<PAGE>
As filed with the Securities and Exchange Commission on March 11, 1999
Registration No. 333-72001
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
FUSION MEDICAL TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 3842 94-3177221
(State of (Primary Standard Industrial (I.R.S. Employer
incorporation) Classification Code Number) Identification Number)
</TABLE>
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
PHILIP M. SAWYER
President and Chief Executive Officer
Fusion Medical Technologies, Inc.
1615 Plymouth Street
Mountain View, California 94043
(650) 903-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
J. CASEY MCGLYNN, ESQ. FREDERICK T. MUTO, ESQ.
JOHN T. SHERIDAN, ESQ. NANCY E. DENYES, ESQ.
DAVID J. SAUL, ESQ. Cooley Godward LLP
Wilson Sonsini Goodrich & Rosati 4365 Executive Drive, Suite 1100
Professional Corporation San Diego, California 92121
650 Page Mill Road (619) 550-6000
Palo Alto, California 94304
(650) 493-9300
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If only the securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered in connection with dividend or interest
reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to such
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We +
+cannot sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 11, 1999
PROSPECTUS
1,700,000 Shares
[LOGO OF FUSION MEDICAL TECHNOLOGIES, INC.]
Common Stock
------------
Fusion is selling 1,700,000 shares of common stock.
Our shares are listed for trading on the Nasdaq National Market under the
symbol "FSON." On March 8, 1999, the last reported sale price of our common
stock on the Nasdaq National Market was $6.00.
Investing in common stock involves risks.
See "Risk Factors" starting on page 6.
------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is complete or truthful. Any representation to the contrary is
a criminal offense.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
- --------------------------------------------------------------------------------
<S> <C> <C>
Public offering price.........................................
Placement agent's commission..................................
Fusion's proceeds.............................................
</TABLE>
- --------------------------------------------------------------------------------
We have retained ING Baring Furman Selz LLC to act, on a best efforts basis,
as the placement agent in marketing this offering to selected institutional
investors. Prior to the closing date, all investor funds will be placed in
escrow with an escrow agent. Before accepting investor funds, we will deposit
with the Depository Trust Company the shares to be credited to the accounts of
the investors. However, if we decide not to accept funds from any investor, the
escrow agent will promptly refund such investor's money.
------------
ING Baring Furman Selz LLC
, 1999
<PAGE>
FloSeal has been shown to control
even heavy bleeding within minutes
[Picture of FloSeal product]
FloSeal combines
a collagen-based gel
with thrombin. It is
designed to control
bleeding in various
types of surgery.
Fusion recently
submitted its full
premarket approval
application for
FloSeal, which
included data from its
309-patient pivotal
clinical trial. The
results of the trial
are described in
detail in this
prospectus.
[Illustration of FloSeal bleeding control process]
1 2 3
FloSeal is delivered Blood interacts with Excess FloSeal can
as a granular gel to the thrombin-coated be removed by the
the bleeding site with granules, which then surgeon with gentle
a standard disposable swell by 10-20%, irrigation without
syringe. FloSeal may creating a damming causing rebleeding.
be held in place at effect at the Those granules
the wound site with bleeding site. incorporated into
very little pressure, Together the blood the clot are
even in cases of heavy and thrombin-coated absorbed by the body
bleeding. granules form a within six to eight
clot. weeks.
FloSeal and our other products under development have not been approved for
sale in the United States by the United States Food and Drug
Administration. FloSeal and our other products in development might not be
successfully developed or approved by regulatory authorities for sale.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all the information you
should consider before buying shares in the offering. You should read the
entire prospectus carefully, especially the risks described below under "Risk
Factors."
Fusion Medical Technologies, Inc.
We are developing and commercializing proprietary collagen gel-based
products for use in controlling bleeding in a variety of surgeries. Our lead
product is FloSeal Matrix Hemostatic Sealant, which combines a gel derived from
collagen with thrombin, a potent clotting agent, to control surgical bleeding.
In November 1998, we completed enrollment in a 309-patient U.S. pivotal
clinical trial for FloSeal in patients undergoing cardiac, vascular and spinal
surgery. The pivotal trial was designed primarily to test whether FloSeal
stopped bleeding within ten minutes at least as frequently as the Gelfoam plus
thrombin control.
The trial showed that FloSeal stopped patients' bleeding within ten minutes
in 96% of all patients treated with FloSeal, whereas Gelfoam plus thrombin
stopped patients' bleeding within ten minutes in 77% of all patients in the
control group. The trial also showed that FloSeal stopped patients' bleeding at
least two times more quickly than Gelfoam plus thrombin. We completed
submission of our premarket approval application for FloSeal in February 1999.
If the FDA accepts our application and approves FloSeal on a timely basis, we
expect to commercialize the product in the United States in early 2000. We have
also filed for European regulatory clearance and expect to receive required
certification by mid-1999 and to commercialize FloSeal in Europe shortly
thereafter.
We have designed FloSeal to complement sutures and staples and to overcome
limitations of existing products used to control bleeding, including topical
hemostats, fibrin glues and other types of surgical sealants and adhesives. We
believe that FloSeal offers the following key performance advantages:
. Stops Bleeding Rapidly and Effectively. FloSeal's proprietary physical
structure rapidly induces stable clot formation and seals the wound site,
even in challenging surgical situations, including very wet tissue and
heavily bleeding sites.
. Stop Various Types of Bleeding. A subanalysis of our clinical data
demonstrated that FloSeal stopped all degrees of bleeding encountered,
ranging from lighter "oozing" to heavier "flowing" and "spurting." For
example, a secondary endpoint analysis in our pivotal trial showed that
in cases of heavy bleeding experienced by some cardiac patients FloSeal
stopped bleeding within three minutes in 77% of patients treated with
FloSeal, as compared to 0% for those treated with Gelfoam plus thrombin.
The clinical data is located under "Business--Fusion's Products".
. Easy to Prepare. FloSeal can be prepared within two minutes and can be
used for up to two hours after preparation. No special equipment is
required during preparation, and all materials are contained in one
simple package.
. Broad Applicability. In addition to the cardiac, vascular and spinal
surgical specialties, in which FloSeal was tested in our U.S. pivotal
clinical trials, FloSeal has been used outside the United States in other
surgical specialties, including nasal and sinus, gynecologic and general
surgery.
. Biocompatible. FloSeal is biocompatible and fully absorbed by the body
within approximately six to eight weeks, consistent with the body's
normal healing process. The materials used in FloSeal are naturally
occurring and have a safe history of use in humans.
3
<PAGE>
We are also currently developing additional bleeding control products based
upon the core technology underlying FloSeal. These products include SinuSeal,
for use in ear, nose and throat surgeries, and VASC, for sealing femoral artery
punctures following vascular interventional procedures. We expect to file a
premarket approval supplement for SinuSeal shortly after obtaining FloSeal
approval. We expect to begin clinical trials for VASC in late 1999.
Assuming timely regulatory approvals, we expect to generate revenues from
the sale of FloSeal within the next 12 months. We also anticipate, however,
incurring increased expenses relating to FloSeal sales and additional research
and development. We therefore do not expect to achieve profitability before
2001.
Our address is 1615 Plymouth Street, Mountain View, California 94043, and
our telephone number is (650) 903-4000.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common Stock Offered.......................... 1,700,000 shares
Common Stock Outstanding after this Offering.. 8,911,086 shares(/1/)
Use of Proceeds............................... Regulatory approvals,
manufacturing scale-up and
commercialization of FloSeal,
research and development and
working capital and general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market Symbol................. FSON
</TABLE>
- --------
(1) Based on shares outstanding on December 31, 1998, excluding 1,041,150
shares of common stock reserved for issuance pursuant to outstanding stock
options at a weighted average exercise price of $3.31 per share and
warrants to purchase 12,785 shares of common stock at an exercise price of
$4.00 per share. Also excludes 808,434 shares of common stock reserved for
future issuance under the 1993 Stock Option Plan, the 1996 Employee Stock
Purchase Plan and the 1996 Director Option Plan. See Note 8 of Notes to
Consolidated Financial Statements, "Management--Incentive Stock Plans" and
"Description of Capital Stock."
Summary Consolidated Financial Data
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net sales....................... $ -- $ -- $ 31 $ 153 $ --
Cost of sales and start-up
manufacturing costs............ -- -- 196 968 --
------- ------- ------- -------- -------
Gross loss...................... -- -- (165) (815) --
------- ------- ------- -------- -------
Operating expenses:
Research and development....... 756 2,650 4,693 5,647 6,145
Sales and marketing............ 67 142 1,582 2,421 614
General and administrative..... 349 841 1,426 2,004 1,474
------- ------- ------- -------- -------
Total operating expenses...... 1,172 3,633 7,701 10,072 8,233
------- ------- ------- -------- -------
Loss from operations............ (1,172) (3,633) (7,866) (10,887) (8,233)
Interest income, net............ 17 351 910 984 542
Other income (expense), net..... 2 1 -- (49) 4
------- ------- ------- -------- -------
Net loss........................ $(1,153) $(3,281) $(6,956) $ (9,952) $(7,687)
======= ======= ======= ======== =======
Basic and diluted net loss per
share.......................... $ (0.81) $ (2.31) $ (1.52) $ (1.41) $ (1.08)
Shares used in computing basic
and diluted net loss per
share.......................... 1,431 1,423 4,563 7,070 7,145
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
------------------------
Actual As Adjusted(1)
-------- --------------
<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and available-for-sale
securities.......................................... $ 7,164 $ 16,327
Working capital...................................... 6,242 15,405
Total assets......................................... 8,088 17,251
Long-term debt, including current portion............ 321 321
Accumulated deficit.................................. (29,232) (29,232)
Total stockholders' equity........................... 6,827 15,990
</TABLE>
- --------
(1) Adjusted to give effect to the receipt of assumed net proceeds from the
sale of the 1,700,000 shares of common stock at an estimated offering price
of $6.00 per share and after deducting the placement agent's commission and
estimated offering expenses. Actual proceeds and the actual number of
shares sold may differ.
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occur, our
business, financial condition or results of operations could be materially
adversely affected. As a result, the trading price of our common stock could
decline, and you may lose all or part of your investment. This prospectus also
contains forward-looking statements that involve risks and uncertainties.
We did not generate any revenues in 1998 and 1999; we have a history of losses
and we expect losses to continue in the future.
We have not achieved profitability and expect to incur net losses through at
least 2001. We incurred net losses of $7.0 million, $10.0 million and $7.7
million for the years ended December 31, 1996, 1997 and 1998, respectively. As
of December 31, 1998, we had an accumulated deficit of $29.2 million. We have
not had significant revenues in any period since our inception. We expect to
increase our operating expenses in the near future, including sales and
marking, manufacturing and research and development expenses, as we approach
commercialization of FloSeal and continue development of our other products. As
a result, we will need to generate significant revenues to achieve and maintain
profitability. The amount of future net losses and the time required to achieve
profitability are highly uncertain. If we do achieve profitability in any
period, we cannot be certain that we will sustain or increase such
profitability on a quarterly or annual basis. For more detailed information
regarding our operating results and financial condition, please see "Selected
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The success of our business depends upon the success of FloSeal.
We are dependent upon the success of our lead product under development,
FloSeal. We have not yet received necessary regulatory approval for the
commercial sale of FloSeal in the United States or Europe. Our success after
regulatory approval, if any, will depend on the medical community's acceptance
of FloSeal and our ability to successfully scale up commercial manufacturing
and develop an effective sales, marketing and distribution capability. We
cannot predict how quickly, if at all, the medical community will accept
FloSeal, or if accepted, the extent of its use. A surgeon's use of FloSeal will
require the surgeon to change from his or her usage of currently available
products with which they are familiar. For FloSeal to achieve market
acceptance, it will have to be priced competitively and offer clinically
significant advantages over other commercially available products. Even if the
market generally accepts FloSeal, surgeons may choose to use it in fewer
procedures than projected. If FloSeal does not achieve significant market
adoption, our business will be materially and adversely affected.
Significant increases in operating expenses in the future may adversely effect
our operating results and financial condition.
We plan to significantly increase our operating expenses to expand our sales
and marketing operations and broaden our customer support capabilities as we
approach commercial introduction of FloSeal and fund greater levels of product
development. Our operating expenses, which include sales and marketing,
research and development and general and administrative expenses, are based on
our expectations of future revenues and are relatively fixed in the short term.
If revenues fall below our expectations, we will not be able to quickly reduce
our spending in response, which would materially adversely affect our operating
results and financial condition.
Our limited operating history, dependence upon an unapproved product and lack
of experience in manufacturing and marketing FloSeal may result in significant
fluctuations of our financial results.
Our limited operating history, dependence upon FloSeal, an unapproved
medical device, to provide revenue and our lack of experience in manufacturing
and marketing FloSeal may likely cause our operating results to fluctuate
dramatically. As a result of these fluctuations and uncertainties in our
operating results, we
6
<PAGE>
believe that quarter-to-quarter or annual comparisons of our operating results
are not a good indication of our future performance. In addition at some point
in the future, these fluctuations may likely cause us to perform below the
expectations of public market analysts and investors. If our results were to
fall below market expectations, the price of our common stock would likely
fall. Our limited operating results have varied widely in the past, and we
expect that they will continue to vary significantly from quarter-to-quarter as
we attempt to commercially produce and establish our products in the market,
after the appropriate governmental approvals, if any, are received.
After this offering is completed, we will need to raise additional money before
we expect to achieve profitability.
We expect to receive net proceeds of approximately $9.2 million from this
offering. We anticipate that the funds from this offering plus our current cash
and cash equivalents will only allow us to run our planned operations through
the next 12 months, which is prior to the time that we expect to achieve
profitability. As a result, we must raise additional funds after this offering
in order to be successful. Alternative financing strategies may include, but
are not limited to:
. partnering relationships with larger medical device companies,
. bank facilities, or
. debt or additional equity offerings.
In addition, if we do not raise the full amount contemplated in this
offering, we will need to raise additional funds sooner than anticipated. If we
are unable to raise additional funds when needed, we may not be able to market
FloSeal as planned, or continue development of our other products, which would
materially and adversely affect our business.
Additional funding may not be available to us or, if available, may not be
available on commercially reasonable terms.
When we need to raise additional money to fund our operations, we cannot be
certain that funding from any source will be available to us on acceptable
terms, or at all. The amount and the timing of raising additional funds will
depend primarily upon our ability to obtain needed regulatory clearances and
generate revenues from the sale of FloSeal. Our inability to obtain any
additional funding on reasonable terms will materially and adversely affect our
business.
We must obtain governmental approvals before we can sell our products; we must
continue to comply with applicable laws and regulations.
FloSeal is considered to be a medical device and will be subject to
extensive regulation in the United States and internationally. Before we can
market FloSeal or any of our other products under development in the United
States or Europe, we must show in clinical trials that our products are safe
and effective, and obtain approval from applicable governmental authorities,
which cannot be guaranteed. Clinical trial data can also be the subject of
differing interpretation. There is no assurance that FDA will interpret our
clinical data the same way we do, or that FDA will not require additional
clinical data to support approval.
If we get approval, we will continue to be subject to extensive regulatory
requirements. These regulations are wide-ranging and govern, among other
things:
. product development,
. product testing,
. product labeling,
7
<PAGE>
. product storage,
. premarket clearance or approval,
. advertising and promotion, and
. product sales and distribution.
If we fail to comply with medical device laws or regulations, we may be
fined and barred from selling our products.
In the United States, we must obtain premarket approval from the FDA for
FloSeal before we can market it. We have recently completed submission of our
full premarket approval application. Currently, the time required to obtain
premarket approval averages approximately 12 months, but timing is uncertain
and the process may be significantly longer. We cannot guarantee either the
timing or receipt of approval.
Regulatory agencies may limit the uses of FloSeal or any of our other
products during the approval process. Further, they may restrict or withdraw
approval of a product if additional information becomes available to support
such action. Delays in the FloSeal approval process, limitation of its labeling
claims or denial of our premarket approval application would cause our business
to be materially and adversely affected. We will face a similar process and
similar risks for each product that we wish to market, including SinuSeal.
We are also required to demonstrate compliance with Quality System
regulations before approval of FloSeal, and maintain compliance after approval.
The Quality System regulations are similar to good manufacturing practices and
relate to product testing and quality assurance, as well as the maintenance of
records and documentation. The FDA enforces the Quality System regulations
through pre-approval and periodic post-approval inspections. We have never been
through a Quality System inspection by the FDA, and we can provide no assurance
that we will be able to pass such an inspection or maintain compliance. If we
or any third party manufacturer of our products do not conform to the Quality
System regulations and cannot be brought up to such a standard, we will be
required to find alternative manufacturers that do conform. This may be a long
and difficult process.
We are subject to numerous federal, state and local laws relating to such
matters as:
. safe working conditions,
. manufacturing practices,
. environmental protection,
. fire hazard control, and
. disposal of hazardous or potentially hazardous substances.
We may have to incur significant costs to comply with such laws and regulations
and our failure to comply with them could lead to penalties that could have a
material and adverse affect on our business.
International sales of our products will also be subject to extensive
regulation. In order to market FloSeal and other products in the member
countries of the European Union, we are required to obtain CE mark
certification. CE mark certification is an international symbol of adherence to
certain quality assurance standards and compliance with the European Medical
Devices Directives. In February 1997, we received ISO 9001 and EN 46001
qualification of our processes, which is one of the principal steps in the CE
mark certification process. In September 1998, we filed an application for CE
mark certification of FloSeal in the EU. Unless we receive and maintain CE mark
certification, we cannot sell FloSeal in the EU, which would have a material
and adverse affect on our business.
8
<PAGE>
Our sales, marketing and distribution capabilities for FloSeal and our other
products are limited.
If we fail to establish a sufficient marketing and distribution or direct
sales force to commercialize FloSeal or any of our other products, our ability
to enter new or existing markets will be impaired. Our inability to effectively
enter these markets would materially and adversely affect our business. The
alternatives for selling our products are:
. distribution agreements,
. collaborative arrangements with corporate strategic partners, or
. our own direct sales force.
We have not and we cannot be certain that we will be able to enter into
distribution agreements or collaborative arrangements on a timely basis or at
all, or that these relationships will be successful. We have only limited
experience in establishing and managing a direct sales force, from selling the
RapiSeal patch, a prior product line, and we cannot be certain that we can
establish and manage a direct sales force for FloSeal. Our ability to achieve
any significant revenue will depend heavily upon our success in establishing
effective sales and market capabilities, either through distribution or
collaboration arrangements, a direct sales force or a combination of these.
A large number of approved products compete directly with FloSeal.
The market for products that control surgical bleeding is highly
competitive. A wide variety of approved products such as Gelfoam plus thrombin
and fibrin glues, exist today that will compete directly with FloSeal, which
has not yet received approval for domestic or international sale. Many
competitive products are produced by companies that have competitive advantages
over us, such as:
. greater name recognition,
. broader product lines,
. greater distribution capabilities,
. substantially greater capital resources, and
. larger marketing, research and development staffs and facilities.
Such companies include, for example Upjohn, Inc. and Johnson & Johnson. We
cannot be certain FloSeal or our other products will be able to successfully
compete against these products and companies, or any other companies which may
enter the marketplace. In addition, we cannot be certain that current
competitors or other companies will not succeed in developing technologies and
other products that are more effective or that would render our technology or
products obsolete or unable to compete.
We may be unable to protect our intellectual property.
We regard elements of FloSeal as proprietary and we attempt to protect them
through patent and trade secret laws and restrictions, as well as licenses and
contractual confidentiality provisions. Any steps that we take to protect our
intellectual property may be inadequate and expensive. Despite our efforts, we
may be unable to prevent third parties from infringing upon or misappropriating
our intellectual property. We have five pending U.S. patent applications
relating to FloSeal and other products under development, but no issued
patents. We also have two corresponding international patent applications filed
under the Patent Cooperation Treaty and may file additional patent applications
outside the United States at a later date. Obtaining foreign patents may be
more difficult than obtaining domestic patents because of differences in patent
laws. Protection provided by foreign patents, if obtained, and any other
foreign intellectual property protection may be weaker than that provided
domestically. Any existing or new patent applications, domestic or
international, may not result in:
. the priority of our patent applications over others' applications or
issued patents,
9
<PAGE>
. the issuance of any patents, or
. any competitive advantage.
Furthermore, our competitors may independently develop similar technology in
the future that substantially limits the value of our intellectual property.
FloSeal or our other products under development may infringe patents that have
not yet issued.
We have conducted searches to determine whether our patent applications
interfere with existing patents. Based upon these searches, we believe that our
patent applications and products do not interfere with existing patents.
However, we cannot be sure that relevant patents have not been issued that
could block our ability to obtain patents or commercialize our products.
Moreover, since U.S. patent applications are not a matter of public record, a
patent application could currently be on file that would stand in our way of
obtaining an issued patent. In addition, 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
surgical sealing. The issuance of any of these potentially competing patents
could materially and adversely affect our business.
Infringement claims may be brought against us.
The medical device industry is characterized by extensive litigation
regarding patents and other intellectual property rights. Many medical device
companies have employed intellectual property litigation as a way to gain a
competitive advantage. We cannot be certain that third parties will not sue us
in the future to challenge our patent rights or claim infringement of their
patents. An adverse determination in litigation or interference proceedings to
which we may become a party could:
. subject us to significant liabilities to third parties,
. require us to license disputed rights from third parties, and
. require us to cease using the disputed technology.
Although patent and intellectual property disputes in the medical device area
are often settled through licensing or similar arrangements, costs associated
with these arrangements may be substantial and could include ongoing royalties.
Furthermore, we cannot be certain that the necessary licenses would be
available to us on satisfactory terms, if at all. Any of these results could
materially and adversely affect our business operations.
The European fear of "mad cow disease" could adversely impact acceptance of our
products in Europe.
There is uncertainty as to the European acceptance of products that
incorporate elements derived from cows. This uncertainty is due to concerns
over transmission of disease from cows to humans. This disease in cows is
commonly referred to as "mad cow disease." Transmission of this disease to
humans may cause serious illness or death. FloSeal and our other products under
development contain thrombin and gelatin derived from bovine tissue only from
traceable U.S. herds. There have been no cases of mad cow disease associated
with cattle from traceable U.S. herds. Despite this fact, concerns over
transmission of this disease to humans may prevent or substantially delay the
acceptance of FloSeal in Europe. A delay could materially and adversely affect
our business.
We have never manufactured commercial quantities of FloSeal.
We have produced FloSeal for use in Canada and for our U.S. clinical trial.
However, we have no experience manufacturing FloSeal or any of our other
products under development in the amounts necessary to achieve significant
commercial sales. We are currently expanding our manufacturing capacity, but we
cannot be certain that we will be capable of reliable, high-volume
manufacturing at commercially reasonable costs. We
10
<PAGE>
believe that our manufacturing capacity will be sufficient through 2000.
However, we could encounter problems related to:
.capacity constraints,
.production yields,
.quality control, and
.shortages of qualified personnel.
Such problems could affect our ability to adequately scale-up production of our
products and fulfill customer orders on a timely basis, which could materially
and adversely affect our business.
Our manufacturing facilities will be subject to Quality System regulations,
international quality standards and other regulatory requirements, including
preapproval inspection for FloSeal and periodic post-approval inspections for
all products. We have never undergone a Quality System inspection by FDA, and
cannot guarantee we will pass such an inspection. Our failure to implement and
maintain our facilities in accordance with these regulatory requirements and
standards will result in a delay or termination of production. Any delay or
termination of production would materially and adversely affect our business.
We purchase bovine hides, thrombin and sterilization services from single
source suppliers.
We currently purchase bovine hides and thrombin, essential elements of
FloSeal, as well as sterilization services for the end product, from single
suppliers. We do not have long-term supply arrangements with any of these
suppliers. In the event that any of our current single source suppliers become
unavailable for any reason, we will be required to obtain regulatory approval
of alternative suppliers and our business would be disrupted. Any disruption
caused by a loss of one of these suppliers could materially and adversely
affect our business.
We may be adversely affected by the Year 2000 computer problem.
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on January
1, 2000, computer systems and software used by many companies and organizations
in a wide variety of industries (including technology, transportation,
utilities, finance and telecommunications) will produce erroneous results or
fail unless they have been modified or upgraded to process date information
correctly. Our primary exposure with respect to this problem involves third
party software we have purchased or licensed for our financial systems
(including general ledger, accounts payable and payroll modules), network and
telecommunications equipment. Our financial systems software is Year 2000
compliant. We have obtained the software needed to make our network Year 2000
compliant. We have analyzed the Year 2000 risk with regard to our
telecommunications equipment and have concluded that there is no material Year
2000 risk.
We also rely on the business systems of customers, suppliers, creditors,
financial organizations and governments, both domestically and internationally,
to accurately exchange and process data and information. We are also in the
process of verifying compliance by external vendors that supply us with any
material software and information systems and are communicating with
significant suppliers to determine their Year 2000 readiness. To date, we have
not encountered any material Year 2000 problems with software and information
systems provided to us by third parties. We have contacted our suppliers of
bovine hides and thrombin, the two essential supplies we require for FloSeal
and have confirmed that there is no material Year 2000-associated risk of a
delay in supply from these sources.
While we expect to complete an estimate of our Year 2000 project costs
during the first half of 1999, we do not expect that the total costs of these
Year 2000 compliance activities will be material to our business. However,
these costs and the timing with which we plan to complete our Year 2000
modifications and testing processes are based on our management's estimates.
Since our assessment process is ongoing, we may yet learn
11
<PAGE>
of significant Year 2000 complications that could not be corrected on a timely
basis. While the manufacture of our products are not dependent on computer chip
driven processes, any interruption in receipt of supplies, delivery of goods by
outside carriers, or processing of orders by distributors could have a material
adverse effect on our business. If, for example, a supplier is unable to
provide us with the needed raw materials inventory to produce our products, our
contingency plan is to have a secondary source in place whenever possible. For
those items where no secondary source exists, our plan is to carry
approximately three to four months of inventory to allow us to continue
operations until that source has recovered from any Year 2000 issues.
The adoption of the Euro may result in increased competition for European
sales.
In January 1999, the new "Euro" currency was introduced in certain European
countries that are part of the European Monetary Union. Beginning in 2003, all
EMU countries are expected to be operating with the Euro as their single
currency. As a result of the adoption of a single currency, the EMU sales
environment will likely become more competitive. In addition, a significant
amount of uncertainty exists as to the effect the Euro will have on the
marketplace generally. Some of the rules and regulations relating to the
governance of the currency have not yet been defined and finalized. As a
result, companies operating in or conducting business in Europe will need to
ensure that their financial and other software systems are capable of
processing transactions and properly handling the Euro.
We are currently assessing the effect the introduction of the Euro will have
on our internal accounting systems and the potential sales of our products. We
will take appropriate corrective actions based on the results of such
assessment. We have not yet determined the costs related to addressing this
issue. This issue and its related costs could materially and adversely affect
our business.
Failure of our end-users to obtain adequate third party reimbursement for the
procedures utilizing FloSeal or our other products could adversely affect our
business.
In the United States, health care providers that purchase medical devices,
such as FloSeal and our other products under development, generally rely on
third party payors, such as federal Medicare, state Medicaid and private health
insurance plans, to reimburse some or all of the cost of the procedure in which
the medical device was used. We expect that in a prospective payment system,
such as the one utilized by the Health Care Financing Administration which
manages the federal Medicare program, and whose polices are followed by state
Medicaid and private third party payors, that our products' costs will be
incorporated into the overall cost of the procedures, and there will not be
separate reimbursement for our products. Our success depends, in part, upon
health care providers obtaining satisfactory reimbursement from third party
payors for surgical procedures that may use FloSeal and our other products
under development. Failure by our products' users to obtain sufficient
reimbursement from third party payors for procedures in which our products are
used or adverse changes in governmental and private third party payors'
policies toward reimbursement for such procedures could mean that they reduce
or eliminate purchases of our products, which would materially and adversely
affect our business.
If we obtain the necessary foreign regulatory approvals, international
market acceptance of our products would be dependent, in part, upon the
availability of reimbursement for our products or procedures that use our
products by the prevailing health care payment systems. Reimbursement and
health care payment systems in international markets vary significantly by
country and include both government-sponsored health care and private
insurance. We intend to seek international reimbursement approvals where
applicable. We cannot be certain that any such approvals will be obtained in a
timely manner, if at all. Failure to receive international reimbursement
approvals could materially and adversely affect our business.
We may face product liability claims related to the use or misuse of our
products.
We face an inherent business risk of product liability claims in the event
that the use or misuse of our products results in personal injury or death. We
have not experienced any such claims to date, but we cannot be
12
<PAGE>
certain, in particular after commercial introduction of our products, that we
will not experience losses due to product liability claims. We currently
maintain liability insurance with combined coverage limits of $3.0 million on a
claims-made basis. We cannot be certain that the insurance policies' coverage
limits are adequate. The insurance is expensive, difficult to obtain and may
not be available in the future on acceptable terms, or at all. Any claims
against us, regardless of their merit, could materially and adversely affect
our business.
The loss of key personnel and our failure to attract and retain additional
personnel could adversely affect our business and decrease the value of your
investment.
We depend on members of our management and scientific staffs for our
success. The future recruitment and retention of qualified scientific personnel
to perform research and development work is also critical to our success. We
cannot be certain that we will attract and retain qualified personnel on
acceptable terms given the competition among biotechnology, pharmaceutical and
health care companies, universities and non-profit research institutions for
experienced scientists. In addition, we rely on scientific advisors and other
consultants to assist us in formulating our research and development strategy.
These consultants are employed by other parties and may have commitments to, or
advisory or consulting agreements with, other entities, which may limit their
availability to us.
Our stock price is unpredictable and has fluctuated widely.
The market price of our common stock has fluctuated widely in the past and
is likely to fluctuate in the future. The stock market in general has
experienced price and volume volatility that has affected companies' stock
prices. The stock prices of medical device companies over the last few years
have been difficult to predict. In addition, the securities markets have
experienced significant price and volume fluctuations and the market prices of
the securities of medical device companies have been especially volatile.
Investors may be unable to resell their shares of our common stock at or above
the offering price. In the past, some companies that have experienced
volatility in the market price of their stock have been the object of
securities class action litigation. If we were named in a securities class
action litigation, it could result in substantial costs and a diversion of
management's attention and resources. We discuss the fluctuations in the price
of our stock in the section entitled "Price Range of Common Stock."
We have implemented certain anti-takeover provisions, any of which may reduce
the market price of our common stock.
Certain provisions of our Certificate of Incorporation and Bylaws and
Delaware law, as well as our Preferred Shares Rights Agreement could make it
more difficult for a third party to acquire us, even if the acquisition would
be beneficial to our stockholders. We discuss these provisions in detail in the
section entitled "Description of Capital Stock."
The issuance of preferred stock with special voting and dividend privileges
under the terms of the Preferred Shares Rights Agreement may have the effect of
delaying, deferring or preventing a change in control without any further
action by the stockholders. Any such issuance may materially and adversely
affect the price of the common stock. The preferred stock may also result in
the loss of the voting control of the holders of common stock to the holders of
the preferred stock.
We also have a staggered board of directors. The board of directors consists
of seven authorized members and three classes with only one class being elected
in any one year. This staggered board could make it more difficult for a third
party to acquire us, even if the acquisition would be beneficial to our
stockholders.
Your investment will be immediately diluted, and if we raise additional funding
by issuing equity securities, the voting power of your investment will be
diluted further.
Your investment will suffer immediate and substantial dilution of
approximately $4.21 per share, assuming an offering price of $6.00, in the net
tangible book value of the shares purchased. In addition, if we raise
13
<PAGE>
additional funding by issuing more equity securities, the new shares will
dilute the voting power of your investment on a percentage basis. Any
additional issuance of equity securities may also result in the value of your
investment declining.
Because stock ownership is concentrated, you and other investors will have
minimal influence on stockholder decisions.
Following completion of this offering, officers, directors and their
affiliates will beneficially own approximately 50% of our outstanding common
stock. As a result, these persons, individually and as a group, may be able to
significantly influence the management of our company and all matters requiring
stockholder approval, including the election of directors. Such concentration
of ownership may also have the effect of delaying, deferring or preventing a
change in control of our company.
We do not plan to pay cash dividends on our common stock.
We have never paid cash dividends on our common stock and do not anticipate
paying cash dividends in the foreseeable future.
You should not rely on our forward-looking statements.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Discussions containing forward-looking statements may be found
in the material set forth under the sections entitled "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as well as in the prospectus generally. We used words such as
"believes," "intends," "expects," "anticipates," "plans," and similar
expressions identify forward-looking statements. This prospectus also contains
third party estimates regarding the size and growth of the cardiovascular,
spinal and vascular surgery markets, as well as the size of the suture and
staples market and topical hemostat market. You should not place undue reliance
on these forward-looking statements. Our actual results could differ materially
from those anticipated in the forward-looking statements for the reasons
described above and elsewhere in this prospectus.
14
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 1,700,000 shares of common stock
offered by us are estimated to be approximately $9,163,000 at an assumed
offering price of $6.00 per share, after deducting the placement agent's
commission and estimated offering expenses.
We anticipate using approximately $5 million of the net proceeds for
regulatory approvals, manufacturing scale-up and commercialization of FloSeal,
$2 million for research and development and the remaining net proceeds for
working capital purposes. If substantially less than the estimated proceeds are
obtained, we plan to spend the proceeds primarily on developing and
commercializing FloSeal. The amount and timing of expenditures may vary from
the allocations set forth above depending upon numerous factors, including the
following:
. the timing of regulatory actions on FloSeal,
. our ability to enter into strategic sales, marketing and distribution
arrangements,
. our ability to scale-up manufacturing activities,
. the extent and timing of any future FloSeal sales, and
. the nature, timing and success of our other products under development.
In addition, we may use a portion of the net proceeds for licensing or
acquisition of new products or technologies from others. However, we have no
specific plans or commitments in this regard. Pending such uses, we intend to
invest the net proceeds in short-term, investment-grade, interest-bearing
securities.
DIVIDEND POLICY
We have not declared or paid any dividends since inception and do not intend
to pay any cash dividends in the foreseeable future. Our bank loan facility
contains covenants restricting the payment of dividends.
15
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock is quoted on the Nasdaq National Market under the symbol
"FSON." The following table sets forth, for the periods indicated, the high and
low closing sales prices per share of our common stock, as reported on the
Nasdaq National Market since our initial public offering.
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
1996
Second Quarter (from June 6, 1996)......................... $13.250 $7.063
Third Quarter.............................................. 10.000 5.875
Fourth Quarter............................................. 9.375 4.125
1997
First Quarter.............................................. 4.875 3.313
Second Quarter............................................. 4.500 2.750
Third Quarter.............................................. 5.625 3.625
Fourth Quarter............................................. 6.000 2.813
1998
First Quarter.............................................. 5.063 3.000
Second Quarter............................................. 5.000 3.375
Third Quarter.............................................. 4.125 2.250
Fourth Quarter............................................. 8.938 2.000
1999
First Quarter (through March 8, 1999)...................... 7.063 5.563
</TABLE>
On March 8, 1999, the last reported sale price of our common stock on the
Nasdaq National Market was $6.00 per share and, on January 25, 1999, there were
89 stockholders of record.
16
<PAGE>
CAPITALIZATION
The following table sets forth our actual capitalization as of December 31,
1998.
<TABLE>
<CAPTION>
December 31
1998
--------------
(in thousands,
except per
share amounts)
<S> <C>
Bank borrowings, net of current portion(/1/).................... $ 204
--------
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000 shares authorized; no
shares issued and outstanding................................ --
Common stock, $0.001 par value, 50,000 shares authorized;
7,211 shares issued and outstanding.......................... 7
Additional paid-in capital.................................... 36,137
Deferred compensation......................................... (87)
Accumulated other comprehensive income........................ 2
Accumulated deficit........................................... (29,232)
--------
Total stockholders' equity.................................. 6,827
--------
Total capitalization........................................ $ 7,031
========
</TABLE>
- --------
(1) See Note 6 of Notes to Consolidated Financial Statements.
(2) Excludes 1,041,150 shares of common stock reserved for issuance pursuant to
options outstanding as of December 31, 1998, at a weighted average exercise
price of $3.31 per share and warrants to purchase 12,785 shares of common
stock at an exercise price of $4.00 per share. Also excludes 808,434 shares
of common stock reserved for future issuance under the 1993 Stock Option
Plan, the 1996 Employee Stock Purchase Plan and the 1996 Director Option
Plan. See Note 8 of Notes to Consolidated Financial Statements,
"Management--Incentive Stock Plans" and "Description of Capital Stock."
17
<PAGE>
DILUTION
The net tangible book value of our common stock, on December 31, 1998, was
$6,827,000, or approximately $0.95 per share. Net tangible book value per share
represents the amount of tangible assets less the amount of total liabilities
divided by the number of shares of common stock outstanding.
After giving effect to the sale of 1,700,000 shares of common stock offered
hereby at the assumed price of $6.00 per share, and after deducting the
estimated placement agent's commission and other offering expenses, our net
tangible book value, on December 31, 1998, would have been $15,990,000, or
approximately $1.79 per share. This represents an immediate increase in the net
tangible book value of $0.84 per share to existing stockholders and an
immediate dilution of $4.21 per share to new investors.
<TABLE>
<S> <C> <C>
Assumed offering price per share................................... $ 6.00
Net tangible book value per share as of December 31, 1998......... $0.95
Increase per share attributable to the offering................... 0.84
-----
Net tangible book value after the offering......................... 1.79
------
Dilution per share to new investors................................ $ 4.21
======
</TABLE>
This table excludes 1,041,150 shares of common stock reserved for issuance
pursuant to options outstanding as of December 31, 1998, at a weighted average
exercise price of $3.31 per share and warrants to purchase 12,785 shares of
common stock at an exercise price of $4.00 per share. Also excludes 808,434
shares of common stock reserved for future issuance under the 1993 Stock Option
Plan, the 1996 Employee Stock Purchase Plan and the 1996 Director Option Plan.
See Note 8 of Notes to Consolidated Financial Statements, "Management--
Incentive Stock Plans" and "Description of Capital Stock."
18
<PAGE>
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 Consolidated Financial Statements and Notes thereto
included elsewhere in this prospectus. The statements of operations data for
the years ended December 31, 1996, 1997 and 1998 and the balance sheet data as
of December 31, 1997 and 1998 have been derived from audited consolidated
financial statements included elsewhere in this prospectus. The consolidated
statement of operations data for the years ended December 31, 1994 and 1995 and
the balance sheet data as of December 31, 1994, 1995 and 1996 have been derived
from our audited consolidated financial statements that are not included in
this prospectus. The historical results are not necessarily indicative of the
results of operations to be expected in the future.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net sales..................... $ -- $ -- $ 31 $ 153 $ --
Cost of sales and start-up
manufacturing costs.......... -- -- 196 968 --
------- ------- -------- -------- --------
Gross loss.................... -- -- (165) (815) --
------- ------- -------- -------- --------
Operating expenses:
Research and development..... 756 2,650 4,693 5,647 6,145
Sales and marketing.......... 67 142 1,582 2,421 614
General and administrative... 349 841 1,426 2,004 1,474
------- ------- -------- -------- --------
Total operating expenses.... 1,172 3,633 7,701 10,072 8,233
------- ------- -------- -------- --------
Loss from operations.......... (1,172) (3,633) (7,866) (10,887) (8,233)
Interest income, net.......... 17 351 910 984 542
Other income (expense), net... 2 1 -- (49) 4
------- ------- -------- -------- --------
Net loss...................... $(1,153) $(3,281) $ (6,956) $ (9,952) $ (7,687)
======= ======= ======== ======== ========
Basic and diluted net loss per
share........................ $ (0.81) $ (2.31) $ (1.52) $ (1.41) $ (1.08)
Shares used in computing basic
and diluted net loss per
share........................ 1,431 1,423 4,563 7,070 7,145
Balance Sheet Data:
Cash, cash equivalents and
available-for-sale
securities................... $ 222 $ 5,918 $ 23,485 $ 14,459 $ 7,164
Working capital............... (80) 5,314 21,072 11,850 6,242
Total assets.................. 436 6,629 25,063 15,540 8,088
Long-term debt, including
current portion.............. 200 322 189 43 321
Accumulated deficit........... (1,357) (4,637) (11,593) (21,545) (29,232)
Total stockholders' equity.... 126 5,768 23,742 14,224 6,827
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section and other parts of this prospectus contain forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in the section entitled "Risk Factors" commencing on page 6 and
elsewhere in this prospectus.
Overview
Since inception in October 1992, we have been primarily engaged in the
research and development of surgical sealants and topical hemostats. As of
December 31, 1998, we had an accumulated deficit of $29,232,000. Operating
losses are expected to continue at least through 2001.
We commenced selling our first product, the RapiSeal patch, in late 1996.
After careful consideration, we reallocated our capital resources to the
development of FloSeal and in late 1997 discontinued sales of the RapiSeal
patch and disbanded our test sales force. We recorded a one time expense of
$559,000 associated with our exit from the RapiSeal business. Of such expense,
$325,000 was charged to cost of sales, $209,000 to operating expenses and
$25,000 as a charge against sales.
In 1998, we conducted a ten center, 309-patient pivotal clinical trial to
demonstrate the safety and effectiveness of FloSeal. We have filed for European
regulatory clearance and have completed submission of our premarket approval
application for FloSeal with the FDA. In addition, we have been expanding our
manufacturing capacity in order to be able to meet the anticipated product
supply requirements for commercial sale of FloSeal. We expect to complete the
expansion of our manufacturing facility by the end of the second quarter of
1999. In conjunction with this expansion, we anticipate spending a total of
approximately $250,000 for the purchase of production equipment and $275,000
for the facilities' upgrade.
Future revenues, if any, and our results of operations may fluctuate
significantly from quarter-to-quarter and will depend upon our ability to
obtain regulatory clearances for FloSeal and to successfully commercialize the
product.
Results of Operations
Years Ended December 31, 1996, 1997 and 1998
Revenues. We recorded revenues of $31,000 and $153,000 for the years ended
December 31, 1996 and 1997, respectively. We did not record any revenues in
1998. We commenced selling the RapiSeal patch in 1996 and stopped selling
RapiSeal in 1997. We cannot begin selling FloSeal until we receive necessary
regulatory approvals.
Gross Loss. We had gross losses of $165,000, $815,000 and $0 for the years
ended December 31, 1996, 1997 and 1998, respectively. In 1997, the increase in
gross loss of $650,000 resulted from increased manufacturing start-up costs and
the $325,000 charge related to our exit from the RapiSeal business. The charge
included the write-down of dedicated equipment and inventories and the
estimated expenses to settle supply contracts.
Research and Development. Research and development expenses were $4,693,000,
$5,647,000 and $6,145,000 for the years ended December 31, 1996, 1997 and 1998,
respectively. The increase of $954,000 in 1997 was attributable to outside
development services, increased staff and related expenses and increased patent
and regulatory expenses. The increase of $498,000 in 1998 was due to increased
clinical and development expenses related to FloSeal. We believe significant
investment in research and development is essential to our future success and
we expect that research and development expenses will increase in future
periods.
20
<PAGE>
Sales and Marketing. Sales and marketing expenses were $1,582,000,
$2,421,000 and $614,000 for the years ended December 31, 1996, 1997 and 1998,
respectively. The increase of $839,000 in 1997 resulted from nearly a full year
of sales expense for RapiSeal and the charge associated with our exit from the
RapiSeal business late in that year. The decrease of $1,807,000 in 1998
resulted from the cessation of our sales and marketing efforts related to
RapiSeal. We anticipate that sales and marketing expenditures will increase in
future periods in connection with the introduction of FloSeal.
General and Administrative. General and administrative expenses were
$1,426,000, $2,004,000 and $1,474,000 for the years ended December 31, 1996,
1997 and 1998, respectively. The increase of $578,000 in 1997 resulted from
costs associated with the commercialization of RapiSeal. The decrease of
$530,000 in 1998 resulted from reduction of staff and consolidation of
facilities following discontinuation of the RapiSeal business.
Interest and other income and expense, net. Net interest and other income
and expense was $910,000, $935,000 and $546,000 for the years ended December
31, 1996, 1997 and 1998, respectively. The net increase of $25,000 in 1997
resulted from increased cash, cash equivalents and available-for-sale
securities following our initial public offering in June 1996. The decrease of
$389,000 in 1998 resulted from decreased cash, cash equivalents and available-
for-sale securities used to fund operations.
Exit charges. During the fourth quarter of 1997, we made a decision to
discontinue sales of our RapiSeal Patch. We incurred exit charges of $559,000,
which consisted of the following components:
<TABLE>
<CAPTION>
Classification on
Description Amount Statement of Operations
----------- -------- -----------------------
<C> <C> <S>
Equipment.................................. $115,000 Cost of sales
Personnel severance........................ 125,000 Sales and marketing,
general and
administrative and
research and
development
Inventory and purchase commitments......... 210,000 Cost of sales
Accounts receivable and potential returns.. 25,000 Sales
Patents.................................... 84,000 Research and development
--------
Total...................................... $559,000
========
</TABLE>
During 1998, we negotiated a lower exit charge from one of our supply
agreements, which resulted in a change to our reserve estimate by $50,000. Our
anticipated timing until the reserve is completely depleted is the fourth
quarter of 2000.
Liquidity and Capital Resources
From inception to December 31, 1998, we incurred net losses resulting in an
accumulated deficit of $29,232,000. We have financed our operations through
private sales of equity securities and an initial public offering of common
stock in June 1996. These transactions resulted in aggregate net proceeds of
$24,419,000.
Cash, cash equivalents and available-for-sale securities totaled
$23,485,000, $14,459,000 and $7,164,000, as of December 31, 1996, 1997 and
1998, respectively. The decreases from 1996 to 1998 were primarily due to net
losses.
Cash flows used in operating activities were $6,083,000, $8,644,000 and
$7,468,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
These cash outflows resulted from funding our net losses. In addition, capital
expenditures for property and equipment of $769,000, $415,000 and $245,000 for
the years ended December 31, 1996, 1997 and 1998, respectively, contributed to
the cash outflows.
In December 1997, we signed an agreement for a bank loan facility to finance
existing equipment up to a total of $1,000,000, and future equipment purchases
for up to a total facility limit of $2,500,000. The facility is secured by the
equipment financed. The loan balance is subject to a floating interest rate
equal to the bank's prime rate plus 1.5%. The unused portion of the total loan
facility commitments are subject to a 0.5% quarterly
21
<PAGE>
commitment fee. As of December 31, 1998, we had drawn down $321,000 on the
existing equipment loan facility and had no draw down on the new equipment loan
facility. In connection with this loan facility, we issued a warrant to
purchase 4,500 shares of common stock at an exercise price of $4.00 per share.
This warrant expires in December 2002.
We believe that net proceeds from this offering, together with existing
cash, cash equivalents and available-for-sale securities will be sufficient to
fund our operations through the next 12 months. However, the amount and timing
of our capital requirements cannot be predicted with certainty. Our future
capital requirements will depend on numerous factors, including the following:
. timing of regulatory actions on FloSeal,
. our ability to enter into strategic marketing arrangements,
. the timing of our manufacturing scale-up,
. the extent and timing of any future FloSeal sales, and
. the nature, timing and success of other products under development.
We expect to commit substantial capital resources to the development of
commercial-scale manufacturing for FloSeal. The working capital requirements
for the development and commercial launch of our other products are also
expected to be substantial. If we are unable to secure corporate partners to
distribute our products, we will incur substantial expenditures to develop a
suitable direct sales and marketing force. Given these factors, we anticipate
that we will need additional financing before the end of the year 2000.
We intend to explore various financing alternatives to satisfy our
additional funding requirements following the offering, including bank
financing, public or private equity financing and strategic corporate
partnerships. Additional funding may not be available when needed or on
acceptable terms, which would materially and adversely affect our business. Any
additional equity financing will be dilutive to stockholders, and debt
financing, if available, may include restrictive covenants.
At December 31, 1998, we had approximately $19,586,000 in federal and
$19,903,000 in state net operating loss carry forwards which expire during the
years 2001 through 2018, respectively. Utilization of federal income tax net
operating loss carry forwards is subject to certain limitations under Section
382 of the Internal Revenue Code. These annual limitations may result in
expirations of net operating losses and research and development credits before
they can be fully utilized.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. To date, we have not engaged in derivative and
hedging activities. We will adopt SFAS No. 133 as required for our first
quarterly filing of 2000.
Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio and bank borrowings. We do not use derivative
financial instruments in our investment portfolio, and our investment portfolio
only includes highly liquid instruments with an original maturity to us of
generally less than one year. We have primarily entered into debt obligations
for capital expenditures.
We are subject to fluctuating interest rates that may impact, adversely or
otherwise, our results of operations or cash flows for our variable rate bank
borrowings, available-for-sale securities and cash and cash equivalents.
22
<PAGE>
The table below presents principal amounts and related weighted average
interest rates by year of maturity for our investment portfolio and debt
obligations:
<TABLE>
<CAPTION>
Fiscal year
---------------------------
1998 1999 2000 Total
------ ---- ----- ------
(dollars in thousands)
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents........................ $4,151 -- -- $4,151
Average interest rate.......................... 4.90% -- -- 4.90%
Available-for-sale securities.................... $3,013 -- -- $3,013
Average interest rate.......................... 7.72% -- -- 7.72%
Liabilities
Bank borrowings (including current portion)...... $ 117 $117 $ 87 $ 321
Average interest rate.......................... 9.25% 9.25% 9.25% 9.25%
</TABLE>
The estimated fair value of our cash and cash equivalents approximates the
principal amounts reflected above based on the short maturities of these
financial instruments. The estimated fair value of our debt obligations
approximates the principal amounts reflected above based on rates currently
available to us for debt with similar terms and remaining maturities.
Although payments under the operating lease for our facility are tied to
market indices, we are not exposed to material interest rate risk associated
with the operating lease.
Year 2000 Compliance.
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on January
1, 2000, computer systems and software used by many companies and organizations
in a wide variety of industries (including technology, transportation,
utilities, finance and telecommunications) will produce erroneous results or
fail unless they have been modified or upgraded to process date information
correctly. Our primary exposure with respect to this problem involves third
party software we have purchased or licensed for our financial systems
(including general ledger, accounts payable and payroll modules), network and
telecommunications equipment. Our financial systems software is Year 2000
compliant. We have obtained the software needed to make our network Year 2000
compliant. We have analyzed the Year 2000 risk with regard to our
telecommunications equipment and have concluded that there is no material Year
2000 risk.
We also rely on the business systems of customers, suppliers, creditors,
financial organizations and governments, both domestically and internationally,
to accurately exchange and process data and information. We are also in the
process of verifying compliance by external vendors that supply us with any
material software and information systems and are communicating with
significant suppliers to determine their Year 2000 readiness. To date, we have
not encountered any material Year 2000 problems with software and information
systems provided to us by third parties. We have contacted our suppliers of
bovine hides and thrombin, the two essential supplies we require for FloSeal,
and have confirmed that there is no Year 2000- associated risk of a delay in
supply from these sources.
While we expect to complete an estimate of our Year 2000 project costs
during the first half of 1999, we do not expect that the total costs of these
Year 2000 compliance activities will be material to our business. However,
these costs and the timing with which we plan to complete our Year 2000
modifications and testing processes are based on our management's estimates.
Since our assessment process is ongoing, we may yet learn of significant Year
2000 complications that could not be corrected on a timely basis. While the
manufacture of our products are not dependent on computer chip driven
processes, any interruption in receipt of supplies, delivery of goods by
outside carriers, or processing of orders by distributors could have a material
adverse effect on our business. If, for example, a supplier is unable to
provide us with the needed raw inventory to produce our products, our
contingency plan is to have a secondary source in place whenever possible. For
those items where no secondary source exists, our plan is to carry
approximately three to four months inventory to allow us to continue operations
until that source has recovered from any Year 2000 issues.
23
<PAGE>
BUSINESS
Overview
We are developing and commercializing proprietary products as surgical
hemostats. Hemostats are devices, such as sutures, and topical agents, such as
sponges, used to stop bleeding. Our lead product, FloSeal Matrix Hemostatic
Sealant, combines a gel derived from collagen with thrombin, a potent clotting
agent, to control surgical bleeding. We believe that the innovative physical
structure of FloSeal provides certain performance advantages over existing
surgical hemostatic products, such as fast and effective bleeding control even
in challenging applications, quick and easy onsite preparation, excellent
handling and total absorption by the body within six to eight weeks.
In November 1998, we completed enrollment in a 309-patient U.S. pivotal
clinical trial for FloSeal in patients undergoing cardiac, vascular and spinal
surgery. The primary endpoint of the pivotal trial was to show that FloSeal, in
the combined surgical procedures, stopped bleeding within ten minutes of
application at least as frequently as the Gelfoam plus thrombin control. The
trial showed that FloSeal stopped patients' bleeding within ten minutes in 96%
of all patients treated with FloSeal, whereas Gelfoam plus thrombin stopped
patients' bleeding within ten minutes in 77% of all patients in the control
group. A secondary endpoint analysis also showed that FloSeal stopped patients'
bleeding at least two times more quickly than Gelfoam plus thrombin. We
completed submission of our full premarket approval application for FloSeal in
February 1999. Assuming timely acceptance of the application and approval by
the FDA, which cannot be assured, we expect to commercialize the product in the
United States in early 2000. We have filed for European regulatory clearance
and expect to receive required certification by mid-1999 and to commercialize
FloSeal in Europe shortly thereafter.
We are also developing additional products designed to stop bleeding based
upon our core proprietary technology. Such products include SinuSeal, for use
by ear, nose and throat surgeons, and a vascular access site closure device,
which we call VASC, for use in the closure of femoral artery punctures
following vascular interventional procedures. We expect to file a premarket
approval application supplement for SinuSeal shortly after obtaining FloSeal
approval. We expect to begin clinical trials for VASC in late 1999.
Background
Surgical wounds must be effectively closed and bleeding controlled to ensure
the success of surgical procedures. Failure to close surgical wounds completely
can result in serious or possibly life-threatening complications, including
blood loss, tissue damage, infection and excessive scarring. A variety of
hemostats have been developed to help surgeons control intraoperative bleeding,
including devices such as sutures and staples, as well as topical hemostatic
products, such as sponges, like Gelfoam, and commercial fibrin glues. Topical
hemostatic products are a popular means of supplementing sutures and staples in
applications where sutures and staples are not entirely effective in
controlling bleeding.
Sutures and Staples
Historically, sutures have been the most common type of hemostat used for
closing surgical wounds. Sutures mechanically bring together the tissue on
either side of a wound to facilitate healing. In the 1960s, surgical stapling
was introduced to reduce the time-consuming and cumbersome aspects of suturing.
Surgical stapling involves drawing together tissue by applying staples along
the line of the incision using a manually operated device. Industry sources
estimate that the annual worldwide market for sutures and staples is
approximately $2.3 billion.
Sutures and staples have a number of limitations. In particular, they do not
have inherent sealing capabilities and thus sometimes do not eliminate bleeding
along suture lines, especially when connecting blood vessels. Sutures and
staples are often ineffective in stopping bleeding associated with fragile
tissue and organ wounds because such sites often lack the structural integrity
required to support such devices. Similarly, sutures and staples are difficult
or impossible to use in certain types of surgeries where access to the surgical
site is limited, such as minimally invasive procedures.
24
<PAGE>
Topical Hemostats
Topical hemostats provide the surgeon with additional means for controlling
bleeding in procedures in which sutures and staples are not entirely effective.
Numerous materials have been used to achieve hemostasis in surgical procedures,
including sponges, like Gelfoam, thrombin, fibrin glues and other types of
hemostats and surgical sealants and adhesives. While existing topical hemostats
are a popular complement to sutures and staples, they too have several
limitations, including the following:
. Limited Effectiveness. Topical hemostats do not always conform to a
bleeding site and can take a long time or fail to stop bleeding. For
example, fibrin glues do not adhere strongly to wet tissue and have
little impact on actively bleeding wounds. Gelfoam plus thrombin can take
several minutes to stop even moderate bleeding.
. Lengthy and Complex Preparation. Preparation of some topical hemostats
can take a long time, require complicated steps or necessitate special
equipment. For example, fibrin glues may take up to 40 minutes to
prepare, and thus must often be mixed prior to surgery, whether or not
they are actually used in the procedure. Certain fibrin glues and
adhesives also require special equipment for preparation, such as heaters
or centrifuges.
. Difficult to Use. Many topical hemostats can be awkward to use or
difficult to place precisely. Sponges, such as Gelfoam, often require
sustained manual pressure to be effective. In addition, topical hemostats
can impede a surgeon's vision of and access to the surgical site. Both
these factors can significantly delay the completion of the surgical
procedure, especially where continued visualization is important, such as
in spinal and sinus surgeries, and in certain minimally invasive
surgeries.
. Rebleeding May Occur After Application. Topical hemostats are often
removed prior to closing the wound. Similar to when a gauze bandage is
pulled away from a scab, rebleeding can occur upon removal because these
materials become incorporated into the clot itself.
The limitations of current products have been particularly pronounced in
procedures involving suture lines in blood vessels, such as coronary artery
bypass grafts, and in patients with compromised coagulation. Despite these
limitations, topical hemostats have achieved significant sales to date. We
estimate that sales of topical hemostats, including Gelfoam plus thrombin,
exceeded $100 million in 1997. Most of these sales were within the United
States and did not include the sale of fibrin glue. In 1997, international
sales of fibrin glue, however, were approximately $270 million, of which we
believe that over 60% were attributable to bleeding control. The FDA did not
approve the sale of fibrin glue until May 1998.
The Benefits of FloSeal
Our lead product, FloSeal, a proprietary gel derived from collagen combined
with thrombin, is designed to complement sutures and staples and to overcome
limitations of other existing products used to control bleeding, including
topical hemostats, fibrin glues and other types of surgical sealants and
adhesives. Our U.S. pivotal clinical trial demonstrated the effectiveness of
FloSeal in stopping bleeding in a combined analysis of patients undergoing
cardiac, vascular and spinal surgeries. We believe that FloSeal offers the
following key performance advantages:
. Stops Bleeding Rapidly and Effectively. FloSeal's proprietary physical
structure rapidly induces stable clot formation and seals the wound site,
even in challenging surgical situations, including very wet tissue and
heavily bleeding sites. For example, a secondary endpoint analysis in our
pivotal trial showed that FloSeal stopped bleeding within three minutes
in 84% of patients treated with FloSeal, whereas Gelfoam plus thrombin
stopped bleeding in 47% of the control patients.
. Stops Various Types of Bleeding. A subanalysis in our clinical trial
demonstrated that FloSeal stopped all degrees of bleeding encountered,
ranging from lighter "oozing" to heavier "flowing" and "spurting." We
believe that FloSeal will be the first product to effectively control
substantially all of these types of bleeding. For example, a secondary
endpoint analysis in our pivotal clinical trial showed
25
<PAGE>
that in cases of heavy bleeding experienced by some cardiac patients
FloSeal stopped bleeding within three minutes in 77% of patients treated
with FloSeal, as compared to 0% for those treated with Gelfoam plus
thrombin. In addition, we believe that FloSeal will address bleeding
associated with fragile tissues, diffuse organ bleeding and high pressure
arterial bleeding, including bleeding in patients being treated with anti-
coagulant drugs. Data from the clinical trial is included below under the
subsection entitled "Fusion's Products."
. Easy to Prepare. FloSeal can be prepared within two minutes and can be
used for up to two hours after preparation. No special equipment is
required during preparation, and all materials are contained in one
simple package.
. Easy to Use. FloSeal is easy to apply using a standard disposable syringe
and has a gel-like consistency which rapidly conforms to the application
site. The surgeon can either remove any excess material without
difficulty by gentle irrigation of the treated area or leave it to be
absorbed by the body. Since only minimal training is necessary, we
believe that surgeons will quickly learn how to use the product.
. Broad Applicability. Under our current premarket approval application, we
are pursuing regulatory approval of FloSeal for a broad range of surgical
specialties. Our U.S. pivotal clinical trial demonstrated the
effectiveness of FloSeal in a combined analysis of patients undergoing
cardiac, vascular and spinal surgeries. In addition, FloSeal has been
used outside the United States in several other surgical specialties,
including nasal and sinus, gynecologic and general surgery.
. Biocompatible. FloSeal is biocompatible and fully absorbed by the body
within approximately six to eight weeks, consistent with the body's
normal healing process. Since FloSeal does not have to be removed after
application, rebleeding is unlikely to occur. The materials used in
FloSeal are naturally occurring and have a safe history of use in humans.
Fusion's Products
The technology underlying FloSeal and our other products currently under
development consists of a mixture of a proprietary gel derived collagen and
thrombin, a blood clotting agent. When mixed, the thrombin coats the gel, and
they act synergistically to stop bleeding. The granular nature of the gel
allows it to conform to irregular wound geometries. We have engineered the
FloSeal granules to swell upon contact with the blood. By swelling, the
granules restrict blood flow. Blood percolates through the spaces between the
granules and is exposed to high concentrations of thrombin, thereby
accelerating formation of a mechanically stable clot.
The following diagrams illustrate the surgical sealing activity of FloSeal:
[THREE ILLUSTRATIONS APPEAR HERE]
26
<PAGE>
FloSeal
FloSeal, our lead product, is designed to control bleeding in various types
of surgery and has been tested for safety and effectiveness in a pivotal U.S.
clinical trial involving patients undergoing cardiac, vascular and spinal
surgery. In February 1999, we completed submission of our full premarket
approval application for FloSeal.
Clinical Development. In November 1998, we completed enrollment in a ten-
center, randomized pivotal clinical trial of FloSeal involving 309 patients who
underwent cardiac, vascular or spinal surgery. One hundred fifty-six patients
were treated with FloSeal while 153 patients were treated with Gelfoam plus
thrombin. The degree of intraoperative bleeding ranged from lighter "oozing" to
heavier "flowing" and "spurting," with nearly one-third (32%) of the patients
experiencing bleeding in the heavier, more difficult to control ranges.
The primary endpoint of the pivotal trial was to show that FloSeal, in the
combined surgical procedures, stopped bleeding within ten minutes of
application at least as frequently as the Gelfoam plus thrombin control.
FloSeal stopped bleeding within ten minutes in 96% of the 156 patients treated
with FloSeal, whereas Gelfoam plus thrombin stopped bleeding within ten minutes
in 77% of the 153 patients in the control group. In addition, a subset analysis
demonstrated that FloSeal stopped bleeding at least two times faster than
Gelfoam plus thrombin. These results were consistent across all tested surgical
specialties and bleeding classes, from simple oozing to active arterial
spurting.
Ninety-three patients underwent cardiac surgery, the most difficult group to
treat due to the use of cardiopulmonary bypass and high levels of anti-
coagulant drugs. FloSeal stopped bleeding within ten minutes in 94% of the 48
patients treated with FloSeal, whereas Gelfoam plus thrombin stopped bleeding
within ten minutes in 60% of the 45 patients in the control group. In cases of
heavy cardiac bleeding, FloSeal stopped bleeding within three minutes in 77% of
patients, as compared to 0% for those treated with Gelfoam plus thrombin.
In the trial, 89 patients underwent vascular surgery. FloSeal stopped
bleeding within ten minutes in 93% of the 43 patients treated with FloSeal,
versus 76% for the 46 control group patients. One hundred twenty-seven patients
underwent spinal surgery. FloSeal stopped bleeding within ten minutes in 98% of
the 65 patients treated with FloSeal, versus 90% for the 62 control group
patients. Detailed results for the vascular and spinal arms of the pivotal
trial have not yet been published, but we anticipate publication in a peer-
reviewed medical journal in the future.
The following chart summarizes certain data from the pivotal clinical trial,
including a subset analysis of all cardiac patients based upon surgeons'
assessments of the degree of intraoperative bleeding:
Summary Clinical Trial Results
<TABLE>
<CAPTION>
Hemostasis within Hemostasis within
10 minutes 3 minutes
----------------- -----------------
Gelfoam Gelfoam
Patient Category FloSeal +thrombin FloSeal +thrombin
---------------- ------- --------- ------- ---------
<S> <C> <C> <C> <C>
All patients............................. 96% 77% 84% 47%
Vascular patients....................... 93 76 * *
Spinal patients......................... 98 90 * *
Cardiac patients........................ 94 60 69 22
Cardiac: "Oozing"...................... 94 66 66 29
Cardiac: "Flowing" or "Spurting"....... 92 40 77 0
</TABLE>
* Data not yet released and subject to publication in a peer-reviewed medical
journal.
27
<PAGE>
The primary endpoint of the trial was reached. In addition, subset analyses
of secondary endpoints showed statistically significant and clinically
meaningful benefits of FloSeal relative to Gelfoam plus thrombin. We completed
submission of our full premarket approval application for FloSeal in February
1999. Assuming timely acceptance of the application and approval by the FDA,
which cannot be assured, we expect to commercialize the product in the United
States in early 2000. We are seeking a labeling indication which reads "for
surgical procedures (other than in neurosurgical, ophthalmic and urological) as
an adjunct to hemostasis when control of bleeding by ligature or conventional
procedures is ineffective or impractical."
We have filed for European regulatory approval and expect to receive such
approval by mid-1999. We intend to commercialize FloSeal in EU member countries
shortly thereafter with a labeling indication which reads "for surgical
procedures as an adjunct to hemostasis when control of bleeding by ligature or
conventional procedures is ineffective or impractical."
Target Market. We expect our domestic and international commercialization
efforts to focus initially on those surgeons who perform cardiac, vascular and
spinal procedures, the specialties studied on a combined basis in the pivotal
clinical trial. There are approximately 500,000 cardiac surgeries, 380,000
vascular surgeries and 400,000 spinal surgeries performed annually in the
United States. We believe that FloSeal could be used in approximately 15% of
cardiac surgeries, 50% of vascular surgeries and 50% of spinal surgeries. We
believe that the potential market for FloSeal outside of the United States with
respect to each of these surgical specialties is roughly equal to the
corresponding market within the United States. We also believe that FloSeal
will be useful in other types of surgery, including orthopedic, trauma,
gynecologic, plastic and other general surgery.
SinuSeal
We are also developing SinuSeal, an additional application for FloSeal, for
use by ear, nose and throat surgeons to control bleeding. SinuSeal is delivered
through a standard disposable syringe with a sinus applicator tip and consists
of the same FloSeal gel tested in the clinical trial described above. At the
close of sinus surgeries, conventional packing materials, such as gauze strips
or plugs are often inserted into the nose and left in place for several days.
Removal of these packing materials requires a return visit to the surgeon's
office, is generally painful and often results in re-bleeding. SinuSeal,
however, is absorbed by the body and consequently does not require removal. We
believe that SinuSeal will eliminate much of the discomfort, pain and cost
associated with nasal packing.
In 1998, we completed a three-center evaluation of 18 patients in Canada in
which SinuSeal controlled intra-operative bleeding during sinus surgery in 100%
of 29 application sites. We intend to file a premarket approval application
supplement for SinuSeal after receiving FDA approval for FloSeal. We may be
required to perform a formal clinical trial prior to submitting such a
supplement for SinuSeal.
We expect our domestic and international commercialization efforts to focus
on ear, nose and throat surgeons. Industry sources estimate that approximately
400,000 sinus surgeries are performed annually in the United States. In
addition, we have performed technical and clinical studies which suggest that
SinuSeal can be used to control bleeding associated with tonsillectomies and
adenoidectomies. Industry sources estimate there are approximately 530,000 of
these procedures performed annually in the United States. We estimate that
approximately one-third of these nose and throat procedures could benefit from
the use of SinuSeal.
VASC
We are also developing VASC, a vascular access site closure device, as an
additional application of our FloSeal technology. VASC is designed to be used
by interventionalists to seal arterial punctures following vascular
interventional procedures, such as balloon angioplasty or angiography. VASC
incorporates a proprietary catheter-based applicator to easily and safely
deliver to the site of the arterial puncture the same FloSeal gel tested in the
pivotal clinical trial described above. Currently available suturing devices
and collagen plugs can be costly, difficult to use and may require extensive
surgeon training prior to use. We are designing VASC to address these
limitations.
28
<PAGE>
We have conducted preliminary pre-clinical studies examining the safety and
effectiveness of VASC. We plan to begin a pilot clinical trial in late 1999 and
a pivotal clinical trial in 2000. Industry sources estimate that approximately
3.3 million arterial puncture closure procedures will be performed in the
United States in 1999.
The statements we have made above regarding the anticipated
commercialization of our products are forward looking. We are not permitted to
commercialize any of the above products unless and until we receive necessary
regulatory approvals.
Research and Development
Our research and development activities are focused on enhancing and
expanding the applications of the FloSeal technology platform. We have
established an active dialogue with surgeons to ascertain the most desirable
additional applications and enhancements for the FloSeal technology. Current
products at the research stage include a sponge form of FloSeal for field
dressing and other emergency applications and an absorbable spinal anti-
adhesion agent.
Sales and Marketing
We are engaged in preliminary discussions with prospective partners to
provide sales, marketing and distribution functions in both the U.S. and
international markets once regulatory approvals are received. We initially
intend to focus our domestic and international sales and marketing efforts on
developing surgeon acceptance of FloSeal for application in procedures
including cardiac, vascular and spinal surgeries. We are in discussions with
worldwide surgical companies with capabilities in various surgical specialties.
We are also in discussions with independent distributors, particularly in
international markets in order to capitalize on their strong capabilities in
local markets. Fusion intends to select distribution partners based on
demonstrated sales and marketing expertise, focused positioning of FloSeal
within a portfolio of other surgical products and favorable economic terms.
Manufacturing
Our manufacturing operations are located in our headquarters in Mountain
View, California. We are currently expanding our manufacturing capacity within
this facility, and we believe that such additional capacity will be sufficient
through 2000. We expect to complete the expansion of our manufacturing facility
by the end of the second quarter of 1999. In conjunction with this expansion,
we anticipate spending a total of approximately $250,000 for the purchase of
production equipment and $275,000 for the facilities' upgrade.
Our manufacturing facilities are subject to Quality System Regulations,
international quality standards and other regulatory requirements. Difficulties
we encounter in manufacturing scale-up or our failure to implement and maintain
our facilities in accordance with quality standards or other regulatory
requirements could entail a delay or termination of production, which would
materially and adversely affect our business. We have received a manufacturing
license from the California Department of Health Services and have produced
FloSeal for use in Canada and for our U.S. clinical trial. However, we have no
experience manufacturing our products in the volumes necessary to achieve
significant commercial sales, and there can be no assurance that such
manufacturing can be achieved at a commercially reasonable cost. If we
encounter any manufacturing difficulties involving capacity constraints,
production yields, quality control and assurance, supplies of components or
shortages of qualified personnel, our business could be materially and
adversely affected. There can be no assurance that we will be able to
manufacture sufficient quantities of products to meet supply requirements for
commercialization and continued clinical trials in the United States or
internationally.
Fusion acquires raw materials and product components from suppliers,
processes the raw materials internally to the appropriate form and composition,
packages kits, arranges for sterilization by a third party and then packages
the products for shipment. We acquire some raw materials and components, such
as bovine hides, thrombin and sterilization services, all of which are
essential components of FloSeal, from single
29
<PAGE>
suppliers. We believe that there are additional and alternative suppliers of
equivalent materials available and that we could supplement and substitute
suppliers with minimal business and regulatory consequences. However, there can
be no assurance that such supplies will be available or that such substitutions
could be made in a timely manner, on commercially reasonable terms, or at all.
In the event that any of our current single source suppliers become unable to
meet our needs or we lose them as a supply source for some other reason, our
business could be disrupted and materially and adversely affected.
Competition
The market for topical hemostats is highly competitive. A wide variety of
existing products and products under development may compete directly with
FloSeal and our other products under development. Such products include:
<TABLE>
<CAPTION>
Category of Product Manufacturer Tradename(s)
- ------------------- ------------ ------------
Topical Hemostats
<S> <C> <C>
Gelatin Sponge/Powder Pharmacia & Upjohn, Inc. Gelfoam
Collagen Sponge/Powder Astra AB Hemopad, Hemoterie
C.R. Bard, Inc. Actifoam, Avitene
Johnson & Johnson Instat
Integra Life Sciences Corp. Helistat, Helitene
B. Braun Melsungen AG Lyostypt
Oxidized Cellulose Strip Johnson & Johnson Surgicel
Becton Dickinson & Company Oxycel
Thrombin Jones Medical Thrombin-JMI
Johnson & Johnson Thrombogen
Parke-Davis Thrombostat
<CAPTION>
Fibrin Glue and Variants
<S> <C> <C>
Fibrin Glue Baxter International, Inc. Tisseel
Haemacure Corp. Hemaseel APR, HMN
Centeon L.L.C. Beriplast P
V.I. Technologies, Inc. ViGuard Fibrin Sealant
Omrix Biopharmaceuticals Ltd. Quixil
Kaketsuken (Japan) Bioheal
Fibrin Glue Variants Cohesion Technologies, Inc. CoStasis
Nycomed Tacocomb
</TABLE>
In addition to the companies listed above, there are many medical device
companies that could enter the hemostat and surgical sealant markets and
compete effectively against our products. Many existing and 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. Broad product lines
may give competitors the ability to negotiate exclusive, long-term supply
contracts and, as a result, the ability to offer comprehensive pricing for
their products. With a broader product line, 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 centralized purchasing. There can be no assurance that we
will be able to successfully compete against competitors or potential
competitors. In addition, we cannot be certain that current competitors or
other companies will not succeed in developing technologies and products that
are more effective or that would render our technology or products obsolete or
unable to compete.
30
<PAGE>
Patents and Proprietary Rights
Our ability to compete effectively depends in part on our ability to develop
and maintain the proprietary aspects of our technology. We have five pending
U.S. patent applications relating to FloSeal and other products under
development, but no issued patents. We also have two corresponding
international patent applications filed under the Patent Cooperation Treaty and
may file additional patent applications outside the United States at a later
date. In addition, we have in-licensed technology that we believe strengthens
our patent portfolio.
We can not be certain that any of our pending parent applications will
result in the issuance of any patents, that our patent applications will have
priority over others' applications, or that, if issued, any of our patents will
offer protection against competitors with similar technologies. We have
conducted searches to determine whether our patent applications interfere with
existing patents. Based upon these searches, we believe that our patent
applications and products do not interfere with existing patents. However, we
cannot be sure that relevant patents have not been issued that could block our
ability to obtain patents or commercialize our products. Moreover, since U.S.
patent applications are not a matter of public record, a patent application
could currently be on file that would stand in our way of obtaining an issued
patent. 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 surgical sealing, which could
materially impact our operations. Obtaining foreign patents may be more
difficult than obtaining domestic patents because of differences in patent
laws. Protection provided by foreign patents, if obtained, and any other
foreign intellectual property protection may be weaker than that provided
domestically.
The medical device industry is characterized by extensive litigation
regarding patents and other intellectual property rights. Many medical device
companies have employed intellectual property litigation as a way to gain a
competitive advantage. There is no assurance that third parties will not sue us
in the future to challenge our patent rights or claim infringement of their
patents. An adverse determination in litigation or interference proceedings to
which we may become a party could subject us to significant liabilities to
third parties, require us to license disputed rights from third parties or
require us to cease using the disputed technology. Although patent and
intellectual property disputes in the medical device area are often settled
through licensing or similar arrangements, costs associated with these
arrangements may be substantial and could include ongoing royalties.
Furthermore, we cannot be certain that the necessary licenses would be
available to us on satisfactory terms, if at all.
Our policy is to execute confidentiality agreements with our employees and
consultants upon the commencement of an employment or consulting relationship
with us. These agreements generally require that all confidential information
developed or made known to the individual by us during the course of the
individual's relationship with us to 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 us shall be
our exclusive property. There can be no assurance that such agreements will not
be breached, that we would have adequate remedies for any breach or that our
trade secrets will not otherwise become known to or be independently developed
by competitors.
Government Regulation
United States
Our proposed products and research and development activities are subject to
regulation by the FDA and other regulatory bodies. FDA regulations govern,
among other things, the following activities:
. Product development,
. Product testing,
. Product labeling,
. Product storage,
31
<PAGE>
. Premarket clearance or approval,
. Advertising and promotion, and
. Product sales and distribution.
Product development and approval can take a number of years and can be
expensive and uncertain.
In the United States, medical devices are classified on the basis of
controls deemed necessary to reasonably ensure their safety and effectiveness.
Class I devices are subject to general controls. These controls include
labeling, premarket notification and adherence to the FDA's Quality System
regulations. Class II devices are subject to general and special controls.
Special controls include performance standards, postmarket surveillance,
patient registries, and FDA guidelines. Class III devices are those which must
receive premarket approval by the FDA to ensure their safety and effectiveness.
Premarket notification clearance must be obtained for class I and II devices
and class III devices when the FDA has not called for premarket approval. A
premarket approval application is required for most class III devices. A
premarket approval application must be supported by valid scientific evidence
to demonstrate the safety and effectiveness of the device. The application
typically includes:
. Results of clinical trials, bench and laboratory tests and animal
studies,
. A complete description of the device and its components,
. A detailed description of the methods, facilities and controls used to
manufacture the device, and
. Proposed labeling and advertising literature.
The approval process can be expensive, uncertain and lengthy. A number of
devices for which FDA approval has been sought by other companies have never
been approved for marketing.
FDA Review Process. When the FDA receives a premarket approval application,
it will determine whether the application is complete enough for review. If the
application is complete, the application is filed and the FDA begins an in-
depth review. Currently, FDA review time is approximately 12 months, but timing
is uncertain and the process may take significantly longer. The review time is
often extended by the FDA asking for more information or clarification of
information already provided in the submission. An advisory committee may be
convened to review and evaluate the application and provide a recommendation to
the FDA as to whether the device should be approved. The FDA gives substantial
weight to the recommendation but is not bound by it. Before approval, FDA
generally will conduct an inspection of the manufacturer's facilities to ensure
compliance with applicable Quality System requirements. We have not yet
undergone an FDA Quality System inspection.
The FDA may issue either an approval letter or an approvable letter. An
approvable letter will contain a number of conditions that must be met in order
to secure final approval. When and if those conditions are met, an approval
letter will be issued. The FDA can also deny approval or issue a "complete
action" letter that will detail the deficiencies. The FDA may also determine
that additional clinical trials are necessary. This may delay approval for one
or more years while additional clinical trials are conducted and submitted in
an amendment to the application. Certain modifications to the device, labeling
or manufacturing process may require premarket approval or approval of a
supplement to a premarket approval. Premarket approval supplements often
require the submission of information only needed to support the proposed
change.
Clinical Studies. If clinical trials involve a "significant risk" the
sponsor must file an Investigational Device Exemption application prior to
commencing the study. The FDA must approve the clinical trial before the study
may commence. If the device presents a "non-significant risk" to the patient,
the clinical trial may commence without FDA approval. Institutional Review
Board approval must be obtained for all studies. Submission of an
Investigational Device Exemption application does not give assurance that the
FDA will
32
<PAGE>
approve the application. If the application is approved, there can be no
assurance that FDA will determine that the data derived from the studies will
support the safety and efficacy of the device. An Investigational Device
Exemption supplement must be approved by the FDA before a sponsor or
investigator may make a significant change to the investigational plan.
The FDA has determined that FloSeal will be regulated as a class III medical
device. Premarket approval must be obtained before FloSeal can be marketed in
the United States. Fusion has received approval of an Investigational Device
Exemption to study FloSeal in cardiac, vascular and spinal surgery in the
United States. Enrollment for the FloSeal pivotal U.S. clinical trial was
completed in November 1998. The final analysis of the study is currently
ongoing. There can be no assurance that the study will adequately support
approval for FloSeal. Additional Investigational Device Exemptions will be
required for other applications of FloSeal. There can be no assurance that a
supplemental premarket approval application will be accepted for SinuSeal. In
the event we are unable to file a premarket approval supplement for SinuSeal,
we will be required to file a premarket approval application.
Manufacturing. Manufacture and distribution of FloSeal will be subject to
continuing regulation by the FDA. We will also be subject to routine
inspections by the FDA to determine compliance with the following:
. Quality System requirements,
. Medical Device Reporting regulations, and
. FDA's restrictions on promoting products for unapproved or "off-label"
uses.
Our failure to comply with applicable regulatory requirements could result
in enforcement action by the FDA, and our business could be materially and
adversely affected.
Penalties. If the FDA believes that we are not in compliance with the law,
it can;
. Detain or seize our products,
. Issue a recall,
. Stop future violations, and
. Assess civil and criminal penalties against our company, its officers
and its employees.
Our failure to comply with regulatory requirements could have a material
adverse effect on our business. Regulations are also subject to change. We
cannot predict the effect, if any, that such changes might have on our
business.
International
To market products in Europe and other foreign countries, we must obtain
similar regulatory approvals. Regulations vary significantly from country to
country. The time required to obtain approval to market products may be longer
or shorter than that required in the United States. Fusion must obtain CE mark
certification to market FloSeal in member countries of the European Union. CE
mark certification is an international symbol of adherence to quality assurance
standards and compliance with the European Medical Devices Directives. In
February 1997, we received ISO 9001 and EN 46001 qualification of our
processes, which is one of the principal steps in the CE mark approval process.
There can be no assurance that we will be successful in completing the
remainder of the CE mark certification process or obtaining CE mark
certification in a timely manner.
Employees
As of March 1, 1999, we had 31 employees, 13 of whom were engaged in
research and development, two in regulatory affairs and quality assurance, ten
in operations, two in marketing and four in finance and administration. No
employees are covered by collective bargaining agreements, and we believe we
maintain good relations with our employees.
33
<PAGE>
Facilities
Our headquarters are located in a 13,200 square foot facility in Mountain
View, California. The lease for this facility extends through December 31,
2001. We believe that these existing facilities will be sufficient for our
manufacturing and office requirements through 2000. We believe that suitable
additional or alternative space will be available in the future on commercially
reasonable terms as needed.
Legal Proceedings
We are currently not a party to any material legal proceedings.
34
<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
The following table sets forth certain information with respect to our
executive officers and directors as of January 31, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Philip M. Sawyer................. 34 President, Chief Executive Officer,
acting Chief Financial Officer and
Director
Debera M. Brown.................. 46 Vice President, Regulatory Affairs
and Quality Assurance
Scott A. Huie.................... 40 Vice President, Operations
Cary J. Reich, Ph.D.............. 50 Vice President, Research
Joseph F. Rondinone, Ph.D........ 51 Vice President, Development
Gordon W. Russell (1)............ 65 Chairman of the Board of Directors
Olav B. Bergheim (1)............. 45 Director
Vaughn D. Bryson (2)............. 60 Director
Douglas E. Kelly, M.D. (2)....... 38 Director
Lawrence G. Mohr, Jr. (1)........ 54 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Mr. Sawyer, one of Fusion's founders, has served as President and Chief
Executive Officer and as a Director since April 1993. From 1991 to 1993, Mr.
Sawyer worked in various positions in marketing and business development at the
Stryker Corporation. From 1987 to 1989, 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 a B.A. from
Haverford College and an M.B.A. from the Harvard Business School.
Ms. Brown joined Fusion in May 1995 as Vice President, Regulatory and
Clinical Affairs, which position she held until July 1997. Since July 1997, Ms.
Brown has been Vice President, Regulatory Affairs and Quality Assurance. From
September 1990 to March 1995, Ms. Brown was Vice President, Medical and
Regulatory Affairs, at Celtrix Pharmaceuticals, Inc., a manufacturer of
biopharmaceutical products from recombinant proteins. At Celtrix, Ms. Brown was
responsible for the Regulatory Affairs Department, the Quality Assurance
Department and clinical trials. Ms. Brown holds a B.A. in Human Biology from
Stanford University and completed the Executive Program at Stanford University
School of Business.
Mr. Huie joined Fusion in August 1997 as Vice President, Operations. From
May 1995 to August 1997, Mr. Huie was 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 February 1993 to May 1995, Mr. Huie
was Director of Engineering at Cygnus, Inc., a manufacturer of transdermal drug
delivery systems and developer of a non-invasive glucose monitoring medical
device. As Director of Engineering, Mr. Huie was responsible for all
engineering functions in the company including process engineering, clinical
manufacturing, manufacturing engineering, maintenance and validation. Mr. Huie
holds a B.S. in Chemical Engineering from Rensselaer Polytechnic Institute.
35
<PAGE>
Dr. Reich joined Fusion in May 1995 as Vice President, Research and
Development. Dr. Reich's current position is Vice President, Research. From
June 1987 to May 1995, Dr. Reich held various positions at Chiron Vision
Corporation, a manufacturer of devices and pharmaceuticals, to correct, improve
and restore vision. His most recent position at Chiron Vision, which he held
from April 1993 to May 1995, was Vice President, Research and Development. As
Vice President, Research and Development, Dr. Reich was responsible for global
research and development efforts in the field of ophthalmic medical devices.
Dr. Reich holds a B.S. in Chemistry from Harvey Mudd College and a Ph.D. in
Physical Organic Chemistry from Stanford University.
Dr. Rondinone joined Fusion in January 1996 as Director of Clinical Affairs.
In July 1997, Dr. Rondinone was promoted to Vice President, Development. From
July 1992 to January 1996, Dr. Rondinone was Vice President, Research and
Development, for LaserScope Surgical Systems, Inc., a manufacturer and world-
wide distributor of surgical lasers and instruments. At LaserScope, Dr.
Rondinone was responsible for new product development and management of the
research and development department. Dr. Rondinone holds a B.S. in Biology from
Tufts University, an M.S. in Physics from University of California at Los
Angeles and a Ph.D. in Physics from the University of California at Los
Angeles.
Mr. Russell has served as Fusion's Chairman of the Board since October 1993.
Mr. Russell has been a General Partner with Sequoia Capital, a venture capital
firm, since 1979. Mr. Russell currently serves on the Board of Directors of
Sangstat Medical Corporation, Aradigm Corporation and ChemTrak, Inc. Mr.
Russell has served as Chairman-Emeritus of the Board of Trustees for the Palo
Alto Medical Foundation since 1990, and currently serves as Chairman of the
Board of Overseers for the Dartmouth College Medical School. Prior to 1979, Mr.
Russell was Vice President, General Manager, of the Medical Instrument
Divisions of Coherent, Inc. and Syntex, Inc. Mr. Russell holds an A.B. from
Dartmouth College.
Mr. Bergheim has served as a director since October 1995. Mr. Bergheim has
been a Venture Partner with Domain Associates, a venture capital firm, since
August 1995. From April 1995 to August 1995, Mr. Bergheim was Executive Vice
President at Coram, a health care services company. From 1979 to April 1995,
Mr. Bergheim worked at Baxter Healthcare Corporation, a medical device company,
in various national and international positions. Most recently he was a
corporate officer responsible for Baxter's global cardiovascular business. Mr.
Bergheim is a director of Vista Medical Technologies. Mr. Bergheim has a Master
of Industrial Pharmacy degree from the University of Oslo.
Mr. Bryson has served as a director since March 1996. Since May 1995, Mr.
Bryson has been President of Life Sciences Advisors, a consulting firm focused
on assisting biopharmaceutical companies in building shareholder value. Mr.
Bryson was Vice Chairman of Vector Securities International, Inc., an
investment banking firm, from April 1994 to December 1996. Mr. Bryson was an
employee of Eli Lilly and Company for 32 years and served as President and
Chief Executive Officer of Eli Lilly from 1991 to 1993. He served as a member
of Eli Lilly's Board of Directors from 1984 until his retirement in 1993. Mr.
Bryson is a director of Ariad Pharmaceuticals, Inc., Chiron Corporation,
Perclose, Inc. and Quintiles Transnational Corp. Mr. Bryson received a B.S.
degree in Pharmacy from the University of North Carolina and completed the
Sloan Program at the Stanford University Graduate School of Business.
Dr. Kelly has served as a director since November 1993. Dr. Kelly is a
General Partner of AMA Partners 1996, L.P. and AMA Partners 1998, L.P. and has
been with Asset Management Associates, Inc., a venture capital firm, since July
1993. Dr. Kelly holds a B.A. from the University of California, San Diego, an
M.D. from the Albert Einstein College of Medicine and an M.B.A. from the
Stanford University Graduate School of Business.
Mr. Mohr has served as a director since November 1993. Since 1983, Mr. Mohr
has been a General Partner of Mohr, Davidow Ventures, a venture capital fund,
which he founded. Mr. Mohr holds an M.S. in Industrial Engineering from
Stanford University and an M.B.A. from the Stanford University Graduate School
of Business.
36
<PAGE>
Clinical and Scientific Advisors
Fusion's clinical and scientific advisors are actively involved with our
research and development efforts and routinely advise us in scientific and
product development matters. We meet with our scientific advisors periodically
as needed. Our advisors include:
<TABLE>
<CAPTION>
Name Title/Institution
---- -----------------
<C> <S>
Clark Colton, Ph.D. .... Professor of Chemical Engineering, Massachusetts
Institute of Technology
Michael Hawke, M.D. .... Professor of Otolaryngology and Pathology, University
of Toronto
George Martin, Ph.D. ... Former Director of Scientific Affairs, National
Institute of Aging
Mehmet Oz, M.D. ........ Director, Cardiac Assist Program and Assistant
Professor, Columbia-Presbyterian Medical Center
</TABLE>
Board Composition
We have authorized seven seats on the board of directors. Currently there is
one vacancy. Our Board is divided into three classes, Class I, Class II and
Class III, with each class serving staggered three-year terms. The Class I
directors, currently Messrs. Mohr and Bergheim, stand for reelection at the
1999 annual meeting of stockholders. The Class II directors, currently Mr.
Kelly and one vacancy, stand for reelection at the 2000 annual meeting of
stockholders. The Class III directors, currently Messrs. Sawyer, Russell and
Bryson, stand for reelection at the 2001 annual meeting of stockholders. Any
additional directorships resulting from an increase in the number of directors
will be distributed among the three classes so that, as nearly as possible,
each class will consist of one-third of the directors. This staggered
classification of the board of directors may have the effect of delaying or
preventing changes in control or management.
Each executive officer is appointed by and serves at the discretion of the
board of directors. Each of our officers devotes substantially full time to our
affairs. Our non-employee directors devote such time to our affairs as is
necessary to discharge their duties. There are no family relationships among
any of our directors, officers or key employees.
Board Committees
Our board of directors currently has an audit committee and a compensation
committee. The audit committee of the board of directors, consisting of Messrs.
Russell, Bergheim and Mohr, reviews our internal accounting procedures and
consults with and reviews the services provided by our independent accountants.
The compensation committee of the board of directors is comprised of two non-
employee directors, Dr. Kelly and Mr. Bryson. Richard S. Schneider was a member
of the compensation committee until his resignation from the board of directors
in January 1999. The compensation committee is responsible for reviewing and
making recommendations to the board of directors regarding all forms of
compensation to be provided to our executive officers and directors, including
salaries, bonuses, stock compensation and loans, and all bonus and stock
compensation to other employees.
Compensation Committee Interlocks and Insider Participation
The compensation committee was established in October 1993. Prior to that
time, the entire board participated in all compensation decisions. No member of
the compensation committee was, at any time or during the year ended December
31, 1998, or at any other time, one of our officers or employees.
Director Compensation
Directors do not currently receive any cash compensation from us for their
service as members of the board of directors, although they are reimbursed for
certain expenses incurred in connection with attendance at board and committee
meetings. From time to time, non-employee directors have been granted options
to
37
<PAGE>
purchase shares of our common stock. Gordon Russell, Olav Bergheim, Vaughn
Bryson, Douglas Kelly and Lawrence Mohr have each received options to purchase
6,400 shares, 22,970 shares, 22,970 shares, 6,400 shares and 6,400 shares,
respectively, of common stock under our 1993 Stock Option Plan and/or our 1996
Director Option Plan. We do not provide additional compensation for committee
participation or special assignments of the board of directors. See "--
Incentive Stock Plans."
Executive Compensation
The following table sets forth certain information for the year ended
December 31, 1998, regarding the compensation of our Chief Executive Officer
and each of our other four most highly compensated executive officers whose
annual salary and bonus for 1998 were in excess of $100,000. These executives
are referred to as Named Executive Officers elsewhere in this prospectus. The
Other Annual Compensation column in the table consists of housing allowances.
The Salary column includes compensation earned by the individual but deferred
under our 401(k) plan.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
----------------------------------------- ------------
Securities
Name and Principal Other Annual Underlying
Position Year Salary ($) Bonus ($) Compensation ($) Options (#)
- ------------------ ---- ---------- --------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Philip M. Sawyer........ 1998 175,000 10,000 -- --
President and Chief
Executive Officer 1997 173,750 -- -- --
1996 166,666 -- -- --
Debera M. Brown......... 1998 172,563 -- -- 25,000
Vice President,
Regulatory Affairs and 1997 163,006 -- -- 42,000
Quality Assurance 1996 138,191 -- -- 4,143
Scott A. Huie........... 1998 162,424 20,000 -- 15,000
Vice President,
Operations 1997 64,308(/1/) 20,000 80,000
Cary J. Reich, Ph.D. ... 1998 183,021 -- 13,000 25,000
Vice President,
Research 1997 174,859 -- 20,000 40,000
1996 157,363 -- 26,000 4,143
Joseph F. Rondinone,
Ph.D................... 1998 162,833 -- -- 30,000
Vice President,
Development 1997 146,321 -- -- 55,000
1996 119,933 -- -- 15,742
</TABLE>
- --------
(1) Mr. Huie joined Fusion in August 1997 at an annual salary of $160,000.
Employment Agreements
We have entered into employment agreements with Debera M. Brown, Scott A.
Huie, Cary J. Reich and Joseph F. Rondinone. The agreements provide that all
unvested option shares shall immediately vest upon a change of control event,
which is defined as a transaction wherein our stockholders immediately before
the transaction do not retain direct or indirect beneficial ownership of more
than 50% of the total combined voting power of our outstanding voting stock
immediately after the transaction. The agreements also provide for severance
benefits upon a termination other than for cause. These benefits include: three
months continued salary, vesting of 50% of outstanding options and a one-year
right to purchase vested options from the date of termination.
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<PAGE>
Stock Option Information
The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers in 1998, including the
potential realizable value over the ten-year term of the options, based on
assumed rates of stock appreciation of 5% and 10%, compounded annually. These
assumed rates of appreciation comply with the rules of the Securities and
Exchange Commission and do not represent Fusion's estimate of future stock
price. Actual gains, if any, on stock option exercises will be dependent on the
future performance of our common stock.
In 1998, Fusion granted options to purchase up to an aggregate of 373,250
shares to employees, directors and consultants. All options were granted under
Fusion's 1993 stock option plan at exercise prices equal to the fair market
value of Fusion's common stock on the date of grant. All options have a term of
ten years. All option shares vest over four years, with 25% of the option
shares vesting one year after the option grant date, and the remaining option
shares vesting ratably each month thereafter.
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed
Annual Rate of
Stock Price
Appreciation for
Individual Grants Option Term
---------------------------------------------- ----------------
Number of Percent of
Securities Total Options Exercise
Underlying Granted to Price Per
Options Employees in Share Expiration
Name Granted (#) Fiscal 1998 ($/Share) Date 5% 10%
- ---- ----------- ------------- --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Philip M. Sawyer........ -- -- -- -- -- --
Debera M. Brown......... 25,000 6.7% $4.75 1/01/08 $74,681 $189,257
Scott A. Huie........... 15,000 4.0 4.75 1/01/08 44,809 113,554
Cary J. Reich, Ph.D. ... 25,000 6.7 4.75 1/01/08 74,681 189,257
Joseph F. Rondinone,
Ph.D................... 30,000 8.0 4.75 1/01/08 89,617 227,108
</TABLE>
Options Grants in Last Fiscal Year
Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
The following table sets forth information with respect to the Named
Executive Officers concerning exercisable and unexecisable options held as of
December 31, 1998. No options were exercised by the Named Executive Officers in
1998.
The "Value of Unexercised In-the-Money Options at December 31, 1998" is
based on a value of $5.75 per share, the fair market value of Fusion's common
stock as reflected by the closing price on the Nasdaq National Market on
December 31, 1998, less the per share exercise price, multiplied by the number
of shares issued upon exercise of the option.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
December 31, 1998 December 31, 1998
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Philip M. Sawyer.......... -- -- -- --
Debera M. Brown........... 68,298 48,626 $257,630 $ 83,394
Scott A. Huie............. 30,103 64,897 39,969 84,631
Cary J. Reich, Ph.D....... 101,214 50,779 436,969 99,088
Joseph F. Rondinone,
Ph.D..................... 32,555 62,555 71,092 105,739
</TABLE>
39
<PAGE>
Incentive Stock Plans
1993 Stock Option Plan. The 1993 Stock Option Plan was adopted by the board
of directors in November 1993. The stock plan provides for the grant of
incentive stock options to employees, including directors who are employees,
and for the grant of nonstatutory stock options and stock purchase rights to
employees and consultants. A total of 1,890,335 shares of common stock have
been reserved for issuance pursuant to the stock plan. As of January 31, 1999,
321,546 shares had been issued upon the exercise of stock options granted under
the stock plan, 1,041,000 shares were subject to outstanding options and
527,789 shares were available for future grant. The stock plan is administered
by the compensation committee, which committee is in compliance with Rule 16b-3
promulgated under the Securities Exchange Act of 1934. Only employees may
receive incentive stock options, which are intended to qualify for certain tax
treatment; non-employees receive nonstatutory stock options, which do not
provide for such treatment. The exercise price of incentive stock options under
the stock plan must at least equal the fair market value of the common stock on
the date of grant. Options granted under the stock plan typically vest at a
rate of 25% at the end of the first year following the date of grant and then
monthly thereafter until the option is fully vested at the end of four years.
All stock options expire if not exercised within ten years. In the case of
restricted stock purchase agreements, unless the board of directors or the
compensation committee determines otherwise, Fusion has a repurchase option
exercisable upon the voluntary or involuntary termination of the purchasers
employment for any reason (including death or disability). The purchase price
for shares repurchased pursuant to the restricted stock purchase agreement will
be the original price paid by the purchaser. The repurchase option lapses at a
rate determined by the board of directors or the compensation committee. The
board of directors may amend or modify the stock plan at any time. The stock
plan will terminate in November 2003, unless sooner terminated by the board of
directors.
1996 Director Option Plan. The 1996 Director Option Plan was adopted by the
board of directors in April 1996. A total of 120,000 shares of common stock
have been reserved for issuance thereunder. As of January 31, 1999, no shares
had been issued upon the exercise of stock options, granted under the director
plan, 38,400 shares were subject to outstanding options and 81,600 shares were
available for future grant. The director plan provides for two types of grants
with different vesting schedules. The first option is granted upon election to
the board and vests 25% on the first anniversary of the date of the grant and
the remainder of the shares vest monthly over three years. The subsequent
option is granted on each annual meeting of the stockholders and vests monthly
for four years following the grant date. In the event that we merge with or
into another corporation, or sell all or substantially all of our assets, and
our stockholders before the transaction own less than 50% of the voting
securities of the surviving or successor corporation or its parent following
the transaction, then all shares subject to options granted under the director
plan not assumed by the successor corporation will become fully vested and
exercisable. The board of directors may amend the director plan at any time.
The director plan will terminate in April 2006, unless terminated earlier in
accordance with the provisions of the director plan.
1996 Employee Stock Purchase Plan. The 1996 Employee Stock purchase plan was
adopted by the board of directors in April 1996. A total of 280,000 shares of
common stock have been reserved for issuance thereunder. As of January 31,
1999, 80,955 shares have been issued under the purchase plan and 199,045 were
available for future issuance. The purchase plan, which is intended to qualify
under Section 423 of the Internal Revenue Code is administered by our board of
directors or by a committee appointed by the board of directors. Under the
purchase plan, we withhold a specified percentage (not to exceed 10%), as
determined by the employee, of each salary payment to participating employees
over certain offering periods. Any employee who we or one of our majority owned
subsidiaries currently employ for at least 20 hours per week and for at least
five consecutive months in a calendar year, is eligible to participate in the
purchase plan. Each offering period currently runs for six months and commences
on the first trading day on or after June 1 and December 1 each year. If we
merge with or into another corporation, or sell all or substantially all of our
assets, in which our stockholders before the transaction own less than 50% of
the voting securities of the surviving or successor corporation or its parent
following the transaction, the offering period then in progress will be
shortened. The price at which common stock is purchased under the purchase plan
is equal to 85% of the fair market value of
40
<PAGE>
the common stock either on the first day of the applicable offering period or
the last day of the applicable offering period, whichever is lower. Employees
may end their participation in the offering at any time during the offering
period, and participation ends automatically on termination of employment with
the us. The maximum number of shares that a participant may purchase on the
last day of any offering period is determined by dividing the payroll
deductions accumulated during the purchase period by the purchase price.
However, no person may purchase shares under the purchase plan to the extent
such person would own 5% or more of the total combined value or voting power of
all classes of our capital stock or of any of our subsidiaries, or to the
extent that such persons rights to purchase stock under all employee stock
purchase plans would accrue at a rate that exceeds $25,000 worth of stock for
any calendar year. The board of directors may amend the purchase plan at any
time. The purchase plan will terminate in April 2006, unless terminated earlier
in accordance with the provisions of the purchase plan.
401(k) Plan
In March 1995, we adopted a 401(k) plan covering our full-time employees.
The 401(k) plan is intended to qualify under Section 401(k) of the Internal
Revenue Code, so that contributions to the 401(k) plan by employees or by us,
and the investment earnings thereon, are not taxable to employees until
withdrawn from the 401(k) plan, and so that we can deduct our contributions, if
any, when made. Pursuant to the 401(k) plan, employees may elect to reduce
their current compensation by up to $10,000 and to have the amount of such
reduction contributed to the 401(k) plan. The 401(k) plan permits, but does not
require, that we provide additional matching contributions to the 401(k) plan
on behalf of all participants in the 401(k) plan. We have not made any
contributions to the 401(k) plan to date.
Limitations on Directors Liability and Indemnification
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that, if so
provided in the corporation's certificate of incorporation, directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability for (1) any breach of
their duty of loyalty to the corporation or its stockholders, (2) acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) unlawful payments of dividends or unlawful stock
repurchases or redemptions, or (4) any transaction from which the director
derived an improper personal benefit. Such limitation of liability does not
apply to liabilities arising under the federal securities laws and does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
Our current Bylaws provide for the indemnification of officers, directors
and third parties acting on behalf of the corporation if such person acted in
good faith and in a manner reasonably believed to be in and not opposed to the
best interest of the corporation, and, with respect to any criminal action or
proceeding, the indemnified party had no reason to believe his conduct was
unlawful.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our Bylaws. These
agreements, among other things, provide for indemnification of our directors
and executive officers for expenses incurred by any such person in any action
or proceeding arising out of such person's services as one of our directors or
executive officers, any of our subsidiaries or any other company or enterprise
to which the person provides services at our request. We believe that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and executive officers.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or other employees in which indemnification is required
or permitted, and we are not aware of any threatened litigation or proceeding
that may result in a claim for such indemnification.
41
<PAGE>
CERTAIN TRANSACTIONS
In fiscal 1996, 1997 and in 1998, we had a certain consulting contract with
Dr. Philip N. Sawyer, a retired distinguished heart surgeon and noted medical
device designer. We paid Dr. Sawyer $4,500 per month and related expenses for
up to ten days of consulting per month until the contract was modified on
August 31, 1998, at which time it was reduced to no more than $1,500 per month.
Dr. Sawyer is a shareholder of Interface BioMedical Laboratories Corporation
which is an affiliate of ours. Dr. Sawyer is also the father of Philip M.
Sawyer, our president and chief executive officer. We believe that the terms of
the contract with Dr. Sawyer were no less favorable to Fusion than could be
obtained from unaffiliated third parties.
All future transactions, including any loans from us to our officers,
directors, principal stockholders or affiliates, will be approved by a majority
of the board of directors, including a majority of the independent and
disinterested members of the board of directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to Fusion than could be obtained from unaffiliated third parties.
42
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information we know with respect to the
beneficial ownership of our common stock as of January 25, 1999, and as
adjusted to reflect the sale of our common stock hereby, for each person, or
group of affiliated persons, who we know to beneficially own more than 5% of
our common stock. The table also sets forth such information for our directors
and executive officers, individually and as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Except as indicated by footnote, and
subject to community property laws where applicable, to our knowledge, the
persons named in the table have sole voting and investment power with respect
to all shares of common stock shown as beneficially owned by them. Options to
purchase shares of common stock that are exercisable within 60 days of January
25, 1999 are deemed to be beneficially owned by the person holding such options
for the purpose of computing the percentage ownership of such person, but are
not treated as outstanding for the purpose of computing the ownership of any
other person. Applicable percentage of beneficial ownership is based on
7,217,886 shares of common stock outstanding as of January 25, 1999, and
8,917,886 shares of common stock outstanding after completion of this offering.
All shares shown below for Joseph Rondinone and Scott Huie represent shares
issuable upon exercise of stock options. The shares shown for directors Douglas
Kelly, Gordon Russell, Olav Bergheim, Vaughn Bryson and Lawrence Mohr, each
include 2,132 shares issuable upon exercise of stock options. The shares below
also include exercisable options for (1) Cary Reich, 110,713 shares, (2) Debera
Brown, 75,980 shares, and (3) all directors and officers as a group, 271,619
shares.
<TABLE>
<CAPTION>
Percent of Total
-----------------
Shares Percent Percent
Beneficially Before After
Name and Address of Beneficial Owner Owned Offering Offering
- ------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Philip M. Sawyer(/1/)......................... 1,333,885 18.4% 15.0%
Fusion Medical Technologies, Inc.
1615 Plymouth Street
Mountain View, CA 94043
Interface Biomedical Laboratories
Corporation.................................. 878,210 12.2 9.8
Philip N. Sawyer, M.D.
7600 Ridge Boulevard
Brooklyn, NY 11209
Douglas E. Kelly, M.D.(/2/)................... 681,979 9.4 7.6
2275 East Bayshore Road, Suite 150
Palo Alto, CA 94303
Asset Management Associates 1989, L.P......... 669,491 9.3 7.5
Douglas E. Kelly, M.D.
2275 East Bayshore Road, Suite 150
Palo Alto, CA 94303
Entities affiliated with Domain
Associates(/3/).............................. 514,528 7.1 5.8
Richard S. Schneider, Ph.D.
650 Town Center Drive, Suite 810
Costa Mesa, CA 92626
Gordon W. Russell............................. 236,735 3.3 2.7
Cary J. Reich, Ph.D........................... 120,422 1.6 1.3
Debera M. Brown............................... 78,921 1.1 *
Joseph F. Rondinone, Ph.D..................... 38,226 * *
Scott A. Huie................................. 36,040 * *
Olav B. Bergheim.............................. 18,702 * *
Vaughn D. Bryson.............................. 18,702 * *
Lawrence G. Mohr Jr........................... 12,132 * *
All directors and officers as a group (ten
persons)..................................... 4,637,973 61.9 50.5
</TABLE>
43
<PAGE>
- --------
* Less than 1%.
(1) Includes 455,675 shares held by Mr. Sawyer and 878,210 shares held by
Interface Biomedical Laboratories Corporation, of which Mr. Sawyer is a
shareholder.
(2) Includes 669,491 shares held by Asset Management Associates 1989, L.P. Dr.
Kelly is a General Partner of AMA Partners 1996, L.P. and AMA Partners
1998, L.P. and disclaims beneficial ownership of the shares held by Asset
Management Associates L.P. except to the extent of his proportionate
partnership interest. Includes 10,356 shares held by Dr. Kelly.
(3) Includes 488,998 shares held by Domain Partners III, L.P., 8,285 shares
held by Domain Associates and 17,245 shares held by DP III Associates, L.P.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 50,000,000 shares of common stock,
$0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par
value per share.
Common Stock
As of January 25, 1999, there were 7,217,886 shares of common stock
outstanding which were held by 89 stockholders of record.
The holders of common stock are entitled to one vote for each record share
held on all matters to be voted upon by the stockholders. Subject to
preferences that may be applicable to any outstanding preferred stock, the
holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the board of directors out of funds
legally available for that purpose. See "Dividend Policy." In the event we
liquidate, dissolve or wind up, the holders of common stock are entitled to
share ratably in all assets remaining after payment of liabilities, subject to
prior distribution rights of preferred stock, if any, then outstanding. The
common stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon the closing of
this offering will be fully paid and nonassessable.
Preferred Stock
The board of directors has the authority, without action by the
stockholders, to issue up to all 5,000,000 shares of authorized preferred stock
in one or more series and to designate the rights, powers, preferences and
privileges of each series, any or all of which may be greater than the rights
of the common stock. It is not possible to state the actual effect of the
issuance of any shares of preferred stock upon the rights of holders of the
common stock until the board of directors determines the specific rights of the
holders of such preferred stock. However, the effects might include, among
other things, restricting dividends on the common stock, diluting the voting
power of the common stock, impairing the liquidation rights of the common stock
and delaying or preventing a change in control of Fusion without further action
by the stockholders.
Pursuant to a Preferred Shares Rights Agreement we entered into with Bank of
Boston, N.A., as Rights Agent, dated as of October 1997, our board of directors
has declared a dividend distribution of one preferred share purchase right on
each outstanding share of our common stock. Each right entitles stockholders to
buy one one-thousandth of a share of our series A participating preferred stock
at an exercise price of $30.00. The rights become exercisable following the
tenth day after a person or group announces acquisition of 15% or more of our
common stock or the tenth business day after a person or group announces
commencement of a tender offer the consummation of which would result in
ownership by the person or group of 15% or more of our common stock. We may
redeem the rights at $0.01 per right at any time prior to the tenth day after
public announcement that a person or group has acquired beneficial ownership of
15% or more of our common stock. If, prior to redemption of the rights, a
person or group acquires 15% or more of our common stock, each right not owned
by a holder of 15% or more of the common stock will entitle its holder to
purchase, at the right's then current exercise price, that number of shares of
our common stock having a market value at that time of twice the right's
exercise price. If, after the acquisition by a person or group of 15% or more
of our common stock, we sell more than 50% of our assets or earning power or
are acquired in a merger or other business combination transaction, the
acquiring person must assume the obligations under the rights and the rights
will become exercisable to acquire common stock of the acquiring person at the
discounted price. At any time after an event triggering exercisability of the
rights at a discounted price and prior to the acquisition by the acquiring
person of 50% or more of the outstanding common stock, our board of directors
may exchange the rights of those not owned by the acquiring person or its
affiliates for our common stock at an exchange ratio of one
45
<PAGE>
share of common stock per right. However, if a majority of our board of
directors is elected by stockholder action by written consent, then for a
period of 180 days following such election the rights cannot be exchanged if
the exchange is reasonably likely to facilitate an acquisition of Fusion by a
person or entity who proposed, nominated or supported a director elected by the
written consent. We designed the rights to assure that our stockholders receive
fair and equal treatment in the event of any proposed takeover and to guard
against partial tender offers and other abusive tactics to gain control of
Fusion without paying all stockholders the fair value of their shares,
including a "control premium."
The series A participating preferred stock purchasable upon exercise of the
rights will not be redeemable. Each share of series A preferred stock will be
entitled to an aggregate dividend of 1,000 times the dividend declared per
share of common stock. In the event of liquidation, the holders of the series A
participating preferred stock will be entitled to 1,000 times the amount paid
per share of common stock plus an amount equal to accrued and unpaid dividends
and distributions thereon, whether or not declared, to the date of such
payment. Each share of series A participating preferred stock will have 1,000
votes, voting together with the common stock. These rights are protected by
customary anti-dilution provisions. Because of the nature of the dividend,
liquidation and voting rights of the shares of series A participating preferred
stock, the value of the one one-thousandth interest in a share of series A
participating preferred stock purchasable upon exercise of each right should
approximate the value of one share of common stock.
Warrants
As of January 31, 1999, there were two outstanding warrants, both issued in
connection with our credit facilities. The first warrant is for 8,285 shares of
common stock, has an exercise price of $4.00 per share and expires on September
15, 2000. The second warrant is for 4,500 shares of common stock, has an
exercise price of $4.00 per share and expires on December 21, 2002.
Registration Rights
Holders of shares of common stock which were issued as founder's shares, or
were issuable or issued upon conversion of preferred stock or their
transferees, and the holders of the warrants are entitled to certain rights
with respect to the registration of such shares under the Securities Act of
1933. These rights are provided under the terms of an agreement between us and
the holders of registrable securities. The holders of at least 40% of the
registrable securities may require, on two occasions, that we use our best
efforts to register the registrable securities for public resale, provided that
the anticipated aggregate offering price would exceed $5,000,000. If we
register any of our common stock either for our account or for the account of
other security holders, the holders of registrable securities are entitled to
include their shares of common stock in the registration, subject to the
ability of the underwriters to limit the number of shares included in the
offering. The holders of registrable securities may also require us, on four
occasions, but not more than once during any 12-month period, to register all
or a portion of their registrable securities on Form S-3, provided, among other
limitations, that the proposed aggregate selling price is at least $500,000. We
must bear all registration expenses, and the holders of the securities being
registered must bear all selling expenses relating to registrable securities.
Certain Change of Control Provisions
Fusion is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a business
combination with an interested stockholder for a period of three years
following the date the person became an interested stockholder, unless (with
certain exceptions) the business combination or the transaction in which the
person became an interested stockholder is approved in a prescribed manner.
Generally, a business combination includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. Generally, an interested stockholder is a person who, together
with affiliates and associates, owns (or within three years prior to the
determination of interested stockholder status, did own) 15%
46
<PAGE>
or more of a corporations voting stock. The existence of this provision would
be expected to have an anti-takeover effect with respect to transactions not
approved in advance by the board of directors, including discouraging attempts
that might result in a premium over the market price for the shares of common
stock held by stockholders.
Our Certificate of Incorporation divides the board of directors into three
classes of directors with each class serving a staggered three-year term. The
classified Board may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of Fusion because it generally
increases the difficulty of replacing a majority of the directors. Our
Certificate of Incorporation eliminates the right of stockholders to act by
written consent without a meeting. Our Certificate of Incorporation and Bylaws
do not provide for cumulative voting in the election of directors. The
authorization of undesignated preferred stock makes it possible for the board
of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control.
These and other provisions may have the effect of deterring hostile takeovers
or delaying changes in control or management. The amendment of any of these
provisions requires approval by holders of at least 66 2/3% of the outstanding
common stock. Our Preferred Shares Rights Agreement may have the effect of
deterring hostile takeovers or delaying changes in control or management. See
"--Preferred Stock."
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Boston EquiServe.
Its telephone number is (650) 947-3239 or (781) 575-2965.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of common stock in the public market after the
offering, or the possibility of such sales occurring, could adversely affect
the prevailing market price and our ability to raise equity capital in the
future.
Upon the completion of this offering, we will have 8,917,886 shares of
common stock outstanding, assuming no exercise of options after January 25,
1999. Of these shares, those freely tradable without restriction include:
. 1,700,000 shares sold in this offering,
. 2,100,000 shares of common stock which were sold in our initial public
offering,
. Approximately 1,276,060 additional shares of common stock which will not
be subject to the lock-up agreement described below and will be
available for immediate sale pursuant to Rule 144 and Rule 701,
. 270,931 registered shares of common stock issued upon exercise of
options, unless held by our affiliates, as that term is defined in Rule
144 promulgated under the Securities Act of 1933.
The remaining shares were issued and sold by us in private transactions and are
eligible for public sale only if registered under the Securities Act of 1933 or
sold in accordance with Rule 144 or Rule 701 thereunder.
Our directors, executive officers and entities affiliated with our
directors, who in the aggregate hold approximately 3,841,826 of the shares of
our common stock outstanding immediately prior to the completion of this
offering, have entered into lock-up agreements. As of January 31, 1999,
1,064,690 shares were subject to outstanding options. Of these shares, 490,759
held by officers, directors and their affiliates are subject to the lock-up
agreements. The lock-up agreements require that the locked-up person not
dispose of any shares of common stock or rights to purchase the common stock
owned by them for a period of 90 days after the date of this prospectus,
without the prior written consent of the placement agent.
In general, under Rule 144 a person who has beneficially owned shares for at
least one year is entitled to sell in brokers transactions or to market makers,
within any three-month period, a certain number of shares. This number may not
exceed the greater of:
. 1% of the number of shares of common stock then outstanding
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the required filing of a Form 144 with respect
to such sale.
Under Rule 144(k), a person who is not deemed to have been our affiliate at any
time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell such
shares without having to comply with the manner of sale, public information,
volume limitation or notice provisions of Rule 144. Under Rule 701 under the
Securities Act of 1933, people who purchase shares upon exercise of options
granted prior to the effective date of this offering are entitled to sell such
shares after the effective date of this offering in reliance on Rule 144,
without having to comply with the holding period requirements of Rule 144 and,
in the case of non-affiliates, without having to comply with the public
information, volume limitation or notice provisions of Rule 144.
48
<PAGE>
PLAN OF DISTRIBUTION
We are offering the common stock on a best efforts basis principally to
selected institutional investors. We have retained ING Baring Furman Selz LLC
pursuant to a placement agency agreement to act as our exclusive placement
agent in connection with this offering. The placement agent is not obligated
and does not intend to purchase any of the common stock offered hereby.
Arrangement with the Placement Agent. We have agreed to pay to the placement
agent a fee equal to 6.0% of the proceeds of this offering as selling
commissions. In addition, we will reimburse the placement agent for expenses
incurred in connection with this offering in an amount up to $75,000. We have
agreed to indemnify the placement agent against certain liabilities, including
liabilities under the Securities Act of 1933, and to contribute payments that
the placement agent may be required to make in respect thereof.
Offering and Closing Procedure. It is anticipated that the placement agent
will obtain indications of interest from potential investors and that
effectiveness of this registration statement will not be requested and no
investor funds will be accepted until indications of interest have been
received. No investor funds will be accepted prior to effectiveness of this
registration statement. Confirmations and definitive prospectuses will be
distributed to all investors at the time of pricing, informing investors of the
closing date. We currently anticipate that the closing will take place three
days from the pricing. Investors will also be informed of the date on which
they must deposit the purchase price into an escrow account established for the
benefit of investors with an independent escrow agent. Fusion reserves the
right to reject an order from any investor. If an order is rejected, the escrow
agent will promptly return such investor's funds. If the order is accepted, the
escrow agent will maintain the funds in the escrow account until the scheduled
closing date.
On the scheduled closing date, the following will occur:
. We will deposit with The Depository Trust Company the common stock to be
credited to the respective accounts of investors,
. The escrow agent will transfer to us investor funds together with any
interest thereon, and
. We will pay the placement agent its fee.
The offering will not continue after the closing date. If the closing has
not taken place within 30 days of the effectiveness of the registration
statement, the offering will terminate and any funds deposited with the escrow
agent will promptly be returned to the investors.
Negotiation of Price. We will negotiate the price to the public for the
common stock offered in this offering with the placement agent. The factors to
be considered in determining the price to the public will include the recent
market price of our common stock, the general condition of the securities
market at the time of this offering, the history of and prospects for the
industry in which we compete, our past and present operations, our historical
results of operations and our prospects for future earnings.
Lock-Up Agreements. Pursuant to the terms of lock-up agreements, our
officers, directors and certain stockholders have agreed not to directly or
indirectly offer, sell or otherwise dispose of any shares of common stock or
any securities convertible into or exercisable for, or any rights to purchase
or acquire, common stock for a period of 90 days after the date of this
prospectus, without the prior written consent of ING Baring Furman Selz LLC.
ING Baring Furman Selz LLC may, in its sole discretion, release all or any
portion of the securities subject to the lock-up agreements without notice to
our stockholders or other public announcements.
49
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters will be passed upon for the placement agent
by Cooley Godward LLP, San Diego, California.
EXPERTS
PricewaterhouseCoopers LLP, independent accountants, have audited our
consolidated financial statements in this prospectus and registration statement
as of December 31, 1997 and 1998 and for each of the years ended December 31,
1996, 1997 and 1998, as set forth in their report, which is included in this
prospectus and registration statement. Our consolidated financial statements
are included herein in reliance on their report which is given on their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the reporting requirements of the Securities Exchange
Commission, and in accordance therewith, files reports, proxy statements and
other information with the SEC. Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the SEC's regional offices located at the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, IL 60661 and Seven World Trade Center,
13th Floor, New York, NY 10048. Copies of such material can be obtained from
the Public Reference Section of the SEC upon payment of certain fees prescribed
by the SEC. The SEC's web site contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. The address of that site is http://www.sec.gov. Our common stock
is quoted on the Nasdaq National Market and our reports, proxy statements and
other information may also be inspected at the offices of Nasdaq Operations,
1735 K Street, N.W., Washington, D.C. 20006.
We have filed a registration statement on Form S-1 with the SEC under the
Securities Act in respect of the common stock offered hereby. This prospectus,
which is a part of the registration statement, omits certain information
contained in the registration statement as permitted by the SEC's rules and
regulations. For further information about us and the common stock offered
hereby, please reference the registration statement, including our exhibits.
Statements herein concerning the contents of any contract or other document
filed with the SEC as an exhibit to the registration statement are not
necessarily complete and are qualified in all respects by such reference.
Copies of the registration statement, including all exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the SEC, or obtained at prescribed rates from the public
reference section of the SEC at the address set forth above.
50
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations and Comprehensive Loss............... F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
San Jose, California
January 28, 1999
To the Board of Directors and Stockholders
Fusion Medical Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive loss, consolidated
stockholders' equity and of consolidated cash flows present fairly, in all
material respects, the financial position of Fusion Medical Technologies, Inc.
and subsidiary at December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
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 of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
F-2
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 7,473 $ 4,151
Available-for-sale securities............................ 5,465 3,013
Accounts receivable, net of allowance for doubtful
accounts of $10,000 in 1997............................. 21 --
Prepaids and other current assets........................ 207 135
-------- --------
Total current assets................................... 13,166 7,299
Noncurrent available-for-sale securities................... 1,521 --
Property and equipment, net................................ 809 735
Other assets............................................... 44 54
-------- --------
Total assets......................................... $ 15,540 $ 8,088
======== ========
LIABILITIES
Current liabilities:
Accounts payable......................................... $ 598 $ 157
Accrued expenses......................................... 675 783
Current portion of bank borrowings....................... 43 117
-------- --------
Total current liabilities.............................. 1,316 1,057
Bank borrowings, net of current portion.................. 204
-------- --------
Total liabilities.................................... 1,316 1,261
-------- --------
Commitments (Note 7)
STOCKHOLDERS' EQUITY
Preferred Stock, par value $0.001: Authorized: 5,000
shares; issued and outstanding: none
Common Stock, par value $0.001: Authorized: 50,000 shares;
issued and outstanding: 7,118 shares in 1997 and 7,211
shares in 1998............................................ 7 7
Additional paid-in capital................................. 36,096 36,137
Notes receivable from stockholder.......................... (54) --
Deferred compensation...................................... (282) (87)
Accumulated other comprehensive income..................... 2 2
Accumulated deficit........................................ (21,545) (29,232)
-------- --------
Total stockholders' equity............................. 14,224 6,827
-------- --------
Total liabilities and stockholders' equity........... $ 15,540 $ 8,088
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1997 1998
------- -------- -------
<S> <C> <C> <C>
Net sales.......................................... $ 31 $ 153 $ --
Cost of sales and start-up manufacturing costs..... 196 968 --
------- -------- -------
Gross loss..................................... (165) (815) --
------- -------- -------
Operating expenses:
Research and development......................... 4,693 5,647 6,145
Sales and marketing.............................. 1,582 2,421 614
General and administrative....................... 1,426 2,004 1,474
------- -------- -------
Total operating expenses....................... 7,701 10,072 8,233
------- -------- -------
Loss from operations......................... (7,866) (10,887) (8,233)
Interest income.................................. 926 1,008 581
Interest expense................................. (16) (24) (39)
Other income (expense), net...................... -- (49) 4
------- -------- -------
Net loss..................................... (6,956) (9,952) (7,687)
Other comprehensive income (loss):
Change in unrealized gain or loss on available-
for-sale securities............................. (11) 13 --
------- -------- -------
Comprehensive loss........................... $(6,967) $ (9,939) $(7,687)
======= ======== =======
Basic and diluted net loss per share............... $ (1.52) $ (1.41) $ (1.08)
======= ======== =======
Shares used in computing basic and diluted net loss
per share......................................... 4,563 7,070 7,145
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three years ended December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Series A Series B
Convertible Convertible
Preferred Preferred Notes Accumulated
Stock Stock Common Stock Additional Receivable Other
--------------- --------------- ------------- Paid-In From Deferred Comprehensive Accumulated
Shares Amount Shares Amount Shares Amount Capital Shareholder Compensation Income (loss) Deficit
------- ------ ------- ------ ------ ------ ---------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January
1, 1996.......... 2,269 $ 2 5,390 $ 5 1,520 $ 2 $10,416 $ (19) $ (4,637)
Issuance of
common stock:
Upon exercise of
stock options... 123 33
In exchange for
notes
receivable...... 40 48 $(48)
From initial
public offering
net of issuance
costs of
$2,881.......... 2,100 2 24,417
Upon exercise of
warrants........ 26 41
Under employee
stock purchase
plan............ 17 70
Conversion of
preferred stock
in connection
with initial
public offering.. (2,269) (2) (5,390) (5) 3,173 3 4
Unrealized losses
on available-for-
sale
Securities....... $(11)
Deferred
compensation
related to
issuance of
common stock and
grants of stock
options.......... 1,550 (1,550)
Amortization of
deferred
compensation..... 378
Net loss......... (6,956)
------- ---- ------- ---- ------ --- ------- ---- ------- ---- --------
Balances,
December 31,
1996............. -- -- -- -- 6,999 7 36,579 (48) (1,191) (11) (11,593)
Issuance of
common stock:
Upon exercise of
stock options... 84 60
Under employee
stock purchase
plan............ 35 124
Interest on notes
receivable....... (6)
Change in
unrealized loss
on available-for-
sale Securities.. 13
Adjustment for
cancellation of
stock options.... (667) 667
Amortization of
deferred
compensation..... 242
Net loss......... (9,952)
------- ---- ------- ---- ------ --- ------- ---- ------- ---- --------
Balances,
December 31,
1997............. -- -- -- -- 7,118 7 36,096 (54) (282) 2 (21,545)
Issuance of
common stock:
Upon exercise of
stock options... 65 29
Under employee
stock purchase
plan............ 28 73
Payment of notes
receivable....... 54
Adjustment for
cancellation of
stock options.... (61) 61
Amortization of
deferred
compensation..... 134
Net loss......... (7,687)
------- ---- ------- ---- ------ --- ------- ---- ------- ---- --------
Balances,
December 31,
1998............. -- $-- -- $-- 7,211 $ 7 $36,137 $-- $ (87) $ 2 $(29,232)
======= ==== ======= ==== ====== === ======= ==== ======= ==== ========
<CAPTION>
Total
--------
<S> <C>
Balances, January
1, 1996.......... $ 5,769
Issuance of
common stock:
Upon exercise of
stock options... 33
In exchange for
notes
receivable......
From initial
public offering
net of issuance
costs of
$2,881.......... 24,419
Upon exercise of
warrants........ 41
Under employee
stock purchase
plan............ 70
Conversion of
preferred stock
in connection
with initial
public offering..
Unrealized losses
on available-for-
sale
Securities....... (11)
Deferred
compensation
related to
issuance of
common stock and
grants of stock
options..........
Amortization of
deferred
compensation..... 378
Net loss......... (6,956)
--------
Balances,
December 31,
1996............. 23,743
Issuance of
common stock:
Upon exercise of
stock options... 60
Under employee
stock purchase
plan............ 124
Interest on notes
receivable....... (6)
Change in
unrealized loss
on available-for-
sale Securities.. 13
Adjustment for
cancellation of
stock options....
Amortization of
deferred
compensation..... 242
Net loss......... (9,952)
--------
Balances,
December 31,
1997............. 14,224
Issuance of
common stock:
Upon exercise of
stock options... 29
Under employee
stock purchase
plan............ 73
Payment of notes
receivable....... 54
Adjustment for
cancellation of
stock options....
Amortization of
deferred
compensation..... 134
Net loss......... (7,687)
--------
Balances,
December 31,
1998............. $ 6,827
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Cash flows used for operating activities:
Net loss........................................... $(6,956) $(9,952) $(7,687)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 259 464 319
Loss on disposition of property and equipment.... -- 264
Accretion of available-for-sale securities....... -- 17 16
Amortization of deferred compensation............ 378 242 134
Interest on notes receivable from stockholder.... -- (6) --
Provision for doubtful accounts.................. -- 10 --
Changes in assets and liabilities:
Accounts receivable............................. (23) (8) 21
Inventories..................................... (83) 83 --
Prepaids and other current assets............... (239) 100 72
Other assets.................................... (11) (10)
Accounts payable................................ 403 (281) (441)
Accrued expenses................................ 189 423 108
------- ------- -------
Net cash used in operating activities.......... (6,083) (8,644) (7,468)
------- ------- -------
Cash flows from investing activities:
Acquisition of property and equipment.............. (769) (415) (245)
Purchases of available-for-sale securities......... (11,182) (10,515) (1,996)
Sales and maturities of available-for-sale
securities........................................ 16,231 5,953
------- ------- -------
Net cash provided by (used in) investing
activities.................................... (11,951) 5,301 3,712
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance costs.................................... 24,563 184 102
Proceeds from bank borrowings...................... 278
Repayment of notes payable......................... (133) (146)
Payment received on note receivable from
stockholder....................................... 54
------- ------- -------
Net cash provided by financing activities...... 24,430 38 434
------- ------- -------
Net increase (decrease) in cash and cash
equivalents........................................ 6,396 (3,305) (3,322)
Cash and cash equivalents, beginning of year........ 4,382 10,778 7,473
------- ------- -------
Cash and cash equivalents, end of year.............. $10,778 $ 7,473 $ 4,151
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest............................. $ 16 $ 64 $ 80
======= ======= =======
Cash paid for taxes................................ $ 1 $ 1 $ 1
======= ======= =======
Supplemental disclosure of noncash investing and
financing activities:
Issuance of common stock in exchange for notes
receivable........................................ $ 48
=======
Adjustment for cancellation of stock options....... $ 667 $ 61
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Formation and Business of the Company
Fusion Medical Technologies, Inc. (the "Company") was incorporated in the
State of Delaware in 1992. The Company is developing, and commercializing
proprietary collagen gel-based products used to control bleeding in a variety
of surgeries. 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 $24,419,000. Upon completion of the offering, all outstanding
shares of preferred stock (a total of 7,659,000 shares) were converted into
shares of common stock.
These financial statements contemplate the realization of assets and the
satisfaction of liabilities in the normal course of business. In the course of
its development, the Company has sustained operating losses and expects such
losses to continue through at least 2001. Management believes that its existing
cash balances and other potential financing alternatives will be sufficient to
meet the Company's capital and operating requirements for the next 12 months.
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. The failure to raise needed funds on sufficiently
favorable terms could have a material adverse effect on the Company's business,
operating results and financial condition.
2. Summary of Significant Accounting Policies
Basis of Consolidation
The Consolidated Financial Statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
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.
Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangible
assets to be held and used, or disposed of, for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company assesses the impairment of long-lived assets, based
upon the estimated future cash flows from these assets.
F-7
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies, continued
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 "interest income." The cost of securities sold
is based upon the specific identification method. All available-for-sale
securities with maturity dates greater than 365 days are classified as non-
current.
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 and cash equivalents are maintained at two 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.
The Company is dependent upon the success of its lead product under
development. The Company's future success depends upon its ability to develop,
introduce and market new products, its ability to obtain components from key
suppliers, and to obtain sufficient manufacturing capacity.
F-8
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies, continued
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 bank borrowings
approximate fair value. Estimated fair values for available-for-sale
securities, which are separately disclosed elsewhere, are based on quoted
market prices for the same or similar instruments.
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 net loss per share are computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock options
are excluded from the computation of diluted net loss per 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 618,000, 992,000, and 1,113,000 shares of common
stock at prices ranging from $.16 to $11.50 per share were outstanding at
December 31, 1996, 1997, and 1998, respectively, but were not included in the
computation of diluted net loss per share because they were anti-dilutive.
Warrants to purchase 8,000, 8,000 and 13,000 shares of common stock at $4.80,
$4.00 and $4.00 per share were outstanding at 1996 1997, and 1998,
respectively, but were not included in the computation of diluted net loss per
share because they were anti-dilutive. The aforementioned stock options and
warrants could potentially dilute earnings per share in the future.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company, to date, has not engaged in
derivative and hedging activities. The Company will adopt SFAS No. 133 as
required for its first quarterly filing of 2000.
3. Available-for-Sale Securities
The following summarizes the Company's available-for-sale securities (in
thousands):
<TABLE>
<CAPTION>
Unrealized
Cost Gain Fair Value Maturity Dates
------ ---------- ---------- --------------
December 31, 1998
-----------------
<S> <C> <C> <C> <C>
Corporate Bonds................ $3,011 $ 2 $3,013 1/99 - 6/99
====== === ======
<CAPTION>
December 31, 1997
-----------------
<S> <C> <C> <C> <C>
Corporate Bonds................ $6,984 $ 2 $6,986
====== === ======
</TABLE>
During 1998, 1997 and 1996, there were no realized gains or losses on the
disposal of available-for-sale securities.
F-9
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. Property and Equipment
Property and equipment comprise (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------ -------
<S> <C> <C>
Computer equipment.......................................... $ 256 $ 295
Office furniture and equipment.............................. 60 147
Machinery and equipment..................................... 971 1,086
Leasehold improvements...................................... 213 217
------ -------
Total..................................................... 1,500 1,745
Less accumulated depreciation and amortization (691) (1,010)
------ -------
Net....................................................... $ 809 $ 735
====== =======
</TABLE>
5. Accrued expenses
Accrued expenses comprise (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
------ ------
<S> <C> <C>
Accrued compensation.......................................... $ 175 $ 157
Restructuring (Note 12)....................................... 326 43
Clinical trial................................................ -- 383
Accrued general and administrative............................ 174 200
------ ------
$ 675 $ 783
====== ======
</TABLE>
6. Bank Borrowings
In December 1997, the Company signed a loan agreement with a bank to finance
existing equipment and future equipment purchases up to $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,
1998, the Company had a balance of $321,000 outstanding. The loan is payable in
monthly installments bearing interest at the rate of prime plus 1.5% per annum
(9.25% at December 31, 1998). This borrowing agreement contains covenants
restricting the payment of dividends.
Future payments under this loan agreement are as follows:
<TABLE>
<S> <C>
Current............................................................... $117
2000.................................................................. 117
2001.................................................................. 87
----
$321
====
</TABLE>
7. Commitments
The Company leases office, laboratory and manufacturing space under an
operating lease expiring in December 2001. The lease requires the Company to
pay property taxes, insurance and ordinary maintenance and repairs. The lease
contains an option to extend the lease terms for one year. Rent expense for the
years ended December 31, 1996, 1997 and 1998, was approximately $244,000,
$363,000 and $304,000, respectively.
F-10
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. Commitments, continued
Minimum future lease payments under the lease agreements at December 31,
1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999................................................................ $ 317
2000................................................................ 341
2001................................................................ 356
------
$1,014
======
</TABLE>
8. Stockholders' Equity
Preferred Stock
Under our Certificate of Incorporation, the Company's preferred stock is
issuable in series. As of December 31, 1998, 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. In 1997, this
warrant was modified to $4.00 per share and the expiration date was extended to
September 2000.
In December 1997, in connection with bank borrowings, 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. The value of these warrants was
calculated using the Black Scholes Model. The calculated value was deemed to be
insignificant.
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, 1998, 14,000 shares are subject to repurchase. The Company has
reserved 1,890,000 shares of common stock for issuances to employees, and
officers and consultants under the Plan.
F-11
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. Stockholders' Equity, continued
Activity under the Plan is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Shares Weighted
Available Number of Average
for Grant Shares Exercise Price Total
--------- --------- -------------- -------
<S> <C> <C> <C> <C>
Balances, January 1, 1996.......... 292 412 $0.36 $ 148
Additional shares authorized
under the Plan.................. 437 -- -- --
Options granted.................. (438) 438 2.16 946
Options canceled................. 109 (109) 3.30 (360)
Options exercised................ (123) 0.27 (33)
---- ----- -------
Balances, December 31, 1996........ 400 618 1.13 701
Additional shares authorized
under the Plan ................. 300 -- -- --
Options granted.................. (557) 557 4.33 2,410
Options canceled................. 99 (99) 2.17 (215)
Options exercised................ (84) 0.71 (60)
---- ----- -------
Balances, December 31, 1997........ 242 992 2.86 2,836
Additional shares authorized
under the Plan.................. 400 -- -- --
Options granted.................. (354) 354 4.73 1,676
Options canceled................. 240 (240) 4.31 (1,034)
Options exercised................ -- (65) 0.45 (29)
---- ----- -------
Balances, December 31, 1998........ 528 1,041 $3.31 $ 3,449
==== ===== =======
</TABLE>
For the years ended December 31, 1996, 1997, and 1998, the weighted average
fair value of options granted was $0.87, $2.42 and $1.67 per share,
respectively.
In February 1997, the Company offered employees the right to cancel certain
outstanding stock options and receive new options with an exercise price of
$4.38 per share, the closing price of the common stock on the date individual
employees agreed to cancel their original outstanding stock options. Options to
purchase a total of 49,000 shares at original exercise prices ranging from
$6.00 to $11.50 per share were canceled and new options were issued in February
1997. The option term and vesting under the new options are identical to the
terms of the canceled options.
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 1997 and 1998 for a total of 38,400 shares. No options to
purchase shares of the Company's common stock were granted during fiscal 1996.
Shares are granted under the plan at 100% of the fair value of the Company's
common stock on the date of the grant. The options vest at the rate of 25%
after the first year of service and the remaining amount equally over 36 months
until fully vested after four years. These options expire ten years from the
date of grant and are only exercisable upon vesting.
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 1998, 28,000 shares of
common stock were purchased under the plan at $3.31 per share. In 1996 and
1997, 17,000 and 35,000 shares of common stock were purchased under the plan at
$4.02 and $3.54 per share, respectively. Shares are purchased through
employees' payroll deductions at purchase prices equal to 85% of the lesser of
the fair value of the Company's common stock at either the beginning or the end
of the six-month purchase period.
F-12
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. Stockholders' Equity, continued
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 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 1996, 1997 and 1998 consistent with the
provisions of SFAS No. 123, the Company's net loss and basic and diluted net
loss per share for the years ended December 31, 1996, 1997 and 1998 would have
been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- -------
<S> <C> <C> <C>
Net loss--as reported............................. $(6,956) $ (9,952) $(7,687)
======= ======== =======
Net loss--pro forma............................... $(6,990) $(10,313) $(8,051)
======= ======== =======
Basic and diluted net loss per share--as
reported......................................... $ (1.52) $ (1.41) $ (1.08)
======= ======== =======
Basic and diluted net loss per share--pro forma... $ (1.53) $ (1.45) $ (1.13)
======= ======== =======
</TABLE>
The above pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years.
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>
1996 1997 1998
---------- --------- ----------
<S> <C> <C> <C>
Risk-free interest rate................... 5.49%-6.5% 5.79%-6.6% 5.39%-5.77%
Expected life............................. 4 years 4 years 4 years
Expected dividends........................ -- -- --
Expected volatility....................... 0.0%-79.52% 82.15% 82.86%
</TABLE>
The options outstanding and currently exercisable by exercise price at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Options Currently
Options Outstanding Exercisable
-------------------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Yrs) Price Exercisable Price
---------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.16-0.41 232,000 6.27 $0.37 217,000 $0.36
$1.00-2.41 75,000 7.12 1.65 43,000 1.74
$3.62-4.38 436,000 8.26 4.30 187,000 4.32
$4.50-7.25 298,000 8.33 4.78 78,000 4.82
--------- -------
1,041,000 525,000
========= =======
</TABLE>
As of December 31, 1996 and 1997, options to purchase 155,000 and 230,000
shares of common stock were exercisable at weighted average exercise prices of
$0.37 and $0.99, respectively.
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 $1,578,000 has been recorded as deferred
compensation as a component
F-13
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. Stockholders' Equity, continued
of stockholders' equity. Of this amount $763,000 of compensation expense has
been recognized as an expense through December 31, 1998 and $728,000 of the
amount was adjusted for cancellation of stock options, due to the termination
of employment of certain employees. The remaining $87,000 will be recognized as
an expense as the shares and options vest over fiscal 1999.
9. 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.
10. Related Parties
The Company has a consulting contract with a retired surgeon and medical
device designer. The contract pays a maximum of $1,500 per month for consulting
services and reimburses him for related expenses. The retired surgeon is a
shareholder of an affiliate of the Company and related to an executive officer.
In addition, the Company held a note receivable, for $54,000, from an executive
of the Company to purchase stock options. In 1998 the executive terminated his
relationship with the Company and satisfied the note.
11. Income Taxes
The tax effects of the significant temporary differences, which comprise
deferred tax assets (liabilities) at December 31, 1997 and 1998 are as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Capitalized start-up and research and development
costs................................................. $ 978 $ 3,032
Research and development credit........................ 641 811
Depreciation........................................... 78 159
Net operating loss carryforwards....................... 7,063 7472
Other accrued expenses................................. 190 240
------- --------
Net deferred tax asset................................. 8,950 11,714
Less valuation allowance............................... (8,950) (11,714)
------- --------
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 $19,586,000, and $19,903,000, respectively, at December 31, 1998,
available to offset future regular and alternative minimum taxable income. The
Company's net operating loss carryforwards expire in 2001 through 2018, if not
utilized. The Company has federal and state research and development credit
carryforwards of $553,000 and $390,000, respectively, expiring in the years
2009 through 2018, 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.
F-14
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
12. RapiSeal Business Exit
During the fourth quarter of 1997, the Company made a decision to
discontinue sales of its RapiSeal patch. These restructuring actions were taken
to align the Company's costs in light of the discontinuation of the RapiSeal
business. At year-end 1997, the Company incurred RapiSeal exit charges of
$559,000 for personnel severance, patent charges, and inventory and dedicated
equipment write-offs associated with exit of its RapiSeal business. A majority
of the terminated employees were located in California and worked in sales,
marketing, research and development and administrative support functions. A
total of nine employees were terminated. Of such charges $325,000 was charged
to cost of sales, $209,000 to operating expenses and $25,000 as a charge
against sales. In 1998 there was a change in reserve estimate of $50,000, due
to the favorable settlement of a contract with a third party. The majority of
the remaining cash outlays of $43,000 is expected to occur in fiscal 2000.
The following table summarizes the amounts that were charged and where they
are reflected in the accompanying statement of operations:
<TABLE>
<CAPTION>
Classification on
Description Amount Statement of Operations
----------- -------- -----------------------
<C> <C> <S>
Equipment.................................. $115,000 Cost of sales
Personnel severance........................ 125,000 Sales and marketing,
general and
administrative and
research and
development
Inventory and purchase commitments......... 210,000 Cost of sales
Accounts receivable and potential returns.. 25,000 Sales
Patents.................................... 84,000 Research and development
--------
Total...................................... $559,000
========
</TABLE>
The following table summarizes the Company's restructuring reserve balances
(in thousands):
<TABLE>
<CAPTION>
Cost of Operating
Sales Goods Expenses Total
----- ------- --------- -----
<S> <C> <C> <C> <C>
Restructuring reserve...................... $ 25 $ 325 $ 209 $ 559
Non-cash charges........................... (10) (225) 2 (233)
----- ----- ----- -----
Restructuring reserve balances at December
31, 1997.................................. 15 100 211 326
Change in reserve estimate................. (50) (50)
Cash charges............................... (15) (50) (168) (233)
----- ----- ----- -----
Restructuring reserve balances at December
31, 1998.................................. $ -- $ -- $ 43 $ 43
===== ===== ===== =====
</TABLE>
F-15
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
You should rely on the information contained in this document or to which
we have referred you. We have not authorized anyone to provide you with
information that is different. The information in this document may only be
accurate on the date of this document. This document may be used only where it
is legal to sell these securities.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Price Range of Common Stock.............................................. 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Financial Data.................................................. 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations .......................................................... 20
Business................................................................. 24
Management............................................................... 35
Certain Transactions..................................................... 42
Principal Stockholders................................................... 43
Description of Capital Stock............................................. 45
Shares Eligible for Future Sale.......................................... 48
Plan of Distribution..................................................... 49
Legal Matters............................................................ 50
Experts.................................................................. 50
Where You Can Find More Information...................................... 50
Index to Consolidated Financial Statements............................... F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,700,000 Shares
[LOGO OF FUSION MEDICAL TECHNOLOGIES, INC.]
Common Stock
----------------
PROSPECTUS
----------------
ING Baring Furman Selz LLC
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting commission, payable by the Registrant in connection with the sale
of common stock being registered. All amounts are estimates except the SEC
Registration Fee, the NASD Filing Fee and the Nasdaq National Market
Application Fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 2,865
NASD Filing Fee.................................................... 1,548
Nasdaq National Market Application Fee............................. 17,500
Blue Sky Qualification Fees and Expenses........................... --
Printing and Engraving Expenses.................................... 60,000
Legal Fees and Expenses............................................ 150,000
Accounting Fees and Expenses....................................... 75,000
Escrow Agent Fees.................................................. 20,000
Transfer Agent and Registrar Fees.................................. 10,000
Miscellaneous Expenses............................................. 13,087
--------
Total.......................................................... $350,000
========
</TABLE>
--------
*To be filed by amendment
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law permits a corporation to
indemnify its directors, officers, employees and other agents in terms
sufficiently broad to permit indemnification (including reimbursement for
expenses) under certain circumstances for liabilities arising under the
Securities Act of 1933. The Registrant's Certificate of Incorporation and
bylaws contain provisions covering indemnification of corporate directors,
officers and other agents against certain liabilities and expenses incurred as
a result of proceedings involving such persons in their capacities as
directors, officers, employees or agents, including proceedings under the
Securities Act of 1933 or the Securities Exchange Act of 1934.
The Registrant's Certificate of Incorporation provides for the
indemnification of directors to the fullest extent permissible under Delaware
law.
The Registrant's Bylaws provide for the indemnification of officers,
directors and third parties acting on behalf of the corporation if such person
acted in good faith and in a manner reasonably believed to be in and not
opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, the indemnified party had no reason to believe
his conduct was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for
in the Registrant's Bylaws, and intends to enter into indemnification
agreements with any new directors and executive officers in the future.
The Placement Agency Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the placement agent of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act, or otherwise.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought, nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since February 1996, the Registrant has sold or issued the following
securities which were not registered under the Securities Act: the Registrant
issued a warrant to purchase 4,500 shares of common stock on December 21, 1997
to Imperial Bank at an exercise price of $4.00 which expires on December 21,
2002. The warrant was issued in conjunction with and in consideration for the
Imperial Bank Loan Agreement dated December 1997 plus the cash amount of $1.00.
The sale and issuance of the warrant was deemed to be exempt from registration
under the Securities Act by virtue of section 4(2), because the transaction did
not involve any public offering and the issuee was a bank acting in its
individual capacity.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Placement Agency Agreement.
3.1+ Amended and Restated Certificate of Incorporation of Registrant.
3.2+++ Certificate of Designation of Preferences of Registrant.
3.3+ Amended and Restated Bylaws of the Registrant.
4.1* Form of Lock-Up Agreement.
4.2+ Form of Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1+ Restated Shareholder Rights Agreement dated as of January 17,
1995.
10.2+ 1993 Incentive Stock Plan, as amended, and form of incentive stock
option agreement and nonstatutory 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 Agreement.
10.6(a)+ Lease Agreement dated June 15, 1994, between the Registrant and
James Benson
10.6(b)* Extension of Industrial Lease Agreement, between the Registrant
and James Benson dated July 10, 1996 extending Lease Agreement
dated June 15, 1994.
10.6(c)* Extension of Industrial Lease Agreement, between the Registrant
and James Benson dated March 25, 1998 extending Lease Agreement
dated June 15, 1994.
10.6(d)* Extension of Industrial Lease Agreement, between the Registrant
and James Benson dated December 17, 1998 extending Lease Agreement
dated June 15, 1994.
10.7(a)++ Loan and Security Agreement dated December 21, 1997 between the
Registrant and Imperial Bank.
10.7(b)++ First Amendment dated December 21, 1997 to Warrant to Purchase
Stock dated May 31, 1995.
10.7(c)++ Warrant to Purchase Stock dated December 21, 1997.
10.8* Purchase Agreement dated January 1, 1997 between Registrant and
Spear Products
10.9* Manufacturing Agreement dated September 28, 1998 between
Registrant and GenTrac, Inc.
10.10 +++ Preferred Shares Rights Agreement dated October 1997 between the
Registrant and Bank of Boston, N.A., including the form of Rights
Certificate, the Certificate of Designation, and the Summary of
Rights Attached thereto as Exhibits A, B and C, respectively.
10.11 Form of Employment Letter Agreement between Registrant and Debera
M. Brown, Cary J. Reich, Scott A. Huie and Joseph F. Rondinone.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
24.1* Power of Attorney (see page II-4).
27.1* Financial Data Schedule
</TABLE>
- --------
* Previously filed.
+ Incorporated by reference to our Registration Statement on Form SB-2 (File
No. 33-3990-LA) filed with the Securities and Exchange Commission on April
22, 1996.
++ Incorporated by reference to our Form 10-K for the year ending December 31,
1997, filed with the Securities and Exchange Commission on April 1, 1998.
+++ Incorporated by reference to our Form 8-A, filed with the Securities and
Exchange Commission on November 5, 1997.
II-2
<PAGE>
(b) Financial Statements and Schedules
(1) Financial Statements
The financial statements filed as part of this Registration Statement
are listed in the Index to Financial Statements of the Company on Page F-1.
(2) Schedules
All Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted
because they are not required under the related instructions, are
inapplicable or because the information required thereby has been included
in the Financial Statements.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes that:
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, may be permitted to directors, officers and
controlling persons of the Registrant, the Registrant has been advised that
in the opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer of controlling person of the Registrant in the successful defense
of any action, suit proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered the
Registrant will, unless in the opinion of counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction in the question whether such indemnification by it is against
public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
(c) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(d) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Mountain View, State of
California, on this 10th day of March, 1999.
FUSION MEDICAL TECHNOLOGIES, INC.
/s/ Philip M. Sawyer
By: _________________________________
Philip M. Sawyer
President and Chief Executive
Officer
Pursuant to the requirements of the Act, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Philip M. Sawyer President, Chief Executive Officer March 10, 1999
____________________________________ and Director (Principal Executive
Philip M. Sawyer Officer)
/s/ Keith Thomas Controller March 10, 1999
____________________________________
Keith Thomas
/s/ Gordon Russell* Chairman of the Board of Directors March 10, 1999
____________________________________
Gordon Russell
/s/ Olav B. Bergheim* Director March 10, 1999
____________________________________
Olav B. Bergheim
/s/ Vaughn Bryson* Director March 10, 1999
____________________________________
Vaughn Bryson
/s/ Douglas Kelly, M.D.* Director March 10, 1999
____________________________________
Douglas Kelly, M.D.
/s/ Lawrence G. Mohr* Director March 10, 1999
____________________________________
Lawrence G. Mohr
</TABLE>
*By: /s/ Philip M. Sawyer
__________________________
Philip M. Sawyer
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Index Description
--------- -----------
<C> <S>
1.1 Form of Placement Agency Agreement.
3.1+ Amended and Restated Certificate of Incorporation of Registrant.
3.2+++ Certificate of Designation of Preferences of Registrant.
3.3+ Amended and Restated Bylaws of the Registrant.
4.1* Form of Lock-Up Agreement.
4.2+ Form of Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1+ Restated Shareholder Rights Agreement dated as of January 17, 1995.
10.2+ 1993 Incentive Stock Plan, as amended, and form of incentive stock
option agreement and nonstatutory 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 Agreement.
10.6(a)+ Lease Agreement dated June 15, 1994, between the Registrant and
James Benson
10.6(b)* Extension of Industrial Lease Agreement, between the Registrant and
James Benson dated July 10, 1996 extending Lease Agreement dated
June 15, 1994.
10.6(c)* Extension of Industrial Lease Agreement, between the Registrant and
James Benson dated March 25, 1998 extending Lease Agreement dated
June 15, 1994.
10.6(d)* Extension of Industrial Lease Agreement, between the Registrant and
James Benson dated December 17, 1998 extending Lease Agreement dated
June 15, 1994.
10.7(a)++ Loan and Security Agreement dated December 21, 1997 between the
Registrant and Imperial Bank.
10.7(b)++ First Amendment dated December 21, 1997 to Warrant to Purchase Stock
dated May 31, 1995.
10.7(c)++ Warrant to Purchase Stock dated December 21, 1997.
10.8* Purchase Agreement dated January 1, 1997 between Registrant and
Spear Products
10.9* Manufacturing Agreement dated September 28, 1998 between Registrant
and GenTrac, Inc.
10.10 +++ Preferred Shares Rights Agreement dated October 1997 between the
Registrant and Bank of Boston, N.A., including the form of Rights
Certificate, the Certificate of Designation, and the Summary of
Rights Attached thereto as Exhibits A, B and C, respectively.
10.11 Form of Employment Letter Agreement between Registrant and Debera M.
Brown, Cary J. Reich, Scott A. Huie and Joseph F. Rondinone.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
24.1* Power of Attorney (see page II-4).
27.1* Financial Data Schedule
</TABLE>
- --------
* Previously filed.
+ Incorporated by reference to our Registration Statement on Form SB-2 (File
No. 33-3990-LA) filed with the Securities and Exchange Commission on April
22, 1996.
++ Incorporated by reference to our Form 10-K for the year ending December 31,
1997, filed with the Securities and Exchange Commission on April 1, 1998.
+++ Incorporated by reference to our Form 8-A, filed with the Securities and
Exchange Commission on November 5, 1997.
<PAGE>
EXHIBIT 1.1
1,700,000 Shares
FUSION MEDICAL TECHNOLOGIES, INC.
Common Stock
PLACEMENT AGENCY AGREEMENT
___________, 1999
ING Baring Furman Selz LLC
55 East 52nd Street, 33rd Floor
New York, New York 10055
Ladies and Gentlemen:
Fusion Medical Technologies, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell (the "Offering") up to an aggregate of 1,700,000
shares (the "Shares") of common stock, par value $0.001 per share (the "Common
Stock"), principally to selected institutional investors (collectively,
"Investors"). The Company desires to engage you as its placement agent (the
"Placement Agent") in connection with the Offering.
The Company hereby confirms its agreements with the Placement Agent as
follows:
1. Agreement To Act As Placement Agent. On the basis of the representations,
warranties and agreements of the Company herein contained and subject to all the
terms and conditions of this Agreement, the Placement Agent agrees to act as the
Company's exclusive placement agent, on a best efforts basis, in connection with
the issuance and sale by the Company of the Shares to Investors. The Company
shall pay to the Placement Agent in the aggregate 6% of the proceeds received by
the Company from the sale of the Shares in the Offering. If the Placement Agent
presents to the Company Qualified Indications of Interest (defined hereinafter)
from one or several Investors, which, in the aggregate, amount to $10.0 million
or greater, and the Company does not accept at least $10.0 million of such
funds, then the Cash Placement Fee set forth in the preceding sentence shall
amount to $600,000. For purpose of this Agreement, a Qualified Indication of
Interest shall mean an oral or written proposal to purchase securities of the
Company offered pursuant to the Offering at a price per share equal to or in
excess of 85% of the average closing price of the Company's common stock (as
traded on the
1.
<PAGE>
Nasdaq National Market) for (i) the ten (10) trading days immediately preceding
the presentation by the Placement Agent to the Company of the list of the
minimum amount of Qualified Indications of Interest (the "Presentation Date") or
(ii) the trading days from January 1, 1999 to the Presentation Date, whichever
is higher. The Company will also reimburse the Placement Agent for certain out-
of-pocket expenses up to a maximum of $75,000 in accordance with Section 5 of
this Agreement.
2. Delivery and Payment. On or prior to the Effective Date (as defined
below), the Company, the Placement Agent and ________________________, as escrow
agent (the "Escrow Agent"), shall enter into an escrow agreement in customary
form mutually acceptable to the Company, the Placement Agent and the Escrow
Agent (the "Escrow Agreement"), pursuant to which an escrow account will be
established, at the Company's expense, for the benefit of Investors (the "Escrow
Account"). The Escrow Agreement will provide that, prior to the Closing Date,
(i) each Investor will deposit in the Escrow Account an amount equal to the
price per Share multiplied by the number of Shares purchased by it, and (ii) the
Escrow Agent will notify the Company and the Placement Agent in writing whether
such Investors have deposited in the Escrow Account funds in an amount which
shall equal the proceeds of the sale of not fewer than _________ of the Shares
offered in the Offering (the "Requisite Funds"). At 9:00 a.m., New York City
time, on such date as may be agreed upon by the Company and the Placement Agent
(such date is hereinafter referred to as the "Closing Date"), the Escrow Agent
will release the Requisite Funds from the Escrow Account for collection by the
Company and the Placement Agent as provided in the Escrow Agreement and the
Company shall deliver the Shares to Investors, which delivery may be made
through the facilities of the Depository Trust Company. The closing of the
Offering (the "Closing") shall take place at the offices of Wilson Sonsini
Goodrich & Rosati, Palo Alto, California. All actions taken at the Closing shall
be deemed to have occurred simultaneously.
3. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Placement Agent as follows:
(a) A registration statement on Form S-l (File No. 333-72001) under the
Securities Act of 1933 as amended (the "Act"), with respect to the Shares,
including a form of prospectus subject to completion, has been prepared by the
Company in conformity with the requirements of the Act and the rules and
regulations of the Securities and Exchange Commission (the "Commission")
thereunder (the "Rules and Regulations"). Such registration statement has been
filed with the Commission under the Act, and one or more amendments to such
registration statement (including any post-effective amendment thereto and any
registration statement filed under Rule 462(b) of the Commission relating
thereto) may also have been so filed. After the execution of this Agreement, the
Company shall file with the Commission either (i) if such registration
statement, as it may have been amended, has been declared by the Commission to
be
2.
<PAGE>
effective under the Act, a prospectus in the form most recently included in
an amendment to such registration statement filed with the Commission (or, if no
such amendment shall have been filed, in such registration statement), with such
insertions and changes as are required by Rule 430A under the Act or permitted
by Rule 424(b) under the Act as shall have been provided to and approved by the
Placement Agent prior to the filing thereof, or (ii) if such registration
statement, as it may have been amended, has not been declared by the Commission
to be effective under the Act, an amendment to such registration statement,
including a form of prospectus, a copy of which amendment has been furnished to
and approved by the Placement Agent prior to the filing thereof. As used in this
Agreement, the term "Registration Statement" means such registration statement,
as amended at the time when it was or is declared effective, including all
financial schedules and exhibits thereto; the Registration Statement shall be
deemed to include any information omitted therefrom pursuant to Rule 430A under
the Act and included in the Prospectus (as hereinafter defined) and shall also
mean any registration statement filed pursuant to Rule 462(b) under the Act; the
term "Preliminary Prospectus" means each prospectus subject to completion
contained in such registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration Statement
or any amendment thereto or filed pursuant to Rule 424(a) under the Act at the
time it was or is declared effective); and the term "Prospectus" means the
prospectus first filed with the Commission pursuant to Rule 424(b) under the Act
or, if no prospectus is required to be filed pursuant to said Rule 424(b), such
term means the prospectus included in the Registration Statement.
(b) Neither the Commission nor any state securities commission has issued
any order preventing or suspending the use of any Preliminary Prospectus or has
instituted or threatened to institute any proceedings with respect to such an
order. When any Preliminary Prospectus was filed with the Commission it (i)
contained all statements required to be stated therein in accordance with, and
complied in all material respects with the requirements of, the Act and the
Rules and Regulations and (ii) did not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. When the Registration Statement or any amendment thereto
was or is declared effective, it (A) contained or will contain all statements
required to be stated therein in accordance with, and complied or will comply in
all material respects with the requirements of, the Act and the Rules and
Regulations and (B) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectus and when any amendment or
supplement thereto is filed with the Commission pursuant to Rule 424(b) (or, if
the Prospectus or such amendment or supplement is not required to be so filed,
when the Registration Statement and when any amendment thereto containing such
amendment or supplement to the Prospectus was or is declared effective) and at
all times
3.
<PAGE>
subsequent thereto up to and including the Closing Date (as defined in
Section 2 hereof), the Prospectus, as amended or supplemented at any such time,
(I) contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act and the Rules and Regulations and (II) did not or will
not include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (b) shall not apply to statements or omissions made
in any Preliminary Prospectus which have been corrected in a subsequent
Preliminary Prospectus or the Prospectus or to statements or omissions made in
any Preliminary Prospectus, the Registration Statement or any amendment thereto
or the Prospectus or any amendment or supplement thereto in reliance upon, and
in conformity with, information furnished in writing to the Company by the
Placement Agent expressly for use therein.
(c) The Company and each of its subsidiaries (i) is a duly incorporated
and validly existing corporation in good standing under the laws of its
jurisdiction of incorporation, with full power and authority, corporate and
other, to own or lease its properties and to conduct its business as described
in the Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus); and (ii) is duly
qualified to do business as a foreign corporation and is in good standing in
California and in each other jurisdiction (A) in which the conduct of its
business requires such qualification (except for those jurisdictions in which
the failure so to qualify has not had and will not have a Material Adverse
Effect (as hereinafter defined)) and (B) in which it owns or leases property.
"Material Adverse Effect" means, when used in connection with the Company or its
subsidiaries, any development, change or effect that is materially adverse to
the business, properties, assets, net worth, condition (financial or other),
results of operations or prospects of the Company and its subsidiaries taken as
a whole.
(d) The Company has the duly authorized and validly outstanding
capitalization set forth under the caption "Capitalization" in the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) and will have the adjusted capitalization set forth therein on the
Closing Date, based on the assumptions set forth therein. The securities of the
Company conform to the descriptions thereof contained in the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus). The
outstanding shares of Common Stock have been duly authorized and validly issued
by the Company and are fully paid and nonassessable. Except as created hereby or
referred to in the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), there are no outstanding options, warrants,
rights or other arrangements requiring the Company or any subsidiary at any time
to issue any capital stock. No holders of outstanding shares of capital stock of
the Company are entitled as such to any preemptive or other rights to subscribe
for any of the
4.
<PAGE>
Shares, and neither the filing of the Registration Statement nor the offering or
sale of the Shares as contemplated by this Agreement gives rise to any rights,
other than those which have been waived or satisfied, for or relating to, the
registration of any securities of the Company. The Shares have been duly
authorized, on the Closing Date, after payment therefor in accordance with the
terms of this Agreement, (A) the Shares to be sold by the Company hereunder will
be validly issued, fully paid and nonassessable, and (B) good and marketable
title to the Shares will pass to the Investors on the Closing Date free and
clear of any lien, encumbrance, security interest, claim or other restriction
whatsoever. All the outstanding shares of capital stock of each subsidiary has
been duly authorized and validly issued, are fully paid and nonassessable and
are owned directly by the Company, free and clear of any lien, encumbrance,
security interest, claim or other restriction whatsoever. The Shares have been
listed for quotation on the Nasdaq National Market.
(e) The consolidated financial statements and the related notes and
schedules thereto included in the Registration Statement and the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus)
fairly present the consolidated financial condition, results of operations,
stockholders' equity and cash flows of the Company and its subsidiaries at the
dates and for the periods specified therein. Such financial statements and the
related notes and schedules thereto have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved (except as otherwise noted therein) and such financial
statements as are audited have been examined by PricewaterhouseCoopers LLP, who
are independent public accountants within the meaning of the Act and the Rules
and Regulations, as indicated in their reports filed therewith. The selected
financial information and statistical data set forth under the caption "Selected
Financial Information" in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) have been prepared on a basis
consistent with the consolidated financial statements of the Company and its
subsidiaries.
(f) The Company and each of its subsidiaries have filed all necessary
federal, state and local income, franchise and other material tax returns and
have paid all taxes shown as due thereunder, and the Company has no knowledge of
any tax deficiency which might be assessed against the Company which, if so
assessed, may have a Materially Adverse Effect.
(g) The Company and each of its subsidiaries maintain insurance of the
types and in amounts which they reasonably believe to be adequate for their
business in such amounts and with such deductibles as is customary for companies
in the same or similar business, all of which insurance is in full force and
effect.
5.
<PAGE>
(h) Except as disclosed in the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus), there is no action, suit,
proceeding or investigation pending or threatened before or by any court,
regulatory body or administrative agency or any other governmental agency or
body, domestic or foreign, which (i) questions the validity of the capital stock
of the Company or this Agreement or of any action taken or to be taken by the
Company pursuant to or in connection with this Agreement, (ii) is required to be
disclosed in the Registration Statement which is not so disclosed (and such
proceedings, if any, as are summarized in the Registration Statement are
accurately summarized in all material respects), or (iii) may have a Material
Adverse Effect.
(i) The Company has full legal right, power and authority to enter into
this Agreement and the Escrow Agreement and to consummate the transactions
provided for herein and therein. Each of this Agreement and the Escrow Agreement
has been duly authorized, executed and delivered by the Company and, assuming
they are binding agreements of yours, constitutes a legal, valid and binding
agreement of the Company enforceable against the Company in accordance with its
terms (except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting the enforcement of creditors' rights and the
application of equitable principles relating to the availability of remedies and
except as rights to indemnity or contribution may be limited by federal or state
securities laws and the public policy underlying such laws), and none of the
Company's execution or delivery of this Agreement or the Escrow Agreement, its
performance hereunder or thereunder, its consummation of the transactions
contemplated herein or therein, its application of the net proceeds of the
offering in the manner set forth under the caption "Use of Proceeds" or the
conduct of its business as described in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), conflicts or will
conflict with or results or will result in any breach or violation of any of the
terms or provisions of, or constitutes or will constitute a default under,
causes or will cause (or permits or will permit) the maturation or acceleration
of any liability or obligation or the termination of any right under, or result
in the creation or imposition of any lien, charge, or encumbrance upon, any
property or assets of the Company or any of its subsidiaries pursuant to the
terms of (i) the certificate of incorporation or by-laws of the Company or any
of its subsidiaries, (ii) any indenture, mortgage, deed of trust, voting trust
agreement, stockholders' agreement, note agreement or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which any of them are or may be bound or to which any of their respective
property is or may be subject or (iii) any statute, judgment, decree, order,
rule or regulation applicable to the Company or any of its subsidiaries of any
government, arbitrator, court, regulatory body or administrative agency or other
governmental agency
6.
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or body, domestic or foreign, having jurisdiction over the Company, any of its
subsidiaries or any of their respective activities or properties.
(j) All executed agreements or copies of executed agreements filed or
incorporated by reference as exhibits to the Registration Statement to which the
Company or any of its subsidiaries is a party or by which any of them are or may
be bound or to which any of their assets, properties or businesses is or may be
subject have been duly and validly authorized, executed and delivered by the
Company or such subsidiary, as the case may be, and constitute the legal, valid
and binding agreements of the Company or such subsidiary, as the case may be,
enforceable against it in accordance with their respective terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization or other similar laws relating to enforcement of creditors'
rights generally, and general equitable principles relating to the availability
of remedies, and except as rights to indemnity or contribution may be limited by
federal or state securities laws and the public policy underlying such laws).
The descriptions in the Registration Statement of contracts and other documents
are accurate and fairly present the information required to be shown with
respect thereto by the Act and the Rules and Regulations, and there are no
contracts or other documents which are required by the Act or the Rules and
Regulations to be described in the Registration Statement or filed as exhibits
to the Registration Statement which are not described or filed as required or
incorporated therein by reference, and the exhibits which have been filed are
complete and correct copies of the documents of which they purport to be copies.
(k) Subsequent to the most recent respective dates as of which
information is given in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), and except as expressly
contemplated therein, neither the Company nor any of its subsidiaries has
incurred, other than in the ordinary course of its business, any material
liabilities or obligations, direct or contingent, purchased any of its
outstanding capital stock, paid or declared any dividends or other distributions
on its capital stock or entered into any material transactions not in the
ordinary course of business, and there has been no material change in capital
stock or debt or any material adverse change in the business, properties,
assets, net worth, condition (financial or other), or results of operations or
prospects of the Company and its subsidiaries taken as a whole. Neither the
Company nor any of its subsidiaries (or the manner in which either of them
conducts its business) is in breach or violation of, or in default under, any
term or provision of (i) its certificate of incorporation or bylaws, (ii) any
indenture, mortgage, deed of trust, voting trust agreement, stockholders'
agreement, note agreement or other agreement or instrument to which it is a
party or by which it is or may be bound or to which any of its property is or
may be subject, or any indebtedness, the effect of which breach or default
singly or in the aggregate may have a Material Adverse Effect, or (iii) any
statute, judgment, decree, order, rule or regulation applicable to the Company
or any of its subsidiaries or of any arbitrator, court, regulatory body,
administrative agency or
7.
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any other governmental agency or body, domestic or foreign, having jurisdiction
over the Company or any of its subsidiaries or any of their respective
activities or properties and the effect of which breach or default singly or in
the aggregate may have a Material Adverse Effect.
(l) No labor disturbance by the employees of the Company or any of its
subsidiaries exists or is imminent which may have a Material Adverse
Effect.
(m) Since its inception, the Company has not incurred any material
liability arising under or as a result of the application of the provisions of
the Act.
(n) (i) The Company and its subsidiaries own or possess valid and
enforceable licenses for all inventions, patents, patent applications,
trademarks (registered or unregistered), trademark applications, tradenames,
copyrights, manufacturing processes, formulae, trade secrets, know-how, and
other intangible property and assets necessary to the conduct of their business
now conducted as described in the Prospectus (collectively, "Intellectual
Property") and the Company does not know of any facts which would form a
reasonable basis for a claim that the Company or any of its Subsidiaries do not
own or possess valid and enforceable licenses for all Intellectual Property
necessary to the conduct of their business proposed to be conducted as described
in the Prospectus; (ii) the Company has no knowledge that it or any of its
subsidiaries lack or will be unable to obtain any rights or licenses to use any
of the Intellectual Property; (iii) the Company does not know of any third
parties who have or will be able to establish rights to any of the Intellectual
Property; (iv) to the Company's knowledge, there is no infringement by third
parties of any of the Intellectual Property; (v) there is no pending or, to the
Company's knowledge, threatened action, suit, proceeding or claim by others
challenging the Company's or any subsidiary's rights of title or other interest
in or to any Intellectual Property, and the Company does not know of any facts
which would form a reasonable basis for any such claim; (vi) except as disclosed
in the Prospectus, there is no pending, or, to the Company's knowledge,
threatened action, suit, proceeding or claim by others challenging the validity
and scope of any Intellectual Property, and the Company does not know of any
facts which would form a reasonable basis for any such claim; (vii) there is no
pending or, to the Company's knowledge, threatened action, suit, proceeding or
claim by others that the Company or any of its subsidiaries or any of their
products or processes infringe or otherwise violate any patent, trademark,
copyright, trade secret or other proprietary right of others, and the Company is
unaware of any facts which would form a reasonable basis for any such claim;
(viii) except as disclosed in the Prospectus, to the Company's knowledge, there
are no grounds for an interference proceeding before the United States Patent
and Trademark Office in relation to any of the patents or patent applications
currently owned by the Company or any of its subsidiaries; (ix) to the Company's
knowledge, there are no facts which would bar the grant of a patent from each of
the patent applications within the Intellectual Property; (x) there is no
pending or, to
8.
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the Company's knowledge, threatened action, suit, proceeding or claim by any
current or former employee, consultant or agent of the Company or any of its
subsidiaries seeking either ownership rights to any invention or compensation
from the Company or any of its subsidiaries for any invention made by such
employee, consultant or agent in the course of his/her employment with the
Company or any of its subsidiaries, nor, to the Company's knowledge, can any
such action, suit, proceeding or claim, if instituted, be sustained; and (xi)
there is no act or omission by the Company or its agents or representatives of
which the Company has knowledge that may render any patent or patent application
within the Intellectual Property unpatentable, unenforceable or invalid. The
Prospectus fairly and accurately describes in all material respects the
Company's and its subsidiaries' rights with respect to the Intellectual
Property.
(o) To the best of the Company's knowledge, the issued patents owned by,
or licensed to, the Company and described in the Registration Statement and
Prospectus are valid and enforceable patents. Except as described in the
Registration Statement and Prospectus and in the agreements referred to therein,
no other entity or individual has any right or claim in any of such issued
patents. The patent applications owned by, or licensed to, the Company and
described in the Registration Statement and Prospectus have been properly
prepared and filed and are being diligently pursued on behalf of the Company,
and each of such patent applications is owned or controlled by the Company, and
no other entity or individual has any right or claim in any of the patent
applications or any patent to be issued therefrom, except as described in the
Registration Statement and Prospectus and in the agreements referred to therein.
To the best of the Company's knowledge, each patent application owned by or
licensed to the Company and described in the Registration Statement and
Prospectus discloses patentable subject matter.
(p) The human clinical trials conducted by the Company or in which the
Company has participated that are described in the Registration Statement and
Prospectus or the results of which are referred to in the Registration Statement
and Prospectus, and, to the best of the Company's knowledge, such studies and
tests conducted on behalf of the Company, were and, if still pending, are being
conducted in accordance with experimental protocols, procedures and controls
pursuant to accepted professional scientific standards for the clinical study of
new medical devices; the descriptions of the results of such studies, tests and
trials contained in the Registration Statement and Prospectus are accurate and
complete in all material respects, and the Company has no knowledge of any other
trials, studies or tests, the results of which reasonably call into question the
results described or referred to in the Registration Statement and Prospectus;
and the Company has not received any notices or correspondence from the Food and
Drug Administration ("FDA") or any other governmental agency requiring the
termination, suspension or modification of any clinical trials conducted by, or
on behalf of, the Company or in which the Company has participated that are
described in the
9.
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Registration Statement and Prospectus or the results of which are referred to in
the Registration Statement and Prospectus.
(q) No consent, approval, authorization or order of or filing with any
court, regulatory body, administrative agency or any other governmental agency
or body, domestic or foreign, is required for the performance of this Agreement
or the consummation of the transactions contemplated hereby, except such as have
been or may be obtained under the Act or may be required under state securities
or Blue Sky laws in connection with the transactions contemplated by this
Agreement and the Escrow Agreement.
(r) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the Company to
include such securities under the Registration Statement (other than those that
have been disclosed in the Prospectus or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus), that have not been waived with respect
to the Registration Statement.
(s) Neither the Company nor any of its officers, directors or affiliates
(within the meaning of the Rules and Regulations) has taken, directly or
indirectly, any action designed to stabilize or manipulate the price of any
security of the Company, or which has constituted or which might in the future
reasonably be expected to cause or result in stabilization or manipulation of
the price of any security of the Company, to facilitate the sale or resale of
the Shares or otherwise.
(t) Each of the Company and its subsidiaries has good and marketable
title to, or valid and enforceable leasehold interests in, all properties and
assets owned or leased by it, free and clear of all liens, encumbrances,
security interests, claims, restrictions, equities, claims and defects, except
(i) such as are described in the Registration Statement and Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus), or
such as do not materially adversely affect the value of any of such properties
or assets taken as a whole and do not materially interfere with the use made and
proposed to be made of any of such properties or assets, and (ii) liens for
taxes not yet due and payable as to which appropriate reserves have been
established and reflected in the financial statements included in the
Registration Statement. The Company owns or leases all such properties as are
necessary to its operations as now conducted, and as proposed to be conducted as
set forth in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus); and the
properties and business of the Company and its subsidiaries conform in all
material respects to the descriptions thereof contained in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary
10.
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Prospectus). All the material leases and subleases of the Company and its
subsidiaries, and under which the Company or any subsidiary holds properties or
assets as lessee or sublessee, constitute valid leasehold interests of the
Company or such subsidiary free and clear of any lien, encumbrance, security
interest, restriction, equity, claim or defect, are in full force and effect,
and neither the Company nor any subsidiary is in default in respect of any of
the material terms or provisions of any such material leases or subleases, and
neither the Company nor any subsidiary has notice of any claim which has been
asserted by anyone adverse to the Company's or any of its subsidiary's rights as
lessee or sublessee under either the material lease or sublease, or affecting or
questioning the Company's or any subsidiary's right to the continued possession
of the leased or subleased premises under any such material lease or sublease,
which may have a Material Adverse Effect.
(u) Neither the Company nor any subsidiary has violated any applicable
environmental, safety, health or similar law applicable to the business of the
Company, nor any federal or state law relating to discrimination in the hiring,
promotion, or pay of employees, nor any applicable federal or state wages and
hours law, nor any provisions of ERISA or the rules and regulations promulgated
thereunder, the consequences of which violation may have a Material Adverse
Effect.
(v) Each of the Company and its subsidiaries holds all franchises,
licenses, permits, approvals, certificates and other authorizations from
federal, state and other governmental or regulatory authorities, including, but
not limited to the FDA and any foreign regulatory authorities performing
functions similar to those performed by the FDA, necessary to the ownership,
leasing and operation of its properties or required for the present conduct of
its business, and such franchises, licenses, permits, approvals, certificates
and other governmental authorizations are in full force and effect and the
Company and its subsidiaries are in compliance therewith in all material
respects except where the failure so to obtain, maintain or comply with would
not have a Material Adverse Effect. All of the descriptions in the Registration
Statement and Prospectus of the legal and governmental proceedings by and before
the FDA or any foreign state or local government body exercising comparable
authority are true, complete and accurate in all material respects.
(w) No subsidiary of the Company is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on such subsidiary's capital stock, from repaying to the Company
any loans or advances to such subsidiary from the Company or from transferring
any of such subsidiary's property or assets to the Company or any other
subsidiary of the Company, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
11.
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(x) Neither the Company nor any of its subsidiaries is (i) in violation
of its certificate of incorporation or bylaws, (ii) in default in the
performance or observance of any obligation, agreement, covenant or condition
contained in any bond, debenture, note or other evidence of indebtedness, which
default would have a Material Adverse Effect, (iii) in default in the
performance or observance of any contract, indenture, mortgage, loan agreement
joint venture or other agreement or instrument to which it is a party or by
which its or any of its properties are bound, which default would have a
Material Adverse Effect, or (iv) in violation of any law, order, rule,
regulation, writ, injunction, judgment or decree of any court of government
agency or body to which the Company is subject, including, but not limited to,
the FDA, which violation would have a Material Adverse Effect.
(y) The Company and its subsidiaries are (i) in compliance with any and
all applicable United States, foreign, state and local environmental laws,
rules, regulations, treaties, statutes and codes promulgated by any and all
governmental authorities relating to the protection of human health and safety,
the environment or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) have received all permits, licenses or other
approvals required of it under applicable Environmental Laws to conduct their
business as currently conducted, and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except, in the case of each
of clauses (i) through (iii), above, where such noncompliance with Environmental
Laws, failure to receive required permit licenses or other approvals would not,
individually or in the aggregate, be reasonably likely to have a Material
Adverse Effect. No action, proceeding, revocation proceeding, writ, injunction
or claim is pending or, to the Company's knowledge, threatened against the
Company or its subsidiaries relating to the Environmental Laws or to their
activities involving Hazardous Materials. "Hazardous Materials" means for
purposes of this Agreement any material or substance (i) that is prohibited or
regulated by any environmental law, rule, regulation, order, treaty, statute or
code promulgated by any governmental authority, or any amendment or modification
thereto, or (ii) that has been designated or regulated by any governmental
authority as radioactive, toxic, hazardous or otherwise a danger to health,
reproduction or the environment. The Company and its subsidiaries have not
engaged in the generation, use, manufacture, transportation or storage of any
Hazardous Materials on any of their properties or former properties, except
where such use, manufacture, transportation or storage is in compliance in all
material respects with Environmental Laws. The Company and its subsidiaries have
not disposed of any, and to the Company's knowledge, no parties other than the
Company and its subsidiaries have disposed of, Hazardous Materials on any of
their properties or on properties formerly owned or leased by them during the
time of such ownership or lease, except in compliance in all material respects
with Environmental Laws. To the Company's knowledge, no spills, discharges,
releases, deposits, emplacements, leaks or disposal of any Hazardous Materials
have occurred on
12.
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or under or have emanated from any of the Company's or its subsidiaries'
properties or former properties during the time of their ownership or lease
thereof except in compliance in all respects with Environmental Laws or that
would not be reasonably likely to have a Material Adverse Effect, and except as
disclosed in the Prospectus, the Company has no knowledge of any spills,
discharges, releases, deposits, emplacements, leaks or disposal of any Hazardous
Materials that have occurred on or under or have emanated from any of the
Company's or subsidiaries' properties or former properties prior to the
Company's or subsidiaries' ownership or lease thereof.
(z) Except as disclosed in the Prospectus, there are no business
relationships or related party transactions required to be disclosed therein by
Item 404 of Regulation S-K of the Commission.
(aa) The Company and its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(bb) The Company and its subsidiaries have not at any time during the last
five years (i) made any unlawful contribution to any candidate for foreign
office, or failed to disclose fully any contribution in violation of law, or
(ii) made any payment to any foreign, United States or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States.
4. Covenants of the Company. The company covenants and agrees as follows:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, and any
amendments thereto to become effective as promptly as practicable. If required,
the Company will file the Prospectus and any amendment or supplement thereto
with the Commission in the manner and within the time period required by Rule
424(b) under the Act. During any time when a prospectus relating to the Shares
is required to be delivered under the Act, the Company (i) will comply with all
requirements imposed upon it by the Act and the Rules and Regulations to the
extent necessary to permit the continuance of sales of or dealings in the Shares
in accordance with the provisions hereof and of the
13.
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Prospectus, as then amended or supplemented, and (ii) will not file with the
Commission the prospectus or the amendment referred to in the third sentence of
Section 3(a) hereof, any amendment or supplement to such prospectus or any
amendment to the Registration Statement of which the Placement Agent shall not
previously have been advised and furnished with a copy a reasonable period of
time prior to the proposed filing and as to which filing the Placement Agent
shall not have given their consent.
(b) As soon as the Company is advised or obtains knowledge thereof, the
Company will advise the Placement Agent (i) when the Registration Statement, as
amended, has become effective; if the provisions of Rule 430A promulgated under
the Act will be relied upon, when the Prospectus has been filed in accordance
with said Rule 430A and when any post-effective amendment to the Registration
Statement becomes effective; (ii) of any request made by the Commission for
amending the Registration Statement, for supplementing any Preliminary
Prospectus or the Prospectus or for additional information, or (iii) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or any order
preventing or suspending the use of any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto or the institution or threat of any
investigation or proceeding for that purpose, and will use its best efforts to
prevent the issuance of any such order and, if issued, to obtain the lifting
thereof as soon as possible.
(c) The Company will (i) use its best efforts to arrange for the
qualification of the Shares for offer and sale under the state securities or
blue sky laws of such jurisdictions as the Placement Agent may designate, (ii)
continue such qualifications in effect for as long as may be necessary to
complete the distribution of the Shares, and (iii) make such applications, file
such documents and furnish such information as may be required for the purposes
set forth in clauses (i) and (ii); provided, however, that the Company shall not
be required to qualify as a foreign corporation or file a general or unlimited
consent to service of process in any such jurisdiction.
(d) The Company consents to the use of the Prospectus (and any amendment
or supplement thereto) by the Placement Agent in connection with the offering or
sale of the Shares and for such period of time thereafter as the Prospectus is
required by law to be delivered in connection therewith. If, at any time when a
prospectus relating to the Shares is required to be delivered under the Act, any
event occurs as a result of which the Prospectus, as then amended or
supplemented, would include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein not misleading,
or if it becomes necessary at any time to amend or supplement the Prospectus to
comply with the Act or the Rules and Regulations, the Company promptly will so
notify the Placement Agent and, subject to Section 4(a) hereof, will prepare and
file with the Commission an amendment to the
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Registration Statement or an amendment or supplement to the Prospectus which
will correct such statement or omission or effect such compliance, each such
amendment or supplement to be reasonably satisfactory to counsel to the
Placement Agent.
(e) As soon as practicable, but in any event not later than 45 days after
the end of the 12-month period beginning on the day after the end of the fiscal
quarter of the Company during which the effective date of the Registration
Statement occurs (90 days in the event that the end of such fiscal quarter is
the end of the Company's fiscal year), the Company will make generally available
to its security holders, in the manner specified in Rule 158(b) of the Rules and
Regulations, and to the Placement Agent, an earnings statement which will be in
the detail required by, and will otherwise comply with, the provisions of
Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations, which
statement need not be audited unless required by the Act or the Rules and
Regulations, covering a period of at least 12 consecutive months after the
effective date of the Registration Statement.
(f) During a period of five years after the date hereof, the Company will
furnish to its stockholders, as soon as practicable, annual reports (including
financial statements audited by independent public accountants) and unaudited
quarterly reports of earnings, and will deliver to the Placement Agent:
(i) concurrently with furnishing such quarterly reports to its
stockholders, statements of income of the Company for each quarter in the form
furnished to the Company's stockholders and certified by the Company's principal
financial or accounting officer;
(ii) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the preceding
fiscal year, together with statements of operations, stockholders' equity, and
cash flows of the Company for such fiscal year, accompanied by a copy of the
report thereon of independent public accountants;
(iii) as soon as they are available, copies of all information
(financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the National
Association of Securities Dealers, Inc. ("NASD") or any securities exchange;
(v) every press release and every material news item or article of
interest to the financial community in respect of the Company or its affairs
which was released or prepared by the Company; and
15.
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(vi) any additional information of a public nature concerning the
Company or its business which the Placement Agent may reasonably request.
During such five-year period, if the Company has active subsidiaries, the
foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and will
be accompanied by similar financial statements for any significant subsidiary
which is not so consolidated.
(g) The Company will maintain a Transfer Agent and, if necessary under
the jurisdiction of incorporation of the Company, a Registrar (which may be the
same entity as the Transfer Agent) for its Common Stock.
(h) The Company will furnish, without charge, to the Placement Agent or
on the Placement Agent's order, at such place as the Placement Agent may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two copies of which will
be signed and will include all financial statements and exhibits) and the
Prospectus, and all amendments and supplements thereto, in each case as soon as
available and in such quantities as the Placement Agent may reasonably request.
(i) The Company will not, directly or indirectly, without the prior
written consent of the Placement Agent, issue, offer, sell, grant any option to
purchase or otherwise dispose (or announce any issuance, offer, sale, grant of
any option to purchase or other disposition) of any shares of Common Stock or
any securities convertible into, or exchangeable or exercisable for, shares of
Common Stock for a period of 90 days after the date hereof, except for issuances
pursuant to the exercise of stock options outstanding on or granted subsequent
to the date hereof, pursuant to a stock option or other employee benefit plan in
existence on the date hereof and except as contemplated by the Prospectus.
(j) The Company will cause the Shares to be duly included for quotation
on the Nasdaq National Market prior to the Closing Date.
(k) Neither the Company nor any of its officers or directors, nor
affiliates of any of them (within the meaning of the Rules and Regulations) will
take, directly or indirectly, any action designed to, or which might in the
future reasonably be expected to cause or result in, stabilization or
manipulation of the price of any securities of the Company.
(l) The Company will apply the net proceeds of the offering received by
it in the manner set forth under the caption "Use of Proceeds" in the
Prospectus.
(m) The Company will timely file all such reports, forms or other
documents as may be required from time to time, under the Act, the Rules and
16.
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Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations thereunder, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Rules and Regulations, the Exchange Act and the
rules and regulations thereunder.
5. Expenses. Regardless of whether the transactions contemplated in this
Agreement are consummated, and regardless of whether for any reason this
Agreement is terminated, the Company will pay, and hereby agrees to indemnify
the Placement Agent against, all fees and expenses incident to the performance
of the obligations of the Company under this Agreement, including, but not
limited to, (i) fees and expenses of accountants and counsel for the Company,
(ii) all costs and expenses incurred in connection with the preparation,
duplication, printing, filing, delivery and shipping of copies of the
Registration Statement and any pre-effective or post-effective amendments
thereto, any Preliminary Prospectus and the Prospectus and any amendments or
supplements thereto (including postage costs related to the delivery by the
Placement Agent of any Preliminary Prospectus or Prospectus, or any amendment or
supplement thereto), this Agreement, the Escrow Agreement and all other
documents in connection with the transactions contemplated herein, including the
cost of all copies thereof, (iii) fees and expenses relating to qualification of
the Shares under state securities or blue sky laws, including the cost of
preparing and mailing the preliminary and final blue sky memoranda and filing
fees and disbursements and fees of counsel and other related expenses, if any,
in connection therewith, (iv) filing fees of the Commission and the NASD
relating to the Shares and reasonable fees of counsel to the Placement Agent in
connection with NASD filings, (v) any fees and expenses in connection with the
listing for quotation of the Shares on the Nasdaq National Market, (vi) costs
and expenses incident to the preparation, issuance and delivery to the escrow
Agent of any certificates evidencing the shares, including transfer agent's and
registrar's fees and any applicable transfer taxes incurred in connection with
the delivery to the Escrow Agent of the Shares to be sold by the company
pursuant to this Agreement and (vii) the fees of the Escrow Agent. In addition,
the Company shall reimburse the Placement Agent, upon invoice on a monthly
basis, for all actual, accountable travel, legal (including fees and expenses of
counsel to the Placement Agent) and other out-of-pocket expenses incurred in
connection with their engagement hereunder up to a maximum of $75,000.
6. Conditions of the Placement Agent's Obligations. The obligations of the
Placement Agent under this Agreement are subject to the continuing accuracy of
the representations of the Company herein as of the date hereof and as of the
Closing Date as if they had been made on and as of the Closing Date; the
accuracy on and as of the Closing Date of the statements of officers of the
Company made pursuant to the provisions hereof; the performance by the Company
on and as of the Closing Date of its covenants and agreements hereunder; and the
following additional conditions:
17.
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(a) If the Company has elected to rely on Rule 430A under the Act, the
Registration Statement shall have been declared effective, and the Prospectus
(containing the information omitted pursuant to Rule 430A) shall have been filed
with the Commission not later than the Commission's close of business on the
second business day following the date hereof or such later time and date to
which the Placement Agent shall have consented; if the Company does not elect to
rely on Rule 430A, the Registration Statement shall have been declared effective
not later than 11:00 A.M., New York time, on the date hereof or such later time
and date to which the Placement Agent shall have consented; if required, in the
case of any changes in or amendments or supplements to the Prospectus in
addition to those contemplated above, the Company shall have filed such
Prospectus as amended or supplemented with the Commission in the manner and
within the time period required by Rule 424(b) under the Act; no stop order
suspending the effectiveness of the Registration Statement or any amendment
thereto shall have been issued, and no proceedings for that purpose shall have
been instituted or threatened or, to the knowledge of the Company or the
Placement Agent, shall be contemplated by the Commission; and the Company shall
have complied with any request of the Commission for additional information (to
be included in the Registration Statement or the Prospectus or otherwise).
(b) The Placement Agent shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Placement Agent's opinion, is material, or omits to state
a fact which, in the Placement Agent's opinion, is material and is required to
be stated therein or is necessary to make the statements therein not misleading,
or that the Prospectus, or any supplement thereto, contains an untrue statement
of fact which, in the Placement Agent's opinion, is material, or omits to state
a fact which, in the Placement Agent's opinion, is material and is required to
be stated therein or is necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the Placement Agent shall have
received from counsel to the Placement Agent, such opinion or opinions with
respect to the issuance and sale of the Shares, the Registration Statement and
the Prospectus and such other related matters as the Placement Agent reasonably
may request and such counsel shall have received such documents and other
information as they request to enable them to pass upon such matters.
(d) On the Closing Date, the Placement Agent shall have received the
opinion, dated the Closing Date, of (i) Wilson Sonsini Goodrich & Rosati,
counsel to the Company ("Company Counsel"), and (ii) Townsend and Townsend and
Crew, patent counsel to the Company ("Patent Counsel"), in the forms attached
hereto as Exhibit A and Exhibit B, respectively.
18.
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(e) On or prior to the Closing Date, counsel to the Placement Agent shall
have been furnished such documents, certificates and opinions as they may
reasonably require in order to evidence the accuracy, completeness or
satisfaction of any of the representations or warranties of the Company or
conditions herein contained.
(f) At the time that this Agreement is executed by the Company the
Placement Agent shall have received from PricewaterhouseCoopers LLP a letter as
of the date this Agreement is executed by the Company in form and substance
satisfactory to the Placement Agent (the "Original Letter"), and on the Closing
Date the Placement Agent shall have received from such firm a letter dated the
Closing Date stating that, as of a specified date not earlier than five (5) days
prior to the Closing Date, nothing has come to the attention of such firm to
suggest that the statements made in the Original Letter are not true and
correct. The letter shall not disclose any change, or any development involving
a prospective change, in or affecting the business or properties of the Company
which, in the Placement Agent reasonable judgment, makes it impracticable or
inadvisable to proceed with the offering of the Shares as contemplated by the
Prospectus.
(g) On the Closing Date, the Placement Agent shall have received a
certificate, dated the Closing Date, of the principal executive officer and the
principal financial or accounting officer of the Company to the effect that each
of such persons has carefully examined the Registration Statement and the
Prospectus and any amendments or supplements thereto and this Agreement, and
that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date, and
the Company has complied with all agreements and covenants and satisfied all
conditions contained in this Agreement on its part to be performed or satisfied
at or prior to the Closing Date;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for that purpose have been
instituted or are pending or, to the best knowledge of each of such persons are
contemplated or threatened under the Act and any and all filings required by
Rule 424 and Rule 430A have been timely made;
(iii) The Registration Statement and Prospectus and, if any, each
amendment and each supplement thereto, contain all statements and information
required to be included therein, and neither the Registration Statement nor any
amendment thereto includes any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading and neither the Prospectus (or any supplement
thereto) or any Preliminary Prospectus includes or included any untrue statement
of a material fact or omits or omitted to state
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any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; and
(iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus up to and including the
Closing Date, neither the Company nor any of its subsidiaries has incurred,
other than in the ordinary course of its business, any material liabilities or
obligations, direct or contingent; neither the Company nor any of its
subsidiaries has purchased any of its outstanding capital stock or paid or
declared any dividends or other distributions on its capital stock; neither the
Company nor any of its subsidiaries has entered into any transactions not in the
ordinary course of business; and there has not been any change in the capital
stock or consolidated long-term debt or any increase in the consolidated short-
term borrowings (other than any increase in short-term borrowings in the
ordinary course of business) of the Company or any material adverse change to
the business properties, assets, net worth, condition (financial or other),
results of operations or prospects of the Company and its subsidiaries taken as
a whole; neither the Company nor any of its subsidiaries has sustained any
material loss or damage to its property or assets, whether or not insured; there
is no litigation which is pending or threatened against the Company or any of
its subsidiaries which is required under the Act or the Rules and Regulations to
be set forth in an amended or supplemented Prospectus which has not been set
forth; and there has not occurred any event required to be set forth in an
amended or supplemented Prospectus which has not been set forth therein.
References to the Registration Statement and the Prospectus in this paragraph
(g) are to such documents as amended and supplemented at the date of the
certificate.
(h) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus up to and including the Closing
Date there has not been (i) any change or decrease specified in the letter or
letters referred to in paragraph (f) of this Section 6 or (ii) any change, or
any development involving a prospective change, in the business or properties of
the Company or its subsidiaries which change or decrease in the case of clause
(i) or change or development in the case of clause (ii) makes it impractical or
inadvisable in the Placement Agent's judgment to proceed with the public
offering or the delivery of the Shares as contemplated by the Prospectus.
(i) No order suspending the sale of the Shares in any jurisdiction
designated by you pursuant to Section 4(c) hereof has been issued on or prior to
the Closing Date and no proceedings for that purpose have been instituted or, to
your knowledge or that of the Company, have been or are contemplated.
(j) The Placement Agent shall have received from each person who is a
director or officer of the Company or a principal stockholder of the Company an
20.
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agreement to the effect that such person will not, directly or indirectly,
without the prior written consent of the Placement Agent, offer, sell, grant any
option to purchase or otherwise dispose (or announce any offer, sale, grant of
an option to purchase or other disposition) of any shares of Common Stock or any
securities convertible into, or exchangeable or exercisable for, shares of
Common Stock for a period of 90 days after the date of this Agreement.
(k) The Shares have been duly authorized for quotation on the Nasdaq
National Market.
(l) The Company shall have furnished the Placement Agent with such
further opinions, letters, certificates or documents as the Placement Agent or
counsel for the Placement Agent may reasonably request. All opinions,
certificates, letters and documents to be furnished by the Company will comply
with the provisions hereof only if they are reasonably satisfactory in all
material respects to the Placement Agent and to counsel for the Placement Agent.
The Company shall furnish the Placement Agent with conformed copies of such
opinions, certificates, letters and documents in such quantities as you
reasonably request. The certificates delivered under this Section 6 shall
constitute representations, warranties and agreements of the Company as to all
matters set forth therein as fully and effectively as if such matters had been
set forth in Section 2 of this Agreement.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless the Placement Agent
and each person, if any, who controls such Placement Agent within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, against any and all
losses, claims, damages or liabilities, joint or several (and actions in respect
thereof), to which such Placement Agent or such controlling person may become
subject, under the Act or other federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities or
actions arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or the
Prospectus or any Preliminary Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements, in light of the circumstances under which they were made, not
misleading and will reimburse, as incurred, such Placement Agent or such
controlling persons for any legal or other expenses incurred by such Placement
Agent or such controlling persons in connection with investigating, defending or
appearing as a third party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon any untrue
21.
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statement or alleged untrue statement or omission or alleged omission made in
any of such documents in reliance upon and in conformity with information
furnished in writing to the Company by the Placement Agent expressly for use
therein, and provided, further, that such indemnity with respect to any
Preliminary Prospectus shall not inure to the benefit of the Placement Agent (or
to the benefit of any person controlling such Placement Agent) from whom the
person asserting any such loss, claim, damage, liability or action purchased
Shares which are the subject thereof to the extent that any such loss, claim,
damage, liability or action (i) results from the fact that such Placement Agent
failed to send or give a copy of the Prospectus (as amended or supplemented) to
such person at or prior to the confirmation of the sale of such Shares to such
person in any case where such delivery is required by the Act and (ii) arises
out of or is based upon an untrue statement or omission of a material fact
contained in such Preliminary Prospectus that was corrected in the Prospectus
(as amended and supplemented), unless such failure resulted from non-compliance
by the Company with Section 4(h) hereof. The indemnity agreement in this
paragraph (a) shall be in addition to any liability which the Company may have
at common law or otherwise.
(b) The Placement Agent agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who has signed the
Registration Statement, each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act against any
and all losses, claims, damages or liabilities (and actions in respect thereof)
to which the Company or any such director, officer, or controlling person may
become subject, under the Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages,
liabilities or actions arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or the Prospectus or any Preliminary Prospectus, or any amendment or
supplement thereto or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements not misleading, in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
information furnished in writing by the Placement Agent to the Company expressly
for use therein; and will reimburse, as incurred, all legal or other expenses
reasonably incurred by the Company or any such director, officer, controlling
person in connection with investigating or defending any such loss, claim,
damage, liability or action. The Company acknowledges that the statements with
respect to the public offering of the Shares set forth under the heading "Plan
of Distribution" in the Prospectus have been furnished by the Placement Agent to
the Company expressly for use therein and constitute the only information
furnished in writing by or on behalf of the Placement Agent for inclusion in the
Prospectus. The indemnity agreement contained in
22.
<PAGE>
this subsection (b) shall be in addition to any liability which the Placement
Agent may have at common law or otherwise.
(c) Promptly after receipt by an indemnified party under this Section 7
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against one or more indemnifying parties
under this Section 7, notify such indemnifying party or parties of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a) or (b) of this Section 7 or to the extent
that the indemnifying party was not adversely affected by such omission. In case
any such action is brought against an indemnified party and it notifies an
indemnifying party or parties of the commencement thereof, the indemnifying
party or parties against which a claim is to be made will be entitled to
participate therein and, to the extent that it or they may wish, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party;
provided however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party has
reasonably concluded that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall have
the right to select separate counsel to assume such legal defenses and otherwise
to participate in the defense of such action on behalf of such indemnified party
or parties. Upon receipt of notice from the indemnifying party to such
indemnified party of its election so to assume the defense of such action and
approval by the indemnified party of counsel, the indemnifying party will not be
liable to such indemnified party under this Section 7 for any legal or other
expenses (other than the reasonable costs of investigation) subsequently
incurred by such indemnified party in connection with the defense thereof unless
(i) the indemnified party has employed such counsel in connection with the
assumption of such different or additional legal defenses in accordance with the
proviso to the immediately preceding sentence, (ii) the indemnifying party has
not employed counsel reasonably satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action, or (iii) the indemnifying party has authorized in
writing the employment of counsel for the indemnified party at the expense of
the indemnifying party.
(d) If the indemnification provided for in this Section 7 is unavailable
to hold harmless an indemnified party under paragraph (a) or (b) above in
respect of any losses, claims, damages, expenses or liabilities (or actions in
respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
(i) in such proportion as is appropriate to reflect the relative benefits
received by each of the contributing parties, on the one hand, and the party to
be indemnified, on the other hand, from the offering of the Shares or (ii) if
the allocation
23.
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provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each of the contributing
parties, on the one hand, and the party to be indemnified, on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. In any case where the Company is a contributing party and the
Placement Agent is the indemnified party, the relative benefits received by the
Company, on the one hand, and the Placement Agent, on the other, shall be deemed
to be in the same proportion as the total net proceeds from the offering of the
Shares (before deducting expenses) bear to the total placement agent commissions
and fees received by the Placement Agent hereunder, in each case as set forth in
the table on the cover page of the Prospectus. Relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or by the
Placement Agent, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions in respect thereof) referred
to above in this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this paragraph (d), no Placement Agent shall be required to
contribute any amount in excess of the placement agent commissions applicable to
the Shares paid to such Placement Agent hereunder. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this paragraph (d), (i) each
person, if any, who controls the Placement Agent within the meaning of Section
15 of the Act or Section 20 of the Exchange Act shall have the same rights to
contribution as such Placement Agent, and (ii) each director of the Company,
each officer of the Company who has signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act shall have the same rights to contribution
as the Company, subject in each case to this paragraph (d). Any party entitled
to contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect to which a claim for
contribution may be made against another party or parties under this paragraph
(d), notify such party or parties from whom contribution may be sought, but the
omission so to notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any other obligation (x) it or
they may have hereunder or otherwise than under this paragraph (d) or (y) to the
extent that such party or parties were not adversely affected by such omission.
The contribution agreement set forth above shall be
24.
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in addition to any liabilities which any indemnifying party may have at common
law or otherwise.
8. Representations, etc. to Survive Delivery. The respective
representations, warranties, agreements, covenants, indemnities and statements
of, and on behalf of, the Company and its officers and the Placement Agent,
respectively, set forth in or made pursuant to this Agreement will remain in
full force and effect, regardless of any investigation made by or on behalf of
the Placement Agent, and will survive delivery of and payment for the Shares.
Any successors to the Placement Agent shall be entitled to the indemnity,
contribution and reimbursement agreements contained in this Agreement.
9. Termination.
(a) This Agreement (except for the provisions of Sections 5 and 7 hereof)
may be terminated by the Placement Agent by notice to the Company in the event
that the Company has failed to comply in any respect with any of the provisions
of this Agreement required on it to be performed at or prior to the Closing
Date, or if any of the representations or warranties of the Company is not
accurate in any respect or if the covenants, agreements or conditions of, or
applicable to the Company herein contained have not been complied with in any
respect or satisfied within the time specified on the Closing Date or if prior
to the Closing Date:
(i) the Company or any of its subsidiaries shall have sustained a
loss by strike, fire, flood, accident or other calamity of such a character as
to interfere materially with the conduct of the business and operations of the
Company and its subsidiaries takes as a whole regardless of whether or not such
loss was insured;
(ii) trading in the Common Stock shall have been suspended by the
Commission or the Nasdaq National Market or trading in securities generally on
the New York Stock Exchange or the Nasdaq National Market shall have been
suspended or a material limitation on such trading shall have been imposed or
minimum or maximum prices shall have been established on any such exchange or
market system;
(iii) a banking moratorium shall have been declared by New York or
United States authorities;
(iv) there shall have been an outbreak or escalation of hostilities
between the United States and any foreign power or an outbreak or escalation of
any other insurrection or armed conflict involving the United States; or
(v) there shall have been a material adverse change in (A) general
economic, political or financial conditions or (B) the present or prospective
business or condition (financial or other) of the Company and its subsidiaries
taken as a whole that, in
25.
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each case, in the Placement Agent's judgment, makes it impracticable or
inadvisable to make or consummate the public offering, sale or delivery of the
Shares on the terms and in the manner contemplated in the Prospectus and the
Registration Statement.
(b) This Agreement may be terminated by either party in the event that
the Requisite Funds shall not have been deposited by Investors by the close of
business thirty (30) days after the Effective Date.
(c) Termination of this Agreement shall be without liability of any party
to any other party other than as provided in Sections 5 and 7 hereof.
10. Notices. All communications hereunder shall be in writing and if sent to
the Placement Agent shall be mailed or delivered or telegraphed and confirmed by
letter or telecopied and confirmed by letter to ING Baring Furman Selz
Incorporated at 55 East 52nd Street, 33rd Floor, New York, New York 10055,
Attention: Syndicate Department or, if sent to the Company, shall be mailed or
delivered or telegraphed and confirmed to the Company at 1615 Plymouth Street,
Mountain View, CA 94043, Attention: Chief Executive Officer.
11. Successors. This agreement shall incur to the benefit of and be binding
upon the Company and the Placement Agent and the Company's and the Placement
Agent's respective successors and legal representatives, and nothing expressed
or mentioned in this Agreement is intended or shall be construed to give any
other person any legal or equitable right, remedy or claim under or in respect
of this Agreement, or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole and
exclusive benefit of such persons and for the benefit of no other person, except
that the representations, warranties, indemnities and contribution agreements of
the Company contained in this Agreement shall also be for the benefit of any
person or persons, if any, who control the Placement Agent within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, and except that the
Placement Agent's indemnity and contribution agreements shall also be for the
benefit of the directors of the Company, the officers of the Company who have
signed the Registration Statement and each person or persons, if any, who
control the Company within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act.
12. Applicable Law; Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to the choice of law or conflict of law principles thereof. Each party
hereto consents to the jurisdiction of each court in which any action is
commenced seeking indemnity or contribution pursuant to Section 7 above and
agrees to accept, either directly or through an agent, service of process of
each such court.
26.
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13. Counterparts. This agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument.
27.
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If the foregoing correctly sets forth our understanding, please indicate the
Placement Agent's acceptance thereof in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement between us.
Very truly yours,
FUSION MEDICAL TECHNOLOGIES, INC.
By:
--------------------------------------
Philip Sawyer
Chief Executive Officer and President
Accepted as of the date
first above written:
ING Baring Furman Selz LLC
By:
-----------------------------------
Title:
--------------------------------
28.
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Exhibit B
MATTERS TO BE COVERED IN THE OPINION OF
WILSON, SONSINI, GOODRICH & ROSATI
Counsel for the Company
1. Each of the Company and its subsidiaries has been duly organized and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, is duly qualified as a foreign corporation
and in good standing in each jurisdiction in which its ownership or leasing of
property or the conduct of its business requires such qualification (except
where the failure to be so qualified would not have a Material Adverse Effect,
and has full corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement.
2. The authorized, issued and outstanding capital stock of the Company is as
set forth in the Registration Statement and the Prospectus under the caption
"Capitalization" as of the dates stated therein; proper corporate proceedings
have been taken validly to authorize such authorized capital stock; all of the
outstanding shares of such capital stock (including the Shares) have been duly
authorized and validly issued and are fully paid and nonassessable; and no
preemptive rights or rights of refusal in favor of, stockholders exist with
respect to the Shares, or the issue and sale thereof, pursuant to the
certificate of incorporation or bylaws of the Company and, to such counsel's
knowledge, there are no contractual preemptive rights, rights of first refusal
or rights of co-sale which exist with respect to the issue and sale of the
Shares that have not expired or been waived in writing.
3. The Registration Statement has become effective under the Act and no stop
order suspending the effectiveness of the Registration Statement or suspending
or preventing the use of the Prospectus has been issued or is in effect and no
proceedings for that purpose have been instituted or are pending or, to such
counsel's knowledge, contemplated by the Commission.
4. The Registration Statement and the Prospectus (except as to the financial
statements and schedules and financial data derived therefrom contained therein,
as to which such counsel need express no opinion) comply and as of the Effective
Date complied as to form in all material respects with the requirements of the
Act and with the Rules and Regulations, and to such counsel's knowledge, there
are no agreements, contracts, leases, documents or legal proceedings, pending or
threatened, that are of a character required to be described in, or filed as an
exhibit to, the Registration Statement which are not described or filed as
required by the Act and the applicable Rules and Regulations.
<PAGE>
5. The form of certificate evidencing the Common Stock complies with the
applicable provisions of Delaware law.
6. The statements under the captions "Management -- Limitations on Directors
Liability and Indemnification," "Description of Capital Stock -- Certain Change
of Control Provisions," and "Shares Eligible for Future Sale," in the
Registration Statement and the Prospectus insofar as such statements constitute
a summary of statutes, rules and regulations, including the Delaware General
Corporation Law and the description of the certificate of incorporation and
bylaws, are accurate summaries and fairly and correctly present the information
required to be presented by the Act or the Rules and Regulations in all material
respects; and, to such counsel's knowledge, there are no statutes, rules or
regulations required to be described in the Registration Statement or the
Prospectus that are not described or referred to therein as required.
7. The Company and each of its subsidiaries has the corporate power and
authority to own or lease all of the assets owned or leased by it and to conduct
its business, in each case as described in the Registration Statement and the
Prospectus, except where failure to have such power and authority would not have
a Material Adverse Effect.
8. No authorization, approval, consent, order, designation or declaration of
or filing by or with any governmental authority or agency is necessary in
connection with the execution and delivery of this Agreement by the Company and
the consummation of the transactions therein contemplated except such as may
have been obtained under the Act and the Rules and Regulations or such as may be
required under state securities or Blue Sky laws or by the bylaws and rules of
the NASD.
9. Each of the Placement Agency Agreement and the Escrow Agreement and the
transaction contemplated thereby, including the issuance and sale of the shares,
have been duly authorized by all necessary corporate action on the part of the
Company; each of the Placement Agency Agreement and the Escrow Agreement has
been duly executed and delivered by the Company and, assuming due authorization,
execution and delivery by the Representatives, is a valid and binding agreement
of the Company, except insofar as indemnification and contribution provisions
may be limited by applicable law or equitable principles, and except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally or by general
equitable principles.
10. Except as set forth in the Registration Statement and Prospectus, no
holders of the Company's Common Stock or other securities have registration
rights with respect to securities of the Company, and all holders of securities
of the Company having rights
<PAGE>
to the registration of shares of Common Stock, or other securities, because of
the filing of the Registration Statement by the Company have waived such rights
or such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement.
11. The Shares issued and sold by the Company has been approved for quotation
on the Nasdaq National Market, subject to official notice of issuance.
12. Any required filing of the Prospectus and any supplement thereto pursuant
to Rule 424(b) of the Rules and Regulations has been made in the manner and
within the time period required by such Rule 424(b).
13. The statements under the captions "Management -- Incentive Stock Plans,"
"Management -- 401(k) Plan," "Certain Transactions," "Description of Capital
Stock" and "Shares Eligible For Future Sale" in the Prospectus, insofar as such
statements constitute a summary of documents referred to therein or matters of
law, are accurate summaries and fairly and correctly present, in all material
respects, the information called for with respect to such documents and matters,
provided, however, that such counsel shall be entitled to rely on
representations of the Company with respect to certain factual matters contained
in such statements, and provided further that such counsel shall state that
nothing has come to the attention of such counsel which leads them to believe
that such representations are not true and correct in all material respects.
14. The execution, delivery and performance of the Agreement and the
consummation of the transactions therein contemplated do not and will not (a)
conflict with or result in a breach of any of the terms or provisions of or,
constitute a default under, the certificate of incorporation or bylaws of the
Company or any of its subsidiaries, any agreement or document filed as an
exhibit to the Registration Statement, or, to such counsel's knowledge, any
statute, rule or regulation applicable to the Company or any of its subsidiaries
(except that no opinion need to be expressed with respect to compliance with
federal and state securities laws), or (b) result in the creation or imposition
of any lien or encumbrance upon any of the assets of the Company or any of its
subsidiaries pursuant to the terms or provisions of, or result in a breach or
violation of any of the terms or provisions of, or constitute a default or
result in the acceleration of any obligation under, any indenture, mortgage,
deed of trust, loan agreement, bond, debenture, note agreement, other evidence
of indebtedness, or material lease, contract or other material agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which its property is bound, or (c) to such counsel's knowledge, conflict with
or result in a violation or breach of, or constitute a default under, any
applicable license, authorization, approval, permit, judgment, franchise, order,
writ or decree of any court or governmental agency or body.
<PAGE>
15. Neither the Company or any of its subsidiaries is in violation of its
certificate of incorporation or bylaws, and, to such counsel's knowledge,
neither the Company or any of its subsidiaries is in breach of, or default with
respect to, any provision of any agreement that was filed as an exhibit to the
Registration Statement, and the Company and its subsidiaries are compliance with
all laws, rules, regulations, judgments, decrees, orders and statutes of any
court or jurisdiction to which it is subject, except where noncompliance would
not have a Material Adverse Effect.
16. To such counsel's knowledge, there are no pending or threatened actions,
suits, claims, proceedings or investigations that, if successful, would have a
Material Adverse Effect, or would limit, revoke, cancel, suspend, or cause not
to be renewed any existing license, certificate, registration, approval or
permit, known to such counsel, from any state, federal, or regulatory authority
that is material to the conduct of the business of the Company as presently
conducted, or that is of a character otherwise required to be disclosed in the
Registration Statement or the Prospectus under the Act or the applicable Rules
and Regulations.
17. The Company will not, upon consummation of the transactions contemplated
by this Agreement, be an "investment company," or a "promoter" or "principal
underwriter" for, a "registered investment company," as such terms are defined
in the Investment Company Act of 1940, as amended.
In addition, such counsel shall include a statement to the effect that such
counsel has participated in conferences with officers and other representatives
of the Company, the Placement Agent, Placement Agent's counsel and the
independent accountants of the Company, concerning the Registration Statement
and the Prospectus and has considered the matters required to be stated therein
and the statements contained therein, and that, although such counsel does not
assume responsibility for and has not independently verified the accuracy,
completeness or fairness of such statements, nothing has come to such counsel's
attention that causes such counsel to believe that (1) the Registration
Statement (other than the financial statements, financial data and supporting
schedules included therein, as to which such counsel need express no opinion or
belief), at the time it was declared effective, contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or (2) the
Prospectus (other than the financial statements and financial data included
therein, as to which such counsel need express no opinion or belief), at the
time the Registration Statement was declared effective (unless the term
"Prospectus" refers to a prospectus that has been provided to the Placement
Agent by the Company for use in connection with the offering of the Shares that
differs from the Prospectus on file at the Commission at the time the
Registration Statement was declared effective, in which case at the time such
Prospectus
<PAGE>
was first provided to the Placement Agent for such use), or at the Closing Date,
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States, the laws of the State of California, or
the Delaware General Corporation Law upon opinions of local counsel satisfactory
in form and scope to counsel for the Placement Agent. A copy of each such
opinion so relied upon shall include a statement that the Placement Agent are
entitled to rely on such opinion and shall be delivered to the Placement Agent
and to the Placement Agent's Counsel concurrently with the opinion above set
forth.
<PAGE>
Exhibit C
MATTERS TO BE COVERED IN THE OPINION OF
TOWNSEND AND TOWNSEND AND CREW
1. Such counsel has no reason to believe that the Registration Statement or
the Prospectus (a) contains any untrue statement of a material fact with respect
to the Intellectual Property owned or used by the Company, or the manner of its
use thereof, or any allegation on the part of any person that the Company is
infringing any intellectual property rights of any such person or (b) omits to
state any material fact relating to the Intellectual Property owned or used by
the Company, or the manner of its use thereof, or any allegation of which such
counsel have knowledge, that is required to be stated in the Registration
Statement or the Prospectus or is necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
2. To the best of such counsel's knowledge, there are no legal or
governmental proceedings relating to the Intellectual Property owned or used by
the Company pending against the Company, or any third party; there are no legal
or governmental proceedings relating to a third party's intellectual property
rights pending against the Company; and no such proceedings are threatened or
contemplated by governmental authorities or others.
3. To the best of such counsel's knowledge, the Company is not infringing or
otherwise violating any intellectual property rights of others, and there are no
infringements by others of any intellectual property rights owned or used by the
Company that, in the judgment of such counsel, could affect materially the use
thereof by the Company.
4. Based on such counsel's representation of the Company and patent searches
related to the Company's freedom to operate, such counsel does not know of any
intellectual property licenses or other rights not possessed by the Company
which would be necessary to conduct the business now being or proposed to be
conducted by the Company as described in the Prospectus.
5. Such statements in the Registration Statement and Prospectus as the
Placement Agent's counsel shall have reasonably determined relate to the
Intellectual Property (including, without limitation, all statements under the
captions "Risk Factors We Face Risks Related to Intellectual Property Rights"
and "Business -- Patents and Proprietary Rights"), insofar as such statements
constitute summaries of matters of law, are accurate and complete statements or
summaries of such matters of law set forth therein.
<PAGE>
6. Based on such counsel's representation of the Company and patent searches
related to the Company's freedom to operate, such counsel has no knowledge of
any facts that would preclude the Company from having valid license rights or
clear title to the patents referenced in the Prospectus. Counsel is unaware of
any facts that form a basis for a finding of unenforceability or invalidity of
any of the Company's Intellectual Property.
7. Subject to any disclosure to the contrary in the Prospectus, such counsel
is not aware of any material defects with respect to the Company's patent
applications presently on file that (a) would preclude the issuance of patents
with respect to such applications or (b) would lead such counsel to conclude
that such patents, if issued, would not be valid and enforceable in accordance
with applicable regulations.
Such counsel may advise the Representatives that, in rendering their opinion,
they have relied on certain factual representations of the Company and that they
have not independently verified the accuracy and completeness of such
representations.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI]
March 11, 1999
Fusion Medical Technologies, Inc.
1615 Plymouth Street
Mountain View, CA 94043
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No. 333-
72001) filed with the Securities and Exchange Commission on February 9, 1999 (as
amended by Amendment No. 1 thereto filed on March 11, 1999, as such may be
amended or supplemented, the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of 1,700,000 shares
of Common Stock of Fusion Medical Technologies, Inc. (the "Shares"). The Shares,
are to be sold in a registered direct offering as described in such Registration
Statement for the sale to the public. As your counsel in connection with this
transaction, we have examined the proceedings proposed to be taken in connection
with said sale and issuance of the Shares.
It is our opinion that, upon approval by the Fusion Board of Directors, the
Shares when issued and sold in the manner referred to in the Registration
Statement will be legally and validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part hereof, and
any amendment thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE>
EXHIBIT 10.11
[Date]
[Name of Employee]
Dear [Employee]:
This letter serves as an addendum to your original offer letter of employment
dated _________ with the Company.
Your employment with the Company continues to be at will. However, in the event
you are terminated by the Company for a reason other than for cause, you will be
entitled to the following separation benefits:
(1) continued payment of your salary at your then current salary rate
(less applicable withholding), for three months;
(2) vesting of fifty percent of your then outstanding stock options;
and
(3) the right to exercise your right to purchase any options in which
you are vested for one year after the date of the termination of
your employment (keeping in mind that if you actually purchase
your options more than ninety days following the date of the
termination of your employment you may be precluded from
receiving any favorable tax treatment currently available under
the Stock Option).
For purposes of this Agreement, a termination "for cause" occurs if you are
terminated for any of the following reasons:
(a) theft, dishonesty, or falsification of any employment or Company
records;
(b) conviction of a felony or any act involving moral turpitude;
(c) consistent poor performance, as determined by the Board in its sole
discretion;
(d) improper disclosure of the Company's confidential or proprietary
information;
(e) any intentional act by you that has a material detrimental effect
on the Company's reputation or business; or
(f) the Company ceases or fails to continue to do business.
Further, in the event of a Change of Control (as defined in this paragraph) of
the Company, all of the unvested shares subject to your stock option agreement
shall become vested immediately prior to the Change in Control. For purposes of
this Agreement, a "Change of Control" shall mean an "Ownership Change Event" (as
defined in this paragraph) or a series of related Ownership Change Events
(collectively, the "Transaction") wherein the stockholders of the Company
immediately
<PAGE>
before the Transaction do not retain immediately after the Transaction direct or
indirect beneficial ownership of more than fifty percent (50%) of the total
combined voting power of the outstanding voting stock of the Company or the
corporation or corporations to which the assets of the Company were transferred
(the "Transferee Corporation(s)"), as the case may be. For purposes of the
preceding sentence, indirect beneficial ownership shall include, without
limitation, an interest resulting from ownership of the voting stock of one or
more corporations which, as a result of the Transaction, own the Company or the
Transferee Corporation(s), as the case may be, either directly or through one or
more subsidiary corporations. The Board shall have the right to determine
whether multiple sales or exchanges of the voting stock of the Company or
multiple Ownership Change Events are related, and its determination shall be
final, binding and conclusive.
Other than this modification, your letter agreement of ________ and any
agreements concerning your stock options shall remain in full force and effect.
Any further modifications to that agreement must be made in writing signed by
both you and the Company. To indicate your acceptance of these modifications,
please sign below.
Best Regards,
Philip Sawyer
President and CEO
Agreed to and accepted
____________________ Date:_____________
-2-
<PAGE>
SCHEDULE OF PARTIES
-------------------
TO AGREEMENT
------------
Debera M. Brown
Scott A. Huie
Cary J. Reich
Joseph F. Rondinone
-3-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement of Fusion Medical
Technologies, Inc. on Amendment No. 1 on Form S-1 (File No. 333-72001) of our
report dated January 28, 1999, on our audits of the consolidated financial
statements of Fusion Medical Technologies, Inc. as of December 31, 1997 and
1998 and for each of the three years in the period ended December 31, 1998. We
also consent to the references to our Firm under the captions "Experts."
San Jose, California
March 11, 1999
/s/ PricewaterhouseCoopers LLP
