requirements could entail a delay or termination
of production, which would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has
received a manufacturing license from CDHS. However, the Company has no
experience manufacturing its products in the volumes necessary to achieve
significant commercial sales, and there can be no assurance that reliable, high-
volume manufacturing can be achieved at a commercially reasonable cost. Any
manufacturing difficulties involving production yields, quality control and
assurance, supplies of components or shortages of qualified personnel
encountered by the Company could have a material adverse effect on its business,
financial condition and results of operations. There can be no assurance that
the Company will be able to manufacture and supply sufficient quantities of
products to meet product requirements for United States and International
clinical trials and commercial sales.
Item 3. Legal Proceedings.
The Company does not have any on-going litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
14
<PAGE> 14
<TABLE>
<CAPTION>
Executive Officers of the Company
The executive officers of the Company and their ages as of March 1, 1998 are as
follows:
Name Age Position with Fusion
- ---- --- --------------------
<S> <C> <C>
Philip M. Sawyer 33 Vice President and Chief Executive
Officer and Director
Raymond W. Anderson 56 Vice President, Finance and Chief
Financial Officer
Debera A. Brown 45 Vice President, Regulatory and Quality
Assurance
Scott A. Huie 39 Vice President, Operations
Cary J. Reich, Ph.D. 49 Vice President, Research
Joseph F. Rondinone, Ph.D.50 Vice President, Development
</TABLE>
Mr. Sawyer, a founder of the Company, has served as President and Chief
Executive Officer since April 1993. From 1991 to 1993, Mr. Sawyer was a Product
Manager and Manager of Business Development at the Stryker Endoscopy Division of
Stryker Corporation ("Stryker Endoscopy"), a manufacturer of endoscopic surgical
devices. From 1987 to1989, Mr. Sawyer worked at Patricof & Co. Ventures Inc.
From 1986 to 1987, Mr. Sawyer worked in the health care corporate finance group
at E.F. Hutton and Co. Mr. Sawyer holds an M.B.A. from the Harvard Business
School.
Mr. Anderson, joined the Company in July 1997 as Vice President Finance and
Chief Financial Officer. From 1996 to 1997, Mr. Anderson was Vice President
Finance and Chief Financial Officer at Fidus Medical Technology, Inc., a
manufacturer of microwave instruments and catheters for cardiac ablation. From
1994 to 1996, Mr. Anderson was a Director at Recombinant Capital, a consulting
firm specializing in strategic alliances in the biotechnology industry. From
1989 to 1994, Mr. Anderson was Vice President Finance at Glycomed Incorporated,
a biotechnology company developing therapeutic pharmaceuticals based on the
biological activities of complex carbohydrates. From 1985 to 1989, Mr. Anderson
was Vice President Finance and Administration at Chiron Corp., a biotechnology
company based on rDNA technology. Mr. Anderson is a director of Glyko
Biomedical, Ltd., a manufacturer of analytical and diagnostic systems involving
analysis of complex carbohydrates. Mr. Anderson holds an M.B.A. from the
Harvard Business School.
Ms. Brown, joined the Company in May 1995 as Vice President, Regulatory and
Clinical Affairs. From 1990 to 1995, Ms. Brown was Vice President, Medical and
Regulatory Affairs, at Celtrix Pharmaceuticals ("Celtrix"), a manufacturer of
biopharmaceutical products from recombinant proteins. From 1974 to 1990, Ms.
Brown held various positions in regulatory, quality assurance and project
management at Collagen Corporation ("Collagen"), a manufacturer of collagen-
derived medical devices. Her most recent position at Collagen was Program
Director, Hard Tissue Projects.
Mr. Huie joined the Company in August 1997 as Vice President Operations.
From 1995 to 1997, Mr. Huie was a Director of Pharmaceutical Engineering at
Aradigm Corporation, a pharmaceutical and medical device company specializing in
non-invasive aerosol drug delivery. He directed process development, scale up,
clinical supplies and facilities. From 1990 to 1995, Mr. Huie held various
positions at Cygnus, Inc, ("Cygnus") a manufacturer of transferral drug delivery
systems and developer of a non-invasive glucose monitoring medical device. His
most recent position at Cygnus was Director of Engineering. Mr. Huie holds a
B.S. in Chemical Engineering from Rensselaer Polytechnic Institute.
Dr. Reich joined the Company in May 1995 as Vice President, Research and
Development. From 1987 to 1995, Dr. Reich held various positions at Chiron
Vision, ("Chiron") a manufacturer of devices and pharmaceuticals to correct,
improve and restore vision. His most recent position at
15
<PAGE> 15
Chiron was Vice President, Research and Development. Dr. Reich holds a Ph.D. in
Physical Organic Chemistry from Stanford University.
Dr. Rondinone joined the Company in November 1995 as Director of Clinical
Affairs. In July, 1997, Dr. Rondinone was promoted to Vice President,
Development. From 1992 to 1995, Dr. Rondinone was Vice President, Research and
Development, for LaserScope Surgical Systems Inc., a manufacturer and world-wide
distributor of surgical lasers and instruments. From 1990 to 1992, Dr.
Rondinone was a Principal for Rondinone and Associates, a consulting firm
specializing in technology assessment and new business development. Dr.
Rondinone holds a Ph.D. in physics from the University of California at Los
Angeles.
16
<PAGE> 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders
Matters.
The Company's Common Stock trades on the Nasdaq National Market under the
symbol FSON. The Company has not paid any dividends since its inception and does
not intend to pay any dividends in the foreseeable future.
The Company completed an initial public offering of 2,100,000 shares of
Common Stock in June 1996. Prior to the initial public offering, the Company's
Common Stock was not publicly traded.
<TABLE>
<CAPTION>
Quarterly high and low closing common stock prices are as follows:
Common Stock Price
------------------
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
June 30, 1996 (from June 7, 1996) $13.000 $7.375
September 30, 1996 $10.125 $5.375
December 31, 1996 $10.125 $4.000
March 31, 1997 $ 4.875 $3.375
June 30, 1997 $ 4.500 $2.750
September 30, 1997 $ 5.625 $3.625
December 31, 1997 $ 6.000 $2.938
</TABLE>
The last closing price of the Common Stock, as reported on the Nasdaq
National Market on March 12, 1998 was $5.00 per share. As of March 12 1998,
there were approximately 88 record holders of the Common Stock. This number does
not include shareholders whose shares are held in trust by other entities. The
actual number of shareholders is greater than this number of holders of record.
The Company estimates that the number of beneficial shareholders of the shares
of the Company's Common Stock as of March 12, 1998 was approximately 1,400.
17
<PAGE> 17
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
this Report. The selected financial data set forth below with respect to the
Company's statements of operations data for the years ended December 31, 1997,
1996 and 1995 and the balance sheet data as of December 31, 1997, and 1996 are
based on audited financial statements of the Company that have been included
elsewhere herein and are qualified by reference to such Financial Statements and
Notes thereto. The statements of operations data for the years ended December
31, 1994 and 1993 and the balance sheet data as of December 31, 1995, 1994, and
1993 are derived from audited financial statements not included herein. The
historical results are not necessarily indicative of the results of operations
to be expected in the future
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Net revenues $ 153,482 $ 31,031
Cost of sales 967,884 196,344
---------- ----------
Gross loss (814,402) (165,313)
---------- ----------
Operating Expenses:
Research and development 5,647,160 4,692,921 $2,649,705 $ 755,664 $ 104,566
Sales and marketing 2,420,786 1,581,343 142,174 66,518 -
General and administrative 2,004,349 1,426,174 840,990 349,357 102,549
---------- ---------- ---------- --------- --------
Total operating expenses 10,072,295 7,700,438 3,632,869 1,171,539 207,115
---------- ---------- ---------- --------- --------
Loss from operations (10,886,697)(7,865,751)(3,632,869)(1,171,539) (207,115)
Interest income, net 983,687 910,193 351,236 16,246 3,901
Other income, net (49,062) - 920 2,000 -
----------- ---------- ---------- ---------- --------
Net loss (9,952,072)(6,955,558)(3,280,713)(1,153,293) (203,214)
=========== ========== ========== ========== ========
Basic and diluted
loss per share $ (1.41)$ (1.52) $ (2.31) $ (0.81) $ (1.14)
========= ========== ========= ========= ========
Shares used in computing
basic and Diluted loss
per share 7,069,622 4,563,016 1,422,829 1,431,124 178,783
========= ========= ========= ========= ========
December 31,
---------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Balance sheet data:
Cash, cash equivalents,
And available-for-sale
securities $14,459,507 $23,485,180 $5,918,030 $222,480 $1,270,443
Working capital 11,849,806 21,072,139 5,314,070 (79,985) 1,166,743
Total assets 15,540,111 25,062,791 6,629,492 436,358 1,216,815
Long-term debt, including
current portion 43,207 188,889 322,222 200,000 -
Accumulated deficit (21,544,850)(11,592,778)(4,637,220)(1,356,507) (203,214)
Total stockholders'
equity $14,223,648 $23,742,368 $5,768,442 $125,928 $1,175,315
</TABLE>
18
<PAGE> 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This section and other parts of this report contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the subsection entitled "Factors Affecting
Future Operating Results and Market Price of Common Stock" commencing on page
23.
Overview
Since its inception in October 1992, Fusion has been primarily engaged in
the research and development of surgical sealants. As of December 31, 1997,
the Company had an accumulated deficit of approximately $21.5 million.
Operating losses are expected to continue at least through 2000 as the Company
continues to fund early research, product development, clinical trials,
regulatory submissions, and related administrative and support services.
The Company commenced selling its first product, the "RapiSeal" Patch,
in the fourth quarter of 1996 using a small sales force to test the commercial
feasibility of direct sales as a distribution strategy for the patch and for
future Company products. In July 1997, the Company received FDA 510(k)
clearance of an electro-cautery accessory, the "SilverBullet", which was
designed to improve the application of the "RapiSeal" patch. In addition, the
Company developed and introduced an improved second generation patch in
response to input from the thoracic surgeons who were the primary users of the
patch. CE Mark approval was gained for sales in Europe in February 1997. In
the fourth quarter of 1997, it became apparent that the Company's flowable gel
product, "FloSeal Matrix" (a promising hemostatic sealant), would require
significant resources to keep "FloSeal Matrix" on a priority track. In the
Company's assessment, "FloSeal Matrix" had much greater potential and was
performing well in pre-clinical testing while the "RapiSeal" patch was proving
not to provide strategic leverage for the Company. After careful
consideration, the Company decided to discontinue sales of the "RapiSeal"
patch, to disband the test sales force, and to allocate the now available
resources to "FloSeal Matrix". At year end, the Company made provision for
the remaining expenses associated with the exit of the "RapiSeal" patch
business. "RapiSeal" sales in 1997 were $153,000.
The Company made excellent progress in 1997 in the development of
"FloSeal Matrix". Beginning in December 1997, "FloSeal Matrix" was utilized in
an applications evaluation series of patients to stop bleeding within a wide
variety of major surgical procedures and bleeding conditions. "FloSeal Matrix"
successfully stopped bleeding in 72 of 74 discrete applications (97%) in its
first thirty-five patients. Thirty (86%) of the patients had impaired
coagulation due to anti-coagulant drug regimens, heart-lung machine stress or
hemophilia. The patients underwent twenty different types of surgeries which
were performed at four medical centers in Canada and one medical center in the
Netherlands. The Company anticipates the start of clinical trials in the
United States under an IDE in March 1998.
In addition, the Company is conducting an early stage research program to
develop liquid adhesives for applications such as physical sealants during
surgery.
Future revenues, if any, and the results of operations may fluctuate
significantly from quarter to quarter and will depend upon, among other
factors, the speed with which the Company's product or products proceed
through clinical trials and the preparation of related regulatory submissions,
the speed with which regulatory agencies review and potentially clear the
Company's products, the rate at which the Company or its corporate partners
for distribution establish product distribution networks and mobilize the
available sales forces, the rate at which the Company's products gain market
acceptance, the timing and impact of the introduction of competitive products
for surgical sealant functions, the regulation and setting of relevant
reimbursement levels and other factors relating to the commercialization of
medical products.
19
<PAGE> 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Results of Operations
1997 Compared to 1996
Revenues
The Company recorded revenues of $153,000 and $31,000 for the years ended
December 31, 1997 and 1996, respectively. The Company's sales representatives
commenced full-scale selling activities of the "RapiSeal" patch in October
1996. The Company stopped active selling of "RapiSeal" patch in November 1997
subsequent to a decision to concentrate the Company's efforts on development
of "FloSeal Matrix".
Gross Margins
In 1997, the Company had a gross margin loss of $814,000 compared to a
gross margin loss of $165,000 in gross in 1996. The increased loss was the
result of a full year of manufacturing start-up expenses in 1997 contrasted to
a partial year of manufacturing start-up expenses in 1996. In addition, the
Company recorded in 1997 the manufacturing expenses to exit the "RapiSeal"
business including the write-down of dedicated equipment and inventories and
the estimated expenses to settle supply contracts.
Research and Development
Research and development expenses were $5,647,000 and $4,693,000 for the
years ended December 31, 1997 and 1996, respectively. The increase of
$954,000 or 20% was attributable primarily to outside development services for
the "SilverBullet" electrode, to increased staff and related expenses, to
increased patent expenses and to increased regulatory consulting for the
development of alternative regulatory pathways. The increase in research and
development capacity was primarily in response to the increased requirements
of "FloSeal Matrix".
Sales and Marketing
Sales and marketing expenses were $2,421,000 in 1997, an increase of
$840,000 or 53% over sales and marketing expenses of $1,581,000 in 1996. The
increase in 1997 was the result of a full year of sales expense including the
addition of two sales representatives and of a European sales and marketing
office in Munich, Germany primarily in support of the "RapiSeal" patch. The
1997 sales and marketing expense includes the required provisions for the
disbanding of the sales force and the exit of the "RapiSeal" business.
General and Administrative
General and Administrative expenses were $2,004,000 and $1,426,000 for
the years ended December 31, 1997 and 1996, respectively. The increase of
$578,000 or 41% was due primarily to a full year of expenses for the
administrative staff (which increased in 1996) and for the various
requirements of a public Company
Other Income and Expense, Net
Other income and expense, net was $935,000 in 1997, an increase of
$25,000 or 3% over Other income and expense, net of $910,000 recorded in 1996.
The funds available for investment were higher in the second half of 1996
compared to 1997 due to the net proceeds of $24.4 million from the initial
public offering in June 1996. However, significant cash balances (although
lowered by operating cash flow compared to 1996) were available for investment
during the entire year in 1997.
RapiSeal Business Exit
In the fourth quarter of 1997, the Company recorded one time expenses of
$559,000 associated with the exit of the "RapiSeal" business The expenses
were recorded in cost of sales ($325,000), operating expenses ($209,000), and
against sales ($25,000).
20
<PAGE> 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Deferred Compensation
In 1996, the Company recorded deferred compensation of approximately $1.5
million for the difference between the option exercise price and the deemed
fair market value of the Company's Common Stock for options granted in 1996.
The deferred compensation is being amortized to operating expense over four
years, the related vesting period of the options, and will, therefore,
continue to have an adverse effect on the Company's results of operations. In
1996, the Company amortized $378,000 of deferred compensation. In 1997, the
Company amortized $242,000 of deferred compensation. In 1997, the Company
reduced the remaining deferred compensation on the balance sheet by $667,000
to account for deferred compensation associated with stock options which had
been cancelled when staff left the Company.
1996 Compared to 1995
Revenues
The Company recorded revenue of $31,000 and $0 for the years ended
December 31, 1996 and 1995, respectively. The Company's sales representatives
commenced full-scale sales activities in October 1996.
Gross Margins
In 1996, the Company recorded a loss in gross margins of $165,000 due to
manufacturing start-up expenses. In 1995, there were no gross margins.
Research and Development
Research and development expenses were $4,693,000 in 1996, an increase of
$2,043,000 or 77.1% from $2,650,000 in 1995. The increase was attributable to
increased staff (with increases in associated salary and benefit costs and
increases in the related use of supplies and equipment); increased use of
consultants for research, regulatory analysis and manufacturing; increased
development of the manufacturing process; continued development and
improvements of the "RapiSeal" patch, initial design and development of the
"SilverBullet" electrode, and increased activity in support of Fusion liquids
product development including "FloSeal Matrix" and liquid adhesives.
Sales and Marketing
Sales and marketing expenses were $1,581,000 and $142,000 for the years
ended December 31, 1996 and 1995, respectively. The increase of $1,439,000
was primarily the result of increased staff, associated personnel costs and
related travel and other support expenses associated with the development of
the "RapiSeal" selling effort.
General and Administrative
General and Administrative expenses were $1,426,000 and $841,000 for the
years ended December 31, 1996 and 1995, respectively. The increase of
$585,000 or 69.6% was due to an increase in administrative staff, associated
personnel expenses and related facility and other support expenses and
expenses associated with the Company's new responsibilities as a public
Company.
Other Income and Expense, Net
Other income and expense, net was $910,000 and $352,000 for the years
ended December 31, 1996 and 1995, respectively. The increase of $558,000 was
due primarily to increased interest income resulting from increased funds
available for investment after the Company's initial public offering in June
1996.
Liquidity And Capital Resources
Since inception, the Company has incurred net losses resulting in an
accumulated deficit of $21,545,000 at December 31, 1997. The Company has
financed its operations primarily through private sales of equity securities
and an initial public offering of common stock in June 1996 together
aggregating approximately $24,418,512.
21
<PAGE> 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
The Company had cash, cash equivalents and short and long term available-
for-sale securities totaling $14,459,000, $23,485,000 and $5,918,000 as of
December 31, 1997, 1996 and 1995, respectively. The decrease in 1997 compared
to 1996 was primarily due to the Company's net loss in 1997. The increase in
1996 compared to 1995 was due to the proceeds of the Company's initial public
offering in June 1996 offset partially by the net loss and capital
expenditures in 1996.
Cash flows used in operating activities were $8,644,000, $6,082,000, and
$2,905,000 in 1997, 1996 and 1995 respectively. The primary causes of the
cash outflows from operating activities and of the changes in those cash flows
in each of the above mentioned years were the net losses in the respective
years as described above. In addition, capital expenditures for property and
equipment at $415,000, $769,000 and $436,000 in 1997, 1996 and 1995,
respectively, contributed to the cash outflow.
In 1994, the Company negotiated a $600,000 line of credit with Imperial
Bank. At December 31, 1994, the Company had borrowed $200,000 under this
facility. During May 1995, the line of credit was converted into a term loan.
The $400,000 term loan is payable in monthly installments through May 1998,
bears interest at the rate of prime plus 1.5% per annum, and is secured with
substantially all of the Company's tangible assets as collateral. In
connection with this Loan facility, the Company issued a warrant to purchase
8,235 shares of Common Stock at an exercise price of $4.80 per share. The
warrant originally was to expire on September 15, 1999.
In December 1997, the Company signed an agreement with Imperial Bank for
a loan facility to finance existing equipment and future equipment purchases
up to a total of $2,500,000. The facility is secured by the equipment
financed. Subject to certain terms and conditions, the facility will finance
a percentage of the invoice cost of existing equipment and all of the invoice
cost of future equipment purchases. As of December 31, 1997, the equipment
loan facility had not been used by the Company. In connection with this Loan
facility, the Company issued a warrant to purchase 4,500 shares of Common
Stock at an exercise price of $4.00 per share. This warrant expires in five
years. Also, the warrant exercise price of the initial warrant for 8,285
shares was modified to $4.00 per share and the expiration date was extended to
September 15, 2000.
The Company believes that the Company's existing cash, cash equivalents
and available-for-sale securities will be sufficient to fund its operations at
their present scope at least through 1998.
The Company's future capital requirements will depend on numerous
factors, including the speed with which the Company's product or products
proceed through clinical trials and the preparation of related regulatory
submissions, the speed with which regulatory agencies review and potentially
clear the Company's products, the rate at which the Company or its corporate
partners for distribution establish product distribution networks and mobilize
the available sales forces, the rate at which the Company's products gain
market acceptance, the timing and impact of the introduction of competitive
products for surgical sealant functions, the regulation and setting of
relevant reimbursement levels and other factors relating to the
commercialization of medical products. The Company expects to commit
substantial capital resources to the development of a commercial scale
manufacturing capacity for "FloSeal Matrix" and the new facility which will be
required to house this capacity (and possibly the rest of the Company). The
associated working capital requirements for manufacturing and commercial
launch of a new product are also expected to be substantial. The timing of
this manufacturing commitment will depend on regulatory processes, but could
be as early as the second half of 1998. If the Company is unable to secure a
corporate partner(s) to distribute its products, the Company will incur
substantial expenditures to develop a suitable sales and marketing capacity.
The timing and amount of capital requirements cannot be accurately predicted.
However, the Company currently anticipates a need to raise additional funds
within the next 18 months through public or private equity financing,
strategic corporate partnerships or otherwise. Additional funding may not be
available when needed or on terms acceptable to the Company, which would have
a material adverse effect on the Company's business prospects, financial
condition and results of operations. Any additional equity financing will be
dilutive to stockholders, and debt financing, if available, may include
restrictive covenants.
22
<PAGE> 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
At December 31, 1997, the Company had approximately $17,728,000 in
federal and $17,744,000 in state net operating loss carry forwards, which
expire in the years 2001 through 2012. Utilization of federal income tax
carry forwards is subject to certain limitations under Section 382 of the
Internal Revenue Code of 1986, as amended. These annual limitations may result
in expirations of net operating losses and research and development credits
before they can be fully utilized.
Factors Affecting Future Operating Results and Market Price of Common Stock
The following factors represent some of the current challenges to the
Company, which create risk and uncertainty. Failure to adequately overcome
any of the following challenges, either singly or in combination, could have a
material adverse effect on the Company's results of operations, business
prospects, and financial position.
Risks Related to "FloSeal Matrix". Following the end of the third quarter
1997, the Company decided to shift essentially all discretionary resources
then committed to the support of the "RapiSeal" patch to its flowable gel
product, "FloSeal Matrix".. Subsequently, the Company decided to exit the
"RapiSeal" business and to disband its small test sales force. "FloSeal
Matrix", which the Company believes to have substantially greater market
potential than "RapiSeal", thus was reinforced as the Company's lead product
in terms of potential strategic impact on the Company's operations. "FloSeal
Matrix" is expected to enter human clinical trials in the first quarter of
1998. The Company is in the process of scaling up production for these trials
and planning for commercial production. There can be no assurance that
production scale-up can be successfully completed, that the product(s) will be
successful in human trials, that the product(s) will gain regulatory
clearance, or that the product(s) will be accepted in the marketplace. There
can be no assurance that strategic corporate partnerships can be concluded to
aid in the development or the distribution of the product or that such
alliances can be concluded on favorable terms. There can be no assurance that
future revenues, if any, will provide a reasonable return, if any, on the cost
of development. Unless "FloSeal Matrix" is successfully introduced and
marketed on a timely basis, the Company's business prospects, financial
condition and results of operations will be materially and adversely affected.
Technology and Development Risk. To be successful, the Company's products
under development including "FloSeal Matrix" must act effectively in humans.
The physiological processes which must be favorably altered are very complex.
The effects that these products seek to provide are very difficult to achieve
and are dependent upon many independent and interacting variables which are
not fully understood. The products must be effective in treating the
substantial variations involved from patient to patient, as well as with
regard to the differing techniques and procedures employed by surgeons. The
technologies related to these potential products are evolving and are not
fully developed. As a result, the predictability and success rate of the
technological design process with respect to these products is highly
uncertain. As a consequence of the above factors and many additional factors,
the time and expense required to design and develop a product is highly
uncertain and cannot be predicted reliably. With respect to any particular
product under development, the desired physiological effects or product
specifications may not be fully achieved, if at all. Even if the products are
successfully developed, there can be no assurance that clinically relevant
effects will be achieved, that successful regulatory clearances will be
secured, or that the products will become economically viable. If the Company
is not successful in developing its planned products, its business prospects,
financial condition and results of operations would be materially and
adversely affected.
Competition and Uncertainty as to Technological Change. The surgical sealant
market is highly competitive, and the Company expects competition in its
targeted markets to intensify. The Company expects to encounter direct
competition from companies (or medical institutions) offering topical
hemostats, fibrin glues, home-brew cryoprecipitates, synthetic adhesives,
synthetic hydrogels, pericardial strips, synthetic strips, synthetic fibrin
glues and femoral artery closure systems/devices. In addition, several large
companies targeting the surgical sealant market
23
<PAGE> 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
may be developing products (unknown to the market at present) that would
compete with the Company's products. The Company is also aware of several
potential competitors that are working on biological tissue sealants. Many of
the competitors or potential competitors have greater name recognition,
broader product lines, greater distribution capabilities, substantially
greater capital resources and larger marketing research and development staffs
and facilities than the Company. Broad product lines may give the Company's
competitors or potential competitors the ability to negotiate exclusive, long-
term medical device supply contracts and, consequently, the ability to offer
comprehensive pricing for their products, including those that may compete
with the Company's products. By offering a broader product line, these
potential competitors may also have a significant advantage in marketing
competing products to group purchasing organizations and other managed care
organizations that increasingly seek to reduce costs through centralization of
purchasing functions. There can be no assurance that the Company will be able
to effectively compete against such competitors or potential competitors. In
addition, there can be no assurance that the Company's current competitors or
other companies will not succeed in developing technologies and products that
are more effective than the Company's or that would render the Company's
technology or products obsolete or unable to compete.
Future Capital Requirements . The Company's future capital requirements will
depend upon numerous factors that include, but are not limited to, the nature
and timing and success of the Company's clinical research and product
development programs, the receipt of and time required to obtain regulatory
clearances, the Company's ability to enter into strategic sales and marketing
arrangements, the level of resources the Company devotes to its manufacturing
capabilities and the extent and timing of future "FloSeal Matrix" sales, if
any. The timing and amount of such capital requirements cannot be accurately
predicted. There can be no assurance that the Company will not require
additional financing through bank facilities, debt or equity offerings or
other sources of capital and that additional funding will be available on
terms acceptable to the Company, if at all. Insufficient capital or a lack of
access to additional capital would impair the Company's ability to pursue its
business objectives, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Patents and Proprietary Technology. The Company's ability to
compete effectively will depend in part on its ability to develop and maintain
the proprietary aspects of its technology. The Company has pursued its own
patents covering its technologies in various forms. In addition, the Company
has licensed technology to further broaden its patent portfolio. The Company
owns three and has licensed three issued United States patents, and has 20
pending United States patent application relating to its patch, gel and liquid
formulations. There can be no assurance that the pending patent applications
will issue, or that the issued patent or any patents that may issue in the
future will provide any competitive advantages for the Company's products or
that they will not be successfully challenged, invalidated or circumvented in
the future. Moreover, litigation or interference proceedings associated with
enforcing or defending patents or trade secrets is expensive and can divert
the efforts of technical and management personnel. The Company has filed
certain corresponding patent applications in certain foreign countries and may
file additional patent applications outside the United States. The Company
believes that obtaining foreign patents may be more difficult than obtaining
domestic patents because of differences in patent laws and believes the
protection provided by foreign patents, if obtained, and any other foreign
intellectual property protection may be weaker than that provided
domestically. In addition, there can be no assurance that competitors will
not seek to apply for and obtain patents that will prevent, limit or interfere
with the Company's ability to make, use and sell its products. A number of
medical device and other companies, universities and research institutions
have filed patent applications or have issued patents relating to the
compositions and methods for wound closure. In addition, the medical device
industry has been characterized by extensive litigation regarding patents and
other intellectual property rights, and many companies in the medical device
industry have employed intellectual property litigation to gain competitive
advantage. There can be no assurance that suits will not be brought against
the Company in the future challenging its patent rights or claiming
infringement on patents held by third parties.
An adverse determination in litigation or interference proceedings to which
the Company may become a party could subject the Company to significant
liabilities to third parties, require disputed rights to be licensed from
third parties
24
<PAGE> 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
or require the Company to cease using such technology. Although patent and
intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms, if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses on satisfactory terms, if at all, could prevent the Company
from manufacturing and selling its products, which would have a material
adverse effect on the Company's business prospects, financial condition and
results of operation.
Regulatory Uncertainty. The regulatory processes for the approval of medical
devices, such as the Company's products, are highly uncertain. The time and
expense required to obtain clearances are difficult to forecast and can vary
widely. In certain cases, a clearance may not be ever gained. In particular,
the regulatory process in the United States is arduous and demanding. A major
factor in the time and expense required for a device clearance to market is
the type of submission required, 510(K) or PMA. While the Company generally
seeks the faster 510(K) regulatory pathway whenever it believes this pathway
is appropriate, the decision as to pathway is essentially within the sole
discretion of the FDA and there can be no assurance that a 510(K) pathway will
be obtained. A PMA pathway is significantly longer and more expensive.
Likewise, the FDA sets the requirements for the size and structure of clinical
trials after input from the Company. There can be no assurance that the
clinical requirements of the FDA for submissions will be favorable for the
Company or within its expense and time estimates or result in an economically
viable program. The clinical or other requirements can change during the
process resulting in new requirements or standards which can materially
increase the time and expense of the regulatory process. The FDA may require
additional clinical trials or tests and new requirements after the initial
submissions. The time required for review and clearance at the FDA can vary
widely at the FDA depending on the quality of the submission, the perceived
importance of the product, and many other factors. Many of the factors
affecting the time and expense for the regulatory process are outside the
control of the Company. Longer and more expensive clinical trials and
regulatory processes can have a material adverse effect on the business
prospects, financial condition and results of operations of the Company. The
regulatory process outside the United States can also vary widely in the time
and expense of clearance and may result in no clearance at all. In summary,
there can be no assurance that marketing clearances will ever be granted for
any of the Company's products in the development process or that the time and
expense of the regulatory process can be reliably predicted or will result in
an economically viable investment.
Uncertainty of Market Acceptance. The Company's success will depend upon the
medical community's active sponsorship and ultimate acceptance of the "FloSeal
Matrix" and the Fusion liquid adhesives. The Company is unable to predict how
quickly, if at all, the medical community will accept its products or, if
accepted, the number of products that will be used. Use of the Company's
products may require changes in surgical practices, and there can be no
assurance that surgeons will be willing to make such changes. To achieve
market acceptance of its products, the Company must also demonstrate that the
Company's products offer clinically significant advantages. Moreover, limited
experience with patients may initially make it difficult for the Company to
ascertain those factors most relevant to the surgeon's decision whether to use
the Company's products. Even if generally accepted, surgeons may choose to
use the Company's products in a smaller minority of procedures than projected
thus leading to lower sales. Failure of "FloSeal Matrix" and the Fusion
liquid adhesives to achieve significant clinical adoption would have a
material adverse effect on the Company's business prospects, financial
condition and results of operations.
Uncertainty as to Bovine (Animal) Sourced Products in Europe. There is
substantial uncertainty as to the acceptance of bovine sourced products in
Europe due to concerns over potential contamination with Transmissible
Spongiform Encephalopathies (TSE), which is the same or closely related to the
disease which strikes cows known as Bovine Spongiform Encephalopathies (BSE)
or commonly as "Mad Cow Disease". The first generation of "FloSeal Matrix" is
made from bovine-sourced thrombin and bovine-sourced gelatin. However
unscientific in the Company's judgement the fear of TSE might be, if TSE
concerns prevent or substantially delay the marketing of "FloSeal Matrix" in
Europe, there would be a material and adverse effect on the Company's business
prospects, financial condition and results of operations. There can be no
assurance that alternative sources of human thrombin or alternative (non-
25
<PAGE> 25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
bovine) sources of the gel component can be obtained with the timing, cost,
capacity, and other factors necessary to support a timely introduction of a
second generation product into Europe.
Limited Manufacturing Experience, Scale-up Risk. The Company has received a
manufacturing license from the CDHS and commenced shipment of "FloSeal Matrix"
for use in its application evaluation cases in December 1997. However, the
Company has no experience manufacturing "FloSeal Matrix" or any other products
in the volumes necessary to achieve significant commercial sales, and there
can be no assurance that reliable, high-volume manufacturing can be achieved
at a commercially reasonable cost. The Company may encounter difficulties in
scaling up production, including problems involving production yield, quality
control and assurance, and shortages of qualified personnel. The Company's
manufacturing facilities will be subject to QSR, international quality
standards and other regulatory requirements. Difficulties encountered by the
Company in manufacturing scale-up or failure by the Company to implement and
maintain its facilities in accordance with QSR, international quality
standards or other regulatory requirements would entail a delay or termination
of production, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Any manufacturing
difficulties involving production yields, quality control and assurances,
supplies of components or shortages of qualified personnel encountered by the
Company could also have a material adverse effect on its business prospects,
financial condition and results of operations. There can be no assurance that
the Company will be able to manufacture and supply sufficient quantities of
products to meet product requirements for United States and international
clinical trials and commercial sales.
Dependence on Single Source Suppliers. The Company acquires several
components of its products from single source suppliers. Generally, the
Company believes that there are alternative suppliers of equivalent materials
available, and that the company could substitute suppliers with minimal
regulatory consequences from this substitution. However, there can be no
assurance that such substitute suppliers will be available, that such
substitutions could be made in a timely manner or on commercially reasonable
terms. In the case of hides for processing into gelatin, there are only a few
suppliers that could meet the Company's requirements. The company currently
relies exclusively on one supplier of such hides and expects to continue to do
so through at least the end of 1999. Fusion and this supplier have entered
into a long-term supply agreement. However, if this supplier were unable to
meet the Company's demands there can be no assurance that the Company would be
able to secure alternative sources of hides of sufficient quality and quantity
to produce sufficient product to meet its customers' needs. A transition to
alternate arrangements could involve additional costs and delays in
production. There can be no assurance that such transition would be
successful in entering into alternate arrangements on commercially reasonable
terms if at all. Sterilization of the Company's product is performed by a
single vendor. While the Company believes alternative sterilization vendors
are readily available, there can be no assurance that such vendors would be
available or that such a transition could be made in a timely, cost-effective
manner. In the event the Company is not able to acquire sufficient supplies
from its current sources or to locate alternate sources on commercially
reasonable terms, the Company may not be able to manufacture its products on a
timely and cost-competitive basis, or at all, which would have a material
adverse effect on the Company's business prospects, financial condition and
results of operations.
Computer Systems Readiness for Year 2000. Many existing computer systems and
applications, and other control devices, use only two digits to identify a
year in the date field, without considering the impact of the upcoming change
at the end of the millennium. They could fail or create erroneous results
unless corrected so that they can process data related to the year 2000. The
Company relies on its systems, applications and devices in operating and
monitoring all major aspects of its business, including financial systems
(such as general ledger, accounts payable and payroll modules), manufacturing
systems, customer services, infrastructure, embedded computer chips, networks,
and telecommunications equipment. The Company also relies on external systems
of business enterprises such as customers, suppliers, creditors, financial
organizations, and of governments, both domestically and globally, for
accurate exchange of data and information. The Company's current estimate is
that the costs associated with the Year 2000 issue, will not have a material
adverse affect on the result of operations or financial position of the
Company in
26
<PAGE> 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
any given year. However, despite the Company's efforts to address the Year
2000 impact on its internal systems, the Company is not certain that is has
fully identified such impact or that the Company can resolve the impact
without disruption of its business and without incurring significant expense.
In addition, even if the internal systems of the Company are not materially
affected by the Year 2000 issue, the Company could be affected through
disruption in the operation of the enterprises with which the Company
interacts.
Limited Sales, Marketing and Distribution Experience. The Company gained
valuable experience in selling its "RapiSeal" patch through a small test sales
force. In conjunction with the company's exit from the "RapiSeal" business,
the sales force was disbanded at the end of 1997. The company has a small
marketing organization which provides market analysis, marketing strategy, and
expertise in product development and positioning. The Company intends to sell
its products primarily through agreements with distributors or by means of
collaborative arrangements with corporate strategic partners. As of March 12,
1998, the Company had not entered into any such agreements or arrangements
with respect to "FloSeal Matrix" or other future products. There can be no
assurance that the Company will be able to enter into agreements with
distributors or collaborative arrangements on a timely basis or at all, or
that such distributors or collaborators will devote adequate resources to
selling the Company's products. In addition, to the extent that the Company
enters into distribution agreements or collaborative arrangements for the sale
of its products, the Company will be dependent upon the efforts of third
parties, and there can be no assurance that such efforts will be successful.
Should the Company decide to use a direct sales strategy for general or for
specialty applications, there can be no assurance that the Company will be
able to build a direct sales force or marketing organization, that
establishing a direct sales force or marketing organization will be cost
effective, or that the Company's sales and marketing efforts will be
successful. Failure to build an effective sales and marketing organization or
to establish effective distribution or collaborative arrangements would have a
material adverse effect on the Company's business prospects, financial
condition and results of operations.
Uncertainty Relating to Third Party Reimbursement. In the United States,
health care providers that purchase medical devices, such as "FloSeal Matrix"
and the Fusion liquid adhesives, generally rely on third-party payors,
principally federal Medicare, state Medicaid and private health insurance
plans to reimburse all or part of the cost of the procedure in which the
medical device is being used. The Company's success will be dependent, in
part, upon its ability to obtain satisfactory third-party reimbursement from
health care payors for surgical procedures that may use "FloSeal Matrix" and
the Fusion liquid adhesives. The Company anticipates that in a prospective
payment system, such as the diagnostic related group system utilized by
Medicare, and in many managed care systems used by private health care payors,
the cost of the Company's products will be incorporated into the overall cost
of the procedures and there will not be separate reimbursement for the
Company's products. Regardless of the type of reimbursement system, the
Company believes that surgeon advocacy of the "FloSeal Matrix" and the Fusion
liquid adhesives will be required to obtain reimbursement. There can be no
assurance that any reimbursement will be sufficient to assure profitability.
Failure by physicians, hospitals and other users of the Company's products to
obtain sufficient reimbursement from health care payors for procedures in
which the Company's products are used or adverse changes in governmental and
private third-party payors' policies toward reimbursement for such procedures
would have a material adverse effect on the Company's business prospects,
financial condition and results of operations.
If the Company obtains the necessary foreign regulatory approvals, market
acceptance of the Company's products in international markets would be
dependent, in part, upon the availability of reimbursement within prevailing
health care payment systems for the Company's products or the procedures in
which the products are used. Reimbursement and health care payment systems in
international markets vary significantly by country, and include both
government-sponsored health care and private insurance. The Company intends
to seek international reimbursement approvals. There can be no assurance that
any such approvals will be obtained in a timely manner, if at all, and failure
to receive international reimbursement approvals could have a material adverse
effect on market acceptance of the Company's products in the international
markets in which such approvals are sought.
27
<PAGE> 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Product Liability Risk, Limited Insurance Coverage. The medical device
industry has historically been litigious, and the Company faces an inherent
business risk of financial exposure to product liability claims in the event
that the use of its products results in personal injury. Although the Company
has not experienced any claims to date, there can be no assurance that the
Company will not experience losses due to product liability claims in the
future. The Company currently maintains liability insurance with combined
coverage limits of $3.0 million on a claims-made basis. There can be no
assurance that the coverage limits of the Company's insurance policies will be
adequate. Such insurance is expensive, difficult to obtain and may not be
available in the future as acceptable terms, or at all. Any claims against
the Company regardless of their merit or eventual outcome, could have a
material adverse impact upon the Company's business, financial condition and
results of operations.
Item 8. Financial Statements and Supplementary Data.
This information is incorporated hereby reference to the financial
statements listed in Item 14 of Part IV of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
28
<PAGE> 28
PART III
Certain information required by Part III is omitted from this Report
because the registrant will file a definitive proxy statement within 120 days
after the end of its fiscal year pursuant to Regulation 14A (the "Proxy
Statement") for its annual meeting of stockholders to be held on May 21, 1998
and the information therein is incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant.
The information concerning the Company's directors required by this item
is incorporated by reference to the Company's Proxy Statement. Information
regarding executive officers is included in Part I hereof under the caption
"Executive Officers of the Company" and is hereby incorporated by reference
into this Item 10.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
29
<PAGE> 29
PART IV
<TABLE>
<CAPTION>
Item 14. Exhibits, Financial Statement Schedules
<S> <C> <C>
(a) 1. Financial Statements Page (s)
------
Report of Independent Accountants. F-2
Balance Sheets, December 31, 1997 and 1996. F-3
Statements of Operations, Years Ended December 31, 1997,
1996 and 1995. F-4
Statements of Stockholders' Equity, Period from January 1,
1995 to December 31, 1997 F-5
Statements of Cash Flows, Years Ended December 31, 1997,
1996 and 1995 F-6
Notes to Financial Statements F-7 to F-15
2. Financial Statement Schedule
All schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or the
notes thereto.
3. Exhibits
The Exhibits listed on the accompanying index immediately
following the signature page are filed as part of this Report.
(b) Reports on Form 8-K
Not applicable.
(c) Exhibits
See Item 14 (a) 3. above.
</TABLE>
30
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) the Securities Exchange Act
of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized.
FUSION MEDICAL TECHNOLOGIES, INC. Date: March 31, 1998
By: /s/ Philip M. Sawyer
-------------------------
Philip M. Sawyer
President and Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Philip M. Sawyer and Raymond W. Anderson, jointly
and severally, his attorneys-in-fact, and each with the power of substitution,
for him in any and all capacities, to sign any amendments to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
on Form 10-K has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Philip M. Sawyer President, March 31, 1998
- ----------------------- Chief Executive Officer
Philip M. Sawyer and Director (Principal
Executive Officer)
/s/ Raymond W. Anderson Vice President, Finance and March 31, 1998
- ----------------------- Chief Financial Officer
Raymond W. Anderson (Principal Financial
and Accounting Officer)
/s/ Gordon W. Russel Chairman of the Board March 31, 1998
- ----------------------- of Directors
Gordon W. Russell
/s/ Olav B. Bergheim Director March 31, 1998
- -----------------------
Olav B. Bergheim
/s/ Vaughn D. Bryson Director March 31, 1998
- -----------------------
Vaughn D. Bryson
Director March __, 1998
- -----------------------
Douglas E. Kelly, M.D.
/s/ Lawrence G. Mohr, Jr. Director March 31, 1998
- -----------------------
Lawrence G. Mohr, Jr.
/s/ Richard S. Schneider, Ph.D. Director March 31, 1998
- -----------------------
Richard S. Schneider, Ph.D.
</TABLE>
31
<PAGE> 31
Index to Exhibits
<TABLE>
<CAPTION>
Exhibits
- --------
<S> <C>
3.1* Certificate of Incorporation of Registrant.
3.4* Amended and Restated By-laws of the Registrant.
10.1* Restated Shareholder Rights Agreement dated as of January 17, 1995.
10.2* 1993 Stock Option Plan, as amended, and form of stock option agreement.
10.3* 1996 Employee Stock Purchase Plan.
10.4* 1996 Director Stock Option Plan, and form of stock option agreement.
10.5* Form of Director and Officer Indemnification Agreements.
10.6* Lease Agreement dated June 15, 1994 between the Registrant and James R.
Benson.
10.7 Loan and Security Agreements dated December 21, 1997 between the
Registrant and Imperial Bank
10.8 First Amendment dated December 21, 1997 to Warrant to Purchase Stock
dated May 31, 1995
10.9 Warrant to Purchase Stock dated December 21, 1997
27.1 Financial Data Schedule.
* Previously filed as exhibits to the Company's Registration Statement on Form
S-1 SEC file number 000-28460.
</TABLE>
FusionTM, Fusion Medical Technologies, Inc. TM, FloSeal MatrixTM, FloSealTM,
RapiSeal PatchTM and SilverBulletTM are trademarks of Fusion Medical
Technologies, Inc. Any use is strictly prohibited without the prior written
consent of Fusion Medical Technologies, Inc.
32
<PAGE> 32
FUSION MEDICAL TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Page
----
Report of Independent Accountants ............................. F-2
Balance Sheets ............................................... F-3
Statements of Operations ..................................... F-4
Statements of Stockholders' Equity .......................... F-5
Statements of Cash Flows ..................................... F-6
Notes to Financial Statements ............................... F-7 to F-15
</TABLE>
F-1
<PAGE> 33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Fusion Medical Technologies, Inc.:
We have audited the accompanying balance sheets of Fusion Medical Technologies,
Inc. as of December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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 audits 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 Fusion Medical Technologies,
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
San Jose, California
February 28, 1998
F-2
<PAGE> 34
FUSION MEDICAL TECHNOLOGIES, INC.
BALANCE SHEET
DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,473,284 $ 10,778,423
Available-for-sale-securities 5,464,753 11,145,226
Accounts receivable, net of allowance
for doubtful accounts of $10,000 in
1997 and none in 1996 20,903 22,859
Inventories - 83,201
Prepaids and other current assets 207,329 307,297
---------- ------------
Total current assets 13,166,269 22,337,006
Available-for-sale securities 1,521,470 1,561,531
Property and equipment, net 808,690 1,120,572
Other assets 43,682 43,682
------------ ------------
Total assets $ 15,540,111 $ 25,062,791
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 597,999 $ 878,874
Accrued expenses 675,257 252,660
Long-term debt, current portion 43,207 133,333
------------ ------------
Total current liabilities 1,316,463 1,264,867
Long-term debt, net of current portion - 55,556
------------ ------------
Total liabilities 1,316,463 1,320,423
------------ ------------
Commitments and contingencies (Notes 8 and 9)
STOCKHOLDERS' EQUITY
Convertible preferred stock, par value
$0.001: Authorized: 5,000,000 shares;
Issued and outstanding: none - -
Common stock, par value $0.001: Authorized:
50,000,000 shares; issued and outstanding:
7,118,180 shares in 1997 and 6,998,517
shares in 1996 7,118 6,999
Additional paid-in capital 36,095,881 36,578,757
Notes receivable from stockholder (53,864) (48,400)
Deferred compensation (282,185) (1,191,104)
Unrealized gain (loss) on investments 1,548 (11,106)
Accumulated deficit (21,544,850) (11,592,778)
------------ ------------
Total stockholders' equity 14,223,648 23,742,368
------------ ------------
Total liabilities and
stockholders' equity $ 15,540,111 $ 25,062,791
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-3
<PAGE> 35
FUSION MEDICAL TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 153,482 $ 31,031
Cost of sales and start-up
manufacturing costs 967,884 196,344
------------ ------------
Gross loss (814,402) (165,313)
Operating Expenses:
Research and development 5,647,160 4,692,921 $ 2,649,705
Sales and marketing 2,420,786 1,581,343 142,174
General and administrative 2,004,349 1,426,174 840,990
------------ ------------ ------------
Total operating expenses 10,072,295 7,700,438 3,632,869
------------ ------------ ------------
Loss from operations (10,886,697) (7,865,751) (3,632,869)
Other income (expense):
Interest income 1,008,122 926,185 381,986
Interest expense (24,435) (15,992) (30,750)
Other, net (49,062) - 920
------------ ------------ ------------
Net loss $ (9,952,072) $ (6,955,558) $ (3,280,713)
============ ============ ============
Net Basic and diluted net
loss per share $ (1.41) $ (1.52) $ (2.31)
============= ============ =============
Shares used in computing basic
and diluted net loss per share 7,069,622 4,563,016 1,422,829
============= =========== =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-4
<PAGE> 36
<TABLE>
<CAPTION>
FUSION MEDICAL
TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS'
EQUITY
For the period from January 1, 1995 to
December 31, 1997
Deficit
Notes Accumulated
Series A Convertible Series B Convertible
Additional Receivable Unrealized During the
Preferred Stock Preferred Stock Common Stock
Paid-In From Deferred Loss on Development
------------------- ---------------- --------------
Shares Amount Shares Amount Shares Amount
Capital Shareholder Compensation Investments Stage Total
--------- ------ --------- ------ --------- ------
- - ----------- -------- ---------- ----- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
<C> <C> <C> <C> <C> <C>
Balances, January 1, 1995 2,269,235 $ 2,269 - - 1,518,099 $ 1,518
$1,478,648 - - - $(1,356,507) $125,928
Issuance of Series B
Convertible preferred
stock during January
1995 at $1.66 per share,
net of offering costs of
$32,645 5,389,759 $5,390
8,908,964 8,914,354
Issuance of common stock
upon exercise of stock
options 1,476 2
229 231
Deferred compensation
related to issuance of
common stock and grants
of stock options
27,975 $ (27,975)
Amortization of deferred
compensation
8,642 8,642
Net loss
(3,280,713) (3,280,713)
--------- ------ --------- ------ --------- ------
- - ----------- -------- ---------- ----- ------------- ----------
Balances, December 31, 1995 2,269,235 2,269 5,389,759 5,390 1,519,575
1,520 10,415,816 - (19,333) - (4,637,220) 5,768,442
Issuance of common stock:
Upon exercise of stock
options 122,966
123 33,141 33,264
In exchange for notes
receivable 40,000
40 48,360 $(48,400)
From initial public offering
in June 1996, net of issuance
costs of $2,881,488 2,100,000
2,100 24,416,412 24,418,512
Upon exercise of
warrants 25,810
26 40,473 40,499
Under employee stock
Purchase plan 17,427
17 70,344 70,361
Conversion of preferred
stock in connection with
initial public offering (2,269,235) (2,269) (5,389,759) (5,390) 3,172,739
3,173 4,486 -
Unrealized loss on investments
$ (11,106) (11,106)
Deferred compensation
related to issuance of
common stock and grants
of stock options
1,549,725 (1,549,725) -
Amortization of deferred
compensation
377,954 377,954
Net loss
(6,955,558) (6,955,558)
--------- ------ --------- ------ --------- ------
- - ----------- -------- ---------- ----- ------------- ----------
Balances, December 31, 1996 - - - - 6,998,517 6,999
36,578,757 (48,400) (1,191,104) (11,106) (11,592,778) 23,742,368
Issuance of common stock:
Upon exercise of stock
options 84,560 84
60,164 60,248
Under employee stock
purchase plan 35,103 35
123,805 123,840
Interest on notes receivable
(5,464) (5,464)
Change in unrealized loss
on investments
12,654 12,654
Adjustment for cancellation
of stock options
(666,845) 666,845 -
Amortization of deferred compensation
242,074 242,074
Net loss
(9,952,072) (9,952,072)
--------- ------ --------- ------ --------- -------
- ----------- -------- ---------- ----- ------------- ----------
Balances, December 31, 1997 - - - - 7,118,180 $ 7,118
$36,095,881 $(53,864) $(282,185) $1,548 $(21,544,850) $14,223,648
========= ====== ========= ====== ========= ======
=========== ======== ========= ====== ============ ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-5
<PAGE> 37
<TABLE>
<CAPTION>
FUSION MEDICAL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Cash flows used for operating
activities:
Net loss $(9,952,072) $(6,955,558) $(3,280,713)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 463,174 259,151 104,714
Loss on disposition of property
and equipment 263,688
Accretion of available-for-sale
securities 17,332
Amortization of deferred
compensation 242,074 377,954 8,642
Interest on notes receivable from
Stockholder (5,464)
Provision for doubtful accounts 10,000
Changes in assets and liabilities:
Accounts receivable (8,044) (22,859)
Inventories 83,201 (83,201)
Prepaids and other current assets 99,968 (239,096) (60,236)
Other assets (11,182) 1,436
Accounts payable (280,875) 403,599 273,641
Accrued expenses 422,597 189,107 47,433
----------- ----------- -----------
Net cash used in operating
Activities (8,644,421) (6,082,085) (2,905,083)
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (414,980) (768,962) (436,174)
Purchases of avaiable-for-sale-
securities (10,514,973) (11,181,832) (2,491,116)
Sales of available-for-sale
Securities 16,230,829 - 955,085
----------- ----------- -----------
Net cash provided by (used in)
investing activities 5,300,876 (11,950,794) (1,972,205)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common
stock, net of issuance costs 184,088 24,562,636 231
Proceeds from issuance of preferred
stock, net of issuance costs 8,914,354
Proceeds from note payable 200,000
Repayment of notes payable (145,682) (133,333) (77,778)
----------- ----------- -----------
Net cash provided by financing
activities 38,406 24,429,303 9,036,807
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (3,305,139) 6,396,424 4,159,519
Cash and cash equivalents, beginning
of year 10,778,423 4,381,999 222,480
----------- ------------ -----------
Cash and cash equivalents, end of year $ 7,473,284 $ 10,778,423 $ 4,381,999
=========== ============ ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 63,580 $ 15,992 $ 28,889
=========== ============ ===========
Cash paid for taxes $ 800 $ 800 $ 800
=========== ============ ===========
Supplemental disclosure of noncash
investing and financing activities:
Capital expenditures accrued but
not paid $ 107,324
============
Issuance of common stock in exchange
for notes receivable $ 48,400
============
Conversion of bank line of credit into
bank term loan $ 200,000
============
Conversion of preferred stock to
common stock in connection with
the Company's initial public
offering in June 1996 $ 1,477,031
============
Adjustment for cancellation of
stock options $ 666,845
===========
The accompanying notes are an integral part of these financial statements
</TABLE>
F-6
<PAGE> 38
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
1. Formation and Business of the Company
Fusion Medical Technologies, Inc. (the "Company") was incorporated in the State
of Delaware in 1993. The Company is developing, and manufacturing surgical
sealants. Since its inception, the Company has devoted substantially all of its
efforts to developing products, raising capital and recruiting personnel.
The Company sold 2,100,000 shares of common stock at $13.00 per share through an
initial public offering in June 1996. Net proceeds (after underwriter's
commissions and fees along with other costs associated with the offering)
totaled $24,418,512. Upon completion of the offering, all outstanding shares of
preferred stock (a total of 7,658,994 shares) were converted into shares of
common stock.
In the course of its development, the Company has sustained operating losses and
expects such losses to continue through at least 2000. There can be no assurance
that the Company will not require additional funding and should this prove
necessary, the Company may sell additional shares of its Common Stock or
preferred stock through private placement or further public offerings. There can
be no assurance that the Company would be able to obtain additional debt or
equity financing, if and when needed, on terms that the Company finds
acceptable. Any additional equity or debt financing may involve substantial
dilution to the Company's stockholders, restrictive covenants or high interest
costs.
2. Summary of Significant Accounting Policies
Stock Split
In May 1996, the Company effected a 1-for-2.414 reverse split of the Company's
common stock and a corresponding change in the preferred stock conversion rates.
All common shares and per share amounts in these financial statements have been
adjusted retroactively to give effect to the split.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents and Available-for-Sale Securities
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents include money market funds and various deposit accounts.
The Company has classified its investments as "available-for-sale." Such
investments are recorded at fair value and unrealized gains and losses, if
material, are recorded as a separate component of equity until realized.
Interest income is recorded using an effective interest rate, with associated
premium or discount amortized to "investment income." The cost of securities
sold is based upon the specific identification method.
Inventories
Inventories are stated at the lower of cost (determined on a first-in first-out
basis) or market value.
F-7
<PAGE> 39
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
2. Summary of Significant Accounting Policies, continued
Depreciation and Amortization
Property and equipment are recorded at cost and are depreciated on a straight-
line basis over their estimated lives of three to five years. Maintenance and
repairs are charged to operations as incurred. Leasehold improvements are
amortized over their estimated useful lives, or the lease term, if shorter.
Revenue Recognition
The Company recognizes revenue upon shipment of product to the customer, upon
fulfillment of acceptance terms, if any, and when no significant contractual
obligations remain outstanding.
Research and Development Expenditures
Research and development expenditures are expensed as incurred.
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
Concentration of Credit Risk
The Company's cash, cash equivalents and available-for-sale securities are
maintained at three financial institutions. Deposits in these institutions may
exceed the amount of insurance provided on such deposits.
Risks and Uncertainties
The Company's products require approvals from the Food and Drug Administration
("FDA") and international regulatory agencies prior to the commencement of
commercialized sales. There can be no assurance that the Company's products
will receive the required approvals. If the Company was denied such approvals,
or such approvals were delayed, it would have a materially adverse impact on
the Company.
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and other liabilities approximate fair value due to their short
maturities. Based upon borrowing rates currently available to the Company for
loans with similar terms, the carrying value of the Company's notes payable
approximate fair value.
Computation of Basic and Diluted Net Loss Per Share
The Company adopted SFAS No. 128 "Earnings Per Share" and the Securities and
Exchange Commission Staff Accounting Bulletin No. 98 ("SAB No. 98") effective
December 31, 1997; accordingly, all prior periods have been restated. Basic
and diluted loss per common share are computed using the weighted average
number of shares of
F-8
<PAGE> 40
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
2. Summary of Significant Accounting Policies, continued
common stock outstanding. Common equivalent shares from stock options are
excluded from the computation of diluted net loss per common share as their
effect is anti-dilutive. No additional shares are considered to be outstanding
for either computation under the provisions of SAB No. 98.
Stock options to purchase 992,017 shares of common stock at prices ranging from
$0.16 to $11.50 per share were outstanding at December 31, 1997, but were not
included in the computation of diluted income per share because they were anti-
dilutive.
3. Available-for-Sale Securities
<TABLE>
<CAPTION>
The following summarizes the Company's available-for-sale securities:
Unrealized
Cost (Loss) Gain Fair Value
------------- ---------------- --------------
<S> <C> <C> <C>
December 31, 1997
- -----------------
Corporate Bonds $ 6,984,675 $ 1,548 $ 6,986,223
============ ========== =============
December 31, 1996
- -----------------
Corporate Bonds $ 12,717,863 $ (11,106) $ 12,706,757
============ ========== ============
Maturities of debt securities at December 31, 1997 are as follows:
Amortized Cost Market Value
---------------- --------------
Less than one year $ 5,463,554 $ 5,464,753
Due in one to two years 1,521,121 1,521,470
----------- ------------
$ 6,984,675 $ 6,986,223
=========== ============
</TABLE>
Inventories
Inventories at December 31, 1996 were comprised of work in progress of $17,801
and finished goods of $65,400.
F-9
<PAGE> 41
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
5. Property and Equipment
Property and equipment comprise:
December 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Computer equipment $ 256,286 $ 273,341
Office furniture and equipment 59,368 203,523
Machinery and equipment 970,979 804,075
Leasehold improvements 212,798 221,917
----------- -----------
Total 1,499,431 1,502,856
----------- -----------
Less accumulated depreciation and
Amortization (690,741) (382,284)
----------- -----------
Net $ 808,690 $ 1,120,572
=========== ===========
6. Accrued expenses
Accrued expenses comprise:
December 31,
---------------------------
1997 1996
------------ ------------
Accrued compensation $ 175,633 $ 82,312
Restructuring (note 14) 325,548 -
Other 174,076 170,348
----------- -----------
$ 675,257 $ 252,660
=========== ===========
</TABLE>
7. Debt
During May 1995, the Company's $600,000 line of credit was converted into a
term loan. The $400,000 term loan is payable in monthly installments bearing
interest at the rate of prime plus 1.5% per annum (10.0% at December 31, 1997).
The term loan is collateralized by substantially all of the Company's assets.
The debt agreement contains covenants relating to minimum tangible net worth
and cash balances, dividend limitations and other financial restrictions. The
balance of the term loan is due and payable during 1998.
In December 1997, the Company signed an agreement with Imperial Bank for a loan
facility to finance existing equipment and future equipment purchases up to a
total of $2,500,000. Subject to certain terms and conditions, the facility
finances a percentage of the invoice cost of existing equipment and all of the
invoice cost of future equipment purchases. The equipment purchased serves as
collateral. As of December 31, 1997, the Company had not used the loan
facility. The loan (when used) is payable in monthly installments bearing
interest at the rate of prime plus 1.5% per annum (10.0% at December 31, 1997).
F-10
<PAGE> 42
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
8. Commitments
The Company leases office, laboratory and manufacturing space under operating
leases expiring in December 1998 and October 1999. The lease also requires the
Company to pay property taxes, insurance and ordinary maintenance and repairs.
Rent expense for the years ended December 31, 1997, 1996, and 1995 was
approximately $363,000, $244,000, and $134,000 respectively.
<TABLE>
<CAPTION>
Minimum future lease payments under the lease agreements at December 31, 1997
are as follows:
<S> <C> <C>
1998 $ 301,812
1999 51,686
---------
$ 353,498
=========
</TABLE>
9. Contingency
The Company, two of its founders, and another party were sued in May 1996 in
California Superior Court by an individual stockholder and former marketing
consultant of the Company alleging an additional ownership interest in the
Company. The suit sought unspecified damages as well as the rescission of a
stock purchase agreement and a consulting agreement entered into by the Company
and the individual. In February 1997, the Company paid $120,000 to settle the
suit.
10. Stockholders' Equity
Preferred Stock
Under the Company's Restated Articles of Incorporation, the Company's preferred
stock is issuable in series. As of December 31, 1997, 5,000,000 shares of
preferred stock were authorized and no preferred stock was issued or
outstanding. The previously outstanding preferred stock was converted into
common stock in connection with the Company's initial public offering in June
1996.
Warrants
During September 1994, in connection with the issuance of a note payable, the
Company issued a warrant to purchase 20,000 shares of Series B preferred stock
at an exercise price of $1.66. Upon the close of the Company's initial public
offering and conversion of the Company's previously outstanding preferred stock
into common stock, the warrant became exercisable for 8,285 shares of common
stock at an exercise price of $4.80 per share. As of December 31, 1997, the
warrant is exercisable and expires on September 15, 2000.
In December 1997, in connection with a loan facility, the Company issued a
warrant to purchase 4,500 common shares at an exercise price of $4.00 per
share. This warrant expires in five years. Also, the warrant exercise price
of the initial warrant for 8,285 shares was modified to $4.00 per share and the
expiration date was extended to September 15, 2000.
F-11
<PAGE> 43
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
10. Stockholders' Equity, continued
Stock Option Plan
In November 1993, the Company established the 1993 Stock Option Plan (the
Plan), which provides for both incentive stock options (ISOs) and non-qualified
stock options (NSOs) to be granted to employees and consultants. All NSOs
allow for the purchase of common stock at prices not less than 85% of the fair
market value as determined by the Board of Directors at the date of grant.
ISOs allow for the purchase of common stock at prices not less than 100% of the
fair market value as determined by the Board of Directors at the date of grant.
If at the time the Company grants an option the optionee owns more than 10% of
the total combined voting power of all the classes of stock of the Company, the
option price shall be at least 110% of the fair value and the term of the
options shall be five years from the date of grant. All options must be
exercised within ten years from the date of grant. Options vest as determined
by the Board of Directors, generally over four years. In the event that
options are exercised prior to vesting, upon termination of service, the
Company has the right to repurchase the issued common stock at the original
issuance price. Shares are released from the Company's repurchase option over
periods consistent with the original options' vesting period. As of December
31, 1997, 36,082 shares are subject to repurchase. The Company has reserved
1,490,492 shares of common stock for issuances to employees, and officers under
the Plan.
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
Outstanding Options
------------------------------ Weighted
Shares Average
Available Number of Price Per Exercise
for Grant Shares Share Total Price
--------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1995 378,865 119,478 $ 0.16 $ 26,697 $ 0.16
Additional Shares
authorized by the Plan 207,125 - - - -
Options granted (295,567) 295,567 $ 0.41 121,295 0.41
Options canceled 1,838 (1,838) $.16-$.41 (498) 0.27
Options exercised - (1,476) $ 0.16 231 0.16
-------- -------- --------
Balances, December 31, 1995 292,261 411,731 $.16-$.41 147,725 0.36
Additional Shares
Authorized by the Plan 437,385 - - - -
Options granted (438,223) 438,223 $.41-$11.50 946,962 2.16
Options canceled 108,966 (108,966) $.16-$8.00 (360,120) 3.30
Options exercised - (122,966) $.16-$2.41 (33,264) 0.27
-------- -------- --------
Balances, December 31, 1996 400,389 618,022 $.16-$11.50 701,303 1.13
Additional Shares
Authorized by the Plan 300,000 - - - -
Options granted (557,650) 557,650 $3.50-$6.0 2,410,358 4.32
Options canceled 99,095 (99,095) $.16-$7.75 (214,791) 2.17
Options exercised - (84,560) $.16-$2.41 60,248 0.71
-------- -------- ----------
Balances, December 31, 1997 241,834 992,017 $.16-$11.50 $2,957,118 $ 2.98
======== ======== ==========
</TABLE>
F-12
<PAGE> 44
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
10. Stockholders Equity, continued
For the years ended December 31, 1997, 1996 and 1995, the weighted average fair
value of options granted was $2.42, $0.87 and $0.04 per share, respectively.
Director Option Plan
In May 1996, the Company approved the Director Option Plan and reserved 120,000
shares of common stock for issuance. Options to purchase 19,200 shares were
granted in fiscal 1997. No options to purchase shares of the Company's common
stock were granted during fiscal 1996.
Employee Stock Purchase Plan
In May 1996, the Company approved the Employee Stock Purchase Plan and reserved
280,000 shares of common stock for issuance. In 1997, 35,100 shares of common
stock were purchased under the plan at $3.1875 per share. In 1996, 17,427
shares of common stock were purchased under the plan at $4.0375 per share.
Stock-Based Compensation
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standard No. 123 (SFAS No. 123) "Accounting for Stock-
Based Compensation." Had compensation cost for the 1993 Plan, the Director
Option Plan and the Employee Stock Purchase Plan been determined based on the
fair value at the grant date for awards in 1997, 1996 and 1995 consistent with
the provisions of SFAS No. 123, the Company's net loss and net loss per share
for the years ended December 31, 1997, 1996 and 1995 would have been increased
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Net loss - as reported $ (9,952,072) $ (6,955,558) $ (3,280,713)
============ ============ ============
Net loss - pro forma $(10,312,861) $ (6,989,519) $ (3,280,713)
============ ============ ============
Basic and Diluted net
loss per share - as reported $ (1.41) $ (1.52) $ (2.31)
=========== ============ ============
Basic and Diluted net
loss per share-pro forma $ (1.45) $ (1.53) $ (2.31)
=========== ============ ============
The above pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years.
</TABLE>
F-13
<PAGE> 45
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
10. Stockholders equity, continued
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Risk-free interest rate 5.79%-6.6% 5.49%-6.5% 5.95%-7.4%
Expected life 4 years 4 years 4 years
Expected dividends - - -
Expected volatility 82.15% 0.0%-79.52% 0.0%
The options outstanding and currently exercisable by exercise price at December
31, 1997 are as follows:
</TABLE>
<TABLE>
<CAPTION>
Options Currently
Options Outstanding Exercisable
------------------------------------------------ ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life (Yrs) Price Exercisable Price
- ------------------ ---------- ---------- ------ ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.16 - 0.41 287,224 6.25 $ 0.33 177,805 $ 0.36
$ 1.00 - 2.41 99,086 8.12 $ 1.79 23,338 $ 1.52
$ 2.92 - 4.00 58,257 9.36 $ 3.57 1,176 $ 3.66
$ 4.06 - 5.00 543,850 8.93 $ 4.50 26,565 $ 4.45
$ 5.06 - 11.50 3,600 9.01 $ 7.86 869 $ 7.84
------- -------
992,017 8.33 $ 2.98 229,753 $ 0.99
======= =======
</TABLE>
As of December 31, 1996, options to purchase 155,412 shares of common stock
were exercisable at an average weighted exercise price of $0.37.
For the options granted in the 12 month period before the initial public
offering, the difference between the stock option exercise price and the
imputed fair market value of the Company's common stock at the date of issue of
the stock options, totaling $1,577,700 has been recorded as deferred
compensation as a component of stockholders' equity. Of this amount $628,670
of compensation expense has been recognized as an expense through December 31,
1997. $666,845 of the amount was adjusted for cancellation of stock options.
The remaining $282,185 will be recognized as an expense as the shares and
options vest over the period of fiscal 1998 and 1999.
11. Employee Benefit Plan
During 1995, the Company established a Retirement Savings and Investment Plan
(the 401(k) Plan) under which employees may defer a portion of their salary up
to the maximum allowed under IRS rules. The Company has the discretion to make
contributions to the 401(k) Plan. To date, the Company has not made any
contributions to the 401(k) Plan.
F-14
<PAGE> 46
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
12. Related Parties
The Company has a consulting contract with Dr. Philip N. Sawyer, a
distinguished heart surgeon (now retired) and noted medical device designer.
The contract pays Dr. Sawyer $4,500 per month for up to ten days of consulting
per month and related expenses. Dr. Sawyer is a shareholder of Interface
BioMedical Laboratories Corporation, which is an affiliate of the Company. Dr.
Sawyer is also the father of Philip M. Sawyer, the Company's president and
chief executive officer.
13. Income Taxes
The tax effects of the significant temporary differences, which comprise
deferred tax assets (liabilities) at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Capitalized start-up and research and
Development costs $ 978,000 $3,046,000 $1,433,000
Research and development credit 641,000 290,000 140,000
Depreciation 78,000 (39,000) (27,000)
Net operating loss carryforwards 7,063,000 1,477,000 431,000
Other accrued expenses 190,000 82,000 9,000
----------- ----------- -----------
Net deferred tax asset 8,950,000 4,856,000 1,986,000
Less valuation allowance (8,950,000) (4,856,000) (1,986,000)
----------- --------- ----------
Net deferred income taxes $ - $ - $ -
=========== ========= ==========
</TABLE>
The Company has established a valuation allowance to the extent of its deferred
tax assets since it is more likely than not that a benefit can not be realized
in the future due to the Company's recurring operating losses.
The Company had federal and state net operating loss carryforwards of
approximately $17,728,000 and $17,744,000, respectively, at December 31, 1997,
available to offset future regular and alternative minimum taxable
income. The Company's net operating loss carryforwards expire in 2001 through
2012, if not utilized. The
Company has federal and state research and development credit carryforwards of
$362,000 and $212,000, respectively, expiring in the years 2009 through 2012,
respectively, if not utilized.
For federal and state tax purposes, a portion of the Company's net operating
loss carryforwards are subject to certain limitations on annual utilization in
case of changes in ownership, as defined by federal and state tax law.
14. RapiSeal Business Exit
During the fourth quarter of 1997, the Company made a decision to discontinue
sales of its RapiSeal patch. At year-end 1997, the Company incurred RapiSeal
exit charges of $559,000 for personnel severance (9 employees), patent charges,
and inventory and dedicated equipment write-offs associated with exit of its
RapiSeal business. The charges were recorded in cost of sales ($325,000),
operating expenses ($209,000) and against sales ($25,000).
F-15
<PAGE> 47
EXHIBIT 10.7
LOAN AGREEMENT
THIS LOAN AGREEMENT is entered into as of December, 1997 (this "Loan
Agreement") between FUSION
MEDICAL TECHNOLOGIES, Inc, a Delaware corporation (herein called "Borrower"),
and WPERIAL BANK (herein called
"Bank').
1. Commitments.
A. Facility-A Commitment. Subject to
all the terms and conditions of this Loan Agreement and prior
to the termination of its commitment as hereinafter provided,
Bank hereby agrees to make loans (each a 'Facility-A Loan")
to Borrower in such amounts as Borrower shall request pursuant
to this Section I.A. at any time from the date hereof
through March 31, 1999 (the "Facility-A Availability End
Date"), in an aggregate principal amount not to exceed
$2,500,000.00 (the "Facility-A Commitment"). If at any time or
for any reason, the outstanding principal amount of the
Facility-A Loan Account (as hereinafter defined) is greater than the Facility-A
Commitment, Borrower shall immediately
Pay to bank, in cash, the amount of such excess. Any
commitment of Bank, pursuant to the terms of this Loan Agreement,
to make Facility-A Loans shall expire on the Facility-A
Availability End Date, subject to Bank's right to renew said
commitment in its sole and absolute discretion at Borrower's
request. Any such renewal of said commitment shall not be
binding upon Bank unless it is in writing and signed by an
officer of Bank. The outstanding principal balance of the Facility-
A Loan Account may be prepaid in whole or in part (but only in
whole multiples of $1,000.00) at any time without penalty.
Facility-A Loans which are repaid by Borrower may not be
reborrowed. Borrower promises to pay to Bank the outstanding
unpaid principal balance (and all accrued unpaid interest
thereon) of the Facility-A Loan Account in accordance with the
terms and repayment schedules set forth in Section LA.(4)
hereof, but in no event shall any unpaid principal balance (and
all accrued unpaid interest thereon) of the Facility-A Loan
Account remain outstanding on March 29, 2002 ("Facility-A
Maturity Date").
(1) Facility-A Loans. The
amount of each Facility-A Loan made by Bank to Borrower
hereunder shall be debited to the loan ledger account of
Borrower maintained by Bank for the Facility-A Commitment (herein
called the 'Facility-A Loan Account') and Bank shall credit
the Facility-A Loan Account with all loan repayments in respect
thereof made by Borrower. When Borrower desires to obtain a
Facility-A Loan, Borrower shall notify Bank (which notice
shall be signed by an officer of Borrower and shall be
irrevocable) in accordance with Section 2 hereof, to be received no
later than 3:00 p.m. Pacific time one (1) Banking Day before
the day on which the Facility-A Loan is to be made. The
notice shall be signed by an officer of Borrower and contain a
detailed schedule of the items being financed, including copies
of paid invoices and serial numbers, if applicable. Facility-A
Loans may only be used to finance capital equipment, software
and telephone equipment purchased by Borrower after January 1,
1997 and will be limited to (a) one hundred percent
(100.0%) of the original invoice amount for such capital
equipment, approved from time to time by Bank, less any taxes,
shipping and freight charges or discounts, warranty charges,
installation expenses and other soft costs and (b) eighty percent
(80.0%) of the original amount for such software or telephone
equipment, approved from time to time by Bank, less any
taxes, shipping and freight charges or discounts, warranty
charges, installation expenses and other soft costs.
Notwithstanding the foregoing, Facility-A Loans made for the
purpose of financing software and telephone equipment shall
be limited to a maximum aggregate total amount of $100,000.00.
(2) Interest Payments Through
Facility-A Maturity Date. Borrower further promises to
pay to Bank from the date of the advance of the initial
Facility-A Loan through the Facility-A Maturity Date, on or before
the twenty-ninth (29th) day of each month, interest on the
average daily unpaid balance of the Facility-A Loan Account
during the immediately preceding month at a rate of interest
equal to one and one-half percent (1.50%) per annum in excess
of the rate of interest which Bank has announced as its prime
lending rate (the "Prime Rate"), which shall vary concurrently
with any change in the Prime Rate. Interest shall be computed
at the above rate on the basis of the actual number of days
during which the principal balance of the Facility-A Loan
Account is outstanding divided by 360, which shall for interest
computation purposes be considered one (1) year.
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(3) Quarterly Term Out and
Principal Payments.
(a) First Quarterly
Term Out. Borrower promises to pay to Bank (i) the principal
balance of the Facility-A Loan Account outstanding on December
31, 1997 (the '1st Quarterly Term Out Date I in forty-two
(42) equal monthly installments of principal, beginning on
January 29, 1998 and continuing on the twenty-ninth (29th) day
of each month thereafter through and including a principal
payment on June 29, 2001, plus (ii) interest computed in
accordance with Section I.A. (3) hereof.
(b) Second Quarterly
Term Out. Borrower promises to pay to Bank (i) the
principal balance of the Facility-A Loans made after the Ist
Quarterly Term Out Date through March 31, 1998 (the '2nd
Quarterly Term Out Date') in forty-two (42) equal monthly
installments of principal, beginning on April 29, 1998 and
continuing on the twenty-ninth (29th) day of each month
thereafter through and including a principal payment on September
29, 2001, plus (ii) interest computed in accordance with Section IA (3) hereof.
(c) Third Quarterly
Term Out. Borrower promises to pay to Bank (i) the principal
balance of the Facility-A Loans made after the 2nd Quarterly
Term Out Date through June 30, 1998 (the '3rd Quarterly
Term Out Date) in forty-two (42) equal monthly installments of
principal, beginning on July 29, 1998 and continuing on
the twenty-ninth (29th) day of each month thereafter through
and including a principal payment on December 29, 200 1, plus
(ii) interest computed in accordance with Section 1.A.(3)
hereof.
(d) Fourth Quarterly
Term Out. Borrower promises to pay to Bank (i) the
principal balance of the Facility-A Loans made after the 3rd
Quarterly Term Out Date through September 30, 1998 (the '4th
Quarterly Term Out Date) in forty-two (42) equal monthly
installments of principal, beginning on October 29, 1998 and
continuing on the twenty-ninth (29th) day of each month
thereafter through and including a principal payment on the Facility-
A Maturity Date, plus (ii) interest computed in accordance
with Section 1.A.(3) hereof.
(e) Fifth Quarterly
Term Out. Borrower promises to pay to Bank (i) the principal
balance of the Facility-A Loans made after the 4th Quarterly
Term Out Date through December 31, 1998 (the '5th Quarterly
Term Out Date') in thirty-nine (39) equal monthly installments
of principal, beginning on January 29, 1999 and continuing
on the twenty-ninth (29th) day of each month thereafter
through and including a principal payment on the Facility-A Maturity
Date, plus (ii) interest computed in accordance with Section I.A. (3) hereof.
M Final Quarterly
Term Out. Borrower promises to pay to Bank (i) the principal
balance of the Facility-A Loans made after the 5th Quarterly
Term Out Date through the Facility-A Availability End Date
in thirty-six (36) equal monthly installments of principal,
beginning on April 29, 1999 and continuing on the twenty-ninth
(29th) day of each month thereafter through and including a
principal payment on the Facility-A Maturity Date, plus
(ii) interest computed in accordance with Section I.A. (3) hereof.
B. Facility-B Commitment. Subject to all
the terms and conditions of this Loan Agreement and prior
to the termination of its commitment as hereinafter provided,
Bank hereby agrees to make loans (each a "Facility-B Loan")
to Borrower in such amounts as Borrower shall request pursuant
to this Section 1.B. at any time from the date hereof
through December 31, 1997 (the "Facility-B Availability End
Date"), in an aggregate principal amount not to exceed
$1,000,000.00 (the "Facility-B Commitment"). If at any time or
for any reason, the outstanding principal amount of the
Facility-B Loan Account (as hereinafter defined) is greater
than the Facility-B Commitment, Borrower shall immediately pay
to Bank, in cash, the amount of such excess. Any commitment of
Bank, pursuant to the terms of this Loan Agreement, to
make Facility-B Loans shall expire on the Facility-B
Availability End Date, subject to Bank's right to renew said commitment
in its sole and absolute discretion at Borrower's request. Any
such renewal of said commitment shall not be binding upon
Bank unless it is in writing and signed by an officer of Bank.
The outstanding principal balance of the Facility-B Loan
Account may be prepaid in whole or in part (but only in whole
multiples of $1,000.00) at any time without penalty.
Facility-B Loans which are repaid by Borrower may not be
reborrowed. Borrower promises to pay to Bank the outstanding
unpaid principal balance (and all accrued unpaid interest
thereon) of the Facility-B Loan Account on December 29, 2000
("Facility-8 Maturity Date").
21410385
121197 2
(1) Facility-B Loans. The
amount of each Facility-B Loan made by Bank to Borrower
hereunder shall be debited to the loan ledger account of
Borrower maintained by Bank for the Facility-B Commitment (herein
called the "Facility-B Loan Account") and Bank shall credit
the Facility-B Loan Account with all loan repayments in respect
thereof made by Borrower. When Borrower desires to obtain a
Facility-B Loan, Borrower shall notify Bank (which notice
shall be signed by an officer of Borrower and shall be
irrevocable) in accordance with Section 2 hereof, to be received no
later than 3:00 p.m. Pacific time one (1) Banking Day before
the day on which the Facility-B Loan is to be made. The
notice shall be signed by an officer of Borrower and contain a
detailed schedule of the items being financed, including copies
of paid invoices and serial numbers, if applicable. Facility-B
Loans may only be used to finance capital equipment, software
and telephone equipment purchased by Borrower prior to January
1, 1997 and will be limited to (a) seventy-five percent
(75.0%) of the original invoice amount for such capital
equipment, approved from time to time by Bank, less any taxes,
shipping and freight charges or discounts, warranty charges,
installation expenses and other soft costs and (b) seventy percent
(70.0%) of the original amount for such software or telephone
equipment, approved from time to time by Bank, less any
taxes, shipping and freight charges or discounts, warranty
charges, installation expenses and other soft costs.
Notwithstanding the foregoing, Facility-B Loans made for the
purpose of financing software and telephone equipment shall
be limited to a maximum aggregate total amount of $50,000.00.
(2) Interest Payments Through
Facility-B Maturity Date. Borrower further promises to
pay to Bank from the date of the advance of the initial
Facility-B Loan through the Facility-B Maturity Date, on or before
the twenty-ninth (29th) day of each month, interest on the
average daily unpaid balance of the Facility-B Loan Account
during the immediately preceding month at a rate of interest equal to one and
one-half percent (1.50%) per annum in excess
of the Prime Rate, which shall vary concurrently with any
change in the Prime Rate. Interest shall be computed at the above
rate on the basis of the actual number of days during which
the principal balance of the Facility-B Loan Account is
outstanding divided by 360, which shall for interest
computation purposes be considered one (1) year.
(3) Principal Payments
Following Facility-B Availability End Date. Borrower further
promises to pay to Bank, on or before January 29, 1998 and on
or before the twenty-ninth (29th) day of each month
thereafter through the Facility-B Maturity Date, (a) the
outstanding principal balance of the Facility-B Loan Account on the
Facility-B Availability End Date in thirty-six (36) equal
monthly installments plus (b) interest on the average daily unpaid
balance of the Facility-B Loan Account accruing during the
immediately preceding month at the rate of interest and computed
in accordance with Section I.B.(3) hereof.
C. Limitation on Advance of any Loan.
Notwithstanding any of the foregoing provisions contained
in Sections 1.A. and I.B. hereof, the maximum aggregate
principal amount outstanding under the Facility-A Loan Account
and the Facility-B Loan Account at any time may not exceed
$2,500,000.00 ("Maximum Outstanding Commitment"). If at
any time or for any reason, the outstanding principal amount
of the Facility-A Loan Account and the Facility-B Loan Account
is greater than the Maximum Outstanding Commitment, Borrower
shall immediately pay to Bank, in cash, the amount of
such excess which shall be applied pro rata to each such Loan
Account.
D. Quarterly Fee on Undisbursed
Commitment. From the date hereof through the Facility-A
Availability End Date, Borrower agrees to pay to Bank on a
quarterly basis, a commitment fee ("Commitment Fee") equal
to one-half of one percent (0.50 %) multiplied by the sum of
(1) the Maximum Outstanding Commitment less (2) the disbursed
principal amount under the Facility-A Commitment less (3) the disbursed
principal amount under the Facility-B Commitment
(the "Undisbursed Commitment"). 'the Commitment Fee for the
Undisbursed Commitment shall be calculated as of the end
of each calendar quarter and shall be paid in arrears on or
before January 29, 1998 and on or before the twenty-ninth (29th)
day of each month immediately following the end of each
calendar quarter thereafter, if applicable.
2. Loan Requests. Requests for Loans hereunder
shall be in writing duly executed by Borrower in a form
satisfactory to Bank and shall contain a certification setting
forth the matters referred to in Section 1, which shall disclose
that Borrower is entitled to the amount and type of Loan being
requested. Bank is hereby authorized to charge Borrower's
deposit account with Bank for all sums due Bank under this
Loan Agree t.
3. Delivery of Payments. Payment to Bank of all
amounts due hereunder shall be made at its Santa Clara
Valley Regional office, or at such other place as may be
designated in writing by Bank from time to time. If any payment
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3.
date fall on a day that is not a day that Bank is open for
the transaction of business ("Banking Day"), the payment due date
shall be extended to the next Banking Day.
4. Late Charge. If any interest payment,
principal payment or principal balance payment required hereunder
is not received by Bank on or before ten (10) days from the
date in which such payment becomes due, Borrower shall pay
to Bank, a late charge equal to the lesser of (a) five
percent (5.0%) of the amount of such unpaid payment, in addition to
said unpaid payment or (b) the maximum amount permitted to be
charged by applicable law, until remitted to Bank; provided,
however, nothing contained in this Section 4, shall be
construed as any obligation on the part of Bank to accept payment of
any past due payment or less than the total unpaid principal
balance of the applicable Loan Account following the Facility-A
Maturity Date and/or the Facility-B Maturity Date, as
applicable. All payments, including any voluntary prepayments of
principal, shall be applied first to any late charges due
hereunder, next to any other sums due Bank hereunder, next to
accrued interest then payable and the remainder, if any, to
reduce any unpaid principal due under the applicable Loan
Account in inverse order of maturity of payment.
5. Default Interest. From and after the
Facility-A Maturity Date and/or the Facility-B Maturity Date, as
applicable, or such earlier date as all sums owing under any
Loan Account becomes due and payable by acceleration or
otherwise, or upon the occurrence of an Event of Default, at
the option of Bank all sums owing under the applicable Loan
Account shall bear interest until paid in full at a rate
equal to the lesser of (a) five percent (5.0%) per annum in excess of
the then applicable interest rate provided for in Sections
1.A.(2) and 1X(2) hereof or (b) the maximum amount permitted
to be charged by applicable law, until all obligations
hereunder are repaid in full or the Event of Default is waived or cured
to the satisfaction of Bank, as applicable.
6. Definitions. As used in this Loan Agreement and unless otherwise
defined herein, all initially capitalized
terms shall have the meanings set forth on Exhibit A attached
hereto and incorporated herein by this reference.
7. Representations and Warranties. Borrower
represents and warrants to Bank: (a) That Borrower is a
corporation, duly organized and existing in the State of its
incorporation and the execution, delivery and performance of each
of the Loan Documents are within Borrower's corporate powers,
have been duly authorized and are not in conflict with law
or the termis of any charter, by-law or other incorporation papers, or of any
indenture, agreement or undertaking to which
Borrower is a party or by which Borrower is bound or
affected; (b) Borrower is, and at the time the Collateral becomes
subject to Bank's security interest will be, the true and
lawful owner of and has, and at the time the Collateral becomes
subject to Bank's security interest will have, good and clear
title to the Collateral, subject only to Bank's rights therein and
to Permitted Liens; (c) Each Account is, and at the time the
Account comes into existence will be, a true and correct
statement of a bona fide indebtedness incurred by the debtor
named therein in the amount of the Account for either
merchandise sold or delivered (or being held subject to
Borrower's delivery instructions) to, or services rendered, performed
and accepted by, the account 'debtor; (d) That there are and
will be no defenses, counterclaims, or setoffs which may be
asserted against the Accounts from time to time, except as permitted in the
definition thereof; (e) Any and all financial
Information, including information relating to the Collateral, submitted by
Borrower tit Bank, whether previously or in the
future, is and will be true and correct; (f) There is no
litigation or other proceeding pending or threatened against or affecting
Borrower, and Borrower is not in default with respect to any
order, writ, injunction, decree or demand of any court or other
governmental or regulatory authority; (g) (i) The
consolidated balance sheets of Borrower dated as of September 30, 1997,
and the related consolidated profit and loss statements for
the fiscal year then ended, copies of which have heretofore been
delivered to Bank by Borrower, and all other statements and
data submitted in writing by Borrower to Bank in connection
with Borrower's request for credit are true and correct, and
said balance sheet and profit and loss statement accurately
present the financial condition of Borrower as of the date
thereof and the results of the operations of Borrower for the period
covered thereby, and have been prepared in accordance with
GAAP, (ii) since such date, there have been no material adverse
changes in the financial condition of Borrower, and (iii)
Borrower has no knowledge of any liabilities, contingent or
otherwise, which are not reflected in said balance sheet, and
Borrower has not entered into any special commitments or
substantial contracts which are not reflected in said balance
sheet, other than in the ordinary and normal course of its
business, which may have a Material Adverse Effect upon its
financial condition, operations or business as now conducted;
(h) Borrower has no liability for any delinquent local, state
or federal taxes, and, if Borrower has contracted with any
government agency, it has no liability for renegotiation of
profits; and (i) Borrower, as of the date hereof, possesses all
21410385
121197
necessary trademarks, trade names, copyrights, patents,
patent rights, and licenses to conduct its business as now operated,
without any known conflict with valid trademarks, trade
names, copyrights, patents, patent rights and license rights of others.
8. Negative Covenants. Borrower agrees that
so long as any loans, obligations or liabilities remain
outstanding or unpaid to Bank or the commitment of Bank
hereunder is in effect, neither Borrower, nor any of its subsidiaries
("Subsidiaries") will, without the prior written consent of
Bank:
A. Make any substantial change in
the character of its business as now conducted;
B. Create, incur, assume or permit
to exist any Indebtedness other than loans from Bank except
obligations now existing as shown in the financial statements
referenced in Section 7. (g) (i), excluding those being refinanced
by Bank, Subordinated Debt and Permitted Indebtedness; or
sell or transfer, either with or without recourse, any accounts
or notes receivable or any monies due or to become due;
C. Create, incur, assume or permit
to exist any mortgage, pledge, encumbrance, lien or charge of
any kind (including the charge upon property at any time
purchased or acquired under conditional sale or other title retention
agreement) upon any asset now owned or hereafter acquired by
it, including, without limitation, the Intellectual Property,
other than Permitted Liens and liens in favor of Bank;
D. Sell, dispose of or grant a
security interest in any of the Collateral or the Intellectual Property other
than to Bank (other than the disposing of such Collateral in
the ordinary and normal course of its business as now conducted
or other assets which are obsolete or otherwise considered
surplus), or execute any financing statements covering the
Collateral in favor of any secured party or Person other than
Bank;
E. Make any loans or advances to any
Person or other entity other than in the ordinary and normal
course of its business as now conducted (provided that such
loans or advances are not made to any Person or entity which
is controlled by or under common control with Borrower) or
make any investment in the securities of any Person or other
entity other than the United States Government;
F. Purchase or otherwise acquire all
or substantially all of the assets or business of any Person or
other entity; or liquidate, dissolve, merge or consolidate,
or commence any proceedings therefore; or, except in the ordinary
and normal course of its business as now conducted, sell
(including, without limitation, the selling of any property or other
asset accompanied by the leasing back of the same) any assets
including any fixed assets, any property, or other assets
necessary for the continuance of its business as now
conducted; and
G. Declare or pay any dividend or
make any other distribution on any of its capital stock now
outstanding or hereafter issued or purchase, redeem or retire
any of such stock other than in dividends or distributions
payable in Borrower's or any such Subsidiary's capital stock.
9. Affirmative Covenants. Borrower
affirmatively covenants that so long as any loans, obligations or
liabilities remain outstanding or unpaid to Bank or the
commitment of Bank hereunder is in effect, it will:
A. Furnish Bank from time to time
such financial statements and information as Bank may reasonably
request and inform Bank immediately upon the occurrence of a
material adverse change therein;
B. Pen-nit representatives of Bank
to conduct an audit of Borrower's books and records relating to
the Collateral and make extracts therefrom, with results
satisfactory to Bank, provided that Bank shall use its best efforts
to not interfere with the conduct of Borrower's business, and
to the extent possible to arrange for verification of the Accounts
directly with the account debtors obligated thereon or
otherwise, all under reasonable procedures acceptable to Bank and at
Borrower's sole expense; provided further that, prior to an Event of Default,
Borrower shall not be responsible for the
expense of more than one such audit, in any fiscal year.
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121197
5.
C. Promptly notify Bank of any
attachment or other legal process levied against any of the Collateral
and any information received by Borrower relative to the
Collateral, including the Accounts, the account debtors or other
Persons obligated in connection therewith, which may in any
way affect the value of the Collateral or the rights and remedies
of Bank in respect thereto;
D. Reimburse Bank upon demand for any
and all legal costs, including reasonable attorneys' fees,
and other expense incurred in collecting any sums payable by
Borrower under any Loan Account or any other obligation
secured hereby, enforcing any term or provision of this Loan
Agreement or otherwise or in the checking, handling and
collection of the Collateral and the preparation and
enforcement of any agreement relating thereto;
E. Notify Bank of each location and
of each office of Borrower at which records of Borrower relating
to the Accounts are kept;
F. Provide, maintain and deliver to
Bank policies insuring the Collateral against loss or damage by
such risks and in such amounts, forms and companies as Bank
may require (to the extent customarily maintained by
businesses similar to Borrower) and with loss payable to Bank,
and, in the event Bank takes possession of the Collateral,
the insurance policy or policies and any unearned or returned
premium thereon shall at the option of Bank become the sole
property of Bank, such policies and the proceeds of any other
insurance covering or in any way relating to the Collateral,
whether now in existence or hereafter obtained, being hereby
assigned to Bank;
G. In the event the unpaid balance of
any Loan Account shall exceed the maximum amount of
outstanding loans to which Borrower is entitled under Section
1 hereof, as applicable, Borrower shall immediately pay to
Bank for credit to such Loan Account the amount of such
excess;
H. Maintain and preserve all rights,
franchises and other authority adequate and necessary for the
conduct of its business and maintain and preserve its
existence in the State of its incorporation and any other state(s) in which
Borrower conducts its business, except with respect to such
other state(s), as the failure to do so would not have a Material
Adverse Effect;
1. Maintain public liability,
property damage and workers compensation insurance and insurance on
all its insurable property against fire and other hazards with
responsible insurance carriers to the extent usually maintained
by similar businesses. Borrower shall provide evidence of
property insurance in amounts and types acceptable to Bank, and
certificates naming Bank as a loss payee;
J. Pay and discharge, before the same
becomes delinquent and penalties accrue thereon, all taxes,
assessments and govermnental charges upon or against it or any
of its properties, and any of its other liabilities at any time
existing, except to the extent and so long as: (1) the same
are being contested in good faith and by appropriate proceedings
in such manner as not to cause any Material Adverse Effect or
the loss of any right of redemption from any sale thereunder;
and (2) it shall have set aside on its books reserves
(segregated to the extent required by GAAP);
K. Maintain a standard and modem
system of accounting in accordance with GAAP on a basis
consistently maintained; permit Bank's representatives to have
access to, and to examine its properties, books and records
at all reasonable times; provided that Bank shall use its best
efforts to not interfere with the conduct of Borrower's business;
L. Maintain its properties, equipment
and facilities in good order and repair;
M. Maintain its primary operating and
depository accounts with Bank; and
N. Prior to allowing any of
Borrower's raw materials, work in process, finished goods inventory and
property, plant and equipment to be transported to or be held
at any contract manufacturer, warehouse or other location
(other than with bona fide distributors and retail accounts),
Borrower shall provide notice to Bank and Borrower shall have
complied with such filing and notice requirements as shall, in
Bank's opinion, assure Borrower's and Bank's priority in such
property over creditors of such contract manufacturer,
warehouseman or operator of such other location, including, without
21410385
121197
6.
limitation, making filings under California Commercial Code
2326, providing notice under California Commercial
Code 9114 and making filings and publications as required
under California Civil Code 3440.1 and 3440.5 All such
filings, notices and publications shall be in form and
substance satisfactory to Bank.
10. Financial Covenants and Information. All
financial covenants and financial information referenced herein
shall be interpreted and prepared in accordance with GAAP as
used in the United States of America applied on a basis
consistent with previous years. Compliance with the financial
covenants shall be calculated and monitored on a monthly
basis, except as shall be expressly stated to the contrary.
Borrower affirmatively covenants that so long as any loans,
obligations or liabilities remain outstanding or unpaid to
Bank or any commitment is outstanding hereunder, it will, on a
consolidated basis:
A. As soon as it is available, but not
later than forty-five (45) days after and as of the end of each
fiscal quarter of Borrower, deliver to Bank a copy of the
quarterly IO-Q report, as filed with the Securities Exchange
Commission;
B. Measured on a quarterly basis on the
last day of each fiscal quarter of Borrower, maintain a
Minimum Balance Sheet Cash (meaning the sum of all cash, cash
equivalents, short-term investments and the receivables
of all Eligible Accounts) of not less than $3,000,000.00
("Minimum Cash Threshold"), and in connection therewith, deliver
to Bank, in such form and detail as Bank may require,
statements showing aging of the Eligible Accounts, together with a
Compliance Certificate in the form of Exhibit B attached
hereto and incorporated herein by this reference, certified by an
officer of Borrower.
(1) If at any time the Minimum
Balance Sheet Cash falls below the Minimum Cash Threshold,
Borrower agrees to immediately execute and deliver to Bank (in
recordable form), Bank's form of IP Security Agreement
adding the intellectual property collateral to be covered
thereby to the Collateral secured hereby; provided, however, Bank
agrees to waive such collateral security requirement if at the
time of such failure to meet the Minimum Cash Threshold
(a) the aggregate outstanding principal balance of the
Facility-A Loan Account and the Facility-B Loan Account is less than
$500,000.00 and (2) Borrower has a Minimum Net Product Sales
of not less than $1,500,000.00 for the fiscal quarter
immediately preceding the date of Borrower's failure to meet
the Minimum Cash Threshold;
C. As soon as it is available, but not
later than ninety (90) days after the end of Borrower's fiscal
year, deliver to Bank (1) unqualified copies of Borrower's
consolidated and consolidating financial statements together with
changes in financial position audited by an independent
certified public accountant selected by Borrower but acceptable to
Bank and (2) a copy of the annual 10-K report, as filed with
the Securities Exchange Commission;
D. As soon as it is available, but not
later than one hundred twenty (120) days after the end of
Borrower's fiscal year, deliver to Bank a copy of its Annual
Report, as submitted to its shareholders;
E. Upon the reasonable request of Bank,
deliver to Bank current budgets, sales projections, operating
plans and other financial exhibits and information in form and
substance satisfactory to Bank; and
F. Upon any officer becoming aware,
deliver immediately to Bank written notice of any pending or
threatened litigation claiming, or reasonably likely to result
in, damages against Borrower in an amount in excess of
$50,000.00.
11. Loan Fee. Borrower has paid, and Bank hereby
acknowledges receipt of a loan fee in the amount of
Twelve Thousand Five Hundred Dollars ($12,500.00).
12. Default and Remedies. The occurrence of any
one or more of the following shall constitute an "Event
of De
.fault": (a) Default be made in the payment of any
obligation by Borrower under any Loan Document; (b) Except for
any failure to pay as described in clause (a) above, breach be
made in any warranty, statement, promise, term or condition,
contained herein or in any other Loan Document and the same
shall not have been cured to the satisfaction of Bank within
fifteen (15) days after Borrower shall have become aware
thereof, whether by written notice from Bank, or otherwise,
21410385
121197 7.
(except that no cure period shall exist for breaches in
respect of Borrower's obligations under Section 8, Subsections 9.A.,
9.B., 9.C., 9.F., 9.G., 9.H. and 9.1., Subsections 1O.A.,
1O.B., 1O.C. and I.O.D. of this Loan Agreement, and Sections
1 and 2 of the General Security Agreement); (c) Any statement,
warranty or representation made by Borrower at any time
proves false; (d) Borrower defaults in the repayment of any
principal of or the payment of any interest on any indebtedness
exceeding in the aggregate principal amount $100,000.00 or
breaches or violates any term or provision of any promissory
note, loan agreement, mortgage, indenture or other evidence of
such indebtedness pursuant to which amounts outstanding
in the aggregate exceed $I 00,000.00 if the effect of such
breach is to permit the acceleration of such indebtedness, whether
or not waived by the note holder or obligee, and such failure
shall not have been cured to Bank's satisfaction within fifteen
(15) calendar days after Borrower shall become aware thereof,
whether by written notice from Bank or otherwise, or there
has in fact been an acceleration of such indebtedness; (e)
Borrower becomes insolvent or makes an assignment for the benefit
of creditors; (f) Any proceeding be commenced by Borrower
under any bankruptcy, reorganization, arrangement,
readjustment of debt or moratorium law or statute or, any such
a proceeding is commenced against Borrower and is not
dismissed or stayed within ten (10) days (provided that no
Loans will be made prior to the dismissal of such proceeding);
(g) Any money judgment, writ of attachment, garnishment,
execution or other legal process be entered against Borrower or
issued against any material property of Borrower which is not
fully covered by insurance (subject to reasonable deductibles)
and remains unvacated, unbonded, unstayed or unpaid or
undischarged for more than fifteen (15) days (whether or not
consecutive) or in any event later than five (5) days prior to
the date of any proposed sale thereunder, or if any assessment
for taxes against Borrower other than against any of its real
property, is made by the Federal or State government or any
department thereof-, or (h) Any change in Borrower's financial
condition, prospects or operations which has a Material
Adverse Effect. Upon the occurrence and during the continuance
of an Event of Default, Bank may, at its option and without
demand first made and without notice to Borrower, do any one
or more of the following: (i) Terminate its obligation to
make loans to Borrower as provided in Section 1 hereof; (ii)
Declare all sums secured hereby immediately due and payable;
(iii) Immediately take possession of the Collateral wherever
it may be found, using all legally permissible means to do so,
or require Borrower to assemble the Collateral and make it
available to Bank at a place designated by Bank which is
reasonably convenient to Borrower and Bank, and Borrower
waives all claims for damages due to or arising from or
connected with any such taking; (iv) Proceed in the
foreclosure of Bank's security interest and sale of the Collateral in any
manner permitted by law, or provided for herein; (v) Sell,
lease or otherwise dispose of the Collateral at public or private
sale, with or without having the Collateral at the place of
sale, and upon terms and in such manner as Bank may determine,
and Bank may purchase same at any such sale; (vi) Retain the
Collateral in full satisfaction of the obligations secured thereby
to the extent permitted under the Uniform Commercial Code; or
(vii) Exercise any remedies of a secured party under the
Uniform Commercial Code. Prior to any such disposition, Bank
may, at its option, cause any of the Collateral to be repaired
or reconditioned in such manner and to such extent as Bank may
deem advisable, and any sums expended therefor by Bank
shall be repaid by Borrower and secured hereby. Bank shall
have the right to enforce one or more remedies hereunder
successively or concurrently, and any such action shall not
estop or prevent Bank from pursuing any further remedy which
it may have hereunder or by law. If a sufficient sum is not
realized from any such disposition of the Collateral to pay all
obligations secured by this Loan Agreement, Borrower hereby
promises and agrees to pay Bank any deficiency.
13. Records Retention. Borrower authorizes Bank
to destroy all invoices, delivery receipts, reports and other
types of documents and records submitted to Bank in connection
with the transactions contemplated herein at any time
subsequent to four (4) months from the time such items are
delivered to Bank.
14. Attorneys' Fees. Borrower agrees to reimburse
Bank up to $5,000.00 for its reasonable attorneys' fees
and expenses incurred in connection with the negotiation,
preparation, execution and delivery of the Loan Documents.
15. Governing Law; Judicial Reference.
A. Governing Law. '17his Agreement
shall be deemed to have been made in the State of California
and the validity, construction, interpretation, and
enforcement hereof, and the rights of the parties hereto, shall be determined
under, governed by, and construed in accordance with the
internal laws of the State of California, without regard to
principles of conflicts of law.
21410385
121197
B. Judicial Reference.
(1) Other than (a)
nonjudicial foreclosure and all matters in connection therewith regarding
security interests in real or personal property; or (b) the
appointment of a receiver, or the exercise of other provisional
remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim between the
parties arising out of or relating to this Loan Agreement or
the other Loan Documents, which controversy, dispute or claim
is not settled in writing within thirty (30) days after the
"Claim Date" (defined as the date on which a party subject to this
Loan Agreement gives written notice to all other parties that
a controversy, dispute or claim exists), will be settled by a
reference proceeding in California in accordance with the
provisions of Section 638 et seq. of the California Code of Civil
Procedure, or their successor section ("CCP"), which shall
constitute the exclusive remedy for the settlement of any
controversy, dispute or claim concerning this Loan Agreement,
including whether such controversy, dispute or claim is
subject to the reference proceeding and except as set forth
above, the parties waive their rights to initiate any legal
proceedings against each other in any court or jurisdiction
other than the Superior Court in the County where the real
property, if any, is located or Santa Clara County, if none
(the "Court"). The referee shall be a retired Judge of the Court
selected by mutual agreement of the parties, and if they
cannot so agree within forty-five (45) days after the Claim Date,
the referee shall be promptly selected by the Presiding Judge
of the Court (or his/her representative). The referee shall be
appointed to sit as a temporary judge, with all of the powers
for a temporary judge, as authorized by law, and upon selection
should take and subscribe to the oath of office as provided
for in Rule 244 of the California Rules of Court (or any
subsequently enacted Rule). Each party shall have one
peremptory challenge pursuant to CCP 170.6. The referee shall
(x) be requested to set the matter for hearing within sixty
(60) days after the date of selection of the referee and (y) try any
and all issues of law or fact and report a statement of
decision upon them, if possible, within ninety (90) days of the Claim
Date. Any decision rendered by the referee will be final,
binding and conclusive and judgement shall be entered pursuant
to CCP 644 in any court in the State of California having
jurisdiction. Any party may apply for a reference proceeding
at any time after thirty (30) days following notice to any
other party of the nature of the controversy, dispute or claim, by
filing a petition for a hearing and/or trial. All discovery
permitted by this Loan Agreement shall be completed no later than
fifteen (15) days before the first hearing date established by
the referee. The referee may extend such period in the event
of a party's refusal to provide requested discovery for any
reason whatsoever, including, without limitation, legal objections
raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in
conducting discovery. Depositions may be taken by either party
upon seven (7) days written notice, and request for
production or inspection of documents shall be responded to
within ten (10) days after service. All disputes relating to
discovery which cannot be resolved by the parties shall be
submitted to the referee whose decision shall be final and binding
upon the parties. Pending appointment of the referee as
provided herein, the Superior Court is empowered to issue
temporary and/or provisional remedies, as appropriate.
(2) Except as expressly set
forth in this Loan Agreement, the referee shall determine the
manner in which the reference proceeding is conducted
including the time and place of all hearings, the order of presentation
of evidence, and another questions that arise with respect to
the course of the referep@e proceeding. All proceedings and
hearings conduct6d before the referee, except for trial, shall
be conducted without a court reporter except that when any party
so requests, a court reporter will be used at any hearing
conducted before the referee. The party making such a request shall
have the obligation to arrange for and pay for the court
reporter. The costs of the court reporter at the trial shall be bome
equally by the parties.
(3) The referee shall be
required to determine all issues in accordance with existing case law
and the statutory laws of the State of California. The rules
of evidence applicable to proceedings at law in the State of
California will be applicable to the reference proceeding. The
referee shall be empowered to enter equitable as well as legal
relief, to provide all temporary and/or provisional remedies
and to enter equitable orders that will be binding upon the
parties. The referee shall issue a single judgment at the
close of the reference proceeding which shall dispose of all of the
claims of the parties that are the subject of the reference.
The parties hereto expressly reserve the right to contest or appeal
from the final judgment or any appealable order or appealable
judgment entered by the referee. The parties hereto expressly
reserve the right to findings of fact, conclusions of laws, a
written statement of decision, and the right to move for a new
trial or a different judgment, which new trial, if granted, is
also to be a reference proceeding under this provision.
21410385
121197
9.
(4) In the event that the
enabling legislation which'i
repealed (and no successor statute is enacted), any dispute
between the parties that
reference procedure herein described will be resolved and
determined by arbitration.
a retired judge of the Court, in accordance with the California
Arbitration Act, 1280'L,
amended from time to time. The limitations with respect to
discovery as set forth herein
arbitration proceeding.
16. Miscellaneous Provisions.
A. Nothing herein shall in any way limit
the effect of the conditions set forth in 91,
or other agreement executed by Borrower, but each and every
condition hereof shall be in addition thereto.
B. No failure or delay on the part of
Bank, in the exercise of any power, right or privilege shall operate as a
waiver thereof, nor shall any single or partial exercise thereof.
C. All rights and remedies existing under
this Loan Agreement or any other Loan Document cumulative to, and not exclusive
of, any rights or remedies otherwise available.
D. All headings and captions in this Loan
Agreement and any related documents are for convenience
only and shall not have any substantive effect.
E. This Loan Agreement may be executed in
any number of counterparts, each of which when so
delivered shall be deemed an original, but all such
counterparts shall constitute but one and the same instrument. Each such
agreement shall become effective upon the execution of a
counterpart hereof or thereof by each of the parties hereto and
telephonic notification that such executed counterparts has
been received by Borrower and Bank.
BANK:
BORROWER:
IMPERIAL BANK
FUSION NUMAL TECHNOLOGIES, INC.,
a Delaware corporation
By:
James M. Petroff
Raymond W. Anderson
Assistant Vice President
Chief Financial Officer
LIST OF EXHIBITS AND SCHEDULES
Exhibit A: Definitions
SCHEDULE I To Exhibit A: List of Specific Permitted
Indebtedness
SCHEDULE 2 To Exhibit A: List of Specific Permitted Liens
Exhibit B: Compliance Certificate
21410385
121197 10.
EXHIBIT A
DEFENITIONS
"Accounts" means any right to payment for goods sold
or leased, or to be sold or to be leased, or for services
rendered or to be rendered no matter how evidenced, including
accounts receivable, contract rights, chattel paper,
instruments, purchase orders, notes, drafts, acceptances,
general intangibles and other forms of obligations and receivables.
"Capital Lease" means, as to any Person, any lease of
any Property by such Person as lessee that is, or should be
in accordance with Financing Accounting Standards Board
Statement No. 13, classified and accounted for as a "capital lease"
on the balance sheet of such Person prepared in accordance
with GAAP.
"Capital Lease Obligation" means, with respect to any
Capital Lease, the amount of the obligation of the lessee
thereunder that, in accordance with GAAP, would appear on a
balance sheet of such lessee in respect of such Capital Lease
or otherwise be disclosed in a note to such balance sheet.
"Collateral" means any and all personal property of
Borrower which is assigned or hereafter is assigned to Bank
as security or in which Bank now has or hereafter acquires a
security interest hereunder (including, without limitation, the
Accounts), or pursuant to the terms of the General Security
Agreement, the IP Security Agreement (as applicable) or
otherwise.
"Contingent Obligation" means, as applied to any
Person, any direct or indirect liability, contingent or otherwise,
of that Person with respect to any indebtedness, lease,
dividend, letter of credit or other obligation of another, including,
without limitation, any such obligation directly or indirectly
guaranteed, endorsed (otherwise than for collection or deposit
in the ordinary course of business), co-made or discounted or
sold with recourse by that Person, or in respect of which that
Person is otherwise directly or indirectly liable, including,
without limitation, any such obligation for which that Person is
in effect liable through any agreement (contingent or
otherwise) to purchase, repurchase or otherwise acquire such obligation
or any security therefor, or to provide funds for the payment
or discharge of such obligation (whether in the form of loans,
advances, capital stock purchases, capital contributions or
otherwise), or to maintain the solvency of the obligor of such
obligation, or to make payment for any products, materials or
supplies or for any transportation, services or lease regardless
of the non-delivery or non-furnishing thereof, in any such
case if the purpose or intent of such agreement is to provide
assurance that such obligation will be paid or discharged, or
that any agreements relating thereto will be complied with, or
that the holders of such obligation will be protected (in
whole or in part) against loss in respect thereof. The amount of any
Contingent Obligation of any Per-son shall be deemed to be an
amount equal to the maximum amount of such Person's
liability with respect to the stated or determinable amount of
the primary obligation for which such Contingent Obligation
is incurred or, if not stated or determinable, the maximum
reasonably anticipated liability in respect thereof (assuming such
Person is required to perform thereunder).
"Eligible Accounts" means such of Borrower's Accounts
as Bank in its sole reasonable discretion shall determine
are eligible from time to time; provided, however, that in no
event shall Eligible Accounts include the following:
(1) all Accounts under which payment is
not received within 90 days from the applicable invoice date;
(2) all Accounts against which the
account debtor or any other Person obligated to make payment
thereon asserts any defense, offset, counterclaim or
other right to avoid or reduce the liability represented by the
Accounts;
(3) any Accounts if the account debtor
or any other Person liable in connection therewith is insolvent,
subject to bankruptcy or receivership proceedings or
has made an assignment for the benefit of creditors or whose
credit standing is unacceptable to Bank and Bank has
so notified Borrower;
21410385
Exhibit A
121197 Page I
of 5
(4) Accounts with respect to which the
account debtor is an officer, director, shareholder, employee
or Subsidiary;
(5) Accounts due from an account
debtor if more than twenty-five percent (25.0%) of the aggregate
amount of Accounts of such account debtor have at
that time remained unpaid for more than ninety (90) days from
the applicable invoice date;
(6) Accounts with respect to
international transactions unless either (a) such Accounts are insured or
covered by a letter of credit in a manner and form
acceptable to the Bank or (b) Bank shall have otherwise permitted
in writing in its sole and absolute direction;
(7) salesperson's accounts for
promotional purposes;
(8) the amount by which the aggregate
of all Accounts of an account debtor exceeds twenty percent
(20.0%) of the total accounts receivable balance;
(9) Accounts where the account debtor
is a seller to borrower, to the extent that a potential offset
exists; and
(10) Accounts where the account debtor
is a federal governmental entity, federal agency or
instrumentality thereof.
"Event of Default" has the meaning set forth in
Section 12.
Vacility-A Maturity Date" has the meaning set forth
in Section l.A.
"Facility-B Maturity Date" has the meaning set forth
in Section I.B.
"GAAP" means generally accepted accounting principles
set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements
of the Financial Accounting Standards Board or in such other
statements by such other Person as may be approved by the
significant segment of the accounting profession, which are
applicable to the circumstances as of the date of determination.
"General Security Agreement" means that certain
General Security Agreement (Tangible and Intangible Personal
Property) dated of even date herewith, made by Borrower in
favor of Bank.
`EP Security Agreement" means any Collateral
Assignment, Patent Mortgage and Security Agreement that may
be entered into after the date hereof by and between Borrower
and Bank to ftirther secure Borrower's obligations to Bank
under this Loan Agreement.
"Indebtedness" means, as to any Person, without
duplication, (a) all indebtedness of such Person for borrowed
money, including, without limitation, all of such indebtedness
outstanding under this Loan Agreement and any of the other
Loan Documents, (b) all Capital Lease Obligations of such
Person, (c) to the extent of the outstanding indebtedness
thereunder, any obligation of such Person representing an
extension of credit to such Person, whether or not for borrowed
money, (d) any obligation of such Person for the deferred
purchase price of Property or services (other than (i) trade or other
accounts payable in the ordinary course of business in
accordance with customary industry terms and (ii) deferred franchise
fees), (e) all Contingent Obligations, (f) any obligation of
such Person of the nature described in clauses (a), (b), (c), (d)
or (e) above, that is secured by a Lien on assets of such
Person and which is non-recourse to the credit of such Person, but
only to the extent of the fair market value of the assets so
subject to the Lien, (g) obligations of such Person arising under
acceptance facilities or under facilities for the discount of
accounts receivable of such Person, (h) any obligation of such
Person to reimburse the issuer of any letter of credit issued
for the account of such Person upon which a draw has been
made, and (i) any lease having the effect of indebtedness,
whether or not the same shall be treated as such on the balance
sheet of Borrower under GAAP.
21410385
Exhibit A
121197 Page
2 of 5
"Intellectual Property" means all of Borrower's
intellectual property of any kind or nature, whether now owned
or hereafter acquired or in which Borrower now holds or
hereafter acquires any interest, including, without limitation, all
registered copyrights, copyright applications, copyright
licenses, registered trademarks, trademark applications, trademark
licenses, registered patents, patent applications, patent
licenses, trade secrets, customer lists, proprietary or confidential
information, inventions (whether or not patented or
patentable), technical information, procedures, designs, knowledge,
know-how, software, data bases, data, skill, expertise,
recipes, experience, processes, models, drawings, materials and
records and all reissues, continuations, continuations-in-part
or extensions thereof
"Lien" means any mortgage, pledge, security interest,
lien or other charge or encumbrance, including the lien or
retained security title of a conditional vendor, upon or with
respect to any property or assets.
"Loan Account or Loan Accounts" means individually and
collectively, the Facility-A Loan Account and the
Facility-B Loan Account.
"Loan Documents" means this Loan Agreement, the
General Security Agreement, the IP Security Agreement (as
applicable), the Warrant to Purchase Stock and that certain
Itemization of Amount Financed/Disbursement Instructions,
Agreement to Provide Insurance (Real or Personal Property) and
Automatic Debit Authorization, each dated of even date
herewith, each -as executed by Borrower in favor of Bank,
together with all other documents entered into or delivered
pursuant to any of the foregoing, in each case as originally
executed or as the same may from time to time be modified,
amended, supplemented or restated.
"Loans" means individually and collectively, the
Facility-A Loans and the Facility-B Loans advanced pursuant to
Section 1.
"Material Adverse Effect" means any set of
circumstances or events which (a) has or could reasonably be expected
to have any material adverse effect upon the validity or
enforceability of any material provision of any Loan Document, (b) is
or could reasonably be expected to be material and adverse to
the condition (financial or otherwise) or business operations
of Borrower, (c) materially impairs or could reasonably be
expected to materially impair the ability of Borrower, to perform
its material Obligations, (d) materially impairs or could
reasonably be expected to materially impair the value or priority of
Bank's security interest in any Collateral or (e) materially
impairs or could reasonably be expected to materially impair the
ability of Bank to enforce any of its legal remedies pursuant
to the Loan Documents.
"Permitted Indebtedness" means the following:
(1) indebtedness of Borrower or
Indebtedness and Contingent Obligations of its Subsidiaries in favor
of Bank arising under this Loan Agreement andthe other
Loan Documents;
(2) the existing Indebtedness and
Contingent Obligations disclosed on Schedule 1 attached hereto and
incorporated herein by this reference; provided that
the principal amount thereof is not increased and the terms
thereof are not modified to impose more burdensome
terms upon Borrower or any of its Subsidiaries;
(3) the Subordinated Debt;
(4) extensions, renewals or refinancings
of Indebtedness permitted under this Loan Agreement, other
than clause (3) immediately above;
(5) accrued dividends on the preferred
stock of Borrower;
(6) interest rate and currency hedging
agreements;
(7) guaranties of any Subsidiary's
suppliers in connection with the purchase of supplies in the ordinary
course of business;
21410385
Exhibit A
121197 Page 3
of 5
(8) guaranties of lease obligations
incurred in the ordinary course of business and to the extent
otherwise pen-nitted hereunder;
(9) Contingent Obligations
constituting Permitted Liens; and
(10) the indebtedness referred to in
clause (3) of the definition of Permitted Liens.
"Permitted Liens" means the following:
(1) liens and security interests
existing as of this date and disclosed in Schedule 2 attached hereto and
incorporated herein by this reference;
(2) liens for taxes, fees,
assessments or other governmental charges or levies, either not delinquent
or being contested in good faith by appropriate
proceedings;
(3) liens and security interests (a)
upon or in any equipment acquired or held by Borrower to secure
the purchase price of such equipment or indebtedness
incurred solely for the purpose of financing the acquisition
of such equipment and in an amount not greater than
the purchase price thereof or (b) existing on such equipment
at the time of its acquisition, provided that the
lien and security interest is confined solely to the property so
acquired and improvements thereon, and the proceeds
of such equipment;
(4) liens consisting of leases or
subleases and licenses and sublicenses granted to others in the ordinary
course of Borrower's business not interfering in any
material respect with the business of Borrower and any interest
or title of a lessor or licensor under any lease or
license, as applicable;
(5) liens securing claims or demands
of materialmen, mechanics, carriers, warehousemen, landlords
and other like persons or entities imposed without
action of such parties, provided that the payment thereof is not
yet required;
(6) liens incurred or deposits made
in the ordinary course of Borrower's business in connection with
worker's compensation, unemployment insurance,
social security and other like laws;
(7) liens arising from judgments,
decrees or attachments in circumstances not constituting an Event
of Default;
(8) easements, reservations, rights-
of-way, restrictions, minor defects or irregularities in title and other
similar charges or encumbrances affecting real
property not interfering in any, material respect with the ordpary
conduct-of-Dorrower's business;
(9) liens in favor of customs and
revenue authorities arising as a matter of law to secure payment of
customs duties in connection with the importation of
goods;
(10) liens that are not prior to
Bank's security interest which constitute rights of set-off of a customary
nature;
(I 1) any interest or title of a
lessor in equipment subject to any Capitalized Lease otherwise permitted
hereunder; and
(12) any liens arising from the
filing of any financing statements relating to true leases otherwise
permitted hereunder.
21410385
Exhibit A
121197 Page
4 of 5
"Person" means any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company,
institution, public benefit corporation, firm, joint stock company, estate,
entity or governmental agency.
"Property" means any interest in any kind of
property or asset, whether real, personal or mixed, whether tangible
or intangible.
"Subordinated Debt" means indebtedness of Borrower,
the repayment of principal of which is fully subordinated
in time and right of payment to the Loans, and has been
approved in Bank's sole and absolute discretion and in writing.
"Warrant to Purchase Stock" means collectively, that
certain Warrant to Purchase Stock issued to Bank on
September 15, 1994 by Borrower, as amended, and that certain
Warrant to Purchase Stock issued as of the date hereof by
Borrower to Bank in connection herewith.
21410385
Exhibit A
121197 Page
5 of 5
SCHEDULE I To Exhibt A
SPECIFIC PERMITTED INDEBTEDNESS
21410385 Schedule I to Exhibit A
121197 Page I of I
I
SCHEDULE 2 To Exhibit A
SPECIFIC PERMITTED LIENS
21410385 Schedule 2 to Exhibit A
121197 Page I of I
EXHIBIT B
COMPLIANCE CERTMCATE
(To be provided and
attached by Bank)
21410385
121197 Exhibit B
EXHIBIT 10.7 (CONTINUED)
GENERAL SECURITY AGREEMENT
THIS GENERAL SECURITY AGREEMENT is executed on December 21,1997 (this "Security
Agreement"), by FUSION MEDICAL TECHNOLOGIES, INC., a Delaware corporation
(hereinafter called "Grantor"). In consideration of financial accommodations
given, to be given or continued, Grantor hereby grants to IMPERIAL BANK
(hereinafter called "Bank") a
security interest in (a) all property (i) delivered to Bank by Grantor, (ii)
which shall be in Bank's possession or control in any matter or for any
purpose, (iii) described below or (iv) now owned or hereafter acquired by
Grantor of the type or class described below and/or in any exhibit or
supplementary schedule hereto, or in any financing statement filed by Bank and
executed by or on behalf of Grantor; and (b) the proceeds, increase and
products of such property, all accessions thereto, and all property which
Grantor may receive on account of such collateral (collectively referred to as
'Collateral") to secure payment and performance of all of Grantor's present or
future debts or obligations to Bank, whether absolute or contingent (hereafter
referred to as "Debt"). See Exhibit A attached hereto and incorporated herein
by this reference for a description of the Collateral. The Collateral which is
not in Bank's possession will be located at the locations set forth on Exhibit
B attached hereto and incorporated herein by this reference. Unless otherwise
defined herein, initially capitalized terms used herein shall have the meanings
given them in the California Uniform Commercial Code, as defined in that
certain Loan Agreement dated as of the date hereof entered into by and among
Grantor and Bank (the "Loan Agreement") or as defined in Exhibit A hereto.
Grantor hereby represents, warrants and agrees:
I . Grantor will immediately pay (a) any Debt
when due, (b) Bank's costs of collecting the Debt, of protecting,
insuring or realizing on Collateral, and any expenditure of
Bank pursuant hereto, including attorneys' fees and expenses, with
interest at the rate of twenty-four percent (24 %) per year,
or the rate applicable to the Debt, whichever is less, from the date
of expenditure, and (c) any deficiency after realization of
Collateral.
2 . Grantor will use the proceeds of any loan
that becomes Debt hereunder for the purpose indicated on the
application therefor, and will promptly contract to purchase
and pay the purchase price of any property which becomes
Collateral hereunder from the proceeds of any loan made for
that purpose.
3 . As to all Collateral in Grantor's possession
or the possession of its contract manufacturers (unless
specifically otherwise agreed to by Bank in writing), Grantor
will:
(a) Have or has possession of the Collateral at
the location disclosed to Bank and will not remove the Collateral
from said location, except for sales in the ordinary course of
Borrower's business.
(b) Keep the Collateral separate and
identifiable.
(c) Maintain the Collateral in good and saleable
condition, repair it if necessary and otherwise deal with the
Collateral in all such ways as are considered good practice by
owners of like property, use it lawfully and only as permitted
by insurance policies, and permit Bank to inspect the
Collateral at any reasonable tirrie in accordance with the terms of the
Loan Agreement.
(d) Not sell, contract to sell, lease, encumber
or transfer the Collateral (other than the disposition of such
inventory Collateral in the ordinary course of Borrower's
business and other assets which are obsolete or otherwise
considered surplus) until the Debt has been paid or performed
in ftill, even though Bank has a security interest in the
proceeds of such Collateral.
21410169
121197
4. As to Collateral which is inventory and
accounts, Grantor:
(a) May, until notice from Bank after the
occurrence and during the continuance of an Event of Default, sell,
lease or otherwise dispose of inventory Collateral in the
ordinary course of business only, and collect the cash proceeds
thereof.
(b) Will, upon notice from Bank after the
occurrence and during the continuance of an Event of Default, deposit
all cash proceeds as received in a demand deposit account with
Bank, containing only such proceeds and deliver statements
identifying units of inventory disposed of, accounts which
gave rise to proceeds, and all acquisitions and returns of inventory
as required by Bank.
(c) Will receive in trust after the occurrence
and during the continuance of an Event of Default, schedule on
forms satisfactory to Bank and, upon notice from Bank, deliver
to Bank all non-cash proceeds other than inventory received
in trade.
(d) So long as there does not exist an Event
of Default, may obtain release of Bank's interest in individual units
of inventory upon request therefore, payment to Bank of the
release price of such units shown on any Collateral schedule
supplementary hereto, and compliance herewith as to proceeds
thereof.
5. As to Collateral which are Accounts,
Chattel Paper, General Intangibles and Proceeds described in
Section 4(c) above, Grantor warrants, represents and agrees:
(a) All such Collateral is genuine,
enforceable in accordance with its terms and conditions precedent (except
as disclosed to and accepted by Bank in writing), and is
supported by consecutively numbered invoices to, or rights against,
the debtors thereon. Grantor will supply Bank with duplicate
invoices or other evidence of Grantor's rights on Bank's
request.
(b) All persons appearing to be obligated on
such Collateral have authority and capacity to contract.
(c) All Chattel Paper is in compliance with
applicable law as to form, content and manner of preparation and
execution and has been properly registered, recorded, and/or
filed to protect Grantor's interest thereunder.
(d) If an account debtor shall also be
indebted to Grantor on another obligation, any payment made by such
account debtor not specifically designated to be applied on
any particular obligation shall be considered to be a payment on
the account in which Bank has a security interest. Should any
remittance include a payment not on an account, it shall be
delivered to Bank and, if no Event of Default has occurred,
Bank shall pay Grantor the amount of such payment.
(e) Grantor agrees that following the
occurrence and during the continuance of an Event of Default, Grantor
shall not compromise, settle or adjust any Account or renew or
extend the time of payment thereof without Bank's prior
written consent.
M Until Bank exercises its rights to collect
the Accounts pursuant to Section 11 hereof, Grantor will collect
with diligence all Grantor's Accounts. Any collection of
Accounts by Grantor, whether in the form of cash, checks, notes,
or other instruments for the payment of money (properly
endorsed or assigned where required to enable Bank to collect
same), shall be in trust for Bank. If an Event of Default has
occurred andis continuing, Grantor shall keep all such
collections separate and apart from all other funds and
property so as to be capable of identification as the property of Bank
and deliver said collections daily to Bank in the identical
form received. The proceeds of such collections when received
by Bank may be applied by Bank directly to the payment of the
applicable Loan Account or to any other obligation secured
hereby. Any credit given by Bank upon receipt of said proceeds
shall be conditional credit subject to collection. Returned
items at Bank's option may be charged to Grantor's deposit
account with Bank. All collections of the Accounts shall be set
forth on an itemized schedule, showing the name of the account
debtor, the amount of each payment and such other
information as Bank may request.
21410169
121197
2.
(g) Until Bank exercises its rights to collect
the Accounts pursuant to Section 11 hereof, Grantor may continue
its present policies with respect to returned merchandise and
adjustments. However, Grantor shall immediately notify Bank
of all cases involving repossessions, and material loss or
damage of or to merchandise represented by the Accounts.
6. Grantor owns all of the Collateral
absolutely and no other person has or claims any interest in any of the
Collateral, except for Permitted Liens and as disclosed to and
accepted by Bank in writing. Grantor will defend any
proceeding which may affect title to or Bank's security
interest in any of the Collateral, and will indemnify and hold Bank
free and harmless from all costs and expenses of Bank's
defense.
7. Grantor will pay when due all existing or
future charges, liens or encumbrances on and all taxes and
assessments (except for taxes not yet due and payable or which
are contested in good faith and for which Grantor has set
aside adequate reserves) now or hereafter imposed on or
affecting the Collateral and, if the Collateral is in Grantor's
possession, the realty on which the Collateral is located.
8. Grantor will insure the Collateral with
Bank as loss payee in form and amounts with companies, and against
risks and liability satisfactory to Bank (to the extent
customarily maintained by businesses similar to Borrower's), and hereby
assigns such policies to Bank, agrees to deliver them to Bank
at Banks request, and authorizes Bank to make any claim
thereunder, to cancel the insurance upon Grantor's default,
and to receive payment of and endorse any instrument in payment
of any loss or return premium. If Grantor should fail to
deliver the required insurance policy or policies to Bank, Bank may,
at Grantor's cost and expense, without any duty to do so, get
and pay for insurance naming as the insured, at Bank's option,
either both Grantor and Bank, or only Bank, and the cost
thereof shall be secured by this Security Agreement, and shall be
repayable as provided in Section I above.
9. Grantor will give Bank any information it
reasonably requires in accordance with the terms of the Loan
Documents. All information at any time supplied to Bank by
Grantor (including, but not limited to, the value and condition
of Collateral, financial statements, financing statements, and
statements made in documentary Collateral) is correct and
complete, and Grantor will notify Bank of any adverse change
in such information. Grantor will promptly notify Bank of
any change of Grantor's residence, chief executive office or
mailing address.
10. At any time and from time to time, upon the
written request of Bank, and at the sole expense of Grantor,
Grantor shall promptly and duly execute and deliver any and
all such further instruments and documents and take such further
action as Bank may reasonably deem desirable to obtain the
full benefits of this Security Agreement and of the rights and
powers herein granted, including, without limitation, (a)
using its best efforts to secure all consents and approvals necessary
or appropriate for the grant of a security interest to Bank in
any Contract or License held by Grantor or in which Grantor
has any rights not heretofore assigned, (b) filing any
financing or continuation statements under the UCC with respect to the
security interests granted hereby, (c) transferring Collateral
to Bank's possession (if a security interest in such Collateral can
be perfected by possession), (d) placing the interest of Bank
as lienholder on the certificate of title (or other evidence of
ownership) of any vehicle owned by Grantor or in or with
respect to which Grantor holds a beneficial interest and (e) using
its best efforts to obtain waivers of liens from landlords and
mortgagees. Grantor also hereby authorizes Bank to file any
such financing or continuation statement without the signature
of Grantor. If any amount payable under or in connection
with any of the Collateral is or shall become evidenced by any
Instrument, such Instrument, other than checks and notes
received in the ordinary course of business, shall be duly
endorsed in a manner satisfactory to Bank and delivered to Bank
promptly upon Grantor's receipt thereof.
IL Upon the occurrence and during the
continuation of an Event of Default Bank may, without prior notice
to Grantor, collect the Collateral and may give notice of
assignment of Accounts to any and all account debtors and Grantor
does hereby make, constitute and appoint Bank its irrevocable,
true and lawful attorney-in-fact with power to do any act
which Grantor is obligated hereby to do, to exercise such
rights as Grantor may exercise, to use such equipment as Grantor
might use, to enter Grantor's premises to give notice of
Bank's security interest, and to collect Collateral and proceeds and
to execute and file in Grantor's name any financing statements
and amendments thereto required to perfect Bank's security
interest hereunder, all to protect and preserve the Collateral
and Bank's rights hereunder. Without limiting the generality
of the foregoing, after and during the continuance of an Event
of Default, Bank may:
21410169
121197
3
(a) Endorse the name of Grantor, collect and
receive delivery or payment of Instruments and Documents
constituting Collateral.
(b) Demand, sue for, give acquittances for, make
extension agreements with respect to or affecting Collateral,
exchange it for other Collateral, release persons liable
thereon or take security for the payment thereof, and compromise,
prosecute or defend any action, claim, proceeding or other
disputes in connection therewith.
(c) Use or operate Collateral for the purpose of
preserving Collateral or its value and for preserving or
liquidating Collateral.
12. Discharge of Grantor except for full
payment, or any extension, forbearance, change of rate of interest,
or acceptance, release or substitution of Collateral or any
impairment or suspension of Bank's rights against Grantor, or any
transfer of Grantor's interest to another shall not affect the
liability of Grantor hereunder. Until the Debt shall have been
paid or performed in full, Bank's rights shall continue even
if the Debt is deemed unenforceable. Grantor hereby waives:
(a) any right to require Bank to proceed against Grantor
before any other, or to pursue any other remedy; (b) presentment,
protest and notice of protest, demand and notice of
nonpayment, demand or performance, notice of sale, and advertisement
of sale; (c) any right to the benefit of or to direct the
application of any Collateral until the Debt shall have been paid or
performed in full; and (d) any right of subrogation to Bank
until the Debt shall have been paid or performed in full.
13. After and during the continuance of an Event
of Default, at Bank's option, without demand or notice, all
or any part of the Debt shall immediately become due and
payable. Bank shall have all rights given by law, and may sell,
in one or more sales, Collateral in any county where Bank has
an office. Bank may purchase at such sale. Sales for cash
or on credit to a wholesaler, retailer or user of the
Collateral, or at public or private auction, are all to be considered
commercially reasonable. Bank may require Grantor to assemble
the Collateral and make it available to Bank at the entrance
to the location where the Collateral is stored, or at a place
designated by Bank.
14. Bank's acceptance of partial or delinquent
payments or the failure of Bank to exercise any right or remedy
shall not waive any obligation of Grantor or right of Bank to
modify this Security Agreement, or waive any other similar
default.
15. Upon the transfer of all or any part of the
Debt, Bank may transfer all or any part of the Collateral. Bank
may deliver all or any part of the Collateral to any Grantor
at any time. Any such transfer or delivery shall discharge Bank
from all liability and responsibility with respect to such
Collateral transferred or delivered. This Security Agreement benefits
Bank's successors and assigns and binds Grantor's heirs,
legatees, personal representatives, successors and assigns. Time
is of the essence. This Security Agreement, the other Loan
Documents and the exhibit(s) attached hereto contain the entire
security agreement between Bank and Grantor. Grantor will
execute any additional agreements, assignments or documents
reasonably require4,by Bank to carry this Security Agreement
into effect.
16. If one or more Grantor signs this Security
Agreement, their liability hereunder shall be joint and several.
Any Grantor who is married hereby agrees that recourse may be
had against his or her separate property for the Debt.
17. This Security Agreement shall be governed by
and construed in accordance with the laws of the State of
California, to the jurisdiction of whose courts Grantor hereby
agrees to submit. Grantor agrees that service of process may
be accomplished by any means authorized by California law. All
words used herein in the singular shall be considered to
have been used in the plural where the context and
construction so require.
21410169
121197
18. Grantor hereby acknowledges receiving a copy of this
Security Agreement and waives all rights to receive
from Bank a copy of any financing statement or financing change
statement filed, or any verification statement received, at
any time in respect of this Security Agreement.
GRAWOR
FUSION
MEDICAL TECHNOLOGIES, INC.,
a
Delaware corporation
By
Raymond W. Anderson
Chief Financial Officer
21410169
121197
EXHIBIT A
DESCRIPTION OF COLLATERAL
A. Collateral. This Exhibit A covers all right,
title and interest of Grantor in, to and under all of the
following, wherever located and whether now owned or hereafter
owned or acquired (collectively, the "Collateral"):
(a) All Accounts of Grantor;
(b) All Chattel Paper of Grantor;
W All Contracts of Grantor;
(d) All Deposit Accounts of Grantor;
(e) All Documents of Grantor;
(f) All Equipment of Grantor;
(g) All Fixtures of Grantor;
(h) All General Intangibles of Grantor;
W All Instruments of Grantor;
0) All Inventory of Grantor;
(k) All Investment Property of Grantor;
(1) All Licenses of Grantor;
(m) All property of Grantor held by Bank
or any other party for whom Bank is acting as agent
hereunder, including, without limitation, all property of every
description now or hereafter in the possession or custody of
or in transit to Bank or such other party for any purpose,
including, without limitation, safekeeping, collection or pledge,
for the account of Grantor, or as to which Grantor may have any
right or power;
(n) All other goods and personal
property of Grantor whether tangible or intangible and whether now
or hereafter owned or existing, leased, consigned by or to, or
acquired by, Grantor and wherever located; and
(0) To the extent not otherwise
included, all Proceeds of each of the foregoing and all accessions to,
substitutions and replacements for, and rents, profits and
products of each of the foregoing.
B. Defined Terms. Unless otherwise defined
herein, the following terms shall have the following meanings
(such meanings being equally applicable to both the singular
and plural forms of the terms defined):
"Accounts" means any "account,,. as such term is
defined in Section 9106 of the UCC, now owned or hereafter
acquired by Grantor and, in any event, shall include, without
limitation, all accounts receivable, book debts and other forms
of obligations (other than forms of obligations evidenced by
Chattel Paper, Documents or Instruments) now owned or
hereafter received or acquired by or belonging or owing to
Grantor (including, without limitation, under any trade name,
style or division thereof) whether arising out of goods sold or
services rendered by Grantor or from any other transaction,
whether or not the same involves the sale of goods or services
by Grantor (including, without limitation, any such obligation
which may be characterized as an account or contract right
under the UCC) and all of Grantor's rights in, to and under all
21410169
Exhibit A
121197 Page 1
of 3
purchase orders or receipts now owned or hereafter acquired by
it for goods or services, and all of Grantor's rights to any
goods represented by any of the foregoing (including, without
limitation, unpaid seller's rights of rescission, replevin,
reclamation and stoppage in transit and rights to returned,
reclaimed or repossessed goods), and all monies due or to become
due to Grantor under all purchase orders and contracts for the
sale of goods or the performance of services or both by
Grantor (whether or not yet earned by performance on the part
of Grantor or in connection with any other transaction), now
in existence or hereafter occurring, including, without
limitation, the right to receive the proceeds of said purchase orders
and contracts, and all collateral security and guarantees of
any kind given by any Person with respect to any of the foregoing.
"Chattel Paper" means any "chattel paper," as such
term is defined in Section 91050)(b) of the UCC, now owned
or hereafter acquired by Grantor.
"Contracts" means all contracts, undertakings,
franchise agreements or other agreements (other than rights evidenced
by Chattel paper, Documents or Instruments) in or under which
Grantor may now or hereafter have any right, title or
interest, including, without limitation, with respect to an
Account, any agreement relating to the terms of payment or the
terms of performance thereof.
'Devosit Account' means any "deposit account" as such
term is defined in Section 9105(e) of the UCC, and should
include, without limitation, any demand, time, savings passbook
or like account, now or hereafter maintained by or for the
benefit of Grantor, or in which Grantor now holds or hereafter
acquires any interest, with a bank, savings and loan
association, credit union or like organization (including Bank)
and all funds and amounts therein, whether or not restricted
or designated for a particular purpose.
'Documents" means any "documents," as such term is
defined in Section 9105(l)(0 of the UCC, now owned or
hereafter acquired by Grantor.
"Eguip . means any "equipment," as such term is
defined in Section 9109(2) of the UCC, now or hereafter
owned or acquired by Grantor and, in any event, shall include,
without limitation, all machinery, equipment, furnishings,
vehicle, computers and other electronic data-processing and any
other office equipment of any nature whatsoever, any and
all additions, substitutions and replacements of any of the
foregoing, wherever located, together with all attachments,
components, parts, equipment and accessories installed thereon
or affixed thereto.
"Fixtures" means 'fixtures," as such term is defined
in Section 9313(l)(a) of the UCC, now or hereafter owned
or acquired by Grantor and, in any event, shall include,
without limitation, regardless of where located, all of the fixtures,
systems, machinery, apparatus, equipment and fittings of every
kind and nature whatsoever and all appurtenances and
additions thereto and substitutions or replacements thereof,
now or hereafter attached or affixed to or constituting a part of,
or located in or upon, real property wherever located,
including, without limitation, all heating, electrical, mechanical,
lighting, lifting, plumbing, ventilating, air-conditioning and
air cooling, refrigerating, food preparation, incinerating and
power, loading and unloading, signs, escalators, elevators,
boilers, communication, switchboards, sprinkler and other fire
prevention and extinguishing fixtures, systems, machinery,
apparatus and equipment, and all engines, motors, dynamos,
machinery, pipes, pumps, tanks, conduits and ducts constituting
a part of any of the foregoing, together with all right, title
and interest of Grantor in and to all extensions, improvements,
betterments, renewals, substitutes, and replacements of, and
all additions and appurtenances to any of the foregoing
property, and all conversions of the security constituted thereby,
immediately upon any acquisition or release thereof or any such
conversion, as the case may be.
"General Intangibles" means any "general
intangibles," as such term is defined in Section 9106 of the UCC, now
owned or hereafter acquired by Grantor and, in any event, shall
include, without limitation, all right, title and interest which
Grantor may now or hereafter have in or under any Contract,
interests in partnerships, joint ventures and other business
associations, Licenses, permits, goodwill, claims in or under
insurance policies, including unearned premiums, uncertificated
securities, deposit accounts, rights to receive tax refunds and
other payments and rights of indemnification.
"Instruments" means any "instrument," as such term is
defined in Section 9105(l)(i) of the UCC now owned or
hereafter acquired by Grantor, including, without limitation,
all notes, certificated securities, and other evidences of
indebtedness, other than instruments that constitute, or are a
part of a group of writings that constitute, Chattel Paper.
21410169
Exhibit A
121197 Page
2 of 3
"Inventory" means any 'inventory," as such term is
defined in Section 9109(4) of the UCC, wherever located, now
or hereafter owned or acquired by, Grantor and, in any event,
shall include, without limitation, all inventory, merchandise,
goods and other personal property which are held by or on
behalf of Grantor for sale or lease or are furnished or are to be
furnished under a contract of service or which constitute raw
materials, work in process or materials used or consumed or
to be used or consumed in Grantor's business, or the
processing, packaging, promotion, delivery or shipping of the same,
and all furnished goods whether or not such inventory is
listed on any schedules, assignments or reports furnished to Bank
from time to time and whether or not the same is in transit or
in the constructive, actual or exclusive occupancy or possession
of Grantor or is held by Grantor or by others for Grantor's
account, including, without limitation, all goods covered by
purchase orders and contracts with supplier's and all goods
billed and held by suppliers and all inventory which may be
located on premises of Grantor or of any carriers, forwarding
agents, truckers, warehousemen, vendors, selling agents or
other persons.
'Investment Property" means any "investment
property," as such term is defined in Section 9115(l)(f) of the UCC,
now owned or hereafter acquired by Grantor, including, without
limitation, a security, whether certificated or uncertificated,
a security entitlement, a securities account, a comniodity
contract or a commodity account.
"License" means any license of rights or interests
now held or hereafter acquired by Grantor.
'Proceeds" means 'proceeds,' as such term is defined
in Section 9-306(l) of the UCC and, in any event, shall
include, without limitation, (a) any and all Accounts, Chattel
Paper, Instruments, cash or other proceeds payable to Grantor
from time to time in respect of the Collateral, (b) any and
all proceeds of any insurance, indemnity, warranty or guaranty
payable to Grantor from time to time with respect to any of
the Collateral, (c) any and all payments (in any form whatsoever)
made or due and payable to Grantor from time to time in
connection with any requisition, confiscation, condemnation,
seizure or forfeiture of all or any part of the Collateral
above by any governmental body, authority, bureau or agency (or
any person acting under color of governmental authority), (d)
all certificates, dividends, cash, Instruments and other property
received or distributed in respect of or in exchange for any
Investment Property and (e) any and all other amounts from time
to time paid or payable under or in connection with any of the
Collateral or any Contract.
'UCC" means the Uniform Commercial Code as the same
may, from time to time, be in effect in the State of California; provided,
however, in the event that, by reason of mandatory provisions of law, any or
all of the attachment,
perfection or priority of Bank's security interest in any
collateral is governed by the Uniform Commercial Code as in effect
in a jurisdiction other than the State of California, the term
" UCC " shall mean the Uniform Commercial Code as in effect
in such other jurisdiction for purposes of the provisions
hereof relating to such attachment, perfection of priority and for
purposes of definitions related to such provisions.
21410169
Exhibit A
121197
Page 3 of 3
LOCATION OF COLLATERAL NOT IN BANK'S POSSESSION
1 1804 Shoreline Boulevard, Suite 130, Mountain View,
California 94043
2. Please add other address locations, if any. If none,
please indicate "None" below:
21410169 Exhibit B
121197 Page I of I
THIS SPACE FOR USE OF FILING OFFICER
FINANCING STATEMENT - FOLLOW INSTRUCTIONS CAREFULLY
This Financing Statement Is Presented for filing pursuant to
the Uniform Commercial Code
and will remain effective. with certain exceptions. for 5 vears
from date of film.
A. NAME & TEL # OF CONTACT AT FILER (optional) S. FILING OFFICE
ACCT. # optional)
C. RETURN COPY TO: (Name and Mailing Address)
7
Imperial Bank
9920 So. LaCienaga Blvd., Suite 628
Inglewood, California 90301
D.OPTIONAL DESIGJNATION lit
app6coMei:HLEssopiLEssEEHCONSIGNOFVCONMGNEE7NON-UCC FILING1
I. DEBTOR'S EXACT FULL LEGAL NAME - Insert only one debtor name
la or lb)
Ia. ENTITY'S NAME
Fusion Medical Techmlogies, Inc.
OR I b. IND114DUAL'S LAST NAME FIRST NAME MIDDLE
NAME SUFFIX
I a. MAILING ADDRESS CITY
STATE COUNTRY POSTAL CODE
1804 Shoreline BlVd., Ste. 130
Mountain View CA I USA
94043
Id. S.$. OR TAX LO.# OPTIONAL
lie.TYPEoFENTITY If. ENTITY'S STATE
I g. ENTITY'S ORGANIZATIONAL I.D.#, It any
ADD'NL INFO RE
OR COUNTRY OF
1wnTYDEErroR1
Comoraitim JORGANIZATION r)pl
NONE
2. ADDITIONAL DEBTOR'S EXACT FULL LEGAL NAME - insert onIV one
debtor name (2a or 2b)
2s. ENTITY'S NAME
OR 2b. INDMIDUAL'S LAST NAME
FIRST NAME MIDDLE NAME
SUFFIX
2c. MAILING ADDRESS
CITY STATE 1COUNTRY
POSTALCODE
2d. S.S. OR TAX I.D.# OPnoNAL 12a. TYPE OF
ENTITY .2f.ENTfrY'S STATE
.2g. ENTITY'S ORGANIZATIONAL I.D.#, It any
ADD'NL INFO RE
OR COUNTRY OF
ENTITY DEIrrOR
IORGANIZATION I
1-1 NONE
3. SECURED PARTY'S (ORIGINAL S/P or ITS TOTAL ASSIGNEE) EXACT
FULL LEGAL NAME - insert only one secured party name (3a or 3b)
3s. ENTITY'S NAME
OR TT(Inerial Pnnk
3b. INDIVIDUAL'S LAST NAME
FIRST NAME MIDDLE NAME
SUFFIX
3c. MAILING ADDRESS
CITY STATE COUNTRY]POSTAL
CODE
226 Airport Parkway
San Jose CA I USA
95110
4. This FINANCING STATEMENT covers the following types or Items
of prop":
All of the Debtor - s right, title and interest,
whether mw amed
or hereafter arising or acquired, in and to the
personal property
described on Exhibit A attached hereto and
incorporated herein
by this reference (continued).
5. CHECK [J This FINANCING STATEMENT Is signed by the Secured
Party Instead of the Debtor to perfect a security interest
- -T7. -Iffild In Florida (check one)
Box (a) In collateral already subject to a
security interest In another Jurisdiction when It woo brought Into this state,
or when the Doc ntery Documentary stamp
[if applicable] debtor's location was changed to this
state, or lb) In accordance with other statutory provisions [additional data
may be required] I [I -tariumtewc paid L] tax not applicable
S. REQUIRED SIGNATUREIS)
B. U This FINANCING STATEMENT Is to be filed (for recordl
Fusim edical Teclimlogies, Inc., a Delaware
corporation "'
recorded) In the REAL ESTATE RECORDS
M
Attach Addendum [if applicable)
9. Check to REQUEST SEARCH CERTIFICATEIS) an Dobtor(a)
ADDITIONAL FEEI
By:
Vp MI-Iz5r-r-r- (optional)
FIAII Debtor*F] Debtor IFIDebtar 2
REORDER F
tr6, Inc.
11) FILING OFFICER COPY- NATIONAL FINANCING STATEMENT (FORM
UCCl) (TRANS) (REV. 12/18/95)
ne ES
@ @ ox -
Exmrr A
TO
UCC-1 FINANCING
STATEMENT
BETWEEN
Mm MEDICAL TEcHNOLOGIES, INC.,
As DEBToR
AND
ImmRIAL BANK, As
SEcuRED PARTY
ITEM 4:
1. Description of Collateral. The Collateral
shall consist of all of Debtor's right, title and interest
in, to and under the following, wherever located and whether
now owned or hereafter owned or acquired in which
Debtor now has or hereafter acquires any right or interest
(collectively, the 'Collateral"):
a. All Accounts of Debtor;
h. All Chattel Paper of Debtor;
C. All Contracts of Debtor;
d. All Deposit Accounts of Debtor;
e. All Documents of Debtor;
f. All l3quipment of Debtor;
9. All Fixtures of Debtor;
h. All General Intangibles of
Debtor;
i. All Instruments of Debtor;
j. All ]Inventory of Debtor;
k. All ]Investment Property of
Debtor;
1. All ]Licenses of Debtor;
M. All property of Debtor held by
Secured Party or any other party for whom Secured Party
is acting as agent hereunder, including, without limitation,
all property of every description now or hereafter in the
possession or custody of or irk transit to Secured Party or
such other party for any purpose, including, without
limitation, safekeeping, collection or pledge, for the
account of Debtor, or as to which Debtor may have any right
or power;
n. All other goods and personal
property of Debtor, whether tangible or intangible and
whether now or hereafter owned or existing, leased,
consigned by or to, or acquired by, Debtor and wherever
located; and
0. To the extent not otherwise
included, all Proceeds of each of the foregoing and all
accessions to, substitutions and replacements for, and
rents, profits and products of each of the foregoing.
21410254
110597
DEBTOR: FusioN MEDICAL
TECHNOLOGIES, NC.
SECURED PARTY: ImPERiAL BANK
UCC- I Financing Statement
Item 4 (continued)
Page 2 of 4
2. Defined Terms. Unless otherwise defined
herein, the following terms shall have the following
meanings (such meanings being equally applicable to both
the singular and plural forms of the terms defined).
"Accounts' means any 'account,' as such term is
defined in Section 9106 of the UCC, now owned or
hereafter acquired by Debtor or in which Debtor now holds
or hereafter acquires any interest and, in any event,
shall include, without limitation, all accounts receivable,
book debts and other forms of obligations (other than forms
of obligations evidenced by Chattel Paper, Documents or
Instruments) now owned or hereafter received or acquired
by or belonging or owing to Debtor (including, without
limitation, under any trade name, style or division thereof)
whether arising out of goods sold or services rendered by
Debtor or from any other transaction, whether or not the
same involves the sale of goods or services by Debtor
(including, without limitation, any such obligation which may
be characterized as an account or contract right under the
UCQ and all of Debtor's rights in, to and under all
purchase orders or receipts now owned or hereafter acquired
by it for goods or services, and all of Debtor's rights
to any goods represented by any of the foregoing
(including, without limitation, unpaid seller's rights of rescission,
replevin, reclamation and stoppage in transit and rights to
returned, reclaimed or repossessed goods), and all monies
due or to become due to Debtor under all purchase orders
and contracts for the sale of goods or the performance
of services or both by Debtor (whether or not yet earned by
performance on the part of Debtor or in connection
with any other transaction), now in existence or hereafter
occurring, including, without limitation, the right to
receive the proceeds of said purchase orders and contracts,
and all collateral security and guarantees of any kind
given by any Person with respect to any of the foregoing.
"Chattel Paper' means any 'chattel paper,' as such
term is defined in Section 9105(l)(b) of the UCC,
now owned or hereafter acquired by Debtor or in which
Debtor now holds or hereafter acquires an interest.
"Contracts" means all contracts, undertakings,
franchise agreements or other agreements (other than rights
evidenced by Chattel Paper, Documents or Instruments) in or
under which Debtor may now or hereafter have any
right, tide or interest, including, without limitation, any
and all right, title and interest of Debtor under any customer
agreements, supply agreements, distribution agreements,
rebate agreements, processing agreements, warehousing
agreements or royalty agreements and shall include, without
limitation, with respect to an Account, any agreement
relating to the terms of payment or the terms of
performance thereof.
'Deposit Account' ineans any 'deposit account" as
such term is defined in Section 9105(e) of the UCC,
and should include, without limitation, any demand, time,
savings passbook or like account, now or hereafter
maintained by or for the benefit of Debtor, or in which
Debtor now holds or hereafter acquires any interest, with
a bank, savings and loan association, credit union or like
organization (including Secured Party) and all funds and
amounts therein, whether or not restricted or designated
for a particular purpose.
'Documents' means any "documents," as such term is
defined in Section 9105(l)(f) of the UCC, now
owned or hereafter acquired b, Debtor or in which Debtor
now holds or hereafter acquires an interest.
Y
"Equipment" means any "equipment," as such term is
defined in Section 9109(2) of the UCC, now or
hereafter owned or acquired by Debtor or in which Debtor
now holds or hereafter acquires an interest, and, in any
event, shall include, without limitation, all machinery,
equipment, furnishings, vehicles and computers and other
electronic data-processing and any other office equipment
of any nature whatsoever, any and all additions,
substitutions and replacementsof any of the foregoing,
wherever located, together with all attachments, components,
parts, equipment and accessories installed thereon or
affixed thereto.
21410254
110597
DEBTOR: FusiON MEDICAL
TECHNOLOGIES, INC.
SECURED PARTY: ImmRiAL BANK
UCC-I Financing Statement
Item 4 (continued)
Page 3 of 4
'Fbdures' means 'fixtures,' as such term is
defined in Section 9313(t)(a) of the UCC, now or hereafter
owned or acquired by Debtor or in which Debtor now holds or
hereafter acquires any interest and, in any event,
shall include, without limitation, regardless of where
located, all of the fixtures, systems, machinery, apparatus,
equipment and fittings of every kind and nature whatsoever
and all appurtenances and additions thereto and
substitutions or replacements thereof, now or hereafter
attached or affixed to or constituting a part of, or located
in or upon, real property wherever located, including,
without limitation, all heating, electrical, mechanical,
lighting, lifting, plumbing, ventilating, air-conditioning
and air cooling, refrigerating, food preparation, incinerating
and power, loading and unloading, communication, sprinkler
and other fire prevention and extinguishing, fixtures,
systems, machinery, apparatus and equipment, any signs,
escalators, elevators, boilers or switchboards, and all
engines, motors, dynamos, machinery, pipes, pumps, tanks,
conduits and ducts constituting a part of any of the
foregoing, together with all right, title, and interest of
Debtor in and to all extensions, improvements, betterments,
renewals, substitutes, and replacements of, and all
additions and appurtenances to any of the foregoing property,
and all conversions of the security constituted thereby,
immediately upon any acquisition or release thereof or any
such conversion, as the case may be.
'General Intangibles" means any 'general
intangibles,' as such term is defined in Section 9106 of the
UCC, now owned or hereafter acquired by Debtor or in which
Debtor now holds or hereafter acquires an interest,
and, in any event, shall include, without limitation, all
right, title and interest which Debtor may now or hereafter
have in or under any Contract, interests in partnerships,
joint ventures and other business associations, Licenses,
permits, goodwill, claims in or under insurance policies,
including unearned premiums, uncertificated securities,
deposit accounts (including as defined in Section 9105(e) of
the UCC), rights to receive tax refunds and other
payments and rights of indemnification.
"Instruments" means any "instrument," as such term
is defined in Section 9105(l)(i) of the UCC now
owned or hereafter acquired by Debtor or in which Debtor now
holds or hereafter acquires any interest, including,
without limitation, all notes, certificated securities, and
other evidences of indebtedness, other than instruments that
constitute, or are a part of a group of writings that
constitute, Chattel Paper.
"Inventory" mean .s any 'inventory," as such
term is defined in Section 9109(4) of the UCC, wherever
located, now or hereafter owned or acquired by Debtor or in
which Debtor now holds or hereafter acquires any,
interest and, in any event, shall include, without
limitation, all inventory, merchandise, goods and other personal
property which are held by or on behalf of Debtor for sale
or lease or are furnished or are to be furnished under
a contract of service or which constitute raw materials,
work in process or materials used or consumed or to be used
or consumed in Debtor's business, or the processing,
packaging, promotion, delivery or shipping of the same, and
all finished goods, whether or not such inventory is listed
on any schedules, assignments or reports furnished to
Secured Party from time to time and whether or not the same
is in transit or in the constructive, actual or exclusive
occupancy or possession of Debtor or is held by Debtor or by
others for Debtor's account, including, without
limitation, all goods covered by purchase orders and
contracts with suppliers and all goods billed and held by
suppliers and all inventory which may be located on premises
of Debtor or of any carriers, forwarding agents,
truckers, warehousemen, vendors, selling agents or other
Persons.
'Investment Property" means any "investment
property" as such term is defined in Section 9115(l)(f) of
the UCC, now owned or hereafter acquired by Debtor or in
which Debtor now holds or hereafter acquires an
interest, including, without limitation, a security, whether
certificated or uncertificated, a security entitlement, a
securities account, a commodity contract or a commodity
account.
21410254
110597
DEBTOR: FUSION MEDicAL
TECHNOLOGIES, INC.
SECURED PARTY: IMPERIAL BANK
UCC-1 Financing Statement
Item 4 (continued)
Page 4 of 4
'License" means any license of rights or interests
now held or hereafter acquired by Debtor or in which
Debtor now holds or hereafter acquires an interest, and any
renewals or extensions thereof.
'Person' means any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated
organization, association, corporation, institution, public
benefit corporation, firm, joint stock company, estate,
entity or governmental agency.
'Proceeds' means 'proceeds,' as such term is
defined in Section 9306(l) of the UCC, and, in any event,
shall include, without limitation, (i) any and all Accounts,
Chattel Paper, Instruments, cash or other forms of money
or currency or other proceeds, payable to Debtor from time
to time in respect of the Collateral; (H) any and all
proceeds of any insurance, indemnity, warranty or guaranty
payable to Debtor from time to time with respect to
any of the Collateral; (iii) any and all payments (in any
form whatsoever) made or due and payable to Debtor from
time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part
of the Collateral by any governmental body, authority,
bureau or agency (or any person acting under color of
governmental authority); (iv) all certificates, dividends,
cash, Instruments and other property received or distributed
in respect of or in exchange for any Investment Property;
and (v) any and all other amounts from time to time paid
or payable under or in connection with any of the Collateral
or any Contract.
"UCC' means the Uniform Cominercial Code as the
same may, from time to time, be in effect in the State
of California; provided, however, in the event that, by
reason of mandatory provisions of law, any or all of the
attachment, perfection or priority of Secured Party's
security interest in any Collateral is governed by the Uniform
Commercial Code as in effect in a jurisdiction other than
the State of California, the term "UCC' shall mean the
Uniform Commercial Code as in effect in such other
jurisdiction for purposes of the provisions hereof relating to
such attachment, perfection or priority and for purposes of
definitions related to such provisions.
21410254
110597
First Amendment to Warrant to Purchase Stock
This First Amendment to Warrant is entered into as of
December 1997,
between Imperial Bank ("Bank") and Fusion Medical Technologies,
Inc. ("Company").
A. Company executed and issued that certain Warrant to
Purchase Stock
dated September 15, 1994, to Bank (the "Warrant").
B. Bank and Company desire to amend the terms
provisions of the Warrant.
In Consideration of extensions of credit by Bank to
Company and other good and
valuable consideration, the parties agree as follows:
1 . Class of Stock is hereby amended to read in its
entirety: "Common."
2. Initial Exercise Price is hereby amended to read in
its entirety: `$4.00 per
share".
3. Expiration Date is hereby amended to read in its
entirety: "September 15,
2000".
4. Except as amended hereby, the Warrant remains in
full force and effect
and is hereby ratified and confirmed.
FUSION MEDICAL TECHNOLOGIES, INC. "Company"
By
-------------------------
Its:
IMPERIAL BANK "Bank"
By:
------------------------
Its:
EXHIBIT 10.8
First Amendment to Warrant to Purchase Stock
This First Amendment to Warrant is entered into as of
December _, 1997,
between Imperial Bank ("Bank") and Fusion Medical Technologies,
Inc. ("Company").
A. Company executed and issued that certain Warrant to
Purchase Stock
dated September 15, 1994, to Bank (the "Warrant").
B. Bank and Company desire to amend the terms
provisions of the Warrant.
In Consideration of extensions of credit by Bank to
Company and other good and
valuable consideration, the parties agree as follows:
1 . Class of Stock is hereby amended to read in its
entirety: "Common."
2. Initial Exercise Price is hereby amended to read in
its entirety: 14.00 per
share".
3. Expiration Date is hereby amended to read in its
entirety: "September 15,
2000".
4. Except as amended hereby, the Warrant remains in
full force and effect
and is hereby ratified and confirmed.
FUSION MEDICAL TECHNOLOGIES, INC. "Company"
By
--------------------------------
Its:
--------------------------------
IMPERIAL BANK "Bank"
By:
-------------------------------
Its:
-------------------------------
THIS WARRANT AND --- HEREUNDER HAVE NOT BEEN REGISTERED
UNDER THE SECURI NDED, AND MAY NOT BE SOLD, PLEDGED
OR OTHERWISE TR, N EFFECTIVE REGISTRATION THEREOF
UNDER SUCH ACT @E 144 OR AN OPINION OF COUNSEL
REASONABLY SATIS )RATION AND ITS COUNSEL THAT SUCH
REGISTRATION IS NC
WARRANT TO PURCHASE STOCK
Corporation: FUSION MEDICAL TECHNOLOGIES, INC.,
a Delaware Corporation
Number of Shares: 4,500
Class of Stock: Common
Initial Exercise Price: $4.00 per share
Issue Date: December2l,1997
Expiration Date: Decembetc@l, 2002 (Subject to
Article 4. 1)
THIS WARRANT CERTIFIES THAT, in consideration of the
payment of $1.00 and for other
good and valuable consideration, IWERIAL BANK or registered
assignee ("Holder") is entitled to
purchase the number of fully paid and nonassessable shares of the
class of securities (the "Shares") of the
corporation (the "Company") at the initial exercise price per
Share (the "Warrant Price") all as set forth
above and as adjusted pursuant to Article 2 of this Warrant,
subject to the provisions and upon the terms
and conditions set forth of this Warrant.
ARTICLE 1. EXERCISE
1.1 Method of Exercise. Holder may exercise this
Warrant by delivering this Warrant and a
duly executed Notice of Exercise in substantially the form
attached as Appendix I to the principal office
of the Company. Unless Holder is exercising the conversion right
set forth in Section 1.2, Holder shall
also deliver to the Company a check for the aggregate Warrant
Price for the Shares being purchased.
1.2 Conversion Rig . In lieu of exercising this
Warrant as specified in Section 1.1, Holder
may from time to time convert this Warrant, in whole or in part,
into a number of Shares determined by
dividing (a) the aggregate fair market value of the Shares or
other securities otherwise issuable upon
exercise of this Warrant minus the aggregate Warrant Price of
such Shares by (b) the fair market value of
one Share. The fair market value of the Shares shall be
determined pursuant to Section 1.5.
1.3 Omitted.
1.4 Omitted.
1.5 Fair Market Value. If the Shares are traded
regularly in a public market, the fair market
value of the Shares shall be the closing price of the Shares (or
the closing price of the Company's stock
into which the Shares are convertible) reported for the business
day immediately before Holder delivers
its Notice of Exercise to the Company. If the Shares are not
regularly traded in a public market, the
Board of Directors of the Company shall determine fair market
value in its reasonable good faith
judgment. The foregoing notwithstanding, if Holder advises the
Board of Directors in writing that Holder
disagrees with such determination, then the Company and Holder
shall promptly agree upon a reputable
investment banking firm to undertake such valuation. If the
valuation of such investment banking firm is
greater than that determined by the Board of Directors, then all
fees and expenses of such investment
banking firm shall be paid by the Company. In all other
circumstances, such fees and expenses shall be
paid by Holder.
1.6 Delivery of Certificate and New Warrant. Promptly
after Holder exercises or converts this
Warrant, the Company shall deliver to Holder certificates for the
Shares acquired and, if this Warrant has
not been fully exercised or converted and has not expired, a new
Warrant representing the Shares not so
acquired.
1.7 Replacement of Warrants. On receipt of evidence
reasonably satisfactory to the Company
of the loss, theft, destruction or mutilation of this Warrant and,
in the case of loss, theft or destruction, on
delivery of an indemnity agreement reasonably satisfactory in form
and amount to the Company or, in the
case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute
and deliver, in lieu of this Warrant a new warrant of like tenor.
1.8 Repurchase on Sale, Merger, or Consolidation of
the Company.
1.8.1. "Acquisition". For the purpose of this
Warrant, "Acquisition" means any sale,
license, or other disposition of all or substantially all of the
assets (including intellectual property) of the
Company, or any reorganization, consolidation, or merger of the
Company where the holders of the
Company's securities before the transaction beneficially own less
than 50% of the outstanding voting
securities of the surviving entity after the transaction.
1.8.2. Assumption of Warrant. If upon the closing
of any Acquisition the successor
entity assumes the obligations of this Warrant, then this Warrant
shall be exercisable for the same
securities, cash, and property as would be payable for the Shares
issuable upon exercise of the
unexercised portion of this Warrant as if such Shares were
outstanding on the record date for the
Acquisition and subsequent closing. The Warrant Price shall be
adjusted accordingly. The Company
shall use reasonable efforts to cause the surviving corporation to
assume the obligations of this Warrant.
1.8.3. Nonassumption. If upon the closing of any
Acquisition the successor entity does
not assume the obligations of this Warrant and Holder has not
otherwise exercised this Warrant in full,
then the unexercised portion of this Warrant shall be deemed to
have been automatically converted
pursuant to Section 1.2 and thereafter Holder shall participate in
the Acquisition on the same ten-ns as
other holders of the same class of securities of the Company.
1.8.4. Purch----- Rip-lit. Notwithstanding the
foregoing, at the election of Holder, the
Company shall purchase the unexercised portion of this Warrant
for cash upon the closing of any
Acquisition for an amount equal to (a) the fair market value of
any consideration that would have been
received by Holder in consideration of the Shares had Holder
exercised the unexercised portion of this
Warrant immediately before the record date for determining the
shareholders entitled to participate in the
proceeds of the Acquisition, less (b) the aggregate Warrant Price
of the Shares, but in no event less than
zero.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 Stock Dividends, Splits, Etc. If the Company
declares or pays a dividend on its common
stock payable in common stock, or other securities, subdivides
the outstanding common stock into a
greater amount of common stock, then upon exercise of this
Warrant, for each Share acquired, Holder
shall receive, without cost to Holder, the total number and kind
of securities to which Holder would have
been entitled had Holder owned the Shares of record as of the
date the dividend or subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon
any reclassification, exchange,
substitution, or other event that results in a change of the
number and/or class of the securities issuable
upon exercise or conversion of this Warrant, Holder shall be
entitled to receive, upon exercise or
conversion of this Warrant the number and kind of securities and
property that Holder would have
received for the Shares if this Warrant had been exercised
immediately before such reclassification,
exchange, substitution, or other event. Such an event shall
include any automatic conversion of the
outstanding or issuable securities of the Company of the same
class or series as the Shares to common
stock pursuant to the terms of the Company's Articles of
Incorporation upon the closing of a registered
public offering of the Company's common stock. The Company or its
successor shall promptly issue to
Holder a new Warrant for such new securities or other property.
The new Warrant shall provide for
adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in
this Article 2 including, without limitation, adjustments to the
Warrant Price and to the number of
securities or property issuable upon exercise of the new Warrant.
The provisions of this Section 2.2 shall
similarly apply to successive reclassifications, exchanges,
substitutions, or other events.
2.3 Adjustments for Combinations, Etc. If
the outstanding Shares are combined or
consolidated, by reclassification or otherwise, into a lesser
number of shares, the Warrant Price shall be
proportionately increased.
2.4 Adiustments for Diluting Issuances. The Warrant
Price and the number of Shares issuable
upon exercise of this Warrant shall be subject to adjustment,
from time to time, in the manner set forth on
Exhibit B, if attached, in the event of Diluting Issuances (as
defined on Exhibit B).
2.5 No Impairment. The Company shall not, by
amendment of its Articles of Incorporation or
through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities
or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to
be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in
carrying out all the provisions of this Article 2 and in taking
all such action as may be necessary or
appropriate to protect Holder's rights under this Article against
impain-nent. If the Company takes any
action affecting the Shares or its common stock other than as
described above that adversely affects
Holder's rights under this Warrant, the Warrant Price shall be
adjusted downward and the number of
Shares issuable upon exercise of this Warrant shall be adjusted
upward in such a manner that the
aggregate Warrant Price of this Warrant is unchanged.
2.6 Certificate as to Adjustments. Upon each
adjustment of the Warrant Price, the Company
at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief
Financial Officer setting forth such adjustment and the facts
upon which such adjustment is based. The
Company shall, upon written request, furnish Holder a certificate
setting forth the Warrant Price in effect
upon the date thereof and the series of adjustments leading to
such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 Representations and Warranties. The Company
hereby represents and warrants to the
Holder as follows:
(a) The initial Warrant Price referenced on
the first page of this Warrant is not greater
than the fair market value of the Shares as of the date of this
Warrant.
(b) All Shares which may be issued upon the
exercise of the purchase right
represented by this Warrant, and all securities, if any, issuable
upon conversion of the Shares, shall, upon
issuance, be duly authorized, validly issued, fully paid and
nonassessable, and free of any liens and
encumbrances except for restrictions on transfer provided for
herein or under applicable federal and state
securities laws.
3.2 Notice of Certain Events. If the Company
proposes at any time (a) to declare any
dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and
whether or not a regular cash dividend; (b) to offer for
subscription pro rata to the holders of any class or
series of its stock any additional shares of stock of any class
or series or other rights; (c) to effect any
reclassification or recapitalization of common stock; (d) to
merge or consolidate with or into any other
corporation, or sell, lease, license, or convey all or
substantially all of its assets, or to liquidate, dissolve or
wind up; or (e) offer holders of registration rights the
opportunity to participAte in an underwritten public
offering of the company's securities for cash, then, in
connection with each such event, the Company shall
give Holder (1) at least 20 days prior written notice of the date
on which a record will be taken for such
dividend, distribution, or subscription rights (and specifying
the date on which the holders of common
stock will be entitled thereto) or for determining rights to
vote, if any, in respect of the matters referred to
in (c) and (d) above; (2) in the case of the matters referred to
in (c) and (d) above at least 20 days prior
written notice of the date when the saine will take place (and
specifying the date on which the holders of
common stock will be entitled to exchange their common stock for
securities or other property
deliverable upon the occurrence of such event); and (3) in the
case of the matter referred to in (e) above,
the same notice as is given to the holders of such registration
rights.
3.3 Information Rights. So long as the Holder holds
this Warrant ad/or any of the Shares, the
Company shall deliver to the Holder (a) promptly after mailing,
copies of all communiques to the
shareholders of the Company, (b) within ninety (90) days after
the end of each fiscal year of the
Company, the annual audited financial statements of the Company
certified by independent public
accountants of recognized standing and (c) within forty-five (45)
days after the end of each of the first
three quarters of each fiscal year, the Company's quarterly,
unaudited financial statements.
3.4 Registration Under Securities Act of 1933, as
amended. The Company agrees that the
Shares shall be subject to the registration rights set forth on
Exhibit C.
ARTICLE 4. MISCELLANEOUS.
4.1 Term: Notice of Expiration. This Warrant is
exercisable, in whole or in part, at any time
and from time to time on or before the Expiration Date set forth
above. The Company shall give Holder
written notice of Holder's right to exercise this Warrant in the
form attached as Appendix 2 not more than
90 days and not less than 30 days before the Expiration Date. If
the notice is not so given, the Expiration
Date shall automatically be extended until 30 days after the date
the Company delivers the notice to
Holder.
4.2 Legends. This Warrant and the Shares (and the
securities issuable, directly or indirectly,
upon conversion of the Shares, if any) shall be imprinted with a
legend in substantially the following
form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF
UNDER SUCH
ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL
REASONABLY
SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This
Warrant and the Shares issuable upon
exercise this Warrant (and the securities issuable, directly or
indirectly, upon conversion of the Shares, if
any) may not be transferred or assigned in whole or in part
without compliance with applicable federal
and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of
investment representation letters and legal opinions reasonably
satisfactory to the Company). The
Company shall not require Holder to provide an opinion of counsel
if the transfer is to an affiliate of
Holder or if there is no material question as to the availability
of current information as referenced in Rule
144(c), Holder represents that it has complied with Rule 144(d)
and (e) in reasonable detail, the selling
broker represents that it has complied with Rule 144(f), and the
Company is provided with a copy of
Holder's notice of proposed sale.
4.4 Transfer Procedure. Subject to the provisions of
Section 4.2, Holder may transfer all or
part of this Warrant or the Shares issuable upon exercise of this
Warrant (or the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) by
giving the Company notice of the portion
of the Warrant being transferred setting forth the name, address
and taxpayer identification number of the
transferee and surrendering this Warrant to the Company for
reissuance to the transferee(s) (and Holder, if
applicable). Unless the Company is filing financial information
with the SEC pursuant to the Securities
Exchange Act of 1934, the Company shall have the right to refuse
to transfer any portion of this Warrant
to any person who directly competes with the Company.
4.5 Notices. All notices and other communications from
the Company to the Holder, or vice
versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or
certified mail, postage prepaid, at such address as may have been
furnished to the Company or the
Holder, as the case may be, in writing by the Company or such
Holder from time to time.
4.6 Waiver. This Warrant and any term hereof may be
changed, waived, discharged or
terminated only by an instrument in writing signed by the party
against which enforcement of such
change, waiver, discharge or termination is sought.
. 4.7 Attorneys' Fees. In the event of any dispute
between the parties concerning the terms and
provisions of this Warrant, the party prevailing in such dispute
shall be entitled to collect from the other
party all costs incurred in such dispute, including reasonable
attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by
and construed in accordance with the
laws of the State of California, without giving effect to its
principles regarding conflicts of law.
FUSION MEDICAL TECHNOLOGIES, INC.
By:
-----------------------
Name
------------------------
Title:
-----------------------
APPENDIX I
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase shares
of the Common Stock of
Fusion Medical Technologies, Inc. pursuant to the terms of the
attached Warrant, and tenders herewith
payment of the purchase price of such shares in full.
1. The undersigned hereby elects to convert the
attached Warrant into Shares/cash [strike
one] in the manner specified in the Warrant. This conversion is
exercised with respect to of the
Shares covered by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates
representing said shares in the name of the
undersigned or in such other name as is specified below:
Chief Financial Officer
Controllers Department
Imperial Bank or registered assignee
P.O. Box 92991
Los Angeles, CA 90009
3. The undersigned represents it is acquiring the
shares solely for its own account and not as
a nominee for any other party and not with a view toward the
resale or distribution thereof except in
compliance with applicable securities laws.
IMPERIAL BANK or registered assignee
(Signature)
--------------------
(Date)
--------------------
APPENDIX 2
NOTICE THAT WARRANT IS ABOUT TO EXPIRE
Chief Financial Officer
Controllers Department
Imperial Bank or registered assignee
P.O. Box 92991
Los Angeles, CA 90009
Dear Gentleperson:
This is to advise you that the Warrant issued to you
described below will expire on November 28,2002.
Issuer: Fusion Medical
Technologies, Inc.
Issue Date: November 28, 1997
Class of Security Issuable: Common
Exercise Price Per Share: $4.00
Number of Shares Issuable: 4,500
Procedure for Exercise:
Please contact Bill Anderson at (650) 903-4067 with any
questions you may have concerning
exercise of the Warrant. This is your only notice of
pending expiration.
Fusion Medical Technologies, Inc.
By:
-------------------------
Its:
-------------------------
EXHIBIT A
Omitted .1
EXHIBIT B
IMPERIAL BANK or registered assignee
ANTIDILUTION AGREEMENT
This Antidilution Agreement is entered into as of November
28, 1997, by and between Imperial
Bank or registered assignee, ("Purchaser") and Fusion Medical
Technologies, Inc. ("the Company"').
RECITALS
A. Concurrently with the execution of this
Antidilution Agreement, the Purchaser is
purchasing from the Company a Warrant to Purchase Stock (the
"Warrant") pursuant to which
Purchaser has the right to acquire from the Company the Shares (as
defined in the Warrant).
B. By this Antidilution Agreement, the Purchaser and
the Company desire to set forth the
adjustment in the number of Shares issuable upon exercise of the
Warrant as a result of a Diluting
Issuance (as defined in Exhibit A to the Warrant).
C. Capitalized terms used herein shall have the same
meaning as set forth in the Warrant.
NOW, THEREFORE, in consideration of the mutual
promises, covenants and
conditions hereinafter set forth, the parties hereto mutually
agree as follows:
I . Definitions. As used in this Anti-dilution
Agreement, the following terms have
the following respective meanings:
(a) "Option" means any right, option or warrant to
subscribe for, purchase or otherwise
acquire common stock or Convertible Securities.
(b) "Convertible Securities" means any evidences of
indebtedness, shares of stock or other
securities directly or indirectly convertible into or exchangeable
for common stock.
(c) "Issue" means to grant, issue, sell, assume or fix
a record date for determining persons
entitled to receive any security (including Options), whichever of
the foregoing is the first to occur.
(d) "Additional Common Shares" means all common stock
(including reissued shares)
issued (or deemed to be issued pursuant to Section 2) after the
date of the Warrant. Additional
Common Shares does not include, however, any common stock Issued
in a transaction described in
Sections 2.1 and 2.2 of the Warrant; any common stock Issued upon
conversion of preferred stock
outstanding on the date of the Warrant; the Shares; or common
stock Issued as incentive or in a
nonfinancing transaction to employees, officers, directors or
consultants to the Company.
(e) The shares of common stock ultimately Issuable
upon exercise of an Option (including
the shares of common stock ultimately Issuable upon conversion or
exercise of a Convertible Security
Issuable pursuant to an Option) are deemed to be Issued when the
Option is Issued. The shares of
common stock ultimately Issuable upon conversion or exercise of a
Convertible Security (other than a
Convertible Security Issued pursuant to an Option) shall be
deemed Issued upon Issuance of the
Convertible Security.
2. Deemed Issuance of Additional Common Shares. The
shares of common stock
ultimately Issuable upon exercise of an Option (including the
shares of common stock ultimately
Issuable upon conversion or exercise of a Convertible Security
Issuable pursuant to an Option) are
deemed to be Issued when the Option is Issued. The shares of
common stock ultimately Issuable upon
conversion or exercise of a Convertible Security (other than a
Convertible Security Issued pursuant to
an Option) shall be deemed Issued upon Issuance of the
Convertible Security. The maximum amount
of common stock Issuable is determined without regard to any
future adjustments permitted under the
instrument creating the Options or Convertible Securities.
3. Adjustment of Warrant Price for Diluting
Issuances.
3.1 Weighted Average Adjustment. If the Company
issues Additional Common
Shares after the date of the Warrant and the consideration per
Additional Common Share (determined
pursuant to Section 9) is less than the Warrant Price in effect
immediately before such Issue, the
Warrant Price in effect immediately before such Issue shall be
reduced, concurrently with such Issue,
to a price (calculated to the nearest hundredth of a cent)
determined by multiplying the Warrant Price
by a fraction:
(a) the numerator of which is the amount of
common stock outstanding immediately
before such Issue plus the amount of common stock that the
aggregate consideration received by
Company for the Additional Common Shares would purchase at the
Warrant Price in effect
immediately before such Issue, and
(b) the denominator of which is the amount of
common stock outstanding
immediately before such Issue plus the number of such Additional
Shares.
3.2 Adjustment of Number of Shares. Upon each
adjustment of the Warrant Price,
the number of Shares Issuable upon exercise of the Warrant shall
be increased to equal the quotient
obtained by dividing (a) the product resulting from multiplying
(i) the number of Shares Issuable upon
exercise of the Warrant and (ii) the Warrant Price, in each case
as in effect immediately before such
adjustment, by (b) the adjusted Warrant Price.
3.3 Securities Deemed Outstanding. For the
purpose of this Section 3, all securities
Issuable upon exercise of any outstanding Convertible Securities
or Options, Warrants, or other rights
to acquire securities of the Company shall be deemed to be
outstanding.
4. No Adjustment for Issuances Following Deemed
Issuances. No adjustment to the
Warrant Price shall be made upon the exercise of Options or
conversion of Convertible Securities.
5. Adjustment Following Changes in Terms of Options
or Convertible Securities. If the
consideration payable to, or the amount of common stock Issuable
by, the Company increases or
decreases, respectively, pursuant to the terms of any
outstanding Options or Convertible Securities, the
Warrant Price shall be recomputed to reflect such increase or
decrease. The recomputation shall be
made as of the time of the Issuance of the Options or
Convertible Securities. Any changes in the
Warrant Price that occurred after such Issuance because other
Additional Common Shares were Issued
or deemed Issued shall also be recomputed.
6. Recomputation Upon Expiration of Options or
Convertible Securities. The Warrant
Price computed upon the original Issue of any Options or
Convertible Securities, and any subsequent
adjustments based thereon, shall be recomputed when any Options
or rights of conversion under
Convertible Securities expire without having been exercised. In
the case of Convertible Securities or
Options for common stock, the Warrant Price shall be recomputed
as if the only Additional Common
Shares Issued were the shares of common stock actually Issued
upon the exercise of such securities, if
any, and as if the only consideration received therefor was the
consideration actually received upon the
Issue, exercise or conversion of the Options or Convertible
Securities. In the case of Options for
Convertible Securities, the Warrant Price shall be recomputed as
if the only Convertible Securities
Issued were the Convertible Securities actually Issued upon the
exercise thereof, if any, and as if the
only consideration received therefor was the consideration
actually received by the Company
(determined pursuant to Section 9), if any, upon the Issue of
the Options for the Convertible Securities.
7. Limit on Readjustments. No readjustment of the
Warrant Price pursuant to Sections 5 or
6 shall increase the Warrant Price more than the amount of any
decrease made in respect of the Issue of
any Options or Convertible Securities.
8. 30 Day Options. In the case of any Options that
expire by their terms not more than 30
days after the date of Issue thereof, no adjustment of the
Warrant Price shall be made until the
expiration or exercise of all such Options.
9. Computation of Consideration. The consideration
received by the Company for the
Issue of any Additional Common Shares shall be computed as
follows:
(a) Cash shall be valued at the amount of cash
received by the Corporation, excluding
amounts paid or payable for accrued interest or accrued
dividends.
(b) Property. Property, other than cash, shall be
computed at the fair market value thereof at
the time of the Issue as determined in good faith by the Board
of Directors of the Company.
(C) Mixed Consideration. The consideration for
Additional Common Shares Issued together
with other property of the Company for consideration that covers
both shall be determined in good
faith by the Board of Directors.
(d) Options and Convertible Securities. The
consideration per Additional Common Share
for Options and Convertible Securities shall be determined by
dividing:
(i) the total amount, if any, received or
receivable by the Company for the Issue of
the Options or Convertible Securities, plus the minimum amount
of additional consideration (as set
forth in the instruments relating thereto, without regard to any
provision contained therein for a
subsequent adjustment of such consideration) payable to the
Company upon exercise of the Options or
conversion of the Convertible Securities, by
(ii) the maximum amount of common stock (as
set forth in the instruments relating
thereto, without regard to any provision contained therein for a
subsequent adjustment of such number)
ultimately Issuable upon the exercise of such Options or the
conversion of such Convertible Securities.
10. General.
10.1 Governing Law. This Antidilution
Agreement shall be governed in all respects
by the laws of the State of California as such laws are applied
to agreements between California
residents entered into and to be performed entirely within
California.
10.2 Successors and Assigns. Except as
otherwise expressly provided herein, the
provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs,
executors and administrators of the parties hereto.
10.3 Entire Aareement. Except as set forth
below, this Antidilution Agreement and
the other documents delivered pursuant hereto constitute the
full and entire understanding and
agreement between the parties with regard to the subjects hereof
and thereof.
10.4 Notices, etc. All notices and other
communications required or permitted
hereunder shall be in writing and shall be mailed by first class
mail, postage prepaid, certified or
registered mail, return receipt requested, addressed (a) if to
Purchaser at Purchaser's address as set forth
below, or at such other address as Purchaser shall have
furnished to the Company in writing, or (b) if to
the Company, at the Company's address set forth below, or at
such other address as the Company shall
have furnished to the Purchaser in writing.
10.5 Severability. In case any provision of
this Antidilution Agreement shall be
invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions of
this Antidilution Agreement shall not in any way be affected or
impaired thereby.
10.6 Titles and Subtitles. The titles of the
sections and subsections of this Agreement
are for convenience of reference only and are not to be
considered in construing this Antidilution
Agreement.
10.7 Counf6roarts. This Antidilution 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.
PURCHASER ISSUER
IMPERIAL BANK
or registered assignee FUSION MEDICAL TECHNOLOGIES,
INC.
By: By:
------------------- -----------------------
Name: Name:
------------------- ----------------------
Title: Title:
------------------- ----------------------
Address: Address:
------------------- ----------------------
EXHIBIT C
Registration Rights
The Shares shall be deemed "registrable securities" or
otherwise entitled to "piggy back"
registration rights in accordance with the terms of the following
agreement (the "Agreement") between
the Company and its investor(s):
[Identify Agreement by date, title and parties. If
no Agreement
exists, indicate by "none."]
The Company agrees that no amendments will be made to the
Agreement which would have an
adverse impact on Holder's registration thereunder without the
consent of Holder. By acceptance of the
Warrant to which this Exhibit C is attached, Holder shall not be
deemed to be a party to the Agreement,
but solely entitled to the registration rights created thereby.
If no Agreement exists, then the Company and the Holder
shall enter into Holder's standard form
of Registration Rights Agreement as in effect on the Issue Date
of the Warrant.
IMPERIAL BANK
Member FDIC
AUTOMATIC DEBIT AUTHORIZATION
To: Imperial Bank
Re: Loan #
You are hereby authorized and instructed to charge Account No.
17-061-828 in the name of
FUSION MEDICAL TECHNOLOGIES, INC. for principal and/or
interest payments due on the above
referenced loan as set forth below and credit the loan
referenced above.
C!O Debit each interest payment as it becomes due
according to the terms of that
certain Loan Agreement dated of even date
herewith, and any renewals or
amendments thereof.
N Debit each principal payment as it becomes due
according to the terms of that
certain Loan Agreement dated of even date:
herewith, and any renewals or
amendments thereof.
This Authorization is to remain in full force and effect until
revoked in writing.
Borrower Signature:
Date: December l, 1997
FUSION MEDICAL TECHNOLOGEES, INC.,
a Delaware corporation
By:
-----------------------------
Raymond W. Anderson
Chief Financial Officer
21410218
121197
[Equipment Lines)
AGREEMENT TO PROVIDDE
INSURANCE
(REAL OR PERSONAL
PROPERTY)
TO: IMPERIAL BANK
Date: December 1997
226 Airport Parkway
Borrower: FUSION MEDICAL TECHNOLOGUES, INC.
San Jose, California 951 10
In consideration of loans that shall not at any one
time in the aggregate exceed the principal sum of $2,500,000.00
("Loans"), secured by all tangible personal property of the
undersigned, including inventory and equipment, the
undersigned agrees to obtain adequate insurance coverage to
remain in force during the term of the Loans.
'Me undersigned also agrees to advise the below
named agent to add IMPERIAL BANK ("Bank") as a loss payee
on the new or existing insurance policy, and to furnish Bank
at the above address with a copy of said policy/endorsements
and any subsequent renewal policies.
'Me undersigned understands that the policy must
contain:
1. Fire and extended coverage in an amount
sufficient to cover:
(a) 'Me amount of the Loans, OR
(b) All existing encumbrances,
whichever is greater.
But not in excess of the replacement value of the
improvements on the real property.
2. A Lender's "Loss Payable' Endorsement Form
438 BFU in favor of IMPERIAL BANK, or any other form
acceptable to Bank.
INSURANCE
INFORMATION
C) e))
Insurance Co./Agent:
Telephone No.
Agent's Address:
BORROWER
FUSION MEDICAL TECHNOLOGIES, INC.,
a Delaware corporation
Raymond W. Anderson
Chief Financial Officer
FOR BANK USE ONLY
INSURANCE VERIFICATION: Date:
Person Spoken to:
Policy Number:
Effective Form: To:
Verified By:
21410236
121197
IMPERIAL BANK
Member FDIC
ITEMIZATION OF AMOUNT FINANCED
DISBURSEMENT INSTRUCTIONS
Borrower: FUSION MEDICAL TECHNOLOGIES, INC.
Date: December__, 1997
$ paid to you directly
by Cashiers Check No.
$ 2,500,000.00 (maximum aggregate
amount available less outstanding under Facility-B
Commitment calculated
as set forth in Loan Agreement) credited to deposit
Account No. 17-061-828
(from undisbursed proceeds from the Facility-A
Commitment)
$ 1,000,000.00 (maximum aggregate
amount available less outstanding under Facility-A
Commitment calculated
as set forth in Loan Agreement) credited to deposit
Account No. 17-061-828
(from undisbursed proceeds from the Facility-B
Commitment)
$ paid on Loan(s) No.
$ amounts paid to Bank
for:
Amounts vaid to others on your behal
$ to
Title Insurance Company
$ to Public Officials
$ to
$ to
$ to
$ to
$ 2,500,000.00 SUBTOTAL (Aggregate
Loans Outstanding At Any One Time)
LESS $ 0.00 Prepaid Finance Charge
(Loan fee)
$ 2,500,000.00 TOTAL (Amount Financed
At Any One Time Outstanding)
Upon consummation of this transaction, this document will also
serve as the authorization for Imperial Bank to disburse the
loan proceeds as stated above.
FUSION MEDICAL TECHNOLOGIES, INC.,
a Delaware corporation
- ------------------------
Raymond W. Anderson
Chief Financial Officer
21410242
121197
[Equipment Lines]
EXHIBIT 10.9
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN
REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, PLEDGED
OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
THEREOF
UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT
SUCH
REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: FUSION MEDICAL TECHNOLOGIES, INC.,
a Delaware Corporation
Number of Shares: 4,500
Class of Stock: Common
Initial Exercise Price: $4.00 per share
Issue Date: December __, 1997
Expiration Date: December __, 2002 (Subject to
Article 4. 1)
THIS WARRANT CERTIFIES THAT, in consideration of the
payment of $1.00 and for other
good and valuable consideration, IMPERIAL BANK or registered
assignee ("Holder") is entitled to
purchase the number of fully paid and nonassessable shares of
the class of securities (the "Shares") of the
corporation (the "Company") at the initial exercise price per
Share (the "Warrant Price") all as set forth
above and as adjusted pursuant to Article 2 of this Warrant,
subject to the provisions and upon the terms
and conditions set forth of this Warrant.
ARTICLE 1. EXERCISE
1.1 Method of Exercise. Holder may exercise this
Warrant by delivering this Warrant and a
duly executed Notice of Exercise in substantially the form
attached as Appendix I to the principal office
of the Company. Unless Holder is exercising the conversion right
set forth in Section 1.2, Holder shall
also deliver to the Company a check for the aggregate Warrant
Price for the Shares being purchased.
1.2 Conversion Rig . In lieu of exercising this
Warrant as specified in Section 1.1, Holder
may from time to time convert this Warrant, in whole or in part,
into a number of Shares determined by
dividing (a) the aggregate fair market value of the Shares or
other securities otherwise issuable upon
exercise of this Warrant minus the aggregate Warrant Price of
such Shares by (b) the fair market value of
one Share. The fair market value of the Shares shall be
determined pursuant to Section 1.5.
1.3 Omitted.
1.4 Omitted.
\\Sfmps0l\sys\SPECMARK\COMMON\PETROFF\FUSION\Docs'@Warrant.doc
1.5 Fair Market Value. If the Shares are traded
regularl, in a public market, the fair market
Y
value of the Shares shall be the closing price of the Shares (or
the closing price of the Company's stock
into which the Shares are convertible) reported for the business
day immediately before Holder delivers
its Notice of Exercise to the Company. If the Shares are not
regularly traded in a public market, the
Board of Directors of the Company shall deten-nine fair market
value in its reasonable good faith
judgment. The foregoing notwithstanding, if Holder advises the
Board of Directors in writing that Holder
disagrees with such determination, then the Company and Holder
shall promptly agree upon a reputable
investment banking firm to undertake such valuation. If the
valuation of such investment banking firm is
greater than that determined by the Board of Directors, then all
fees and expenses of such investment
banking firm shall be paid by the Company. In all other
circumstances, such fees and expenses shall be
paid by Holder.
1.6 DeliveEy of Certificate and New Warrant.
Promptly after Holder exercises or converts this
Warrant, the Company shall deliver to Holder certificates for
the Shares acquired and, if this Warrant has
not been fully exercised or converted and has not expired, a new
Warrant representing the Shares not so
acquired.
1.7 Replacement of Warrants. On receipt of evidence
reasonably satisfactory to the Company
of the loss, theft, destruction or mutilation of this Warrant
and, in the case of loss, theft or destruction, on
delivery of an indemnity agreement reasonably satisfactory in
form and amount to the Company or, in the
case of mutilation, or surrender and cancellation of this
Warrant, the Company at its expense shall execute
and deliver, in lieu of this Warrant, a new warrant of like
tenor.
1.8 Repurchase on Sale, Merger, or Consolidation of
the Company.
1.8.1. "Acquisition". For the purpose of this
Warrant, "Acquisition" means any sale,
license, or other disposition of all or substantially all of the
assets (including intellectual property) of the
Company, or any reorganization, consolidation, or merger of the
Company where the holders of the
Company's securities before the transaction beneficially own
less than 50% of the outstanding voting
securities of the surviving entity after the transaction.
1.8.2. Assumption of Warrant. If upon the
closing of any Acquisition the successor
entity assumes the obligations of this Warrant, then this
Warrant shall be exercisable for the same
securities, cash, and property as would be payable for the
Shares issuable upon exercise of the
unexercised portion of this Warrant as if such Shares were
outstanding on the record date for the
Acquisition and subsequent closing. The Warrant Price shall be
adjusted accordingly. The Company
shall use reasonable efforts to cause the surviving corporation
to assume the obligations of this Warrant.
1.8.3. Nonassurription. If upon the closing of
any Acquisition the successor entity does
not assume the obligations of this Warrant and Holder has not
otherwise exercised this Warrant in full,
then the unexercised portion of this Warrant shall be deemed to
have been automatically converted
pursuant to Section 1.2 and thereafter Holder shall participate
in the Acquisition on the same terms as
other holders of the same class of securities of the Company.
1.8.4. Purchase Right. Notwithstanding the
foregoing, at the election of Holder, the
Company shall purchase the unexercised portion of this Warrant
for cash upon the closing of any
Acquisition for an amount equal to (a) the fair market value of
any consideration that would have been
received by Holder in consideration of the Shares had Holder
exercised the unexercised portion of this
Warrant immediately before the record date for determining the
shareholders entitled to participate in the
proceeds of the Acquisition, less (b) the aggregate Warrant Price
of the Shares, but in no event less than
zero.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 Stock Dividends, Splits, Etc. If the Company
declares or pays a dividend on its common
stock payable in common stock, or other securities, subdivides
the outstanding common stock into a
greater amount of common stock, then upon exercise of this
Warrant, for each Share acquired, Holder
shall receive, without cost to Holder, the total number and kind
of securities to which Holder would have
been entitled had Holder owned the Shares of record as of the
date the dividend or subdivision occur-red.
2.2 Reclassification, Exchange or Substitution.
Upon any reclassification, exchange,
substitution, or other event that results in a change of the
number and/or class of the securities issuable
upon exercise or conversion of this Warrant, Holder shall be
entitled to receive, upon exercise or
conversion of this Warrant, the number and kind of securities and
property that Holder would have
received for the Shares if this Warrant had been exercised
immediately before such reclassification,
exchange, substitution, or other event. Such an event shall
include any automatic conversion of the
outstanding or issuable securities of the Company of the same
class or series as the Shares to common
stock pursuant to the terms of the Company's Articles of
Incorporation upon the closing of a registered
public offering of the Company's common stock. The Company or its
successor shall promptly issue to
Holder a new Warrant for such new securities or other property.
The new Warrant shall provide for
adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in
this Article 2 including, without limitation, adjustments to the
Warrant Price and to the number of
securities or property issuable upon exercise of the new Warrant.
The provisions of this Section 2.2 shall
similarly apply to successive reclassifications, exchanges,
substitutions, or other events.
2.3 Adjustments for Combinations, Etc. If
the outstanding Shares are combined or
consolidated, by reclassification or otherwise, into a lesser
number of shares, the Warrant Price shall be
proportionately increased.
2.4 Adjustments for Diluting Issuances. The Warrant
Price and the number of Shares issuable
upon exercise of this Warrant shall be subject to adjustment,
from tirne to time, in the manner set forth on
Exhibit B, if attached, in the event of Diluting Issuances (as
defined on Exhibit B).
2.5 No Impairment. The Company shall not, by
amendment of its Articles of Incorporation or
through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities
or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to
be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in
carrying out all the provisions of this Article 2 and in taking
all such action as may be necessary or
appropriate to protect Holder's rights under this Article against
impairment. If the Company takes any
action affecting the Shares or its common stock other than as
described above that adversely affects
Holder's rights under this Warrant, the Warrant Price shall be
adjusted downward and the number of
Shares issuable upon exercise of this Warrant shall be adjusted
upward in such a manner that the
aggregate Warrant Price of this Warrant is unchanged.
2.6 Certificate as to Adjustments. Upon each
adjustment of the Warrant Price, the Company
at its expense shall promptly compute such adjustment, and
ftimish Holder with a certificate of its Chief
Financial Officer setting forth such adjustment and the facts
upon which such adjustment is based. The
Company shall, upon written request, furnish Holder a
certificate setting forth the Warrant Price in effect
upon the date thereof and the series of adjustments leading to
such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 Representations and Warranties. The Company
hereby represents and warrants to the
Holder as follows:
(a) The initial Warrant Price referenced
on the first page of this Warrant is not greater
than the fair market value of the Shares as of the date of this
Warrant,
(b) All Shares which may be issued upon
the exercise of the purchase right
represented by this Warrant, and all securities, if any,
issuable upon conversion of the Shares, shall, upon
issuance, be duly authorized, validly issued, fully paid and
nonassessable, and free of any liens and
encumbrances except for restrictions on transfer provided for
herein or under applicable federal and state
securities laws.
3.2 Notice of Certain Events. If the Company
proposes at any time (a) to declare any
dividend or distribution upon its common stock, whether in
cash, property, stock, or other securities and
whether or not a regular cash dividend; (b) to offer for
subscription pro rata to the holders of any class or
series of its stock any additional shares of stock of any class
or series or other rights; (c) to effect any
reclassification or recapitalization of common stock; (d) to
merge or consolidate with or into any other
corporation, or. sell, lease, license, or convey all or
substantially all of its assets, or to liquidate, dissolve, or
wind up; or (e) offer holders of registration rights the
opportunity to participate in an underwritten public
offering of the company's securities for cash, then, in
connection with each such event, the Company shall
give Holder (1) at least 20 days prior written notice of the
date on which a record will be taken for such
dividend, distribution, or subscription rights (and specifying
the date on which the holders of common
stock will be entitled thereto) or for determining rights to
vote, if any, in respect of the matters referred to
in (c) and (d) above; (2) in the case of the matters referred
to in (c) and (d) above at least 20 days prior
written notice of the date when the same will take place (and
specib ing the date on which the holders of
Y
common stock will be entitled to exchange their common stock
for securities or other property
deliverable upon the occurrence of such event); and (3) in the
case of the matter referred to in (e) above,
the same notice as is given to the holders of such registration
rights.
3.3 Information Riahts. So long as the Holder holds
this Warrant ad/or any of the Shares, the
Company shall deliver to the Holder (a) promptly after mailing,
copies of all communiques to the
shareholders of the Company, (b) within ninety (90) days after
the end of each fiscal year of the
Company, the annual audited financial statements of the Company
certified by independent public
accountants of recognized standing and (c) within forty-five
(45) days after the end of each of the first
three quarters of each fiscal year, the Company's quarterly,
unaudited financial statements.
3.4 Reizistration Under Securities Act of 1933, as
amended. The Company agrees that the
Shares shall be subject to the registration rights set forth on
Exhibit C.
ARTICLE 4. MISCELLANEOUS.
4.1 Tenn: Notice of Expiration. This Warrant is
exercisable, in whole or in part, at any time
and from time to time on or before the Expiration Date set forth
above. The Company shall give Holder
written notice of Holder's right to exercise this Warrant in the
form attached as Appendix 2 not more than
90 days and not less than 30 days before the Expiration Date. If
the notice is not so given, the Expiration
Date shall automatically be extended until 30 days after the
date the Company delivers the notice to
Holder.
4.2 Legends. This Warrant and the Shares (and the
securities issuable, directly or indirectly,
upon conversion of the Shares, if any) shall be imprinted with a
legend in substantially the following
form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF
UNDER SUCH
ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL
REASONABLY
SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT
SUCH
REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer.
This Warrant and the Shares issuabte upon
exercise this Warrant (and the securities issuable, directly or
indirectly, upon conversion of the Shares, if
any) may not be transferred or assigned in whole or in part
without compliance with applicable federal
and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of
investment representation letters and legal opinions reasonably
satisfactory to the Company). The
Company shall not require Holder to provide an opinion of
counsel if the transfer is to an affiliate of
Holder or if there is no material question as to the
availability of current information as referenced in Rule
144(c), Holder represents that it has complied with Rule 144(d)
and (e) in reasonable detail, the selling
broker represents that it has complied with Rule 144(f), and the
Company is provided with a copy of
Holder's notice of proposed sale.
4.4 Transfer Procedure. Subject to the provisions of
Section 4.2, Holder may transfer all or
part of this Warrant or the Shares issuable upon exercise of this
Warrant (or the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) by
giving the Company notice of the portion
of the Warrant being transferred setting forth the name, address
and taxpayer identification number of the
transferee and surrendering this Warrant to the Company for
reissuance to the transferee(s) (and Holder, if
applicable). Unless the Company is filing financial information
with the SEC pursuant to the Securities
Exchange Act of 1934, the Company shall have the right to refuse
to, transfer any portion of this Warrant
to any person who directly competes with the Company.
4.5 Notices. All notices and other communications
from the Company to the Holder, or vice
versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or
certified mail, postage prepaid, at such address as may have been
furnished to the Company or the
Holder, as the case may be, in writing by the Company or such
Holder from time to time.
4.6 Waiver. This Warrant and any term hereof may be
changed, waived, discharged or
terminated only by an instrument in writing signed by the party
against which enforcement of such
change, waiver, discharge or termination is sought.
4.7 Attorneys' Fees. In the event of any dispute
between the parties concerning the terms and
provisions of this Warrant, the party prevailing in such dispute
shall be entitled to collect from the other
party all costs incurred in such dispute, including reasonable
attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by
and construed in accordance with the
laws of the State of California, without giving effect to its
principles regarding conflicts of law.
FUSION MEDICAL TECHNOLOGIES, INC.
By:
Title:
APPENDIX I
NOTICE OF EXERCISE
I The undersigned hereby elects to purchase
shares of the Common Stock of
Fusion Medical Technologies, Inc. pursuant to the terms of the
attached Warrant, and tenders herewith
payment of the purchase price of such shares in full.
1. The undersigned hereby elects to convert the
attached Warrant into Shares/cash [strike
one] in the manner specified in the Warrant. This conversion is
exercised with respect to of the
Shares covered by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates
representing said shares in the name of the
undersigned or in such other name as is specified below:
Chief Financial Officer
Controllers Department
Imperial Bank or registered assignee
P.O. Box 92991
Los Angeles, CA 90009
3. The undersigned represents it is acquiring the
shares solely for its own account and not as
a nominee for any other party and not with a view toward the
resale or distribution thereof except in
compliance with applicable securities laws.
IMPERIAL BANK or registered assignee
(Signature)
(Date)
APPENDIX 2
NOTICE THAT WARRANT IS ABOUT TO EXPIRE
Chief Financial Officer
Controllers Department
Imperial Bank or registered assignee
P.O. Box 92991
Los Angeles, CA 90009
Dear Gentleperson:
This is to advise you that the Warrant issued to you
described below will expire on November 28,
2002.
Issuer: Fusion Medical
Technologies, Inc.
Issue Date: November 28,
1997
Class of Security Issuable: Common
Exercise Price Per Share: $4.00
Number of Shares Issuable: 4,500
Procedure for Exercise:
Please contact Bill Anderson at (650) 903-4067 with any
Questions you may have concerning
exercise of the Warrant. This is your only notice of
pending expiration.
Fusion Medical Technologies, Inc.
By:
-----------------------
Its:
-----------------------
EXHIBIT A
Omitted
EXHIBIT B
IMPERIAL BANK or registered assignee
ANTIDILUTION AGREEMENT
This Antidilution Agreement is entered into as of November
28, 1997, by and between Imperial
Bank or registered assignee, ("Purchaser") and Fusion Medical
Technologies, Inc. ("the Company").
RECITALS
A. Concurrently with the execution of this
Antidilution Agreement, the Purchaser is
purchasing from the Company a Warrant to Purchase Stock (the
"Warrant") pursuant to which
Purchaser has the right to acquire from the Company the Shares (as
defined in the Warrant).
B. By this Antidilution Agreement, the Purchaser and
the Company desire to set forth the
adjustment in the number of Shares issuable upon exercise of the
Warrant as a result of a Diluting
Issuance (as defined in Exhibit A to the Warrant).
C. Capitalized terms used herein shall have the same
meaning as set forth in the Warrant.
NOW, THEREFORE, in consideration of the mutual
promises, covenants and
conditions hereinafter set forth, the parties hereto mutually
agree as follows:
I . Definitions. As used in this Antidilution
Agreement, the following terms have
the following respective meanings:
(a) "Option" means any right, option or warrant to
subscribe for, purchase or otherwise
acquire common stock or Convertible Securities.
(b) "Convertible Securities" means any evidences of
indebtedness, shares of stock or other
securities directly or indirectly convertible into or exchangeable
for common stock.
(c) "Issue" means to grant, issue, sell, assume or fix
a record date for determining persons
entitled to receive any security (including Options), whichever of
the foregoing is the first to occur.
(d) "Additional Common Shares" means all common. stock
(including reissued shares)
Issued (or deemed to be issued pursuant to Section 2) after the
date of the Warrant. Additional
Common Shares does not include, however, any common stock Issued
in a transaction described in
Sections 2.1 and 2.2 of the Warrant; any common stock Issued upon
conversion of preferred stock
outstanding on the date of the Waff ant; the Shares; or common.
stock Issued as incentive or in a
nonfinancing transaction to employees, officers, directors or
consultants to the Company.
(e) The shares of common stock ultimately Issuable upon
exercise of an Option (including
the shares of common stock ultimately Issuable upon conversion or
exercise of a Convertible Security
Issuable pursuant to an Option) are deemed to be Issued when the
Option is Issued. The shares of
common stock ultimately Issuable upon conversion or exercise of a
Convertible Security (other than a
Convertible Security Issued pursuant to an Option) shall be deemed
Issued upon Issuance of the
Convertible Security.
2. Deemed Issuance of Additional Cornmon Shares. The
shares of common stock
ultimately Issuable upon exercise of an Option (including the
shares of common stock ultimately
Issuable upon conversion or exercise of a Convertible Security
Issuable pursuant to an Option) are
deemed to be Issued when the Option is Issued. The shares of
common stock ultimately Issuable upon
conversion or exercise of a Convertible Security (other than a
Convertible Security Issued pursuant to
an Option) shall be deemed Issued upon Issuance of the Convertible
Security. The maximum amount
of common stock Issuable is determined without regard to any
future adjustments permitted under the
instrument creating the Options or Convertible Securities.
3. Adiustment of Warrant Price for Dilutinp,
Issuances.
3.1 Weighted Average Adiustment. If the Cornpany
issues Additional Common
Shares after the date of the Warrant and the consideration per
Additional Common Share (determined
pursuant to Section 9) is less than the Warrant Price in effect
immediately before such Issue, the
Warrant Price in effect immediately before such Issue shall be
reduced, concurrently with such Issue,
to a price (calculated to the nearest hundredth of a cent)
determined by multiplying the Warrant Price
by a fraction:
(a) the numerator of which is the amount of
common stock outstanding immediately
before such Issue plus the amount of common stock that the
aggregate consideration received by
Company for the Additional Common Shares would purchase at the Warrant Price in
effect
immediately before such Issue, and
(b) the denominator of which is the amount of
common stock outstanding
immediately before such Issue plus the number of such Additional
Shares.
3.2 Adiustment of Number of Shares. Upon each
adjustment of the Warrant Price,
the number of Shares Issuable upon exercise of the Warrant shall.
be increased to equal the quotient
obtained by dividing (a) the product resulting from multiplying
(i) the number of Shares Issuable upon
exercise of the Warrant and (ii) the Warrant Price, in each case
as in effect immediately before such
adjustment, by (b) the adjusted Warrant Price.
3.3 Securities Deemed Outstanding. For the
purpose of this Section 3, all securities
Issuable upon exercise of any outstanding Convertible Securities
or Options, Warrants, or other rights
to acquire securities of the Company shall be deemed to be
outstanding.
4. No Adjustment for Issuances Following Deemed
Issuances. No adjustment to the
Warrant Price shall be made upon the exercise of Options or
conversion of Convertible Securities.
5. Adjustment Following Changes in Terms of Options or
Convertible Securities. If the
consideration payable to, or the amount of common stock Issuable
by, the Company increases or
decreases, respectively, pursuant to the terms of any outstanding
Options or Convertible Securities, the
Warrant Price shall be recomputed to reflect such increase or
decrease. The recomputation shall be
made as of the time of the Issuance of the Options or Convertible
Securities. Any changes in the
Warrant Price that occurred after such Issuance because other
Additional Common Shares were Issued
or deemed Issued shall also be recomputed.
6. Recomputation Upon Expiration of Options or
Convertible Securities. The Warrant
Price computed upon the original Issue of any Options or
Convertible Securities, and any subsequent
adjustments based thereon, shall be recomputed when any Options or
rights of conversion under
Convertible Securities expire without having been exercised, In
the case of Convertible Securities or
Options for common stock, the Warrant Price shall be recomputed as
if the only Additional Common
Shares Issued were the shares of common stock actually Issued upon
the exercise of such securities, if
any, and as if the only consideration received therefor was the
consideration actually received upon the
Issue, exercise or conversion of the Options or Convertible
Securities. In the case of Options for
Convertible Securities, the Warrant Price shall be recomputed as
if the only Convertible Securities
Issued were the Convertible Securities actually Issued upon the
exercise thereof, if any, and as if the
only consideration received therefor was the consideration
actually received by the Company
(determined pursuant to Section 9), if any, upon the Issue of the
Options for the Convertible Securities.
7. Limit on Readjustments. No readjustment of the
Warrant Price pursuant to Sections 5 or
6 shall increase the Warrant Price more than the amount of any
decrease made in respect of the Issue of
any Options or Convertible Securities.
8. 30 Dqy Options. In the case of any Options that
expire by their terms not more than 30
days after the date of Issue thereof, no adjustment of the Wan-ant
Price shall be made until the
expiration or exercise of all such Options.
9. Computation of Consideration. The consideration
received by the Company for the
Issue of any Additional Common Shares shall be computed as
follows:
(a) Cash shall be valued at the amount of cash received
by the Corporation, excluding
amounts paid or payable for accrued interest or accrued dividends.
(b) Property. Property, other than cash, shall be
computed at the fair market value thereof at
the time of the Issue as determined in good faith by the Board of
Directors of the Company.
(c) Mixed Consideration. The consideration for
Additional Common Shares Issued together
with other property of the Company for consideration that covers
both shall be determined in good
faith by the Board of Directors.
(d) Options and Convertible Securities. The
consideration per Additional Common Share
for Options and Convertible Securities shall be determined by
dividing:
(i) the total amount, if any, received or
receivable by the Company for the Issue of
the Options or Convertible Securities, plus the minimum amount of
additional consideration (as set
forth in the instruments relating thereto, without regard to any
provision contained therein for a
subsequent adjustment of such consideration) payable to the
Company upon exercise of the Options or
conversion of the Convertible Securities, by
(ii) the maximum amount of common stock (as
set forth in the instruments relating
thereto, without regard to any provision contained therein for a
subsequent adjustment of such number)
ultimately Issuable upon the exercise of such Options or the
conversion of such Convertible Securities.
10. General.
10.1 Governing Law. This Antidilution
Agreement shall be governed in all respects
by the laws of the State of California as such laws are applied
to agreements between California
residents entered into and to be performed entirely within
California.
10.2 Successors and Assigns. Except as
otherwise expressly provided herein, the
provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs,
executors and administrators of the parties hereto.
10.3 Entire Agreement. Except as set forth
below, this Antidilution Agreement and
the other documents delivered pursuant hereto constitute the full
and entire understanding and
agreement between the parties with regard to the subjects hereof
and thereof.
10.4 Notices, etc. All notices and other
communications required or permitted
hereunder shall be in writing and shall be mailed by first class
mail, postage prepaid, certified or
registered mail, return receipt requested, addressed (a) if to
Purchaser at Purchaser's address as set forth
below, or at such other address as Purchaser shall have furnished
to the Company in writing, or (b) if to
the Company, at the Company's address set forth below, or at such
other address as the Company shall
have furnished to the Purchaser in writing.
10.5 Severability. In case any provision of
this Antidilution Agreement shall be
invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions of
this Antidilution Agreement shall not in any way be affected or
impaired thereby.
10.6 Titles and Subtitles. The titles of the
sections and subsections of this Agreement
are for convenience of reference only and are not to be
considered in construing this Antidilution
Agreement.
10.7 CounteEparts. This Antidilution 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.
PURCHASER ISSUER
IMPERIAL BANK
or registered assignee FUSION MEDICAL TECHNOLOGIES, INC.
By: By:
Name: Name:
Title: Title:
Address: Address:
EXHIBIT C
Registration Rights
The Shares shall be deemed "registrable securities" or
otherwise entitled to "piggy back"
registration rights in accordance with the terms of the following
agreement (the "Agreement") between
the Company and its investor(s):
[Identify Agreement by date, title and parties. If
no Agreement
exists, indicate by "none."]
The Company agrees that no amendments will be made to the
Agreement which would have an
adverse impact on Holder's registration thereunder without the
consent of Holder. By acceptance of the
Warrant to which this Exhibit C is attached, Holder shall not be
deemed to be a party to the Agreement,
but solely entitled to the registration rights created thereby.
If no Agreement exists, then the Company and the Holder
shall enter into Holder's standard form
of Registration Rights Agreement as in effect on the Issue Date of
the Warrant.
<PAGE>
<TABLE> <S> <C>
<S> <C><ARTICLE> 5<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,473,284
<SECURITIES> 5,464,753
<RECEIVABLES> 20,903
<ALLOWANCES> 10,000
<INVENTORY> 0
<CURRENT-ASSETS> 13,166,269
<PP&E> 808,690
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,540,111
<CURRENT-LIABILITIES> 1,316,463
<BONDS> 0
0
0
<COMMON> 7,118
<OTHER-SE> 14,216,530
<TOTAL-LIABILITY-AND-EQUITY> 15,540,111
<SALES> 153,482
<TOTAL-REVENUES> 153,482
<CGS> 967,884
<TOTAL-COSTS> 10,072,295
<OTHER-EXPENSES> 959,060
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,435
<INCOME-PRETAX> (9,952,072)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,952,072)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,952,072)
<EPS-PRIMARY> (1.41)
<EPS-DILUTED> (1.41)
</TABLE>
