<PAGE>
As filed with the Securities and Exchange Commission on February 9, 1999
Registration No. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
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 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. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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- ---------------------------------------------------------------------------------------
<CAPTION>
Proposed
Proposed Maximum
Maximum Aggregate Amount of
Title of Each Class of Amount to be Offering Price Offering Registration
Securities to be Registered Registered per Share(1) Price(1) Fee
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock $.001 Par Value..... 1,700,000 $6.0625 $10,306,250 $2,865
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee in accordance with Rule 457(a) under the Securities Act
of 1933, as amended.
---------------
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 FEBRUARY 9, 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 February 5, 1999, the last reported sale price of our common
stock on the Nasdaq National Market was $6 1/16.
Investing in common stock involves certain 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.
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<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>
[Pictures of Fusion's FloSeal product.]
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company, the common stock being sold in this offering
and our consolidated financial statements and related notes appearing elsewhere
in this prospectus. Because this is only a summary, you should read the rest of
this prospectus before you invest in our common stock. Read the entire
prospectus carefully, especially the risks described 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, FloSeal Matrix Hemostatic Sealant, combines a collagen-derived matrix
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 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 Sponge 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 expect to complete our PMA filing for FloSeal during the first
quarter of 1999, and assuming timely FDA approval, which cannot be assured, 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 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 very 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.
. Stop 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 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 (see clinical data
under "Business--Fusion's Products"). 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.
. 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.
3
<PAGE>
. 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 PMA 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 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.
We are also currently developing additional products based upon the core
technology underlying FloSeal, our proprietary collagen-derived matrix. These
products include SinuSeal, a hemostat for use in nasal and sinus surgery, and
Vascular Access Site Closure Device, a hemostat for use in the closure of
femoral artery punctures following vascular interventional procedures. We
expect to file a PMA supplement for SinuSeal shortly after obtaining FloSeal
approval. We expect to begin clinical trials for VASC in late 1999.
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 $16,427
Working capital...................................... 6,242 15,505
Total assets......................................... 8,088 17,351
Long-term debt, including current portion............ 321 321
Accumulated deficit.................................. (29,232) (29,232)
Total stockholders' equity........................... 6,827 16,090
</TABLE>
- --------
(1) Adjusted to give effect to the receipt of the net proceeds from the sale of
the 1,700,000 shares of common stock at an assumed offering price of $6
1/16 per share and after deducting the placement agent's commission and
estimated offering expenses.
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also impair our business
operations. 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. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of certain factors, including the risks described below
and elsewhere in this prospectus.
We Have a History of Losses and Expect Future Losses.
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.
Our Financial Results Are Subject to Significant Fluctuations.
We believe that quarter-to-quarter or annual comparisons of our operating
results are not a good indication of our future performance. It is likely that
in some future quarter our operating results may be below the expectations of
public market analysts and investors. In this event, the price of our common
stock will likely fall. Our operating results have varied widely in the past,
and we expect that they will continue to vary significantly from quarter-to-
quarter due to a number of factors, including:
. the timing of regulatory approvals for FloSeal;
. the degree of market acceptance of FloSeal;
. our ability to successfully manufacture FloSeal in commercial quantities;
. our ability to establish an effective sales, marketing and distribution
capability, including our ability to enter into strategic partnerships
for distribution, both domestically and abroad;
6
<PAGE>
. our ability to compete effectively against established competitors with
greater resources;
. successful completion of clinical trials for our other products under
development and obtaining related regulatory approvals; and
. general economic conditions and economic conditions specific to the
medical device industry.
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 to such a shortfall, which would materially 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. These
regulations are wide ranging and govern, among other things:
. product development;
. product testing;
. product labeling;
. product storage;
. premarket clearance or approval;
. advertising and promotion; and
. product sales and distribution.
Before we can market FloSeal or any of our other products under development
in the United States or Europe, we must demonstrate that our products are safe
and effective and obtain approval from applicable governmental authorities,
which cannot be guaranteed. After approval, if any, we will continue to be
subject to extensive regulatory requirements. If we fail to comply with such
requirements, 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 are in the process of submitting a PMA
application, which must include preclinical and clinical trial data,
manufacturing information and labeling which will support the claims we want to
be able to make for marketing FloSeal (known as labeling claims). Currently,
the time required to obtain PMA regulatory 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 indications for which any of our products
are approved. Further, the FDA may restrict or withdraw approval of a product
if additional information becomes available to support such action. Delays in
the approval process, limitation of our labeling claims or denial of our
application would cause our business to be materially and adversely affected.
We will face a similar process and risks for each product that we wish to
market in the United States. While we currently believe that we will be able to
file a PMA supplement for SinuSeal, there can be no assurance that this will be
the case or that the filing of a PMA supplement would reduce FDA review time.
In the event we are unable to file a PMA supplement for SinuSeal, we will be
required to file a PMA.
We are also required to demonstrate compliance with Quality System
Regulations before approval of FloSeal, and maintain compliance after approval.
The FDA enforces the QSR through pre-approval and periodic post-approval
inspections. The QSR relate to product testing and quality assurance, as well
as the maintenance of records and documentation. If we or any third party
manufacturer of our products do not
7
<PAGE>
conform to the QSR and cannot be brought up to such a standard, we will be
required to find alternative manufacturers that do conform. Identifying and
qualifying alternative manufacturers may be a long and difficult process. We
are also required to provide information to the FDA on death or serious
injuries alleged to have been associated with the use of our medical devices,
as well as product malfunctions that could contribute to death or serious
injury.
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 such laws or
regulations 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
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.
We Will Need to Raise Additional Funds in the Near Future.
We expect to raise net proceeds of approximately $9.3 million from this
offering. We anticipate that these additional funds will only allow us to run
our planned operations through 2000, which is prior to the time that we expect
to achieve profitability. Therefore, we must raise additional funds after this
offering in order to be successful. We plan to pursue additional financing
through partnering relationships, bank facilities, debt or equity offerings or
other sources of capital. We cannot be certain that additional funding from any
source will be available to us on acceptable terms when needed, 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. 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.
We Need to Develop Sales, Marketing and Distribution Capabilities.
We currently do not have sufficient sales, marketing or distribution
capabilities to commercialize our products. We intend to sell our products
primarily through distribution agreements or by means of collaborative
arrangements with corporate strategic partners. 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 may also decide to use a direct sales
strategy for certain surgical specialties. We cannot be certain that we would
be able to build an effective direct sales force. If we do not establish
effective sales, marketing and distribution capabilities, our business would be
materially and adversely affected.
8
<PAGE>
We Face Significant Competition.
The topical hemostat and surgical sealant markets are highly competitive. A
wide variety of products exist today that will compete directly with FloSeal
and our other products under development. The competitive product types and
their manufacturers include:
<TABLE>
<CAPTION>
Product Manufacturer
------- ------------
<C> <S>
Gelatin Sponges and Powders......... Pharmacia & Upjohn, Inc.
Collagen Sponges and Powders........ Astra AB, C.R. Bard, Inc., Johnson &
Johnson and Integra Life Sciences Corp.
Cellulose Strips.................... Johnson & Johnson and Becton Dickinson &
Company
Fibrin Glue......................... Baxter International Inc., Haemacure
Corp., Omrix Biopharmaceuticals Ltd.,
Centeon L.L.C., V.I. Technologies, Inc.
and the American Red Cross
Adhesives........................... Closure Medical Corp., Sherwood-Davis &
Geck, B. Braun Melsungen AG, Cohesion
Technologies, Inc. and Cryolife, Inc.
Hydrogels........................... Focal, Inc.
</TABLE>
In addition to the companies listed above, there are many medical device
companies that could enter the hemostat and surgical sealant markets and could
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.
We Face Risks Related to Intellectual Property 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 cannot be certain that any of our pending patent 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.
9
<PAGE>
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.
The European Fear of "Mad Cow Disease" Could Adversely Impact Acceptance of our
Products in Europe.
There is uncertainty as to the acceptance of products that incorporate
bovine-based products in Europe. 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 No Experience in Large Scale Manufacturing.
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 believe that our
manufacturing capacity will be sufficient through 2000. However, if we
encounter problems related to capacity constraints, production yields, quality
control and assurance or shortages of qualified personnel, we may be unable 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 QSR, international quality
standards and other regulatory requirements, including inspections. 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 Are Dependent on Some Single Source Suppliers.
We currently purchase bovine hides, thrombin and sterilization services 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.
10
<PAGE>
We May Be Adversely Affected by the Year 2000.
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. 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 recognize the need to ensure that our operations will not be adversely
affected by Year 2000 software failures. We have initiated a review of our
internal management information and other systems to identify any services or
systems that are not Year 2000 compliant and to take corrective action. To
date, we have not encountered any material Year 2000 problems with our computer
systems or any other equipment that might be subject to such problems. 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.
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 which could not be corrected on a timely basis. If this were
to occur, our operations could be disrupted and our business materially and
adversely affected. In the event we identify unexpected material exposure to
our operations related to the Year 2000 issue, we will develop contingency
plans designed to mitigate to the full extent possible disruption to our
business.
The Adoption of the Euro Presents Uncertainties.
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. 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.
There Is Uncertainty Relating to Third Party Reimbursement.
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 anticipate 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
11
<PAGE>
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 Will Face Product Liability Risks.
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 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.
We Cannot Be Certain of Our Ability to Attract and Retain Key Personnel .
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 Highly Volatile.
The market price of our common stock has fluctuated widely in the past and
is likely to fluctuate in the future. 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. See "Price Range of Common Stock."
We Have Implemented Certain Anti-Takeover Provisions.
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. See "Description of Capital Stock."
12
<PAGE>
Existing Stockholders Will Maintain Significant Influence.
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.
13
<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 $9,263,000 at an assumed
offering price of $6 1/16 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, general and administrative and other general corporate
purposes. The amount and timing of expenditures may vary from the allocations
set forth above depending upon numerous factors, including the timing of
regulatory actions on FloSeal, our ability to enter into strategic sales,
marketing and distribution arrangements and 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.
14
<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 February 5, 1999)................... 7.063 5.563
</TABLE>
On February 5, 1999, the last reported sale price of our common stock on the
Nasdaq National Market was $6 1/16 per share and, on January 25, 1999, there
were 89 stockholders of record.
15
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1998, our actual
capitalization and the capitalization as adjusted to reflect the sale of the
1,700,000 shares of common stock being offered hereby at an assumed public
offering price of $6 1/16 per share and after deducting the estimated placement
agent's commission and estimated offering expenses.
<TABLE>
<CAPTION>
December 31, 1998
----------------------
Actual As Adjusted
-------- ------------
(in thousands, except
per share amounts)
<S> <C> <C>
Bank borrowings, net of current portion(1).............. $ 204 $ 204
-------- --------
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000 shares
authorized; no shares issued and outstanding, actual
and as adjusted...................................... -- --
Common stock, $0.001 par value, 50,000 shares
authorized; 7,211 shares issued and outstanding
actual, and 8,911 shares as adjusted(2).............. 7 9
Additional paid-in capital............................ 36,137 45,398
Deferred compensation................................. (87) (87)
Accumulated other comprehensive income................ 2 2
Accumulated deficit................................... (29,232) (29,232)
-------- --------
Total stockholders' equity.......................... 6,827 16,090
-------- --------
Total capitalization................................ $ 7,031 $ 16,294
======== ========
</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."
16
<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 1/16 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 $16,090,000, or
approximately $1.81 per share. This represents an immediate increase in the net
tangible book value of $0.86 per share to existing stockholders and an
immediate dilution of $4.25 per share to new investors.
<TABLE>
<S> <C> <C>
Assumed offering price per share................................... $ 6.06
Net tangible book value per share as of December 31, 1998......... $0.95
Increase per share attributable to the offering................... 0.86
-----
Net tangible book value after the offering......................... 1.81
------
Dilution per share to new investors................................ $ 4.25
======
</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."
17
<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, 1995 and 1994 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>
18
<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 as we continue to fund
research, product development, clinical trials, regulatory submissions, product
sales and marketing activities and related administrative and support services.
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 are in the process of completing our PMA 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.
Future revenues, if any, and our results of operations may fluctuate
significantly from quarter-to-quarter and will depend upon, among other
factors, the timing and success of the clinical trials, regulatory approvals
and sales and marketing of FloSeal and our other products under development.
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 will not 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 primarily 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 primarily 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.
19
<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 primarily 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
primarily from costs associated with the commercialization of RapiSeal. The
decrease of $530,000 in 1998 resulted primarily 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.
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 primarily
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 primarily 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 and future equipment purchases up to a total of $2,500,000.
The facility is secured by the equipment financed. Subject to certain terms and
conditions, the facility will finance a percentage of the invoice cost of
existing equipment and all of the invoice cost of future equipment purchases.
As of December 31, 1998, we had drawn down $321,000 on this line. 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 year 2000. 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 timing of
regulatory actions on FloSeal, our ability to enter into strategic marketing
arrangements and to scale-up manufacturing activities, 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, manufacture 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. These
factors may require us to secure additional financing earlier than we currently
plan.
20
<PAGE>
We intend to explore various financing alternatives to satisfy our
additional funding requirements following the offering, including banking
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 in 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 of 1986, as amended. These annual limitations
may result in expirations of net operating losses and research and development
credits before they can be fully utilized.
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. 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.
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.
21
<PAGE>
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. 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 recognize the need to ensure that our operations will not be adversely
affected by Year 2000 software failures. We have initiated a review of our
internal management information and other systems to identify any services or
systems that are not Year 2000 compliant and to take corrective action. To
date, we have not encountered any material Year 2000 problems with our computer
systems or any other equipment that might be subject to such problems. 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.
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 which could not be corrected on a timely basis. If this were
to occur, our operations could be disrupted and our business materially and
adversely affected. In the event we identify unexpected material exposure to
our operations related to the Year 2000 issue, we will develop contingency
plans designed to mitigate to the full extent possible disruption to our
business.
22
<PAGE>
BUSINESS
Overview
We are developing and commercializing proprietary collagen gel-based
products for use in controlling bleeding in a variety of surgeries. Our lead
product, FloSeal Matrix Hemostatic Sealant, combines a collagen-derived matrix
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 expect
to complete our PMA filing for FloSeal during the first quarter of 1999, and
assuming timely FDA approval, which cannot be assured, 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 based upon our core proprietary
technology. Such products include SinuSeal, a hemostat for use in nasal and
sinus surgery, and Vascular Access Site Closure Device, a hemostat for use in
the closure of femoral artery punctures following vascular interventional
procedures. We expect to file a PMA 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
devices have been developed to help surgeons control intraoperative bleeding,
including 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 method for closing surgical
wounds. Sutures mechanically bring together the tissues 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
worldwide market for sutures and staples in 1996 was approximately $2.5
billion.
Sutures and staples have a number of limitations. In particular, they do not
have inherent sealing capabilities and thus cannot always eliminate bleeding
along suture lines, especially when connecting blood vessels. Sutures and
staples can also be 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 may be
difficult or impossible to use in certain types of surgeries where access to
the surgical site is limited, such as minimally invasive procedures.
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Topical Hemostatic Products
Topical hemostatic products provide the surgeon with additional tools to
control 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
hemostatic products are a popular complement to sutures and staples, they too
have several limitations, including the following:
. Limited Effectiveness. Topical hemostatic products 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. Preparing some topical hemostatic
products 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 hemostatic products 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
hemostatic products 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 hemostatic products 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 hemostatic products 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 collagen-derived matrix combined
with thrombin, is designed 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. 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
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<PAGE>
these types of bleeding. For example, a secondary endpoint analysis in our
pivotal clinical 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 (see clinical data under "--Fusion's
Products"). 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.
. 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 PMA 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 collagen-derived matrix and
thrombin, a blood clotting agent. When mixed, the thrombin coats the matrix,
and they act synergistically to promote hemostasis. The granular nature of the
material 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 chart illustrates the surgical sealing activity of FloSeal:
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[Illustration #1] [Description: Thrombin is mixed with saline and then mixed
into a syringe containing FloSeal. Preparation typically takes less than two
minutes. FloSeal is then delivered to the bleeding site through a standard
disposable syringe and may be held in place with very little pressure, even in
cases of severe bleeding.]
[Illustration #2] [Description: Blood interacts with the applied gel,
percolates through the spaces between the thrombin-coated granules and is
exposed to high concentrations of thrombin resulting in clot formation. The
granules swell by 10-20% upon contact with the blood, creating a damming effect
at the bleeding site.]
[Illustration #3] [Description: The resulting clot incorporates the FloSeal
granules. The structural integrity of the clot enables it to remain in place at
the tissue surface, sealing the bleeding site.]
[Illustration #4] [Description: FloSeal granules not incorporated in the
clot can be removed with gentle irrigation without disrupting the hemostatic
seal. FloSeal incorporated in the clot at the application site is absorbed by
the body within six to eight weeks, consistent with the time course of normal
wound healing.]
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. We expect to complete our PMA filing for FloSeal in the first quarter
of 1999.
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. Patients were treated with
either FloSeal or 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 patients treated with
FloSeal, whereas Gelfoam plus thrombin stopped bleeding within ten minutes in
77% of the patients in the control group. In addition, a second 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 patients
treated with FloSeal, whereas Gelfoam plus thrombin stopped bleeding within ten
minutes in 60% of the 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 patients treated with FloSeal, versus 76%
for the control group. One hundred twenty-seven patients underwent spinal
surgery. FloSeal stopped bleeding within ten minutes in 98% of patients treated
with FloSeal, versus 90% for the control group. 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.
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The following chart summarizes certain data from the pivotal clinical trial:
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(/1/)................ 96%(/2/) 77%(/2/) 84% 47%
All vascular patients(/3/)...... 93 76 * *
All spinal patients(/4/)........ 98 90 * *
All cardiac patients(/5/)....... 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.
(/1/)Of the 309 patients studied, 156 were treated with FloSeal and 153 with
Gelfoam plus thrombin.
(/2/)The primary clinical endpoint for the trial was to show equivalence of
FloSeal hemostasis within ten minutes at least as frequently as Gelfoam
plus thrombin. All other data in the table represent secondary endpoints
or subanalysis.
(/3/)Of the 89 vascular patients, 43 were treated with FloSeal and 46 were
treated with Gelfoam plus thrombin.
(/4/)Of the 127 spinal patients, 65 were treated with FloSeal and 62 were
treated with Gelfoam plus thrombin.
(/5/)Of the 93 cardiac patients, 48 were treated with FloSeal and 45 were
treated with Gelfoam plus thrombin. We performed a subset analysis of all
cardiac patients based upon surgeons' assessments of the degree of
intraoperative bleeding.
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 expect to
complete our PMA filing for FloSeal during the first quarter of 1999, and
assuming timely FDA approval, 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 510,000 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 20% 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, to
control bleeding in nasal and sinus passages during functional endoscopic sinus
surgery ("FESS"). SinuSeal is delivered through a standard
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<PAGE>
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 FESS
procedures, 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 in 100% of 29 application
sites during FESS procedures. We intend to file a PMA supplement for SinuSeal
upon receiving FDA approval for FloSeal. We may be required to perform a formal
clinical trial prior to submitting a PMA supplement for SinuSeal.
We expect our domestic and international commercialization efforts to focus
on surgeons who perform FESS and other nasal and sinus surgeries. Industry
sources estimate that approximately 875,000 nasal and sinus surgeries are
performed annually in the United States. We estimate that approximately one-
third of these procedures could benefit from the use of SinuSeal.
Vascular Access Site Closure Device
We are also developing the Vascular Access Site Closure device as an
additional application of our FloSeal technology. VASC is designed as a femoral
artery hemostat, to be used by surgeons to close 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.
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. We believe that there are approximately 3.7
million femoral artery catheter procedures performed in the United States
annually. We estimate that approximately 60% of such procedures could benefit
from the use of VASC.
The statements made regarding the anticipated commercialization of our
products are forward looking. We may not 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 conducting 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.
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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.
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 QSR, international 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 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 topical hemostat and surgical sealant markets are highly competitive. A
wide variety of products exist today that will compete directly with FloSeal
and on other products under development. The competitive product types and
their manufacturers include:
<TABLE>
<CAPTION>
Product Manufacturer
------- ------------
<C> <S>
Gelatin Sponges and Powders......... Pharmacia & Upjohn, Inc.
Collagen Sponges and Powders........ Astra AB, C.R. Bard, Inc., Johnson &
Johnson and Integra Life Sciences Corp.
Cellulose Strips.................... Johnson & Johnson and Becton Dickinson &
Company
Fibrin Glue......................... Baxter International Inc., Haemacure
Corp., Omrix Biopharmaceuticals Ltd.,
Centeon L.L.C., V.I. Technologies, Inc.
and the American Red Cross
Adhesives........................... Closure Medical Corp., Sherwood-Davis &
Geck, B. Braun Melsungen AG, Cohesion
Technologies, Inc. and Cryolife, Inc.
Hydrogels........................... Focal, Inc.
</TABLE>
In addition to the companies listed above, there are many medical device
companies that could enter the hemostat and surgical sealant markets and could
compete effectively against our products. Many existing and potential
competitors have greater name recognition, broader product lines, greater
distribution capabilities,
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<PAGE>
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.
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.
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Government Regulation
United States
Our proposed products and research and development activities are subject to
regulation by a number of governmental authorities, including the FDA. FDA
regulations govern, among other things, the design, development, manufacture,
labeling, selling and promotion of medical devices, including the products we
are currently developing. Product development and approval take a number of
years and can be expensive and uncertain.
In the United States, medical devices are classified as class I, II and III,
on the basis of controls deemed necessary to reasonably ensure the safety and
effectiveness of the device. Class I devices are subject to general
controls (e.g., labeling, premarket notification and adherence to FDA's Quality
System Regulations). Class II devices are subject to general and special
controls (e.g., performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, class III devices are those which
must receive premarket approval by the FDA to ensure their safety and
effectiveness (e.g., life-sustaining, life-supporting and implantable devices,
and new devices).
Before a new medical device can be marketed, marketing clearance must be
obtained through a premarket notification (for class I and II devices and class
III services when FDA has not called for PMAs) or a premarket approval ("PMA")
application (for class III devices). A PMA application must be supported by
valid scientific evidence to demonstrate the safety and effectiveness of the
device, typically including the results of clinical trials, bench tests, and
laboratory and animal studies. The PMA application must also contain a complete
description of the device and its components, and a detailed description of the
methods, facilities and controls used to manufacture the device. In addition,
the submission must include the proposed labeling and advertising literature.
The PMA process can be expensive, uncertain and lengthy, and a number of
devices for which FDA approval has been sought by other companies have never
been approved for marketing.
Upon receiving a PMA application, the FDA determines whether the application
is complete enough for review. If it is, the FDA will accept the application
for filing. Once the submission is accepted for filing, the FDA begins an in-
depth review of the PMA, which currently averages 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. During the review period, 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. Toward the end of the PMA review process, the FDA generally will
conduct an inspection of the manufacturer's facilities to ensure compliance
with applicable QSR requirements, which include testing, documentation and
other quality assurance procedures. We have not yet undergone an FDA QSR
inspection.
If FDA evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter, containing a number of conditions that must be met in order
to secure final approval of the PMA. When and if those conditions are met, the
agency will issue a PMA approval letter, authorizing marketing of the device
for certain uses. If the FDA's evaluation of the PMA application or
manufacturing facilities is not favorable, the FDA will either deny approval of
the PMA application or issue a "complete action" letter. The FDA may determine
that additional clinical trials are necessary, in which case the PMA may be
delayed for one or more years while additional clinical trials are conducted
and submitted in an amendment to the PMA. Modifications to a device that is the
subject of an approved PMA, to its labeling or to its manufacturing process may
require FDA approval of PMA supplements or new PMAs. Supplements to a PMA often
require the submission of the same type of information required for an initial
PMA, except that the supplement is generally limited to that information needed
to support the proposed change.
If clinical trials (i.e., testing on humans) of a device are required, and
the device presents a "significant risk," the sponsor of the trial (usually the
manufacturer or the distributor of the device) must file an investigational
device exemption ("IDE") application prior to commencing human clinical trials.
The IDE
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application must be supported by testing data. Once the IDE application is
approved by the FDA and one or more appropriate Institutional Review Boards
("IRBs"), clinical trials may begin at a specific number of sites with a
specific number of patients, as approved by the FDA. If the device presents a
"nonsignificant risk" to the patient, a sponsor may begin the clinical trial
after obtaining approval for the study by one or more appropriate IRBs without
the need for FDA approval. Submission of an IDE does not give assurance that
FDA will approve the IDE and, if it is approved, there can be no assurance that
FDA will determine that the data derived from the studies support the safety
and efficacy of the device or warrant the continuation of clinical studies.
Sponsors of clinical trials can sell investigational devices distributed in the
course of the study provided the price does not exceed the cost of manufacture,
research, development and handling. An IDE 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 and will require PMA approval before being marketed in the United
States. Fusion has received an IDE from the FDA permitting us to conduct
clinical trials of FloSeal for surgical indications including cardiac, vascular
and spinal surgery in the United States. Enrollment for the FloSeal pivotal
U.S. clinical trial was completed in November 1998, and the analysis of the
clinical data is currently ongoing. There can be no assurance that data from
the trial will adequately support a PMA application for FloSeal. In addition,
we will be required to obtain additional IDEs for other applications of FloSeal
and for other products that we develops that are regulated by the FDA as
medical devices. There can be no assurance that the data we may provide in
support of future IDE applications will be adequate for the purpose of
obtaining IDE approval and allowing us to conduct clinical studies of any such
future product. While we currently believe that we will be able to file a PMA
supplement for SinuSeal, there can be no assurance that a full PMA will not be
required or that the filing of a PMA supplement would reduce FDA review time.
In the event we are unable to file a PMA supplement for SinuSeal, we will be
required to file a PMA.
If we obtain PMA approval, any device manufactured or distributed will be
subject to continuing regulation by the FDA. Fusion will be subject to routine
inspections by the FDA and will have to comply with the regulatory requirements
that usually apply to medical devices marketed in the United States, including
labeling regulations, QSR requirements, the Medical Device Reporting regulation
(which requires us to report to the FDA injuries or deaths involving the use of
our products), and the FDA's restrictions on promoting products for unapproved
or "off-label" uses. The FDA periodically inspects device manufacturing
facilities in the U.S. in order to assure compliance with applicable QSR
requirements. 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.
If the FDA believes that a company is not in compliance with the law, it can
detain or seize products, issue a recall, stop future violations and assess
civil and criminal penalties against the company, its officers and its
employees. Our failure to comply with regulatory requirements could have a
material adverse effect on our business. In addition, regulations are 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 and comply with regulations that 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. In order to market FloSeal and other products in the member countries
of the European Union, Fusion must obtain CE mark certification. 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.
32
<PAGE>
Employees
As of January 31, 1999, we had 31 employees, 14 of whom were engaged in
research and development, two in regulatory affairs and quality assurance, nine
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.
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.
33
<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.
34
<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 serves on the boards of directors of VidaMed, Inc.,
Neurobiological Technologies, Inc. and Cardiac Pathways Corporation. 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.
35
<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, Russel 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.
36
<PAGE>
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 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 such fiscal year were in excess of $100,000 (the
"Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
---------------------------------------- ------------
Securities
Name and Principal Other Annual Underlying
Position Year Salary ($)(1) 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
Quality Assurance 1997 163,006 -- -- 42,000
1996 138,191 -- -- 4,143
Scott A. Huie........... 1998 162,424 20,000 -- 15,000
Vice President,
Operations 1997 64,308(2) 20,000 80,000
1996 -- -- -- --
Cary J. Reich, Ph.D. ... 1998 183,021 -- 13,000(3) 25,000
Vice President,
Research 1997 174,859 -- 20,000(3) 40,000
1996 157,363 -- 26,000(3) 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) Includes compensation earned but deferred at the election of the Named
Executive Officer under our 401(k) plan.
(2) Mr. Huie joined Fusion in August 1997 as Vice President, Operations at an
annual salary of $160,000.
(3) Housing allowance.
37
<PAGE>
Employment Agreements
We have entered into employment agreements with Debera M. Brown, Scott A.
Huie, Cary J. Reich and Joseph F. Rondinone. The agreements provide that all
unvested option shares shall immediately vest upon a change of control event,
which is defined as a transaction wherein our stockholders immediately before
the transaction do not retain direct or indirect beneficial ownership of more
than 50% of the total combined voting power of our outstanding voting stock
immediately after the transaction.
Stock Option Information
The following table sets forth certain information concerning stock options
granted in 1998 to the Named Executive Officers.
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed
Annual Rate of
Stock Price
Appreciation for
Individual Grants Option Term(4)
----------------------------------------------------- ----------------
Number of Percent of
Securities Total Options Exercise
Underlying Granted to Price Per
Options Employees in Share Expiration
Name Granted (#)(1) Fiscal 1998(2) ($/Share)(3) 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
- --------
(1) Options were granted under our 1993 Stock Option Plan and generally vest
over four years from the date of grant.
(2) Based on an aggregate of 373,250 options granted in 1998 to our employees,
directors and consultants, including the Named Executive Officers.
(3) Options were granted at an exercise price equal to the fair market value
per share of common stock on the grant date.
(4) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). In accordance with the rules of
the Securities and Exchange Commission, the following table also sets forth
the potential realizable value over the term of the options (the period
from the grant date to the expiration date) based on assumed rates of stock
appreciation of 5% and 10% compounded annually. These amounts do not
represent our estimate of future stock price performance. Actual realizable
values, if any, of stock options will depend on the future performance of
the common stock.
38
<PAGE>
No options were exercised in 1998 by the Named Executive Officers. The
following table sets forth the number and value of exercisable and
unexercisable options held as of December 31, 1998 by the Named Executive
Officers.
Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
December 31, 1998 December 31, 1998(1)
------------------------- -------------------------
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>
- --------
(1) Based on a value of $5.75 per share, the fair market value as reflected by
the closing price on the Nasdaq National Market on December 31, 1998, minus
the per share exercise price, multiplied by the number of shares underlying
the option.
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.
39
<PAGE>
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. 80,955 shares have
been issued under the Purchase Plan as of January 31, 1999 and 199,045 were
available for future issuance. The Purchase Plan, which is intended to qualify
under Section 423 of the Internal Revenue Code of 1986, as amended, 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
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 Retirement Savings and Investment Plan (the
"401(k) Plan") covering our full-time employees located in the United States.
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 the statutorily prescribed annual limit
($10,000 in 1999) 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.
40
<PAGE>
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 (i) any breach of
their duty of loyalty to the corporation or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) unlawful payments of dividends or unlawful
stock repurchases or redemptions, or (iv) 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 certain expenses (including attorneys fees),
judgments, fines and settlement amounts 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.
CERTAIN TRANSACTIONS
In fiscal 1996, 1997 and in 1998, we had a certain consulting contract with
Dr. Philip N. Sawyer, a distinguished heart surgeon (now retired) 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.
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.
41
<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 (i) each person,
or group of affiliated persons, who we know to beneficially own more than 5% of
our common stock, (ii) each of our directors and Named Executive Officers and
(iii) all directors and executive officers as a group.
<TABLE>
<CAPTION>
Percent of Total
------------------
Shares Percent Percent
Beneficially Before After
Name and Address of Beneficial Owner(1) Owned(1) Offering Offering
- --------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Philip M. Sawyer (2)........................ 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.(3)................... 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
(4)........................................ 514,528 7.1 5.8
Richard S. Schneider, Ph.D.
650 Town Center Drive, Suite 810
Costa Mesa, CA 92626
Gordon W. Russell (5)....................... 236,735 3.3 2.7
Cary J. Reich, Ph.D. (6).................... 120,422 1.6 1.3
Debera M. Brown (7)......................... 78,921 1.1 *
Joseph F. Rondinone, Ph.D. (8).............. 38,226 * *
Scott A. Huie (9)........................... 36,040 * *
Olav B. Bergheim (5)........................ 18,702 * *
Vaughn D. Bryson (5)........................ 18,702 * *
Lawrence G. Mohr Jr. (10)................... 2,132 * *
All directors and officers as a group (ten
persons) (11).............................. 4,627,973 61.8 50.4
</TABLE>
- --------
* Less than 1%.
(1) 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 above 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.
42
<PAGE>
(2) 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.
(3) 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. Also
includes 2,132 shares issuable upon exercise of stock options exercisable
within 60 days of January 25, 1999.
(4) 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.
(5) Includes 2,132 shares issuable upon exercise of stock options exercisable
within 60 days of January 25, 1999.
(6) Includes 110,713 shares issuable upon exercise of stock options
exercisable within 60 days of January 25, 1999.
(7) Includes 75,980 shares issuable upon exercise of stock options exercisable
within 60 days of January 25, 1999.
(8) All 38,226 shares are issuable upon exercise of stock options exercisable
within 60 days of January 25, 1999.
(9) All 36,040 shares are issuable upon exercise of stock options exercisable
within 60 days of January 25, 1999.
(10) All 2,132 shares are issuable upon exercise of stock options exercisable
within 60 days of January 25, 1999.
(11) Includes 271,619 shares issuable upon exercise of stock options
exercisable within 60 days of January 25, 1999.
43
<PAGE>
DESCRIPTION OF CAPITAL STOCK
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.
The following summaries of certain provisions of the common stock and
preferred stock do not purport to be complete and are subject to, and qualified
in their entirety by, the provisions of our Certificate of Incorporation, which
is incorporated as an exhibit to the Registration Statement of which this
prospectus forms a part, and by applicable law.
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 designate and issue preferred stock in one or more series and
to designate the rights, 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
44
<PAGE>
become exercisable to acquire common stock of the acquiring person at the
discounted price. Subject to certain restrictions, 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 (other than those owned
by the acquiring person or its affiliates) for our common stock at an exchange
ratio of one share of common stock per Right. 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 of Certain Holders
Holders of shares of common stock which were issued as founder's shares, or
were issuable or issued upon conversion of preferred stock (the "Registrable
Securities") 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, as amended. These rights are provided under the terms
of an agreement between us and the holders of Registrable Securities. Subject
to certain limitations in the agreement, 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. 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 when use of such form
becomes available to us, provided, among other limitations, that the proposed
aggregate selling price (net of any underwriters discounts or commissions) 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
45
<PAGE>
associates, owns (or within three years prior to the determination of
interested stockholder status, did own) 15% 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.
46
<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, the 1,700,000 shares sold in this offering and 2,100,000
shares of common stock which were sold in our initial public offering, 233,707
registered shares of common stock issued upon exercise of options will be
freely tradable without restriction under the Securities Act of 1933, unless
held by our affiliates, as that term is defined in Rule 144 promulgated under
such Act. 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, which shares are summarized below. Approximately 427,825 additional
shares of common stock will not be subject to the lock-up agreement described
below and will be available for immediate sale without restriction on the date
of this prospectus pursuant to Rule 144 and Rule 701.
Our directors, executive officers and entities affiliated with our
directors, who in the aggregate hold approximately 4,356,354 of the shares of
our common stock outstanding immediately prior to the completion of this
offering, have entered into lock-up agreements under which they have agreed not
to offer, sell, contract to sell, grant any option to sell or otherwise dispose
of, directly or indirectly, any shares of common stock or securities
convertible into, or exchangeable for the common stock or warrants or other
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. We have entered into a similar agreement, except that we may grant
options and issue stock under our current stock option and stock purchase plans
and pursuant to other currently outstanding options.
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 described above.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year (including the holding period of any prior owner, except an affiliate) is
entitled to sell in brokers transactions or to market makers, within any three-
month period commencing 90 days after the date of this prospectus, a number of
shares that does not exceed the greater of (1) 1% of the number of shares of
common stock then outstanding (approximately 89,179 shares immediately after
this offering) or (2) 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. Sales under Rule 144 are generally subject to certain
manner of sale provisions and notice requirements and to the availability of
current public information about us. 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, persons who purchase
shares upon exercise of options granted prior to the effective date of this
offering are entitled to sell such shares 90 days 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.
47
<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.
We have agreed to pay to the placement agent a fee equal to 6.0% of the
proceeds of this offering as selling commissions and to reimburse the placement
agent for expenses incurred in connection with this offering, in an amount up
to $75,000 in the aggregate. We have agreed to indemnify the placement agent
against certain liabilities, including liabilities under the Securities Act,
and to contribute payments that the placement agent may be required to make in
respect thereof.
The placement agent is not obligated and does not intend to take (or
purchase) any of the common stock for itself. It is anticipated that the
placement agent will obtain indications of interest from potential investors
for the good of the offering 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. Confirmations and definitive
prospectuses will be distributed to all investors at the time of pricing,
informing investors of the closing date. No investor funds will be accepted
prior to effectiveness of this Registration Statement. Prior to the closing,
all investor funds will promptly be placed in an escrow account established for
the benefit of investors with an independent escrow agent. The escrow agent
will invest such funds in accordance with Rule 15c2-4 promulgated under the
Exchange Act.
Upon effectiveness of this Registration Statement, investors will be
informed of the date on which they must deposit the purchase price into the
escrow account. Prior to the closing date, the escrow agent will advise us that
investors have deposited the requisite funds in the escrow account of the
escrow agent. Upon receipt of such notice, we will deposit with The Depository
Trust Company the common stock to be credited to the respective accounts of
investors. We will collect investor funds together with interest thereon, if
any, through the facilities of the escrow agent on the scheduled closing date.
The offering will not continue after the closing date. In the event that we do
not accept an investor's funds, such funds will promptly be returned.
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 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.
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
(which consent may be given without notice to our stockholders or other public
announcement).
48
<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.
AVAILABLE 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.
49
<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.
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.
F-7
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies, continued
Depreciation and Amortization
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated lives of three to five years.
Maintenance and repairs are charged to operations as incurred. Leasehold
improvements are amortized over their estimated useful lives, or the lease
term, if shorter.
Revenue Recognition
The Company recognizes revenue upon shipment of product to the customer,
upon fulfillment of acceptance terms, if any, and when no significant
contractual obligations remain outstanding.
Research and Development Expenditures
Research and development expenditures are expensed as incurred.
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
Concentration of Credit Risk
The Company's cash 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.
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
F-8
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies, continued
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.
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>
F-9
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
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.
F-10
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. Stockholders' Equity, continued
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.
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.
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. 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. At year-end 1997, the Company incurred
RapiSeal exit charges of $559,000 for personnel severance (nine employees),
patent charges, and inventory and dedicated equipment write-offs associated
with exit of its RapiSeal business. Of such charges $325,000 was charged to
cost of sales, $209,000 to operating expenses and $25,000 as a charge against
sales.
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.......................................................... 14
Dividend Policy.......................................................... 14
Price Range of Common Stock.............................................. 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations .......................................................... 19
Business................................................................. 23
Management............................................................... 34
Certain Transactions..................................................... 41
Principal Stockholders................................................... 42
Description of Capital Stock............................................. 44
Shares Eligible for Future Sale.......................................... 47
Plan of Distribution..................................................... 48
Legal Matters............................................................ 49
Experts.................................................................. 49
Available Information.................................................... 49
Index to Consolidated Financial Statements............................... F-1
</TABLE>
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- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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.................................................. *
Transfer Agent and Registrar Fees.................................. *
Miscellaneous Expenses............................................. *
--------
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 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 sale and issuance of the warrant was deemed to be exempt from registration
under the Securities Act by virtue of section 4(2).
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>
- --------
* To be filed by amendment.
+ 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 9th day of February, 1999.
FUSION MEDICAL TECHNOLOGIES, INC.
/s/ Philip M. Sawyer
By: _________________________________
Philip M. Sawyer
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Philip M. Sawyer and John T. Sheridan and each
of them, his attorneys-in-fact, each with the power of substitution, for him
and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same Offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, and all post-
effective amendments thereto, and to file the same, with all exhibits thereto
in all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every Act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
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 February 9, 1999
____________________________________ and Director (Principal Executive
Philip M. Sawyer Officer)
/s/ Gordon Russell Chairman of the Board of Directors February 9, 1999
____________________________________
Gordon Russell
Director
____________________________________
Olav B. Bergheim
/s/ Vaughn Bryson Director February 9, 1999
____________________________________
Vaughn Bryson
/s/ Douglas Kelly, M.D. Director February 9, 1999
____________________________________
Douglas Kelly, M.D.
/s/ Lawrence G. Mohr Director February 9, 1999
____________________________________
Lawrence G. Mohr
</TABLE>
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>
- --------
* To be filed by amendment.
+ 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 4.1
Fusion Medical Technologies, Inc.
1615 Plymouth Street
Mountain View, CA 94043
ING Baring Furman Selz LLC
55 East 52/nd/ Street, 33/rd/ Floor
New York, NY 10055
Ladies and Gentlemen:
The undersigned understands that ING Baring Furman Selz LLC (the "Placement
Agent") proposes to enter into a Placement Agency Agreement (the "Placement
Agency Agreement") with Fusion Medical Technologies, Inc. (the "Company"),
providing for the directed public offering of common stock of the Company (the
"Public Offering").
In consideration of the Placement Agency Agreement and the undertaking of
the Public Offering by the Placement Agent and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the undersigned
agrees that, without the prior written consent of ING Baring Furman Selz LLC,
the undersigned will not, for the period beginning on the date hereof and ending
ninety (90) days after the consummation of the Public Offering (the "Lock-up
Period"), directly or indirectly offer, sell, solicit an offer to buy, make any
short sale, pledge, grant any option to purchase, contract to sell, or otherwise
dispose of or transfer (collectively, a "Disposition") any shares of common
stock of the Company ("Common Stock") (including, without limitation, shares of
Common Stock which may be deemed to be beneficially owned by the undersigned in
accordance with the rules and regulations of the Securities and Exchange
Commission) or any securities convertible into or exercisable or exchangeable
for, or any rights to purchase or acquire, shares of Common Stock now owned or
hereafter acquired directly by the undersigned or with respect to which the
undersigned has or hereafter acquires the power of Disposition (collectively,
"Securities"), otherwise than (i) as a bona fide gift or gifts, provided the
donee or donees thereof agree in writing to be bound by this restriction or (ii)
as a distribution to partners or stockholders of the undersigned, provided that
the distributees thereof agree in writing to be bound by the terms of this
restriction.
The undersigned acknowledges that the foregoing restrictions preclude the
undersigned from engaging in any hedging or other transaction which is designed
to or reasonably expected to lead to or result in a Disposition of Securities
during the Lock-up Period, including, without limitation, any transfer of all or
a portion of the economic consequences associated with the ownership of
Securities, even if the Disposition of such Securities would be made by someone
other than the undersigned. Such prohibited hedging or other transactions
include, without limitation, any short sale (whether or not against the box) or
any purchase, sale or grant of any right (including, without limitation, any put
or call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities.
<PAGE>
In addition, the undersigned agrees that the Company may, with respect to
any Securities for which the undersigned is the record or beneficial holder,
cause the transfer agent for the Company to note stop transfer instructions with
respect to such shares on the transfer books and records of the Company.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to enter into this letter agreement, and that, upon
request, the undersigned will execute any additional documents necessary or
desirable in connection with the enforcement hereof. All authority herein
conferred or agreed to be conferred shall survive the death or incapacity of the
undersigned and all obligations of the undersigned created hereunder shall be
irrevocable and binding upon the heirs, personal representatives, successors,
and assigns of the undersigned.
Very truly yours,
________________________________________
Dated:__________________ Name of Holder
________________________________________
Signature
________________________________________
Dated:__________________ Name of Joint Holder
________________________________________
Signature
<PAGE>
EXHIBIT 10.6(B)
EXTENSION OF INDUSTRIAL LEASE AGREEMENT
This agreement is made and entered into this 10th day of July, 1996 by and
between James R. Benson ("Landlord") and Fusion Medical Technologies ("Tenant").
Reference is made to that certain Industrial Lease Agreement dated 15 June, 1994
by and between James R. Benson ("Landlord") and Fusion Medical Technologies
("Tenant") ("Lease Agreement").
The parties agree that the terms of the Lease Agreement shall be amended as
follows:
1. Year three of lease, from 1 July, 1996 through 30 June, 1997, lease rate
shall be $1.20/sq. ft. NNN.
2. Next six months of lease from 1 July, 1997 through 31 December, 1997 shall
be $1.20/sq. ft. NNN.
3. Next six months of lease, from 1 January, 1998 through 30 June, 1998 shall
be $1.25/sq. ft. NNN.
4. A six month extension, from 1 July, 1998 through 31 December, 1998, is
granted, provided notice of exercise is given, in writing, at least six
months in advance. Lease rate for the six months extension shall be
$1.30/sq. ft. NNN.
5. Fusion shall waive any and all claims against Landlord for:
A. any work done on the premises to date during the Term of the
Lease relating to HVAC, plumbing, electrical and other repair
and/or maintenance for regulatory and/or safety issues;
B. any work done hereafter during the Term of the Lease (and any
extension) for which Landlord would otherwise be liable under
Section 6.2; and
C. any work required by regulatory authorities in order to get
approval for building improvements for which Tenant seeks permits
or any other authorizations.
6. Tenant agrees to repaint the building exterior and seal the parking lot
before Tenant vacates the Premises. Painting color scheme must be approved
by Landlord in advance.
7. Except as indicated above, all terms and conditions of Lease Agreement
shall remain in full force and effect.
IN WITNESS WHEREOF, the Landlord and Tenant have executed this agreement the
date and year first above written.
"LANDLORD" "TENANT"
JAMES R. BENSON FUSION MEDICAL TECHNOLOGIES, INC.
a California Corporation
/s/ James R. Benson /s/ William Spalding
- ------------------------- -------------------------------
James R. Benson By:
Its:
<PAGE>
EXHIBIT 10.6(C)
EXTENSION OF INDUSTRIAL LEASE AGREEMENT
This agreement is made and entered into this 25th day of March, 1998 by and
between James R. Benson ("Landlord") and Fusion Medical Technologies ("Tenant").
Reference is made to that certain Industrial Lease Agreement dated 15 June, 1994
by and between James R. Benson ("Landlord") and Fusion Medical Technologies
("Tenant") ("Lease Agreement") and that certain Extension of Industrial Lease
Agreement dated 10 July, 1996 ("First Extension").
The parties agree that the terms of the Lease Agreement shall be amended as
follows:
1. A twelve month extension, from 1 January, 1999 through 31 December, 1999,
is granted. Lease rate for this twelve months extension shall be
$2.00/sq.ft. NNN.
2. The security deposit shall be increased by $10,400 payable upon execution
of this agreement.
3. Except as indicated above, all terms and conditions of Lease Agreement and
First Extension shall remain in full force and effect including all
Tenant's obligations thereunder.
IN WITNESS WHEREOF, the Landlord and Tenant have executed this agreement the
date and year first above written.
"LANDLORD" "TENANT"
JAMES R. BENSON FUSION MEDICAL TECHNOLOGIES, INC.
a Delaware corporation
/s/ James R. Benson /s/ Raymond W. Anderson
- ------------------------------ -------------------------------
James R. Benson By: Raymond W. Anderson
Its: Vice President Finance CFO
<PAGE>
EXHIBIT 10.6(D)
EXTENSION OF INDUSTRIAL LEASE AGREEMENT
This agreement is made and entered into this 17th day of December, 1998 by and
between James R. Benson ("Landlord") and Fusion Medical Technologies ("Tenant").
Reference is made to that certain Industrial Lease Agreement dated 15 June, 1994
by and between James R. Benson ("Landlord") and Fusion Medical Technologies
("Tenant") ("Lease Agreement") and that certain Extension of Industrial Lease
Agreement dated 10 July, 1996 ("First Extension") and that certain Extension of
Industrial Lease Agreement dated 25 March, 1998 ("Second Extension").
The parties agree that the Lease Agreement shall be extended for three years
with an option to extend the lease for one additional year, under the following
terms and conditions;
1. MONTHLY LEASE RATES
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
PERIOD LEASE RATE
-------------------------------------------------------------------------
<S> <C>
1 January, 1999 to 31 December 1999 $2.00/sq. ft NNN
-------------------------------------------------------------------------
1 January, 2000 to 31 December 2000 $2.15/sq. ft NNN
-------------------------------------------------------------------------
1 January, 2001 to 31 December 2001 $2.25/sq. ft NNN
-------------------------------------------------------------------------
1 January, 2002 to 31 December 2002 $2.45/sq. ft NNN (Option Year)
-------------------------------------------------------------------------
</TABLE>
2. OPTION YEAR NOTIFICATION
Tenant must notify Landlord during the month of January, 2001 if Tenant
intends not to extend the lease through the year 2002. Failure of Tenant to
notify Landlord during that month automatically defaults to acceptance of
the one-year extension at the lease rate of $2.45/sq.ft. NNN.
3. Except as indicated above, all terms and conditions of Lease Agreement and
First Extension and Second Extension shall remain in full force and effect
including all Tenant's obligations thereunder.
IN WITNESS WHEREOF, the Landlord and Tenant have executed this agreement the
date and year fist above written.
"LANDLORD" "TENANT"
JAMES R. BENSON FUSION MEDICAL TECHNOLOGIES, INC.
a Delaware corporation
/s/ James R. Benson /s/ Philip Sawyer, CEO
- ---------------------------- --------------------------------
James R. Benson By: Philip Sawyer
Its: CEO
<PAGE>
EXHIBIT 10.8
[LETTERHEAD OF FUSION MEDICAL TECHNOLOGIES, INC.]
PURCHASE AGREEMENT
This Agreement effective this 1st day of January, 1997 and is by and between
Spear Products a _________ Corporation, (hereinafter "Seller") and Fusion
Medical Technologies, Inc., a Delaware Corporation, (hereinafter "Buyer").
WHEREAS, Buyer desires to purchase from Seller and Seller desire to sell to
Buyer under the terms and conditions set forth, herein.
NOW THEREFORE, the parties wishing to be legally bound by this contract, agree
as follows:
1. PRODUCT: Spear Products' Product Name, Bovine Calf Corium, meeting the
-------
specifications set forth in Schedule A ("Product"), which is attached to and
made part of this Agreement. Such specifications may be changed from time to
time only as agreed to in writing by the parties.
2. DURATION: Subject to Section 23 below, From January l, 1997 and for the
--------
following two (2) years, unless otherwise agreed in writing by the parties. This
Agreement shall be automatically renewed for successive one (l) years terms
thereafter unless either party notifies the other party to the contrary not less
than ninety (90) days prior to the expiration of the then current term.
3. QUANTITIES: Subject only to other provisions of this Agreement, Seller shall
----------
sell Buyer, and Buyer shall purchase from Seller the minimum quantities of
product in each calendar quarter of this Agreement, set forth in Schedule B
attached hereto Thirty (30) days prior to the expiration of the last quarter of
Schedule B, Buyer will supply a non-binding forecast to Seller for the amount of
Product Buyer anticipates purchasing during the subsequent four quarter period
("Forecast"). The Forecast will be updated semi-annually by Buyer. The first two
quarters of the Forecast presented to Seller shall be binding ("the Binding
Forecast"). Buyer will supply a semi-annual forecast to Seller not less than
fourteen (14) days prior to the end of the preceding six month period for
Product to be purchased during the subsequent six months.
4. ORDER AND DELIVERY: Buyer shall issue a purchase order for each delivery of
------------------
Product under this Agreement. Each purchase order shall state the desired
shipment date and the quantity being ordered. Buyer shall also state what
percentage of the quantity is to be shipped. Seller shall acknowledge promptly
each purchase order issued by Buyer in writing and confirm delivery dates to
destinations specified by Buyer; however, delivery dates must not conflict with
Seller's normal manufacturing lead times which shall not exceed 2 weeks. If any
terms and conditions contained in such purchase order or acknowledgment conflict
with the terms of the Agreement, the terms and conditions of this Agreement
shall apply to the transaction.
ADDITIONAL QUANTITIES: During the initial term of this Agreement (which expires
- ---------------------
2 years after execution), Seller will supply in any given year up to 200% of the
expected semi-annual
<PAGE>
purchase quantities indicated in Buyer's semi-annual forecast without further
Agreement. Following the initial term of this Agreement, Seller will supply in
any given period up to 200% of the expected semi-annual purchase quantities
indicated in Buyer's semi-annual forecast without further agreement. In the
event that Buyer requires in any period quantities which exceed 200% of the
forecasted semi-annual quantity, Buyer shall so notify Seller in writing at
least ninety (90) days in advance of Buyer's desired shipping date. Seller shall
use its reasonable efforts (consistent with good business practice) to meet
Buyer's requirements for such additional Product and shall inform Buyer within
30 days of notice whether or not Seller will supply all or a portion of such
requirements.
6. FAILURE TO PURCHASE MINIMUM QUANTITIES: In the event that Buyer fails to
--------------------------------------
purchase in a given 6 month period the forecasted semi-annual purchase quantity,
Buyer will pay to Seller within 60 days of the close of the period in which the
shortfall occurs an amount equal to 100% of the contract price for the
unpurchased Product, which is the difference between the forecasted semi-annual
quantity and the quantity actually purchased during such year. Buyer's
obligations under this Section 6 are conditioned upon Seller's delivery to
Buyer within sixty (60) days after the end of any such 6 month period of an
amount of Product equal to the difference between the Binding Forecast quantity
and the quantity actually purchased by Buyer during such calendar year.
7. PRICE: The price for the Product shall be forty-two dollars per pound
-----
($42/1b) of product plus the appropriate shipping costs. Buyer will be invoiced
for the Product and shipping costs upon shipment. The price may be adjusted by
Seller annually by so notifying Buyer in writing at least thirty (30) days prior
to the effective date of such change. Such Price shall be paid for all Product
shipped hereunder on and after the date it becomes effective, unless
subsequently again revised by Seller as provided herein. The total cumulative
price increase may not exceed on a percentile basis the cumulative increase in
the CPPI (i.e., Products Price Index for Chemicals and Allied Products, as
published by the United States Department of Labor, Bureau of Labor Statistics)
between the effective date of this Agreement and the date of the proposed price
increase. If other cost factors such as, without limitation, raw material costs,
regulatory costs, or product liability costs, elicit a price increase greater
than that permitted by this Section, Seller will give written notice to Buyer at
least ninety (90) days in advance of the effective date of such increase. Buyer
may accept such price increase or elect to terminate this Agreement. If Buyer
elects to terminate according to the terms of this section, Seller will continue
to provide Buyer with product hereunder at the current contract price for ninety
(90) days.
8. WARRANTY: Seller warrants that the Product shipped hereunder meets the
--------
specifications set forth in Schedule A. Other than the foregoing, SELLER MAKES
NO WARRANTIES OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE EVEN IF
THAT PURPOSE IS KNOWN TO SELLER, NOR ANY OTHER EXPRESS OR IMPLIED WARRANTY.
Buyer assumes all risk and liability for results obtained by the use of Product
(provided they meet Specifications as defined in Schedule A herein) covered by
this Agreement, whether used singly or in combination with other products.
2
<PAGE>
9. INDEMNIFICATION:
--------------
(a) Indemnification by Seller. Subject to the following terms and conditions,
-------------------------
Seller agrees to indemnify, defend and holds harmless Buyer and each of its
shareholders, affiliates and their respective, directors, officers, employees,
attorneys, agents, and representatives from and against any and all claims,
losses, damages, liabilities, demands, causes of action, proceedings and suits,
including all reasonable attorneys' fees and expenses ("Claims"), arising out
of, relating to or in connection with any failure to meet the Specifications set
forth in Schedule A. Buyer agrees that Seller has the right to defend, or at its
----------
option to settle, and Seller agrees, at its own expense, to defend or at its
option to settle, any Claims brought against Buyer by any third party for
infringement of any U.S. patent or worldwide copyright or trade secret by the
Product and Seller agrees to indemnify, defend and hold harmless Buyer from and
against any Claims related thereto, provided, however, that Seller assumes no
infringement liability for (x) any combination of Product with other products
not provided by Seller, which infringement would not arise from Product standing
alone, or (y) the modifications of such Product by Buyer or any third party
where such infringement would not have occurred but for such modifications, or
(z) materials furnished by Buyer. If it is adjudicatively determined that any
Product infringes a third party's U.S. patent or worldwide copyright or trade
secret, or if the sale or use of the Product is, as a result, enjoined, then
Seller may, at its option and expense either; (i) procure for Buyer the right
under such patent, copyright or trade secret to use the Product; or (ii) replace
the Product with functionally equivalent noninfringing products; or (iii) modify
the Product to make the Product functionally equivalent and noninfringing. THE
FOREGOING PROVISIONS OF THIS SECTION STATE THE ENTIRE LIABILITY OF SELLER AND
THE EXCLUSIVE REMEDY OF BUYER WITH RESPECT TO ANY ALLEGED INFRINGEMENT OF
PATENTS, COPYRIGHTS, TRADEMARKS OR OTHER INTELLECTUAL PROPERTY RIGHTS BY THE
PRODUCT.
(b) Indemnification by Buyer. Subject to the following terms and conditions,
------------------------
Buyer agrees to indemnify, defend and hold harmless Seller and shareholders,
affiliates and their respective, directors, officers, employees, attorneys,
agents and representatives from and against any and all Claims arising out of,
relating to or in connection with the use or sale of the Product in Buyer's
applications or applications development.
(c) Indemnification Procedures. In the event that any Claims are asserted by
--------------------------
any third party which may give arise to any damage, liability, loss or cost or
expense in respect of which either party has indemnified the other party under
this Section, the indemnified party shall give the indemnifying party written
notice of the institution of such proceedings, or the assertion of such Claim
promptly after the indemnified party first becomes aware thereof. The
indemnifying party shall have sole control over the defense and/or settlement of
any such Claim; provided that the indemnified party may participate in any such
proceedings with counsel of its choice at its own expense. Each of the parties
agrees to cooperate fully with each other in connection with the defense,
negotiation or settlement of any such Claim and provide full information to the
indemnifying party. Notwithstanding anything to the contrary contained in this
Section, neither party shall be liable for any costs or expenses incurred by an
indemnified party without its prior written authorization.
3
<PAGE>
10. USE OF TRADEMARK: Each party agrees that it will not, without the other
----------------
party's prior written consent, use and/or associate the other party, the other
part's corporate name or any of the other party's trademarks, either orally or
in writing, with any of the other party's products, except that Buyer may use
Seller's name and associate Seller with Buyer's Application as is required by
federal or state regulation in gaining approval to market or to continue
marketing Buyer's Application.
11. QUALITY CONTROL INSPECTION AND CLAIMS: Seller will obtain from his
-------------------------------------
supplier the appropriate certifications that may be required to meet the
requirements of Buyer as outlined in Schedule A and shall be subjected to
quality control Product inspections by Buyer in accordance with CFR's, ISO 9001
or both. Buyer shall have the right to make changes to Schedule A with l0 days
written notice to Buyer. If Buyer's Product inspection shows that the Product
fails to meet the specifications contained in Schedule A, Buyer shall notify
Seller within ten (10) days of receipt of the non-conforming Product. Upon
Seller's confirmation which shall be given within ten (10) days of Buyer's
notice to Seller, Seller will provide Buyer with full credit, refund or
replacement for the shipment containing the non-conforming product, and shall
reimburse Buyer for actual costs of such inspection, including testing, shipping
and insurance in an amount up to ten (10%) percent on the purchase price of the
non-conforming Product. At any time during this Agreement, Buyer will have the
right to inspect Seller's Product production processes, and shall have access to
such documentation, personnel and facilities sufficient to establish that
Seller's Product production is in accordance with GMP. Seller will promptly
provide Buyer with all documents generated by regulatory authorities that relate
to the Product.
12. DELIVERIES: Deliveries shall be F.O.B. Lansdale, PA, U.S.A. via overnight
----------
delivery through Federal Express or other comparable delivery company. Buyer
shall be responsible for all delivery costs and will be invoiced for such by
Seller. Title to and risk of loss in all Product sold hereunder shall pass to
Buyer upon loading for shipment at Seller's plant.
13. TERMS OF PAYMENT: Buyer will pay to Seller the invoiced amount paid net
----------------
cash thirty (30) days from date of Seller's invoice. Seller may impose a late
payment service charge of 1.5% per month on invoices not paid when due. All
payments shall be in United States currency.
14. FORCE MAJEURE: No liability shall result from delay in performance, or
-------------
nonperformance, caused by circumstances beyond the control of the party
affected, included, but not limited to, Act of God, fire, flood, war. Government
action, accident, labor trouble or shortage, inability to obtain material,
utilities, equipment or transportation. Quantities so affected may be eliminated
from the Agreement without liability, but the Agreement shall remain otherwise
unaffected. Any party claiming the benefit of this Article shall promptly so
notify the other party.
15. ALLOCATION: In the event of Seller's inability for any reason to supply
----------
the total demands for Product, Seller may with sixty (60) days notice to Buyer
distribute its available supply among all purchasers, according to the following
requirements. Seller shall first supply Buyer up to 100% of its committed order,
after such order has been satisfied, Seller may then fill
4
<PAGE>
all other orders on such a basis as it may deem fair.. Seller shall have no
obligation to purchase supplies of Product to enable it to perform this
Agreement.
16. GOVERNMENT APPROVALS: Seller shall manufacture Product under this Agreement
--------------------
according to accepted good manufacturing practices (GMP) in accordance with the
protocols provided by the Buyer. Any changes to the manufacturing process or
specifications relating to the final product must be agreed to in writing by
both parties before such changes are implemented. Upon terms of confidentiality
acceptable to Seller, Seller agrees to cooperate with Buyer in obtaining any
such governmental approvals, including providing required information to the FDA
or any other governmental agency requesting the information to the extent such
information is readily available or can be developed at little or not cost to
Seller, unless Buyer agrees to fund such information research.
17. DOCUMENTS INCORPORATED BY REFERENCE: The following documents are hereby
-----------------------------------
incorporated by reference:
A. Schedule A entitled "Product Specifications"
dated January 1, 1997 and mutually agreed revisions.
B. Schedule B entitled "Annual Minimums"
dated January 8, 1997 and mutually agreed revisions.
18. ADVERSE EFFECTS: Buyer will investigate all adverse effects of which Buyer
---------------
has direct or indirect knowledge, in regard to any of Buyer's Application which
incorporate Product and promptly report to Seller any such effects that may
relate to Product.
19. COMPLIANCE WITH LAW: Each party represents that it is and will remain in
-------------------
compliance with all applicable federal, state and local laws, regulations and
orders.
20. INDEPENDENT CONTRACTOR: The employees, methods, equipment and facilities
----------------------
of each party shall at all times be under that party's exclusive direction and
control. Buyer's relationship to Seller under the Agreement shall be that of an
independent contractor and nothing in this Agreement shall be construed to
constitute either party, or any of its employees, an agent, associate, joint
venture or partner of the other party.
21. NOTICES: All notices required hereunder shall be sent by certified mail
-------
return receipt requested, or by telex confirmed by such certified mail, to the
party to be notified at its following address or at such other address as shall
have been specified in written notice from the party to be notified. If to
"Seller", addressed to: Spear Products PO Box 1632 Lansdale, PA 19446, attn:
Jerry Spears. If to "Buyer", addressed to Fusion Medical Technologies, Inc.,
1615 Plymouth Street, Mountain View, California 94043, attn: Judy Lifrieri.
22. ASSIGNMENT: This Agreement is not assignable or transferable, in whole or
----------
in part, without the prior written consent of either party except for any entity
that acquires all or substantially all of the business or assets of a party to
which this Agreement pertains, whether by merger, reorganization, acquisition,
sale or otherwise.
5
<PAGE>
23. TERMINATION: If either party defaults in the performance of any material
-----------
provision of this Agreement, then the non-defaulting party may give written
notice to the defaulting party that if the default is not cured within sixty
(60) days, the agreement will be terminated. If the non-defaulting party gives
such notice and the default is not cured during the sixty-day period, then the
Agreement will automatically terminate at the end of that period. In accordance
with Section 2, either party may terminate this Agreement by giving six (6)
months written notice to the other party. Upon termination, the rights and
obligations set forth in sections 8, 9, 11, 22, 24, 26, 28 shall survive.
24. CLAUSE HEADINGS: The heading of clauses contained herein are used for
---------------
convenience and ease of reference and shall not limit the scope or intent of the
clause.
25. ENTIRETY OF AGREEMENT: This Agreement embodies the entire agreement and
---------------------
understanding between Seller and Buyer relative to the subject matter hereof
that are not merged or suspended hereby. No amendment, modification or release
from any provision hereof shall be of any force or effect unless it is in
writing, signed by the party claimed to be bound thereby, and specifically
refers to this Agreement.
26. WAIVER: No waiver by either party or any breach of the covenants herein
------
contained to be performed by the other party shall be construed as a waiver of
any succeeding breach of the same or any other covenants or conditions hereof.
27. GOVERNING LAW: This Agreement shall be governed by and interpreted in
-------------
accordance with the laws of the State of Pennsylvania. The courts of the State
of Pennsylvania shall have exclusive jurisdiction of all claims arising from
this Agreement except claims relating to payment of products.
28. SEVERABILITY. If any provision of this Agreement shall be held by a court of
------------
competent jurisdiction to be contrary to law, such provision shall be changed
and interpreted so as to best accomplish the objectives of the original
provision to the fullest extent allowed by law and the remaining provisions of
this Agreement shall remain in full force and effect.
Accepted:
Spear Product Fusion Medical Technologies, Inc.
By: /s/ Jerry Spear By: /s/ Cary J. Reich
------------------------------ --------------------------------
Title: Jerry Spear, President Title: VP, R & D
------------------------------ --------------------------------
Date: 1-20-97 Date: 1-8-97
------------------------------ --------------------------------
6
<PAGE>
SCHEDULE A
January 1, 1997
PRODUCT SPECIFICATIONS
SPECIFICATIONS
- --------------
Product Raw bovine calf corium
Age of animal No greater than six (6) months of age
Packaging Plastic wrapped in 51b quantities
Labeling Package marked with supplier lot number, Fusion's purchase
order number, net weight, and labeled "bovine calf splits"
Transportation Ship frozen by FED-X (or Equivalent) Overnight Priority
Delivery
Storage Store frozen within 6 hours of harvesting corium
CERTIFICATION OBTAINED FROM SUPPLIER
- ------------------------------------
A SIGNED CERTIFICATION SHEET FROM SUPPLIER SHALL ACCOMPANY EACH LOT OF MATERIAL
AND CONTAIN THE FOLLOWING:
1. CERTIFICATION OF HIDE SOURCE BY SUPPLIER AS TO THE FOLLOWING ITEMS:
. USDA AND EUROPEAN STANDARDS FACILITY
. VETERINARIAN ON SITE
. HIDES OF U.S. ORIGIN
. ANIMAL AGE
. ANIMALS HAVE NOT BEEN FED RUMINANT PROTEIN or ANIMALS HAVE ONLY
BEEN FED VEGETABLE PROTEINS.
. ANIMALS HAVE BEEN CERTIFIED BY VETERINARIAN TO BE FIT FOR HUMAN
CONSUMPTION
. HIDES SHALL BE REMOVED FROM SLAUGHTER AREA AS SOON AS POSSIBLE
FOLLOWING SLAUGHTER
2. SUPPLIER LOT NUMBER AND FUSION PURCHASE ORDER NUMBER ON CERTIFICATION.
7
<PAGE>
SCHEDULE B
ANNUAL MINIMUMS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
QUARTER REQUIREMENT (LBS)
<S> <C>
- ----------------------------------------------------------------------------------------------------------
Q1'97 90lbs.
- ----------------------------------------------------------------------------------------------------------
Q2'97 90lbs.
- ----------------------------------------------------------------------------------------------------------
Q3'97 90lbs.
- ----------------------------------------------------------------------------------------------------------
Q4'97 90lbs.
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
- -----------------------------------------------------------------------------------------
Fusion Medical Technologies, Inc. Spear Products
- ------------------------------------------------------------------------------------------
By: /s/ Cary J. Reich By: /s/ Jerry Spear
- ------------------------------------------------------------------------------------------
Name/Title: Cary J. Reich, V.P. Research Name/Title: Jerry Spear, President
- ------------------------------------------------------------------------------------------
Date: January, 8, 1997 Date: January 20, 1997
- ------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
EXHIBIT 10.9
[LETTERHEAD OF JONES PHARMA INCORPORATED]
CONTRACT MANUFACTURING AGREEMENT
This agreement is intended to define the responsibilities, mutually agreed to,
by GenTrac, Inc., 2232 Evergreen Road, Middleton, WI 53562 and Fusion Medical
Technologies, Inc., 1615 Plymouth Street, Mountain View, CA 94043 regarding the
manufacture of topical thrombin, Thrombin-JMI(R).
1. GenTrac, Inc. agrees to manufacture Thrombin-JMI(R) in compliance with US
License #977 and applicable CGMPs
2. All distribution of Thrombin-JMI(R) will be performed by Jones Pharma
Incorporated, St. Louis, MO, in compliance with agreements between Fusion
Medical Technologies and Jones Medical Industries, Inc.
3. Each lot of thrombin sold to Fusion Medical Technologies, Inc. will be
accompanied by a certificate of analysis. The certificate of analysis will
contain at least the following Information: Name of product, lot number, date
of manufacture, Thrombin activity, pH, moisture, sterility, general animal
safety per 21CFR610.11, a statement verifying compliance of: cGMPs and
specifications approved in US License #977, as well as verification that raw
material was taken from BSE-free animals of U.S. origin (refer to Attachment
A for an example of the Certificate of Analysis). Each lot of Thrombin must
meet the specifications on Attachment B.
4. GenTrac, Inc. will notify Fusion Medical Technologies, Inc. in writing of
important proposed changes made to the manufacturing process of facilities
which may have an impact on the final product purchased by Fusion Medical
Technologies, Inc.
5. GenTrac, Inc. will allow GMP audits to be performed by approved
representatives of Fusion Medical Technologies, Inc. Such approval shall not
be unreasonably with held. Specific information regarding the process for the
harvesting, activation and purification of the thrombin are not included in
the scope of the audit.
6. Inquiries as to the specific details of manufacture for technical information
regarding Thrombin-JMI(R) shall be directed to the Regulatory Affairs
Specialist of GenTrac, Inc.
Page 1 of 2
<PAGE>
7. Fusion Medical Technologies, Inc. agrees to handle, store and distribute the
Thrombin-JMI(R) in a manner consistent with the conditions stated on the
product labeling and the conditions stated in Fusion's submission(s) to the
Food and Drug Administration and/or foreign regulatory agency.
8. This contract manufacturing agreement can be terminated by either party upon
180 day written notification. This agreement was entered into on this day of
September 28, 1998.
------------
Accepted: Accepted:
Name: /s/ Dan Pawlak Name: /s/ Debera Brown
---------------------------- --------------------------
Title: V.P. QA & RA Title: V.P. RA & QA
---------------------------- --------------------------
GenTrac, Inc. Fusion Medical Technologies, Inc.
2232 Evergreen Road 1615 Plymouth Street
Middleton, WI 53562 Mountain View, CA 94043
Page 2 of 2
<PAGE>
ATTACHMENT A
CERTIFICATE OF ANALYSIS
Thrombin, Topical (Bovine) USP
THROMBIN-JMI(R)
Lot: XXXX
Date of Manufacture: Month XX, XXXX
Thrombin Activity, U.S. Units/vial XXXX
pH -- reconstituted with isotonic saline X.XX
Moisture X.XX
Sterility Sterile
General Animal Safety per 21CFR610.11 Conforms
This lot was manufactured in compliance with cGMPs following the procedures and
specifications approved in U.S. License #977. The bovine plasma and lungs used
to manufacture Thrombin-JMI(R) are taken from BSE-free animals of U.S. origin.
Bovine plasma and lungs used to manufacture this lot of Thrombin-JMI(R) are
derived from inspected animals, which are fit for human consumption and meet all
required USDA specifications.
- ---------------------------------
Quality Assurance
GenTrac, Inc.
The data contained in this certificate of analysis is representative of the
batch at the time of manufacture. Certificates of Analysis are authorized to
clients on a confidential basis. No reference to the data contained in the
certificate of Analysis may be made public without our written authorization.
GenTrac, Inc. is a subsidiary of Jones Pharma Incorporated, St. Louis, MO.
Thrombin-JMI is a trademark of Jones Pharma Incorporated.
<PAGE>
ATTACHMENT B
Specifications for Thrombin, Topical (Bovine Origin), USP
Thrombin-JMI
With 5mL Saline Diluent and Transfer Needle
<TABLE>
<CAPTION>
Parameter Specification How Documented
<S> <C> <C>
- -----------------------------------------------------------------------------------------
Thrombin Activity, US NLT 8,000 US units/vial Vendor Certificate
units/vial
- -----------------------------------------------------------------------------------------
pH (reconstituted with 5.5-7.5 Vendor Certificate
isotonic saline)
- ------------------------------------------------------------------------------------------
Moisture (less than or equal to)3.0% Vendor Certificate
- ------------------------------------------------------------------------------------------
Sterility Sterile Vendor Certificate
- -----------------------------------------------------------------------------------------
General Animal Safety per Conforms Vendor Certificate
21CFR610.11
- -----------------------------------------------------------------------------------------
BSE Contamination Verify that plasma and Vendor Certificate
lungs were taken from
BSE-free animals of US
Origin
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement of Fusion Medical
Technologies, Inc. on Form S-1 (File No. ) 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
February 8, 1999
PricewaterhouseCoopers LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FUSION
MEDICAL TECHNOLOGIES, INC. BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN TS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,151
<SECURITIES> 3,013
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,299
<PP&E> 1,745
<DEPRECIATION> 1,010
<TOTAL-ASSETS> 8,088
<CURRENT-LIABILITIES> 1,057
<BONDS> 0
0
0
<COMMON> 36,144
<OTHER-SE> (29,317)
<TOTAL-LIABILITY-AND-EQUITY> 8,088
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 8,233
<OTHER-EXPENSES> (585)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39
<INCOME-PRETAX> (7,687)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,687)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,687)
<EPS-PRIMARY> (1.08)
<EPS-DILUTED> (1.08)
</TABLE>
