<PAGE>
RULE 424(b)(3)
Registration No. 333-5425
PROSPECTUS
3,000,000 SHARES
[LOGO OF TRI-POINT MEDICAL CORPORATION]
TRI-POINT MEDICAL CORPORATION
COMMON STOCK
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Of the 3,000,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), offered hereby, 2,550,000 shares are being offered by Tri-
Point Medical Corporation ("Tri-Point" or the "Company") and 450,000 shares
are being offered by a stockholder of the Company (the "Selling Stockholder").
See "Principal and Selling Stockholders." The Company will not receive any of
the proceeds from the sale of Common Stock by the Selling Stockholder. Prior
to this Offering, there has been no public market for the Common Stock of the
Company. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The Common Stock has been
approved for quotation on the Nasdaq National Market, subject to notice of
issuance, under the symbol "TPMC."
------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholder
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................... $8.00 $0.56 $7.44 $7.44
- --------------------------------------------------------------------------------
Total(3).................... $24,000,000 $1,680,000 $18,972,000 $3,348,000
</TABLE>
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- -------------------------------------------------------------------------------
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $750,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Stockholder will be $27,600,000, $1,932,000, $22,320,000 and $3,348,000,
respectively. See "Underwriting."
------------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
Underwriters and to certain further conditions. It is expected that delivery
of certificates representing the shares of Common Stock will be made at the
offices of Lehman Brothers Inc., New York, New York, on or about September 30,
1996.
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Lehman Brothers Sands Brothers & Co., Ltd.
September 25, 1996
<PAGE>
TRAUMASEAL(TM) TraumaSeal(TM) will not be
commercially available in the U.S.
until FDA approval is received.
There is no assurance of such
approval.
NO NEEDLES [PHOTO OF LACERATION PRIOR
[PHOTO OF CHILD AND SYRINGE] TO APPLICATION]
Actual Laceration: Prior to
TraumaSeal application.
NO TRAUMA [PHOTO OF TRAUMASEAL [PHOTO OF APPLICATOR
[PHOTO OF CHILD WITH NURSE] APPLICATION TO LACERATION] FOR TRAUMASEAL]
Actual Laceration: After TraumaSeal
is applied.
NO SUTURES [PHOTO OF LACERATION AFTER
[PHOTO OF SUTURES] TWO WEEKS]
Needles, sutures and various medical After Two Weeks: The laceration
supplies depicted are not products shows healing with minimal scarring.
of the Company.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. See "Risk Factors" for a
discussion of certain risks associated with an investment in the Common Stock.
References in this Prospectus to the Company or Tri-Point also include, unless
the context requires otherwise, Tri-Point's predecessor, Tri-Point Medical L.P.
(the "Partnership"). Unless otherwise indicated, all information presented in
this Prospectus (i) is adjusted to give effect to an exchange (the "Exchange")
pursuant to which obligations of and interests in the Partnership will be
exchanged for shares of Common Stock and (ii) assumes the Underwriters have not
exercised the over-allotment option. The Exchange will occur contemporaneously
with the Offering. "Octyldent" and "Nexaband" are federally registered
trademarks of the Company. "TraumaSeal," "Nexacryl," "Nexaband S/C" and
"Nexaband QuickSeal" are trademarks of the Company. All other trade names and
trademarks appearing in this Prospectus are the property of their respective
holders.
THE COMPANY
Tri-Point develops, commercializes and manufactures medical adhesive products
based on its proprietary cyanoacrylate technology. The Company's medical
adhesives can be used to close and seal wounds and incisions rapidly and stop
leakage of blood and other body fluids from injured tissue. The Company's
nonabsorbable products can be used to replace sutures and staples for certain
topical wound closure applications, while the Company's absorbable products can
potentially be used as surgical sealants and surgical adhesives for internal
wound closure and management. Tri-Point's medical adhesive products align
injured tissue without the trauma caused by suturing or stapling and allow
natural healing to proceed. In addition, Tri-Point believes that its medical
adhesive products result in lower overall procedure costs and are easier and
quicker to prepare and use than sutures or staples. The worldwide market for
sutures and staples for topical and internal applications is currently
estimated to be $2.6 billion annually, and the Company expects that it will
compete for a portion of this market.
The Company has three products for human use and has a product line for
veterinary uses, which are described below:
TraumaSeal is a topical adhesive used to close wounds from
skin lacerations and incisions. Human clinical trials for
TraumaSeal commenced in the United States in February 1996
and are expected to be completed by late 1996. TraumaSeal may
be marketed in Canada and product launch is expected in early
1997. The Company has entered into a marketing agreement with
Ethicon, Inc. ("Ethicon"), a subsidiary of Johnson & Johnson,
for exclusive worldwide marketing and distribution of
TraumaSeal.
Octyldent is a topical sealant currently used in conjunction
with Actisite(R), a site-specific drug delivery system
manufactured by ALZA Corporation ("ALZA"), to treat adult
periodontal disease. Octyldent received 510(k) clearance
("510(k)") for use as an adhesive for the temporary fixing of
periodontal fibers to teeth or other hard surface abutments
from the U.S. Food and Drug Administration (the "FDA") in
1990 and is marketed with Actisite(R) in the United States by
Procter & Gamble/ALZA, Partners for Oral Health Care (the
"Procter & Gamble/ALZA Partnership") and outside the United
States by ALZA.
Nexacryl is a topical sealant to be used in the repair of
corneal ulcers and lacerations. The Company received an FDA
approvable letter for Nexacryl in January 1996. If approved,
the Company believes Nexacryl will be the first cyanoacrylate
adhesive product to receive premarket approval ("PMA") from
the FDA. The Company has entered into a marketing agreement
with Chiron Vision Corporation ("Chiron") for exclusive
worldwide marketing and distribution of Nexacryl.
Nexaband is a product line of five topical adhesives
currently used in veterinary wound closure and management.
Nexaband products have been marketed by Farnam Companies,
Inc. ("Farnam") since 1993.
Tri-Point is also developing absorbable products for internal applications.
The Company has development programs for surgical sealants to be used to
control post-surgical leakage from cardiovascular graft, cardiovascular bypass
and bowel resection procedures and for surgical adhesives to be used to close
internal surgical incisions and traumatic wounds. These future products require
further development, clinical trials and regulatory clearance or approval prior
to commercialization.
3
<PAGE>
Tri-Point's medical adhesive products are based on its proprietary
cyanoacrylate technology. Cyanoacrylates are a family of liquid monomers that
react under a variety of conditions to form polymer films with strong adhesive
properties. Using its technology, Tri-Point has overcome several obstacles to
regulatory approval, including demonstrating that cyanoacrylates are safe for
human use. The Company's ability to manufacture highly purified base material
allows Tri-Point to satisfy toxicity tests and, the Company believes, to meet
biocompatability standards. Tri-Point has also developed novel assays to
demonstrate sterility. In addition, Tri-Point has patented a "scavenger"
process that permits degradation of cyanoacrylates without a cytotoxic
reaction, enabling the Company to develop absorbable formulations for internal
applications. Tri-Point's technology allows it to customize the physical and
chemical properties of cyanoacrylates, such as viscosity and setting times, to
meet specific market needs. Tri-Point's products perform consistently and
reproducibly, do not require special preparation or refrigeration and have
shelf-lives of 18 to 24 months. Tri-Point has also developed delivery
technology to enhance the utility of its products. The Company's TraumaSeal
applicator contains a catalyst that controls the polymerization process and
allows the adhesive film to be applied in multiple layers, which enhances bond
strength. The Company is building a strong portfolio of patent and trade secret
protection on its cyanoacrylate technology, delivery technology and
manufacturing processes. The Company has seven U.S. patents with expiration
dates ranging from 2004 to 2013 and has filed applications for seven additional
U.S. patents, as well as certain corresponding patent applications outside the
United States.
The Company's objective is to become the leader in the medical adhesive
market by capitalizing on its proprietary cyanoacrylate technology. The
Company's strategy is to focus initially on commercializing and launching
topical adhesive products based on its nonabsorbable formulations. Initial
target markets are topical wound closure in emergency rooms and operating rooms
and for plastic surgery procedures. The Company is also pursuing the
development and commercialization of absorbable formulations. The Company
intends to implement its strategy by (i) expanding its research and development
activities, (ii) seeking rapid regulatory approval by targeting product
applications classified as medical devices, (iii) expanding manufacturing
capacity by adding facilities, equipment and personnel and continuing to
research processes to improve manufacturing capacity and efficiency and (iv)
establishing marketing partnerships with recognized market leaders for
marketing and distribution of its products.
The Company's executive offices are located at 5265 Capital Boulevard,
Raleigh, North Carolina 27616, and its telephone number is (919) 876-7800.
RISK FACTORS
The shares of Common Stock offered hereby involve a high degree of risk,
including but not limited to the Company's history of operating losses and
accumulated deficit; early stage of product commercialization; dependence on
new products and technologies; uncertainty of market acceptance of its
products; uncertainty of results of clinical trials for TraumaSeal; dependence
on marketing partners; potential adverse effect of competition and
technological change; limited manufacturing experience; dependence on a sole
source supplier; dependence on patents, trade secrets and proprietary rights;
effects of FDA and other government regulation; effects of international sales;
future capital needs and uncertainty of additional financing; dependence upon
key personnel; product liability exposure and potential unavailability of
insurance; control by existing stockholders; anti-takeover provisions; broad
discretion in application of proceeds; no prior public market for the Common
Stock; volatility of the Common Stock price; substantial number of shares
eligible for future sale; substantial registration rights; potential adverse
impact on future market price from sales of shares; adverse impact from
potential release of shares subject to lock-up; absence of dividends; and
dilution to investors. See "Risk Factors" for a more complete discussion of
risk factors which should be considered by potential investors.
4
<PAGE>
THE OFFERING
Common Stock offered by:
<TABLE>
<S> <C>
The Company........... 2,550,000 shares
The Selling Stockhold-
er................... 450,000 shares
Common Stock to be out-
standing after the Of-
fering(1).............. 12,150,000 shares
Use of proceeds......... To fund capital expenditures, clinical trials and
research and development, and for working capital and
general corporate purposes. See "Use of Proceeds."
Nasdaq National Market
symbol................. "TPMC"
</TABLE>
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(1) Excludes 550,000 shares of Common Stock issuable upon the exercise of
options to be outstanding under the Company's 1996 Amended and Restated
Equity Compensation Plan (the "Equity Compensation Plan") after the
Offering at an estimated weighted average exercise price of $5.27 per share
and (ii) 450,000 shares reserved for future option grants under the Equity
Compensation Plan. See "Management--Equity Compensation Plan."
5
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Product sales........... $ 398 $ 648 $ 1,048 $ 1,478 $ 1,380 $ 618 $ 193
License and product
development revenues... 112 230 162 25 -- -- 3,500
------- ------- ------- ------- ------- ------- ------
Total revenues........ 510 878 1,210 1,503 1,380 618 3,693
Cost of products sold... 375 386 366 528 531 261 173
------- ------- ------- ------- ------- ------- ------
Gross profit............ 135 492 844 975 849 357 3,520
Research, development
and regulatory affairs
expenses............... 819 895 863 1,231 1,637 748 1,340
Selling and
administrative
expenses............... 670 912 1,037 1,366 5,089 628 1,014
Payments to CRX and
Caratec................ -- 150 150 150 250 175 288
------- ------- ------- ------- ------- ------- ------
Total operating
expenses............. 1,489 1,957 2,050 2,747 6,976 1,551 2,642
------- ------- ------- ------- ------- ------- ------
Income (loss) from
operations............. (1,354) (1,465) (1,206) (1,772) (6,127) (1,194) 878
Interest expense to
Sharpoint Development
Corporation, net....... 135 234 342 443 845 396 93
------- ------- ------- ------- ------- ------- ------
Net income (loss)....... $(1,489) $(1,699) $(1,548) $(2,215) $(6,972) $(1,590) $ 785
======= ======= ======= ======= ======= ======= ======
Pro forma net income
(loss) per common
share(1)............... $ (.69) $ .08
======= ======
Shares used in
computation of pro
forma net income (loss)
per common share(1).... 10,150 10,150
======= ======
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
------------------------
PRO FORMA
ACTUAL AS ADJUSTED(2)(3)
------ -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash................................................. $2,309 $20,531
Working capital...................................... 863 19,085
Total assets......................................... 3,686 21,908
Long-term debt and capital lease obligations, less
current portion..................................... 26 26
Total partners' capital and stockholders' equity..... 1,418 19,640
</TABLE>
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(1) Pro forma net income (loss) per common share is based on the weighted
average number of shares of Common Stock and Common Stock equivalents
outstanding during the periods assuming that the contribution of
obligations of and interests in the Partnership to the Company in exchange
for 9,600,000 shares of Common Stock in connection with the Exchange had
been consummated as of the first day of the applicable periods. Pro forma
net income (loss) does not reflect the elimination of the payments to CRX
Medical, Inc. ("CRX") and Caratec, L.L.C. ("Caratec"), the successor to
CRX's limited partnership interest in the Partnership, interest expense to
Sharpoint Development Corporation ("Sharpoint") or the non-cash expense
($1.40 per share) discussed in footnote (2) below. These payments and
expenses will not continue after the Exchange. See "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Prior Partnership Status."
(2) In connection with the Exchange, Caratec will exchange its right to receive
various payments from the Partnership and its limited partnership interest
for 1,776,250 shares of Common Stock. This transaction will result in a
non-cash expense of $14,210,000 which equals the difference between the
value of the Common Stock issued to Caratec and its basis in the
Partnership. The resulting charge to accumulated deficit will be offset by
a credit to additional paid-in capital. See "Prior Partnership Status."
(3) Adjusted to reflect the sale by the Company of 2,550,000 shares of Common
Stock (at a public offering price of $8.00 per share) and the application
of the net proceeds therefrom. See "Use of Proceeds."
6
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully by potential
investors before purchasing the Common Stock offered hereby.
History of Operating Losses and Accumulated Deficit. The Company has
incurred net losses in each year since its inception, including net losses of
approximately $7.0 million during the year ended December 31, 1995, and as of
June 30, 1996 had accumulated net losses of $13.9 million. These losses have
resulted primarily from expenses associated with the Company's research and
development activities, including preclinical and clinical trials and general
and administrative expenses. The Company anticipates that its expenses will
increase in the future and that it will incur additional losses for the
foreseeable future. The amount of future net losses and time required by the
Company to reach profitability are highly uncertain. The Company's ability to
generate significant revenue and become profitable is dependent in large part
on its success in obtaining regulatory approvals or clearances for its
products, commercializing the Company's lead product, TraumaSeal, expanding
its manufacturing capacity, developing new products and entering into
additional marketing agreements and the ability of its marketing partners to
commercialize successfully products incorporating the Company's technologies.
There can be no assurance that the Company will generate significant revenue
or become profitable on a sustained basis, if at all. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Early Commercialization; Dependence on New Products and Technologies;
Uncertainty of Market Acceptance. The Company is in the early stage of product
commercialization and has derived only limited revenue from sales of certain
products to its marketing partners. The Company is conducting human clinical
trials of TraumaSeal in the United States and has several potential products
in development. The Company believes that its long-term viability and growth
will depend in large part on receiving regulatory clearances or approvals for
and the successful commercialization of TraumaSeal and other new products
resulting from its research and development activities. The Company presently
is pursuing product opportunities that will require extensive additional
capital investment, research, development, clinical testing and regulatory
clearances or approvals prior to commercialization. There can be no assurance
that the Company's development programs will be successfully completed or that
required regulatory clearances or approvals will be obtained on a timely
basis, if at all. Moreover, commercial applications of the Company's
absorbable formulations are relatively new and evolving. The successful
development and market acceptance of the Company's proposed products are
subject to inherent developmental risks, including ineffectiveness or lack of
safety, unreliability, failure to receive necessary regulatory clearances or
approvals, high commercial cost and preclusion or obsolescence resulting from
third parties' proprietary rights or superior or equivalent products, as well
as general economic conditions affecting purchasing patterns.
There can be no assurance that the Company and its marketing partners will
be able to commercialize successfully or achieve market acceptance of the
Company's technologies or products, or that the Company's competitors will not
develop competing technologies that are less expensive or otherwise superior
to those of the Company. The failure to develop and market successfully new
products would have a material adverse effect on the Company's results of
operations and financial condition. See "Business--Products," "Business--Sales
and Marketing" and "Business--Manufacturing."
Clinical Trials for TraumaSeal. The Company is currently conducting clinical
trials in the United States for TraumaSeal to test safety and efficacy in
humans under an Investigational Device Exemption ("IDE") allowed by the FDA.
There can be no assurance that clinical testing of TraumaSeal will be
completed successfully within any specified time period, if at all, or that
the Company will not encounter problems in the clinical trials that will cause
the Company to delay or suspend clinical trials. There also can be no
assurance that such testing will ultimately show TraumaSeal to be safe or
efficacious. Without obtaining acceptable clinical results, the Company would
not be able to commercialize TraumaSeal in the United States, which would have
a material adverse effect on the Company's results of operations and financial
condition. The Company's other future products will also require clinical
trials. See "--FDA and Other Government Regulation," "Business--Products" and
"Business--Government Regulations."
7
<PAGE>
Dependence on Marketing Partners. The Company has limited experience in
sales, marketing and distribution. Therefore, the Company's strategy for
commercialization of its products includes entering into agreements with other
companies to market current and certain future products incorporating the
Company's technology. To date, the Company has entered into five such
agreements, and the Company derived all of its fiscal 1995 revenues from the
sale of products to its marketing partners. There can be no assurance that the
Company will be able to enter into additional marketing agreements on terms
favorable to the Company, if at all, or that current or future agreements will
ultimately be beneficial to the Company.
The Company is dependent for product sales revenues upon the success of such
marketing partners in performing their responsibilities. The amount and timing
of resources which may be devoted to the performance of their contractual
responsibilities by its marketing partners are not within the control of the
Company. There can be no assurance that such marketing partners will perform
their obligations as expected, pay any additional option or license fees to
the Company or market any products under the marketing agreements, or that the
Company will derive any revenue from such arrangements. Moreover, certain of
the agreements provide for termination under certain circumstances. For
example, Ethicon may terminate its agreement to purchase TraumaSeal from the
Company should the Company be unable to provide an adequate supply, and
Ethicon may itself then manufacture TraumaSeal and only pay the Company
royalties on sales. Certain agreements also permit the marketing partners to
pursue existing or alternative technologies in preference to the Company's
technology. There can be no assurance that the interests of the Company will
continue to coincide with those of its marketing partners or that the
marketing partners will not develop independently or with third parties
products which could compete with the Company's products, or that
disagreements over rights or technology or other proprietary interests will
not occur. To the extent that the Company chooses not to or is unable to enter
into future agreements, it would experience increased capital requirements to
undertake the marketing or sale of its current and future products. There can
be no assurance that the Company will be able to market or sell its current or
future products independently in the absence of such agreements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Marketing Partners."
Potential Adverse Effect of Competition and Technological Change. The
Company competes with many domestic and foreign competitors in various rapidly
evolving and technologically advanced fields in developing its technology and
products, including medical device, pharmaceutical and biopharmaceutical
companies. For example, in the worldwide wound closure market, the Company's
products will compete with the suture products of Ethicon, the world leader in
the wound closure market, and American Home Products Corporation. In addition,
the Company believes its products will compete with the staple products of
United States Surgical Corporation and Ethicon Endo-Surgery, Inc., a
subsidiary of Johnson & Johnson. The Company's products may also compete with
Histoacryl, a cyanoacrylate-based topical adhesive marketed by B. Braun GmbH,
and with a similar adhesive marketed by Loctite Corporation. In the surgical
sealants market, the Company's products will compete with the fibrin-based
sealants of Immuno AG and Behringwerke AG, and most likely with fibrin-based
sealants being developed by Baxter Healthcare Corporation and Bristol-Myers
Squibb Company. The Company's surgical sealants also may compete with
collagen-based hemostatic products of, among others, Collagen Corporation,
Fusion Medical Technologies, Inc. and MedChem Products Inc., a division of
C.R. Bard Inc.
Many of the Company's competitors and potential competitors have
substantially greater financial, technological, research and development,
marketing and personnel resources than the Company. In addition to those
mentioned above, other recently developed technologies or procedures are, or
may in the future be, the basis of competitive products. There can be no
assurance that the Company's competitors will not succeed in developing
alternative technologies and products that are more effective, easier to use
or more economical than those which have been or are being developed by the
Company or that would render the Company's technology and products obsolete
and non-competitive in these fields. These competitors may also have greater
experience in developing products, conducting clinical trials, obtaining
regulatory clearances or approvals, and manufacturing and marketing such
products. Certain of these competitors may obtain patent protection, approval
or clearance by the FDA or product commercialization earlier than the Company,
any of which could materially adversely affect the Company. Furthermore, if
the Company commences significant commercial sales of its products, it will
also be competing with respect to manufacturing efficiency and marketing
capabilities, areas in
8
<PAGE>
which it currently has limited experience. Finally, under the terms of the
Company's marketing agreements, the Company's marketing partners may pursue
parallel development of other technologies or products, which may result in a
marketing partner developing additional products that will compete with the
Company's products. See "Business--Competition and Technological Change."
Limited Manufacturing Experience. The Company has limited manufacturing
capacity and has limited experience in manufacturing its products. The
Company's future success is dependent in significant part on its ability to
manufacture its products in commercial quantities, in compliance with
regulatory requirements and in a cost-effective manner. The Company intends to
expand its manufacturing capabilities by using a portion of the net proceeds
from this Offering to build or acquire large-scale manufacturing and
formulation facilities by the end of 1997. Production of commercial-scale
quantities may involve technical challenges for the Company and will require
significant scale-up expenses for additions to facilities and personnel. There
can be no assurance that the Company will be able to achieve large-scale
manufacturing capabilities or to manufacture its products in a cost-effective
manner or in quantities necessary to allow the Company to achieve
profitability. If the Company is unable to expand sufficiently its
manufacturing capacity to meet Ethicon's requirements for TraumaSeal as set
forth under their agreement, Ethicon may itself then manufacture TraumaSeal
and only pay the Company royalties on sales. The resulting loss of payments
from Ethicon for the purchase of TraumaSeal from the Company would have a
material adverse effect on the Company's results of operations and financial
condition. See "Business--Marketing Partners."
In addition, the manufacture of the Company's products will be subject to
periodic inspection by regulatory authorities and certain marketing partners,
and the Company's manufacture of its products for human use is subject to
regulation and inspection from time to time by the FDA for compliance with
Good Manufacturing Practices ("GMPs"), as well as equivalent requirements and
inspections by state and foreign regulatory authorities. There can be no
assurance that the FDA or other authorities will not, during the course of an
inspection of existing or new facilities, identify what they consider to be
deficiencies in GMPs or other requirements and request, or seek, remedial
action. Failure to comply with such regulations or delay in attaining
compliance may adversely affect the Company's manufacturing activities and
could result in, among other things, Warning Letters, injunctions, civil
penalties, FDA refusal to grant premarket approvals or clearances of future or
pending product submissions, fines, recalls or seizures of products, total or
partial suspensions of production and criminal prosecution. Additionally,
certain modifications of the Company's manufacturing facilities and processes,
such as those made in preparation for commercial-scale production of products,
will subject the Company to further FDA inspections and review prior to final
approval of its products for commercial sale. There can be no assurance that
the Company will be able to obtain necessary regulatory approvals or
clearances on a timely basis, if at all. Delays in receipt of or failure to
receive such approvals or clearances or the loss of previously received
approvals or clearances would have a material adverse effect on the Company's
results of operations and financial condition. See "--FDA and Other Government
Regulation," "Use of Proceeds" and "Business--Manufacturing."
Dependence on Sole Source Supplier. The Company currently purchases
cyanoacetate, the primary raw material used in manufacturing most of the
Company's products, from a single qualified source. Upon manufacturing scale-
up there can be no assurance that the Company will be able to obtain adequate
increased commercial quantities within a reasonable period of time or at
commercially reasonable rates. Lack of adequate commercial quantities or
inability to develop alternative sources meeting regulatory requirements at
similar prices and terms within a reasonable time or any interruptions in
supply in the future could have a material adverse effect on the Company's
ability to manufacture its products, including TraumaSeal, and, consequently,
could have a material adverse effect on the Company's results of operations
and financial condition. See "--Dependence on Marketing Partners," "Business--
Marketing Partners" and "Business--Manufacturing."
Dependence on Patents, Trade Secrets and Proprietary Rights. The Company's
success depends in large part on whether it can obtain patents, maintain trade
secret protection and operate without infringing on the proprietary rights of
third parties. The Company has seven U.S. patents with expiration dates
ranging from 2004 to 2013 and has filed applications for seven additional U.S.
patents, as well as certain corresponding patent
9
<PAGE>
applications outside the United States, relating to the Company's technology.
There can be no assurance that any of the pending patent applications will be
approved, that the Company will develop additional proprietary products that
are patentable, that any patents issued to the Company will provide the
Company with competitive advantages or will not be challenged by any third
parties or that the patents of others will not prevent the commercialization
of products incorporating the Company's technology. Furthermore, there can be
no assurance that others will not independently develop similar products,
duplicate any of the Company's products or design around the Company's
patents. Any of the foregoing results could have a material adverse effect on
the Company's results of operations and financial condition.
The commercial success of the Company also will depend, in part, on its
ability to avoid infringing patents issued to others. If the Company were
determined to be infringing any third party patent, the Company could be
required to pay damages, alter its products or processes, obtain licenses or
cease certain activities. If the Company is required to obtain any licenses,
there can be no assurance that the Company will be able to do so on
commercially favorable terms, if at all. The Company's failure to obtain a
license for any technology that it may require to commercialize its products
could have a material adverse effect on the Company's results of operations
and financial condition.
Litigation, which could result in substantial costs to and diversion of
effort by the Company, may also be necessary to enforce any patents issued or
licensed to the Company or to determine the scope and validity of third party
proprietary rights. If competitors of the Company that claim technology also
claimed by the Company prepare and file patent applications in the United
States, the Company may have to participate in interference proceedings
declared by the U.S. Patent and Trademark Office to determine priority of
invention, which could result in substantial costs to and diversion of effort
by the Company, even if the eventual outcome is favorable to the Company. Any
such litigation or interference proceeding, regardless of outcome, could be
expensive and time consuming. Litigation could subject the Company to
significant liabilities to third parties, require disputed rights to be
licensed from third parties or require the Company to cease using certain
technology and, consequently, could have a material adverse effect on the
Company's results of operations and financial condition.
In addition to patent protection, the Company relies on unpatented trade
secrets and proprietary technological expertise. There can be no assurance
that others will not independently develop or otherwise acquire substantially
equivalent techniques, or otherwise gain access to the Company's trade secrets
and proprietary technological expertise or disclose such trade secrets, or
that the Company can ultimately protect its rights to such unpatented trade
secrets and proprietary technological expertise. The Company relies, in part,
on confidentiality agreements with its marketing partners, employees,
advisors, vendors and consultants to protect its trade secrets and proprietary
technological expertise. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach
or that the Company's unpatented trade secrets and proprietary technological
expertise will not otherwise become known or be independently discovered by
competitors. Failure to obtain or maintain patent or trade secret protection,
for any reason, could have a material adverse effect on the Company's results
of operations and financial condition. See "Business--Patents, Trade Secrets
and Proprietary Rights."
Effects of FDA and Other Government Regulation. As newly developed medical
devices, the Company's medical adhesives must receive regulatory clearances or
approvals from the FDA, and in many instances, from foreign and state
governments, prior to their sale. In order to obtain such clearances or
approvals, medical adhesives must be shown to be efficacious and safe for use
in humans. The Company's current and future medical adhesives for humans are
subject to stringent government regulation in the United States by the FDA
under the federal Food, Drug, and Cosmetic Act, as amended (the "FDC Act").
The FDA regulates the clinical testing, manufacture, safety, labeling, sale,
distribution and promotion of medical devices. Included among these
regulations are premarket clearance and premarket approval requirements and
GMPs. Other statutory and regulatory requirements govern, among other things,
establishment registration and inspection, medical device listing,
prohibitions against misbranding and adulteration, labeling and postmarket
reporting.
The regulatory process is lengthy, expensive and uncertain. Before any new
medical device may be introduced to the market, the manufacturer generally
must obtain FDA approval through either the 510(k)
10
<PAGE>
premarket notification ("510(k)") process or the lengthier premarket approval
("PMA") process. It generally takes from four to 12 months from submission to
obtain 510(k) premarket clearance, although it may take longer. Approval of a
PMA could take two or more years from the date of submission of the
application. Both the 510(k) and PMA processes can be expensive, uncertain and
lengthy, and there is no guarantee of ultimate approval. It is expected that
most of the Company's future products under development will be subject to the
lengthier PMA process. There can be no assurance that the Company will obtain
the necessary clearances or approvals to market its products. Securing FDA
approvals and clearances may require the submission of extensive clinical data
and supporting information to the FDA, and there can be no guarantee of
ultimate clearance or approval. Failure to comply with applicable requirements
can result in Warning Letters, application integrity proceedings, fines,
recalls or seizures of products, injunctions, civil penalties, total or
partial suspensions of production, withdrawals of existing product approvals
or clearances, refusals to approve or clear new applications or notifications
and criminal prosecution.
Medical devices also are subject to postmarket reporting requirements for
deaths or serious injuries when the device may have caused or contributed to
the death or serious injury, and for certain device malfunctions that would be
likely to cause or contribute to a death or serious injury if the malfunction
were to recur. If safety or efficacy problems occur after the product reaches
the market, the FDA may take steps to prevent or limit further marketing of
the product. Additionally, the FDA actively enforces regulations prohibiting
marketing of devices for indications or uses that have not been cleared or
approved by the FDA.
The Company's current human medical devices are at different stages of FDA
review. There can be no assurance that the Company will be able to obtain
necessary 510(k) clearances or PMAs to market and manufacture its products in
the United States for their intended use, on a timely basis, if at all, and
delays in receipt of or failure to receive such clearances or approvals, the
loss of previously received clearances or approvals, or failure to comply with
existing or future regulatory requirements could have a material adverse
effect on the Company's results of operations and financial condition. See "--
Limited Manufacturing Experience" and "Business--Government Regulations."
Effects of International Sales. The Company's marketing partners intend to
market the Company's current and future products outside the United States as
well as domestically. A number of risks are inherent in international
transactions. In order for the Company to market its products in Europe,
Canada and certain other foreign jurisdictions, the Company must obtain
required regulatory approvals or clearances and otherwise comply with
extensive regulations regarding safety, manufacturing processes and quality.
These regulations, including the requirements for approvals or clearances to
market, may differ from the FDA regulatory scheme. There can be no assurance
that the Company will obtain regulatory approvals or clearances in such
countries or that it will not be required to incur significant costs in
obtaining or maintaining its foreign regulatory approvals or clearances.
Delays in receipt of approvals or clearances to market the Company's products
in foreign countries, failure to receive such approvals or clearances or the
future loss of previously received approvals or clearances could have a
material adverse effect on the Company's results of operations and financial
condition. International sales also may be limited or disrupted by political
instability, price controls, trade restrictions and changes in tariffs. The
Company's royalties from international sales of TraumaSeal are based on net
sales in foreign currencies, but payable in U.S. dollars, and thus may be
adversely affected by fluctuations in currency exchange rates. Additionally,
fluctuations in currency exchange rates may adversely affect demand for the
Company's products by increasing the price of the Company's products in the
currency of the countries in which the products are sold. There can be no
assurance that the Company will be able to successfully commercialize its
current or future products in any foreign market. See "Business--Government
Regulations," "Business--Marketing Partners" and "Business--Sales and
Marketing."
Future Capital Needs and Uncertainty of Additional Financing. The Company
has expended and expects to continue to expend substantial funds to complete
the research, development and clinical testing of its products and to
establish commercial-scale manufacturing facilities. The Company believes that
existing cash and cash equivalents, which totaled $2.3 million as of June 30,
1996, together with net proceeds of approximately $18.2 million from this
Offering, will be sufficient to finance its capital requirements for at least
24 months. There can
11
<PAGE>
be no assurance that the Company will not be required to seek additional
capital to finance its operations following the Offering. The Company
currently has no commitments for any additional financing, and there can be no
assurance that adequate funds for the Company's operations from any such
additional financing, the Company's revenues, financial markets, arrangements
with marketing partners or from other sources will be available when needed or
on terms attractive to the Company. The inability to obtain sufficient funds
may require the Company to delay, scale back or eliminate some or all of its
research and product development programs, manufacturing operations, clinical
studies or regulatory activities or to license third parties to commercialize
products or technologies that the Company would otherwise seek to develop
itself, and could have a material adverse effect on the Company's results of
operations and financial condition. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Dependence Upon Key Personnel. The Company is highly dependent on the
principal members of its management and scientific staff. The Company does not
maintain key person life insurance for any of its employees. In addition, the
Company believes that its future success in developing marketable products and
achieving a competitive position will depend in large part upon whether it can
attract and retain additional qualified management and scientific personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to continue to attract and retain such personnel. The
loss of services of one or more members of the management or scientific staff
or the inability to attract and retain additional personnel and develop
expertise as needed could have a material adverse effect on the Company's
results of operations and financial condition. See "Management."
Product Liability Exposure and Potential Unavailability of Insurance. The
testing, manufacturing, marketing and sale of the products being developed by
the Company involve an inherent risk that product liability claims will be
asserted against the Company, its marketing partners or licensees. There is no
assurance that the Company's current clinical trial and commercial product
liability insurance in the amount of $3 million per claim with an annual
aggregate limit of $3 million is adequate or will continue to be available in
sufficient amounts or at an acceptable cost, if at all. A product liability
claim, product recall or other claim, as well as any claims for uninsured
liabilities or in excess of insured liabilities, could have a material adverse
effect on the Company's results of operations and financial condition.
Control by Existing Stockholders; Anti-Takeover Provisions. Upon completion
of this Offering, Rolf D. Schmidt, Chairman of the Board of Directors of the
Company and a co-founder, and F. William Schmidt, a director of the Company
and a co-founder, and their affiliates, will beneficially own approximately
44.9% of the outstanding Common Stock (approximately 43.3% of the outstanding
Common Stock assuming exercise in full of the Underwriters' over-allotment
option), and in the aggregate the Company's stockholders immediately prior to
the Offering will beneficially own a total of approximately 75.3% of the
outstanding Common Stock after the Offering (approximately 72.6% of the
outstanding Common Stock assuming exercise in full of the Underwriters' over-
allotment option). Accordingly, the Schmidts, either acting alone or together
with other existing stockholders, would be able to exert considerable
influence over the management and policies of the Company. Such a
concentration of ownership may have the effect of delaying, deferring or
preventing a change of control of the Company and consequently could adversely
affect the market price of the Common Stock. Additionally, the Company's
Restated Certificate of Incorporation and By-Laws contain certain provisions
that could prevent or delay the acquisition of the Company by means of a
tender offer, proxy contest or otherwise, or could discourage a third party
from attempting to acquire control of the Company, even if such events would
be beneficial to the interests of the stockholders. These provisions, among
other things, (i) prohibit stockholders of the Company from taking any action
required or permitted to be taken by the stockholders by written consent, (ii)
provide that special meetings of stockholders may only be called by the Board
of Directors or the Chairman of the Board, (iii) do not allow cumulative
voting for directors, (iv) divide the Board of Directors into three classes,
each of which serves for a staggered three-year term, (v) prohibit the removal
of directors without cause by the stockholders and without the approval of at
least 75% of the voting power of the then outstanding shares entitled to vote
in the election of directors, voting as a single class, (vi) provide
supermajority voting
12
<PAGE>
requirements with respect to the approval of certain fundamental corporate
changes and transactions, including, among others, amendment of certain
provisions of the Restated Certificate of Incorporation and amendment of the
By-Laws by the stockholders, and (vii) grant the Board of Directors the
authority, without action by the stockholders, to fix the rights and
preferences of and issue shares of preferred stock. The Company is also
subject to Section 203 of the Delaware General Corporation Law which contains
certain anti-takeover provisions which prohibit a "business combination"
between a corporation and an "interested stockholder" within three years of
the stockholder becoming an "interested stockholder" except in certain limited
circumstances. The business combination provisions of Section 203 of the
Delaware General Corporation Law may have the effect of deterring merger
proposals, tender offers or other attempts to effect changes in control of the
Company that are not negotiated and approved by the Board of Directors. See
"Management," "Principal and Selling Stockholders" and "Description of Capital
Stock."
Broad Discretion in Application of Proceeds. The Company intends to use
approximately $2.2 million, or 12%, of the net proceeds to the Company from
the Offering (approximately $5.6 million, or 26%, of the net proceeds to the
Company from the Offering if the Underwriters' over-allotment option is
exercised in full) for working capital and general corporate purposes, and the
Company has not yet finally identified more specific uses for such net
proceeds. In addition, a portion of the $2.2 million of net proceeds may be
used for the acquisition of complementary businesses or products. Accordingly,
the specific uses for the net proceeds will be at the complete discretion of
management of the Company and the Board of Directors and may be allocated
based upon circumstances arising from time to time in the future. See "Use of
Proceeds."
No Prior Public Market; Volatility of Stock Price. Prior to this Offering,
there has been no public market for the Common Stock, and there can be no
assurance that an active public market will develop or be sustained after this
Offering. The initial public offering price of the Common Stock offered hereby
has been determined through negotiations between the Company and the
representatives of the Underwriters and may not be indicative of future market
prices, revenues or profitability. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price. Factors
such as announcements concerning the Company or its competitors, including the
results of testing and clinical trials, technological innovations and the
attainment of (or failure to attain) milestones in the commercialization of
new products, government regulations, developments concerning proprietary
rights, including new patents, changes in existing patents or litigation
matters, a change in status of a marketing partner, investor perception of the
Company or the commercial value or safety of its products, fluctuations in the
Company's operating results and general market conditions in the industry may
cause the market price of the Common Stock to fluctuate significantly.
Furthermore, the stock market has experienced extreme price and volume
fluctuations, which recently have particularly affected the market prices of
the shares of medical technology companies and which have often been unrelated
to the operating performance of such companies. These broad market
fluctuations also may adversely affect the market price of the Common Stock.
Shares Eligible for Future Sale; Registration Rights; Potential Adverse
Impact on Market Price From Sales of Shares. Sales of substantial amounts of
Common Stock in the public market following this Offering could adversely
affect the market price of the Common Stock and adversely affect the Company's
ability to raise capital at a time and on terms favorable to the Company. In
addition to the 3,000,000 shares of Common Stock offered hereby that will be
freely tradeable, 9,150,000 shares of Common Stock to be issued to certain
stockholders in the Exchange and not sold in this Offering will become
eligible for sale in the public market two years after the Exchange, subject
to the provisions of Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"). In addition, after this Offering, there will be
outstanding options to purchase 550,000 shares of Common Stock, of which
132,500 will be fully vested and exercisable. An additional 450,000 shares are
reserved for issuance under the Equity Compensation Plan. The Company intends
to register the shares of Common Stock issuable and reserved for issuance
under the Equity Compensation Plan as soon as practicable following the date
of this Prospectus.
Certain holders of 9,270,000 shares of Common Stock to be outstanding
immediately prior to the Offering, of which 450,000 shares are to be sold by
the Selling Stockholder in the Offering, will be entitled to certain
13
<PAGE>
registration rights with respect to such shares, which registration rights
will become effective contemporaneously with the Offering. If such holders, by
exercising their registration rights, cause a large number of shares to be
registered and sold in the public market, such sales could have an adverse
effect on the market price of the Common Stock. Such rights may not be
exercised prior to the expiration of 180 days from the date of this
Prospectus. See "Description of Capital Stock--Registration Rights" and
"Shares Eligible for Future Sale."
Adverse Impact from Potential Release of Shares Subject to Lock-Up. All
directors and executive officers and certain other stockholders of the Company
who will beneficially own an aggregate 8,820,000 shares of Common Stock upon
completion of this Offering, and the Company, with certain limited exceptions,
have agreed with the Underwriters not to offer for sale, sell or otherwise
dispose of, directly or indirectly, any shares of Common Stock for a period of
180 days from the date of this Prospectus without the prior written consent of
Lehman Brothers Inc. The release of such shares from the lock-up prior to the
expiration of the 180-day period could adversely affect the market price of
the Common Stock.
Absence of Dividends. The Company has never declared or paid cash dividends
on its Common Stock and does not anticipate paying any cash dividends in the
foreseeable future. The Company currently intends to retain future earnings,
if any, to fund the development and growth of its business. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition,
operating results, capital requirements and such other factors as the Board of
Directors deems relevant. See "Dividend Policy."
Dilution to Investors. Purchasers of Common Stock in this Offering will
experience immediate and substantial dilution of $6.40 per share in the net
tangible book value per share of the Common Stock (based on a public offering
price of $8.00 per share and after deducting Underwriters' discounts and
commissions and other estimated offering expenses). See "Dilution."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale and issuance of the 2,550,000
shares of Common Stock offered by the Company hereby, after deducting expenses
payable by the Company in connection with this Offering (at a public offering
price of $8.00 per share), are estimated to be approximately $18.2 million
($21.6 million if the Underwriters' over-allotment option is exercised in
full). The Company will not receive any proceeds from the sale of shares of
Common Stock by the Selling Stockholder. See "Principal and Selling
Stockholders."
The Company estimates that it will use approximately $6 million of the net
proceeds for capital expenditures related to laboratories, office space and
manufacturing facilities. The Company expects to use approximately $10 million
of the net proceeds for clinical trials, research and development. The Company
expects to use the remaining net proceeds of approximately $2.2 million for
working capital and general corporate purposes. A portion of the net proceeds
may also be used for the acquisition of complementary businesses or products,
although the Company has not entered into any definitive agreements or letters
of intent with respect to any such transactions and is not in any negotiations
with respect to any written or oral agreements or understandings regarding
such transactions. The Company believes that existing cash and cash
equivalents, which totaled $2.3 million as of June 30, 1996, together with net
proceeds of approximately $18.2 million from this Offering, will be sufficient
to finance its capital requirements for at least 24 months.
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds of this Offering in short-term, interest-
bearing, investment-grade securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock
and does not anticipate paying any cash dividends in the foreseeable future.
The Company currently intends to retain future earnings, if any, to fund the
development and growth of its business. Any future determination to pay cash
dividends will be at the discretion of the Board of Directors and will be
dependent upon the Company's financial condition, operating results, capital
requirements and such other factors as the Board of Directors deems relevant.
15
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1996 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the
Company reflecting the consummation of the Exchange and (iii) the pro forma as
adjusted capitalization of the Company reflecting the consummation of the
Exchange and the sale of the 2,550,000 shares of Common Stock offered by the
Company hereby (at a public offering price of $8.00 per share) and receipt of
the proceeds therefrom, after deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company. See "Use of Proceeds."
This table should be read in conjunction with "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's financial statements, including the notes
thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
----------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------ ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt and capital lease
obligations, less current portion.......... $ 26 $ 26 $ 26
------ ------ --------
Stockholders' equity:
Preferred Stock, $.01 par value; 2,000,000
shares authorized........................ -- -- --
Common Stock, $.01 par value; 35,000,000
shares authorized; 9,600,000 shares
issued and outstanding; 12,150,000 shares
as adjusted(3)........................... -- 96 121
Additional paid-in capital.................. -- 1,322 33,729
Accumulated deficit......................... -- -- (14,210)
Partners' capital........................... 1,418 -- --
------ ------ --------
Total partners' capital and stockholders'
equity................................... 1,418 1,418 19,640
------ ------ --------
Total capitalization.................... $1,444 $1,444 $ 19,666
====== ====== ========
</TABLE>
- --------
(1) Reflects the consummation of the Exchange. See "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Prior Partnership Status."
(2) Adjusted to reflect the consummation of the Exchange and the sale by the
Company of 2,550,000 shares of Common Stock (at a public offering price of
$8.00 per share) and the application of the net proceeds therefrom. See
"Use of Proceeds." In connection with the Exchange, Caratec will exchange
its right to receive various payments from the Partnership and its limited
partnership interest for 1,776,250 shares of Common Stock. This
transaction will result in a non-cash expense of $14,210,000 which equals
the difference between the value of the Common Stock issued to Caratec and
its basis in the Partnership. The resulting charge to accumulated deficit
will be offset by a credit to additional paid-in capital. See "Prior
Partnership Status."
(3) Excludes 550,000 shares of Common Stock issuable upon the exercise of
options to be outstanding after this Offering at an estimated weighted
average exercise price of $5.27 per share, of which 132,500 will be fully
vested and exercisable. See "Management--Equity Compensation Plan."
16
<PAGE>
DILUTION
As of June 30, 1996, the pro forma net tangible book value of the Company,
after giving effect to the Exchange, but before the Offering, was $1,192,911
or $.12 per share of Common Stock. "Net tangible book value" per share
represents the amount of total tangible assets of the Company reduced by the
amount of its total liabilities, divided by the number of shares of Common
Stock outstanding. As of June 30, 1996, the pro forma as adjusted net tangible
book value of the Company, after giving effect to the Exchange and the
estimated net proceeds from the sale by the Company of the 2,550,000 shares of
Common Stock offered by the Company hereby (based on a public offering price
of $8.00 per share and after deducting the Underwriters' discounts and
commissions and other estimated offering expenses), would have been
approximately $1.60 per share of Common Stock. This represents an immediate
increase of $1.48 per share to existing stockholders and an immediate dilution
of $6.40 per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share(1)................................ $8.00
Pro forma net tangible book value per share before Offering..... $.12
Increase per share attributable to new investors................ 1.48
----
Pro forma net tangible book value per share after Offering........ 1.60
-----
Dilution to new investors......................................... $6.40
=====
</TABLE>
- --------
(1) Before deduction of the Underwriters' discounts and commissions and other
offering expenses to be paid by the Company.
The following table summarizes on a pro forma basis as of June 30, 1996 the
differences between the total consideration paid and the average price per
share paid by the existing stockholders and the new investors with respect to
the number of shares of Common Stock purchased from the Company (based on a
public offering price of $8.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders(1)........ 9,600,000 79.0% $27,631,651 57.5% $ 2.88
New investors........... 2,550,000 21.0 20,400,000 42.5 8.00
---------- ----- ----------- -----
Total................. 12,150,000 100.0% $48,031,651 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Total consideration includes the fair value of the partnership interests
granted to employee limited partners of the Partnership and the fair value
of the Common Stock issued to Caratec in exchange for its right to receive
various payments from and its limited partnership interest in the
Partnership. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
The above tables exclude 550,000 shares of Common Stock issuable upon the
exercise of options to be outstanding after this Offering at an estimated
weighted average exercise price of $5.27 per share, of which 132,500 will be
fully vested and exercisable. To the extent that these options are exercised,
there will be further dilution to new investors.
17
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for each year in the five year
period ended December 31, 1995 have been derived from financial statements
audited by Price Waterhouse LLP, independent accountants. The balance sheets
as of December 31, 1994 and 1995 and the related statements of operations and
of cash flows for the years ended December 31, 1993, 1994 and 1995 and notes
thereto appear elsewhere in this Prospectus. The statement of operations data
for the six months ended June 30, 1995 and 1996 and the balance sheet data as
of June 30, 1996 have been derived from unaudited financial statements of the
Company included elsewhere in this Prospectus. The unaudited financial
statements include all adjustments, consisting of normal recurring
adjustments, which the Company considers necessary for a fair presentation of
its financial position and results of operations for those periods. Operating
results for the six months ended June 30, 1996 are not indicative of the
results that may be expected for the entire year. This data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's financial statements, including
the notes thereto, and the other financial information included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Product sales........... $ 398 $ 648 $ 1,048 $ 1,478 $ 1,380 $ 618 $ 193
License and product
development revenues... 112 230 162 25 -- -- 3,500
------- ------- ------- ------- ------- ------- ------
Total revenues........ 510 878 1,210 1,503 1,380 618 3,693
Cost of products sold... 375 386 366 528 531 261 173
------- ------- ------- ------- ------- ------- ------
Gross profit............ 135 492 844 975 849 357 3,520
Research, development
and regulatory affairs
expenses............... 819 895 863 1,231 1,637 748 1,340
Selling and
administrative
expenses............... 670 912 1,037 1,366 5,089 628 1,014
Payments to CRX and
Caratec................ -- 150 150 150 250 175 288
------- ------- ------- ------- ------- ------- ------
Total operating
expenses............. 1,489 1,957 2,050 2,747 6,976 1,551 2,642
------- ------- ------- ------- ------- ------- ------
Income (loss) from
operations............. (1,354) (1,465) (1,206) (1,772) (6,127) (1,194) 878
Interest expense to
Sharpoint Development
Corporation, net....... 135 234 342 443 845 396 93
------- ------- ------- ------- ------- ------- ------
Net income (loss)....... $(1,489) $(1,699) $(1,548) $(2,215) $(6,972) $(1,590) $ 785
======= ======= ======= ======= ======= ======= ======
Pro forma net income
(loss) per common
share(1)............... $ (.69) $ .08
======= ======
Shares used in
computation of pro
forma net income (loss)
per common share(1).... 10,150 10,150
======= ======
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, AS OF JUNE 30, JUNE 30,
-------------------------------------------- --------------- -----------
PRO FORMA
AS ADJUSTED
1991 1992 1993 1994 1995 1995 1996 1996(2)(3)
------- ------- ------- ------- -------- ------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.................... $ 116 $ 26 $ 11 $ 30 $ 20 $ 22 $2,309 $20,531
Working capital......... 37 (181) (392) (10) (395) (198) 863 19,085
Total assets............ 823 750 764 784 908 242 3,686 21,908
Long-term debt and
capital lease
obligations, less
current portion........ 2,511 3,942 5,232 7,851 10,088 9,262 26 26
Total partners' capital
and stockholders'
equity................. (1,916) (3,615) (5,163) (7,378) (10,850) (8,968) 1,418 19,640
</TABLE>
DIVIDENDS:
Since its inception, the Company has not declared or paid any cash dividends
on its Common Stock.
- -------
(1) Pro forma net income (loss) per common share is based on the weighted
average number of shares of Common Stock and Common Stock equivalents
outstanding during the periods assuming that the contribution of
obligations of and interests in the Partnership to the Company in exchange
for 9,600,000 shares of Common Stock in connection with the Exchange had
been consummated as of the first day of the applicable periods. Pro forma
net income (loss) does not reflect the elimination of the payments to CRX
and Caratec, interest expense to Sharpoint or the non-cash expense ($1.40
per share) discussed in footnote (2) below. These payments and expenses
will not continue after the Exchange. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Prior
Partnership Status."
(2) In connection with the Exchange, Caratec will exchange its right to
receive various payments from the Partnership and its limited partnership
interest for 1,776,250 shares of Common Stock. This transaction will
result in a non-cash expense of $14,210,000 which equals the difference
between the value of the Common Stock issued to Caratec and its basis in
the Partnership. The resulting charge to accumulated deficit will be
offset by a credit to additional paid-in capital. See "Prior Partnership
Status."
(3) Adjusted to reflect the sale by the Company of 2,550,000 shares of Common
Stock (at a public offering price of $8.00 per share) and the application
of the net proceeds therefrom. See "Use of Proceeds."
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements, including the notes thereto, included elsewhere in this
Prospectus.
OVERVIEW
Since its inception in May 1990, the Company has been developing,
commercializing and manufacturing medical adhesive products for use in wound
closure on humans and animals. The Company's products are based on its
proprietary cyanoacrylate technology, and a substantial portion of the
Company's historical expenses has consisted of research and development and
clinical trial expenses. The Company has funded its operations with cash from
borrowings from Sharpoint, sales of its Octyldent and Nexaband products and
license and product development revenues from marketing partners.
The Company has been unprofitable since its inception and has incurred net
losses in each year, including net losses of approximately $6,972,000 for the
year ended December 31, 1995. These losses have resulted in accumulated net
losses of approximately $13,916,000 as of June 30, 1996. Although the Company
had net income during the six months ended June 30, 1996 as a result of the
receipt from Ethicon of $3,500,000 in license and product development revenues
under the supply and distribution agreement for TraumaSeal, the Company
anticipates that it will incur increased losses for the next several years, as
it expects its research and development expenses to increase in order to fund
additional clinical trials and develop new products. The Company also expects
to incur additional capital expenditures to expand its manufacturing
capabilities. The amount of future net losses and time required by the Company
to reach profitability are highly uncertain. The Company's ability to generate
significant revenue and become profitable will depend on its success in
commercializing TraumaSeal, including the receipt of all regulatory clearances
and approvals, expanding its manufacturing capabilities, developing new
products and entering into additional marketing agreements and the ability of
its marketing partners to commercialize successfully products incorporating
the Company's technologies. No assurance can be given that the Company will
generate significant revenue or become profitable on a sustained basis, if at
all.
In connection with the Exchange, obligations of and interests in the
Partnership will be contributed to the Company in exchange for an aggregate of
9,600,000 shares of Common Stock. As of March 29, 1996, the long-term debt of
the Partnership held by Sharpoint, including accrued interest, was contributed
to the Partnership as $11,483,000 of partners' capital. During the period from
May 1990 to June 30, 1996, CRX and Caratec, as a limited partner of the
Partnership, received payments of approximately $988,000 based on net revenues
pursuant to the Partnership agreement. As part of the Exchange, Caratec will
exchange its right to receive payments based on net revenues and its right to
receive, as a limited partner in the Partnership, a percentage of the proceeds
of a sale of all or substantially all of the assets of the Partnership for
1,776,250 shares of Common Stock. This transaction will result in a non-cash
expense of $14,210,000 which equals the difference between the value of the
Common Stock issued to Caratec and its basis in the Partnership. The resulting
charge to accumulated deficit will be offset by a credit to additional paid-in
capital.
Historically, there was no provision for federal or state income taxes in
the financial statements of the Company's predecessor, Tri-Point Medical L.P.,
because income or loss generated by the Partnership was included by the
partners in their personal income tax returns. Since the Company's
incorporation on February 20, 1996, the Company has been subject to federal
and state corporate income taxes.
The Company was formed on February 20, 1996 and substantially all of the
assets of the Partnership were transferred to the Company as of March 1, 1996.
The net operating losses to March 1, 1996 will not be available to the Company
to offset any future taxable income for federal income tax purposes because it
was a partnership for that period.
The Company expects to incur compensation expense in connection with options
for Common Stock granted to employees, consultants and directors because such
options have a weighted average exercise price of
19
<PAGE>
approximately $2.73 per share below the estimated fair market value of the
Common Stock. Such expense will be approximately $323,000 upon the
consummation of the Offering, approximately $304,000 per year in the next two
years and $285,000 per year in the subsequent two years as the options vest.
Such expense could increase during a given year if the vesting of options were
to accelerate upon the occurrence of certain events. See "Management--Equity
Compensation Plan."
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Total revenues for the six months ended June 30, 1996 increased to
$3,693,000 from $618,000 for the six months ended June 30, 1995. This increase
was primarily the result of the receipt of $3,500,000 in license and product
development revenues under the supply and distribution agreement for
TraumaSeal entered into with Ethicon in March 1996. This increase was
partially offset by a decrease in product sales from $618,000 for the six
months ended June 30, 1995 to $193,000 for the six months ended June 30, 1996.
This decrease was attributable to decreased sales volume of Octyldent as a
result of the inventory build-up by the Company's marketing partner during
1995. The Company is unable to predict future prospects for this product with
the current marketing partner.
Cost of products sold for the six months ended June 30, 1996 decreased 34%
to $173,000 from $261,000 for the six months ended June 30, 1995. This
decrease was primarily a result of decreased sales volume of Octyldent, as
discussed above, and was partially offset by decreased manufacturing
efficiencies and additional costs associated with the expansion of the
Company's manufacturing capabilities.
Operating expenses for the six months ended June 30, 1996 increased 70% to
$2,642,000 from $1,551,000 for the six months ended June 30, 1995. This
increase was primarily due to costs associated with the commencement and
conduct of clinical trials for TraumaSeal and increased financial advisory and
professional fees. Additionally, payments to CRX increased as a result of the
Company recording $3,500,000 of license and product development revenues from
Ethicon.
Interest expense for the six months ended June 30, 1996 decreased 76% to
$93,000 from $396,000 for the six months ended June 30, 1995. This decrease
resulted from an agreement to cease accruing interest as of March 1, 1996 in
connection with the incorporation of the Company on February 20, 1996 and the
subsequent transfer on March 1, 1996 of all material assets and liabilities of
the Partnership to the Company, except for the indebtedness to Sharpoint. In
addition, the Company had interest income from cash equivalents of $47,000.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total revenues for 1995 decreased 8% to $1,380,000 from $1,503,000 for 1994.
This decrease in total revenues was the result of a decrease in product sales
revenues, which was primarily due to decreased sales volume of Octyldent as a
result of the initial product launch and the related inventory build-up by the
Company's marketing partner during the year ended December 31, 1994.
Cost of products sold increased 1% to $531,000 for 1995 as compared to
$528,000 for 1994. This increase was primarily a result of decreased
efficiencies and related costs associated with the expansion of the Company's
manufacturing capabilities.
Operating expenses for 1995 increased 154% to $6,976,000 from $2,747,000 for
1994. This increase was primarily a result of a non-cash compensation expense
of $3,500,000 related to the grant of limited partnership interests in the
Partnership to employees of the Company, as well as costs for development and
preparation for clinical trials for TraumaSeal and increased financial
advisory and professional fees. Offsetting these increases were reductions in
clinical trial costs upon the completion of such trials for Octyldent and
Nexacryl. Payments to CRX increased as a result of an increase in the
stipulated minimum amount payable to CRX under the Partnership agreement.
Interest expense for 1995 increased 91% to $845,000 from $443,000 for 1994.
This increase resulted primarily from additional long-term borrowings from
Sharpoint during 1995 and 1994 to provide working capital.
20
<PAGE>
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Total revenues increased 24% to $1,503,000 for 1994 as compared to
$1,210,000 for 1993. This increase in total revenues was the result of an
increase in product sales revenues, which increased 41% to $1,478,000 in 1994,
from $1,048,000 for 1993. This increase in product sales revenues was
primarily the result of increased sales volume of Octyldent related to the
Actisite(R) launch by the Procter & Gamble/ALZA Partnership during 1994.
License and product development revenues for 1994 decreased 85% to $25,000
from $162,000 for 1993. The 1994 and 1993 license and product development
revenues included payments of $25,000 and $112,000, respectively, from the
Procter & Gamble/ALZA Partnership in connection with the supply agreement for
Octyldent. In addition, the Company received $50,000 in 1993 in product
development fees from Farnam.
Cost of products sold for 1994 increased 44% to $528,000 from $366,000 for
1993. This increase was primarily due to increased sales volume of Octyldent.
Operating expenses for 1994 increased 34% to $2,747,000 from $2,050,000 for
1993. This increase was primarily due to development costs associated with the
Company's nonabsorbable products, increased administrative salaries and
product royalties on Octyldent paid to On-Site Therapeutics, Inc. ("On-Site").
On-Site receives a 5% royalty on net sales of Octyldent up to a cumulative
maximum royalty amount of $1,500,000. Payments to CRX were $150,000 each for
1994 and 1993 and represented stipulated minimum amounts payable to CRX under
the Partnership agreement. See "Business--Products."
Interest expense for 1994 increased 30% to $443,000 from $342,000 for 1993.
This increase was primarily due to additional long-term borrowings from
Sharpoint during 1994 and 1993 to provide working capital.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through product
sales revenues, license and product development revenues and borrowings from
Sharpoint. Through June 30, 1996, the Partnership had borrowed $9,571,000 from
Sharpoint, which excludes accrued interest of $932,000 converted to long-term
debt on December 31, 1994. As of March 29, 1996, all such long-term debt,
including accrued interest, was contributed as partners' capital to the
Partnership. The Company also has financed its operations by generating
product sales of $5,363,000 and license and product development revenues of
$4,036,000 from its inception to June 30, 1996.
The Company's cash and cash equivalents totaled $2,309,000 at June 30, 1996,
an increase of $2,289,000 from December 31, 1995. The primary sources of cash
and cash equivalents for the six months ended June 30, 1996 were the receipt
of $4,500,000, of which $3,500,000 was recorded as license and product
development revenues, in connection with the supply and distribution agreement
with Ethicon and $440,000 in proceeds from long-term borrowings from
Sharpoint. The Company expended $2,931,000 in cash and cash equivalents during
the six months ended June 30, 1996 to finance the Company's operations and for
working capital requirements.
Cash used for operating activities was $2,113,000, $1,534,000 and $1,226,000
for 1995, 1994 and 1993, respectively. The cash was used primarily to fund
research and product development programs, sales and marketing efforts,
manufacturing and clinical studies and regulatory affairs.
Cash used for investing activities was $145,000, $136,000 and $79,000 for
1995, 1994 and 1993, respectively. The cash was used to acquire capital
equipment, as well as to obtain and protect patents. Although the Company has
no material commitments for capital expenditures, the Company anticipates
using approximately $6,000,000 of the net proceeds from this Offering for
capital expenditures related to laboratories, office space and manufacturing
facilities. See "Use of Proceeds."
Cash provided by financing activities was $2,248,000, $1,689,000 and
$1,290,000 for 1995, 1994 and 1993, respectively. The Company's only financing
activities were borrowings from Sharpoint.
The Company expects to incur expenses related to the further research and
development of its technology and the development of current and additional
products, including outside testing and preclinical and clinical trials. The
Company also expects to incur additional capital expenditures to expand its
manufacturing capabilities. See "Use of Proceeds."
21
<PAGE>
The Company believes that existing cash and cash equivalents, which totaled
$2,309,000 as of June 30, 1996, together with net proceeds of approximately
$18,222,000 from this Offering, will be sufficient to finance its capital
requirements for at least 24 months. The Company's future capital
requirements, however, will depend on numerous factors, including (i) the
progress of its research and product development programs, including clinical
studies, (ii) the effectiveness of product commercialization activities and
marketing agreements, including the development and progress of sales and
marketing efforts and manufacturing operations, (iii) the ability of the
Company to maintain existing marketing agreements and establish and maintain
new marketing agreements, (iv) the costs involved in preparing, filing,
prosecuting, defending and enforcing intellectual property rights and
complying with regulatory requirements and (v) the effect of competing
technological and market developments. If the proceeds of this Offering,
together with the Company's currently available funds and internally generated
cash flow, are not sufficient to satisfy its financing needs, the Company will
be required to seek additional funding through bank borrowings and additional
public or private sales of its securities, including equity securities, or
through other arrangements with marketing partners. The Company has no credit
facility or other committed sources of capital. There can be no assurance that
additional funds, if required, will be available to the Company on favorable
terms. See "Risk Factors--Future Capital Needs and Uncertainty of Additional
Financing" and "Use of Proceeds."
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"), was issued in March 1995. SFAS 121 requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity
be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company adopted SFAS 121 effective January 1, 1996; the adoption of this
statement did not have a material impact on its results of operations or
financial position.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), was issued in October 1995. SFAS 123 gives
companies the option to adopt the fair value method for expense recognition of
employee stock options and stock-based awards or to continue to account for
such items using the intrinsic value method as outlined under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), with pro forma disclosures of net income and net income per share
as if the fair value method had been applied. The Company intends to continue
to apply APB 25 for future stock options and stock-based awards; consequently,
SFAS 123 will not have an impact on the Company's results of operations or
financial position.
22
<PAGE>
BUSINESS
GENERAL
Tri-Point develops, commercializes and manufactures medical adhesive
products based on its proprietary cyanoacrylate technology. The Company's
medical adhesives can be used to close and seal wounds and incisions rapidly
and stop leakage of blood and other body fluids from injured tissue. The
Company's nonabsorbable products can be used to replace sutures and staples
for certain topical wound closure applications, while the Company's absorbable
products can potentially be used as surgical sealants and surgical adhesives
for internal wound closure and management. Tri-Point's medical adhesive
products align injured tissue without the trauma caused by suturing or
stapling and allow natural healing to proceed. In addition, Tri-Point believes
that its medical adhesive products result in lower overall procedure costs and
are easier and quicker to prepare and use than sutures or staples. The
worldwide market for sutures and staples for topical and internal applications
is currently estimated to be $2.6 billion annually, and the Company expects
that it will compete for a portion of this market.
The Company has three products for human use and has a product line for
veterinary uses, which are described below:
TraumaSeal is a topical adhesive used to close wounds from skin
lacerations and incisions. Human clinical trials for TraumaSeal
commenced in the United States in February 1996 and are expected
to be completed by late 1996. TraumaSeal may be marketed in
Canada and product launch is expected in early 1997. The Company
has entered into a marketing agreement with Ethicon for
exclusive worldwide marketing and distribution of TraumaSeal.
Octyldent is a topical sealant currently used in conjunction
with Actisite(R), a site-specific drug delivery system
manufactured by ALZA, to treat adult periodontal disease.
Octyldent received 510(k) clearance for use as an adhesive for
the temporary fixing of periodontal fibers to teeth or other
hard surface abutments from the FDA in 1990 and is marketed with
Actisite(R) in the United States by the Procter & Gamble/ALZA
Partnership and outside the United States by ALZA.
Nexacryl is a topical sealant to be used in the repair of
corneal ulcers and lacerations. The Company received an FDA
approvable letter for Nexacryl in January 1996. If approved, the
Company believes Nexacryl will be the first cyanoacrylate
adhesive product to receive a PMA from the FDA. The Company has
entered into a marketing agreement with Chiron for exclusive
worldwide marketing and distribution of Nexacryl.
Nexaband is a product line of five topical adhesives currently
used in veterinary wound closure and management. Nexaband
products have been marketed by Farnam since 1993.
Tri-Point is also developing absorbable products for internal applications.
The Company has development programs for surgical sealants to be used to
control post-surgical leakage from cardiovascular graft, cardiovascular bypass
and bowel resection procedures, and for surgical adhesives to be used to close
internal surgical incisions and traumatic wounds. These future products
require further development, clinical trials and regulatory clearance or
approval prior to commercialization.
TECHNOLOGY OVERVIEW
Tri-Point's medical adhesive products are based on its proprietary
cyanoacrylate technology. Cyanoacrylates are a family of liquid monomers that
react under a variety of conditions to form polymer films with strong adhesive
properties. Industrial adhesives based on cyanoacrylates were first introduced
in 1958 and are widely used in the aerospace and automotive industries, as
well as in consumer products such as super glue.
Medical adhesives have not been widely used because, unlike industrial
adhesives, medical adhesives must be shown to be safe for use in humans and
approved by regulatory authorities. The major obstacles to achieving
regulatory approval have been meeting biocompatibility standards and
demonstrating sterility. Using its proprietary cyanoacrylate technology, Tri-
Point believes it has demonstrated biocompatibility as defined by ISO
Toxicology Testing Standards for the Biological Evaluation of Medical Devices.
A key element in the
23
<PAGE>
Company's compliance with these standards is its ability to manufacture highly
purified base material which allows the Company to satisfy toxicity tests. In
addition, Tri-Point's products are synthetic, thereby eliminating the risk of
contamination inherent in products such as fibrin glues or collagen-based
products, which are derived from human blood or animal tissue. Tri-Point has
also developed novel assays to demonstrate sterility, which is required for
regulatory approval and enhances the safety profile of its products.
Tri-Point's technology enables it to develop nonabsorbable formulations for
topical use and absorbable formulations for internal use. Nonabsorbable
formulations close and seal skin wounds and incisions for the duration of
healing, then fall off naturally as new skin cells fill the wound bed.
Absorbable formulations can be used to close or seal internal wounds and
degrade, in a predictable manner, into small molecules that are eliminated
from the body. Tri-Point has been able to develop absorbable formulations by
controlling biodegradability of cyanoacrylates.
The key obstacle in developing an absorbable formulation has been that
certain byproducts of the degradation process are toxic. In particular,
degradation of cyanoacrylates produces formaldehyde, which is toxic at
relatively low concentrations in the body. Tri-Point has patented a
"scavenger" process that permits degradation without a cytotoxic reaction. In
this process, the Company adds agents to its formulations that reduce
formaldehyde to biologically acceptable levels.
The Company's proprietary technology allows it to customize the physical and
chemical properties of cyanoacrylates to meet specific market needs. These
properties include viscosity, flexibility, bond strength, stability, setting
time, porosity and biodegradation. For example, TraumaSeal has been formulated
with the high bond strength of cyanoacrylates, yet has enough flexibility to
adhere and adjust as needed to the tension of the skin on different areas of
the body. Additional formulations of TraumaSeal with higher viscosity and
varied setting times may be developed to enhance ease of use. The Company's
products for the treatment of moist areas, such as the eyes, mouth and
internal tissue, may be formulated to have faster setting times to control the
flow of fluids. The Company's absorbable products may be formulated with
controlled biodegradation rates to match the healing rates of various tissues.
In addition, the Company's products perform consistently and reproducibly, do
not require special preparation or refrigeration and have shelf-lives of 18 to
24 months.
Tri-Point has also developed delivery technology to deliver TraumaSeal and
other products to wound sites in order to enhance the utility of its products.
The current TraumaSeal applicator is a small, pen-like instrument that is easy
to use and facilitates the application of the product. This applicator
contains a catalyst that controls the polymerization process and allows the
adhesive film to be applied in multiple layers, which enhances bond strength.
The Company has also developed a spray applicator for equine wound management,
which permits fast delivery of the Nexaband adhesive to a large surface area
of the animal. Tri-Point intends to continue investigating and developing
delivery technologies as various needs arise.
The Company is building a strong portfolio of patent and trade secret
protection on the basic properties, formulations and medical uses of its
proprietary adhesive and delivery technologies. The Company has been issued
three U.S. patents relating to the Company's scavenger process for its
absorbable formulations. In addition, the Company has four patents directed to
other areas of adhesive and delivery technology. The Company has filed seven
U.S. patent applications covering other aspects of the scavenger process,
delivery technology, biodegradation rate control processes and high strength
wound closure adhesives. Counterparts of certain of these patents and patent
applications have been filed in other countries. The Company also relies on
its trade secrets and technological expertise in order to protect its
proprietary technology.
During the years ended December 31, 1993, 1994 and 1995, the Company spent
$391,000, $546,000 and $652,000, respectively, on Company-sponsored research
and development activities.
BUSINESS STRATEGY
The Company's objective is to become the leader in the medical adhesive
market by capitalizing on its proprietary cyanoacrylate technology. The
Company's strategy is to focus initially on commercializing and
24
<PAGE>
launching topical adhesive products based on its nonabsorbable formulations.
Initial target markets are topical wound closure in emergency rooms and
operating rooms and for plastic surgery procedures. The Company is also
pursuing the development and commercialization of absorbable formulations.
Implementing the Company's strategy involves the following activities:
Continue and expand research and development. Tri-Point's
initial products are all nonabsorbable, and its research and
development efforts are primarily focused on developing
absorbable adhesives, as well as product line extensions of its
nonabsorbable adhesives. The Company intends to increase its
research and development staff, significantly expand its
research facilities and acquire additional laboratory and
analytical equipment.
Seek rapid regulatory approval. The Company targets product
applications classified as medical devices that are eligible for
regulatory approval under a less time-consuming process than
that required for pharmaceuticals. The Company's laboratory,
animal and human studies have generated an extensive database
which the Company believes will facilitate the regulatory
approval process of current and future products. The Company
engages clinical research organizations to utilize the extensive
experience and technical expertise of such organizations in
planning and managing clinical trials.
Expand manufacturing capacity. The Company believes its ability
to manufacture highly purified cyanoacrylate-based medical
adhesives is a key competitive advantage. Tri-Point intends to
retain manufacturing rights to all its products and will expand
its manufacturing capacity by adding facilities, equipment and
personnel. In addition, the Company is researching other
processes to improve manufacturing capacity and efficiency.
Establish marketing partnerships. The Company seeks to market
and distribute its products through recognized market leaders to
take advantage of their resources and distribution channels. In
addition, in the future, as the Company's surgical sealant
products progress toward commercialization, the Company intends
to establish a highly focused sales force to market those
products.
25
<PAGE>
PRODUCTS
The Company's medical adhesive products are an alternative to the
traditional method of closing topical and internal wounds and incisions.
Suturing and stapling involve puncturing healthy tissue in order to align and
close the wound, may cause leakage or additional scarring at the small
puncture sites, may require anesthetics, are time-consuming to apply, and
often require return patient visits and physician time to remove the sutures
or staples. Medical adhesives may be applied quickly, do not require
anesthetics, do not induce trauma to surrounding tissues and do not require
return visits to the physician.
<TABLE>
<CAPTION>
PRODUCT MARKET STATUS MARKETING PARTNER
------------------------ ------------------------ ------------------------ ---------------------
<C> <S> <C> <C>
NONABSORBABLE
TraumaSeal Topical wound closure U.S. clinicals ongoing; Ethicon
marketable in Canada
Octyldent Periodontal sealant Marketed in U.S. and Procter & Gamble/ALZA
European Union countries Partnership; ALZA
in conjunction with
Actisite(R)
Nexacryl Corneal repair PMA pending Chiron
Nexaband (5 products) Veterinary Marketed in U.S. Farnam
ABSORBABLE
Surgical Sealants Cardiovascular graft and Preclinicals None
bypass and
bowel resection
Surgical Adhesives Internal wound closure Preclinicals None
</TABLE>
TraumaSeal
The Company's lead product, TraumaSeal, is a topical adhesive used to close
wounds from skin lacerations and incisions, minimally invasive surgery and
plastic surgery. The Company believes, based on market research, that there
are approximately five million skin lacerations and incisions annually in the
United States for which TraumaSeal could be used. In addition, there were an
estimated 7.6 million minimally invasive surgical procedures in 1995 and
approximately 1.4 million plastic surgery procedures in 1994. The Company
believes, based on industry sources, that approximately 25 million other
surgical procedures are performed annually in the United States. The Company
expects that TraumaSeal will compete for a portion of these markets as a
replacement for, or in conjunction with, sutures or staples. TraumaSeal is
intended to be used for wound closure where a 5.0 or smaller diameter suture
would normally be used and is not intended for use on the hands, feet or
crossing joints. TraumaSeal can also be used topically for lacerations or
incisions requiring subcutaneous sutures or staples. Although the purchase
cost of TraumaSeal will be greater than sutures or staples, the Company
believes that the use of TraumaSeal will result in lower overall procedure
costs because of reduced treatment time, elimination of the need for
anesthetics, simplification of post-closure wound care and elimination of
suture removal.
The Company received an IDE approval from the FDA for TraumaSeal in December
1995 and commenced controlled, randomized clinical trials in February 1996.
The clinical trials compare wound closure utilizing TraumaSeal with wound
closure utilizing sutures or staples and are being performed at ten sites
throughout the United States. At August 2, 1996, patient enrollment was
completed with a total of 818 patients enrolled. The Company anticipates that
clinical trials will be completed by late 1996. Tri-Point has engaged a
clinical research organization to administer the human trials.
26
<PAGE>
TraumaSeal may be marketed in Canada and is expected to be launched in
Canada in early 1997. A controlled, randomized 300-patient clinical study of
TraumaSeal conducted in Canada in late 1995 and early 1996 successfully
demonstrated TraumaSeal to be at least equivalent to nonabsorbable 5.0 or
smaller diameter sutures in wound closure and cosmetic outcome. There were no
reports of unanticipated adverse effects.
In March 1996, the Company entered into an agreement with Ethicon, a
subsidiary of Johnson & Johnson and a world leader in wound closure products,
to market and distribute TraumaSeal.
Octyldent
Octyldent, the Company's first human product introduction, is a topical
sealant used in conjunction with site-specific sustained release antibacterial
drug therapy to treat adult periodontal disease. The American Dental
Association estimated that approximately 14 million scaling and planing
procedures were performed in 1990 (the most recent year for which data are
available) in the United States to help prevent the progression of periodontal
disease. Octyldent is currently used to seal the pocket of a diseased gum
where Actisite(R), a therapeutic drug delivery system manufactured by ALZA,
has been inserted, thereby allowing the system to remain in place over a ten-
day period.
Octyldent received FDA marketing clearance in August 1990, and the FDA
issued approval to market Actisite(R) in March 1994. The Company entered into
supply agreements in 1991 and 1993 with the Procter & Gamble/ALZA Partnership
and ALZA to market Octyldent with Actisite(R) in the United States and outside
the United States, respectively. The U.S. product launch of Octyldent, sold in
combination with Actisite(R), commenced in July 1994. The Actisite(R)/Octyldent
product is marketed in several European countries, where the first launch
occurred in May 1993, and ALZA is pursuing registration and distribution
arrangements for Actisite(R) in a number of other European markets. The Company
received authorization to display the CE mark for Octyldent in the European
Union in August 1995, which will allow Octyldent to be marketed throughout the
European Union.
The Company entered into an agreement in March 1994 with On-Site pursuant to
which On-Site provides exclusive services to identify potential purchasers of
Octyldent for use in conjunction with site-specific sustained release
antibacterial drug therapy for adult periodontal disease. Under the agreement,
On-Site receives royalties on sales of Octyldent.
Nexacryl
Nexacryl is a topical sealant to be used in the repair of corneal ulcers and
lacerations. Nexacryl received orphan device status to treat a condition known
as "melting cornea" for which no FDA-approved product is presently available.
Nexacryl is applied directly to the cornea to seal fluids and allow the
corneal tissue to heal.
A clinical study of Nexacryl has been completed in which 262 patients were
treated at 23 clinical study sites with no reports of leakage or infections
attributable to Nexacryl. Based on this study, the Company filed a PMA
application with the FDA and received an approvable letter from the FDA in
January 1996 for the product. A PMA is anticipated following sterilization
validation studies, FDA inspection of the manufacturing site and FDA labeling
review. If approved, the Company believes Nexacryl will be the first
cyanoacrylate adhesive to obtain a PMA from the FDA.
The Company is developing an additional formulation of Nexacryl for use in
cataract and other related corneal procedures. There are approximately two
million cataract procedures performed in the United States each year. If
Nexacryl receives marketing approval from the FDA, the Company intends to
broaden the indication for Nexacryl to cover such procedures. The Company
believes this can be accomplished by submitting a PMA Supplement to the FDA,
which may include clinical data to be generated from a limited clinical study.
There can be no assurance that a limited clinical study will be acceptable to
the FDA or that the Company will be able to obtain a PMA Supplement for this
or any additional indication.
The Company's marketing partner for Nexacryl is Chiron.
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Nexaband Veterinary Products
The Company has five topical adhesive products sold under the Nexaband trade
name used in veterinary wound closure and management procedures. There were an
estimated 11 million surgical procedures performed on animals annually in the
United States in 1990 and for which the Company believes Nexaband products
could have been used. The Company estimates that Nexaband products were used
in approximately 1.3 million veterinary procedures in the United States in
1995.
Nexaband products seal the wound and provide a flexible, waterproof barrier
against dirt, fluids and contaminants. The adhesive falls off as the wound is
healed. The products are differentiated by type of applicator, setting time,
viscosity and packaging. Nexaband S/C is used for the topical closure of
lacerations and spay and neuter incisions. Nexaband QuickSeal is used as a
sealant for minor grooming cuts. Nexaband Pump Spray is used as a sealant for
large surface area wounds, particularly equine abrasion wounds. Nexaband
Liquid is used for wound closure in cat declawing procedures. Nexaband
Ophthalmic is used as a hemostatic agent and for the protection of damaged
corneas. The Nexaband products are distributed through Farnam, a leader in
large animal over-the-counter products and small and large animal ethical
product markets.
DEVELOPMENTAL PROGRAMS
The Company has several absorbable products under development which will
require further development, clinical trials and regulatory clearance or
approval prior to commercialization. See "--Government Regulations."
Surgical Sealants
The Company is developing an absorbable adhesive to be used as a sealant to
control post-surgical leakage at suture closure sites, a problem that is not
effectively addressed by current medical technology. Tri-Point's surgical
sealant is being developed initially for use in cardiovascular graft,
cardiovascular bypass and bowel resection surgery, of which approximately 1.2
million procedures were performed in the United States in 1992. The Company
believes its absorbable formulations could also serve as effective sealants
for repairing bladder or spleen defects, diffusing bleeding from the liver,
sealing air leakage from lung defects, repairing skin graft sites and managing
chronic skin ulcers.
The Company has initiated preliminary animal studies to test the feasibility
of absorbable formulations to prevent leakage.
A number of major medical firms are seeking to develop blood-based fibrin
products to prevent leakage at suture closure sites. The Company believes that
its surgical sealant has advantages over such products in that it will be
significantly easier to manufacture, control and manipulate than human blood,
which must be harvested, processed and screened for contaminants, and
eliminates the risk of contamination inherent in blood-derived products. In
addition, several companies are seeking to develop collagen-based products,
which are derived from animal tissue, to act as an internal sealant for human
tissue. The Company believes that its surgical sealants have similar
advantages over collagen-based products and that such products will pose many
of the same contamination risks described above. In addition, the Company
believes that its cyanoacrylate-based adhesives have greater bond strength
than either fibrin-based or collagen-based products.
Surgical Adhesives
The Company is developing absorbable adhesives for the closure of internal
surgical incisions and traumatic wounds. There were approximately 50 million
surgical procedures performed globally in 1995, with an estimated growth rate
of 2% to 3% annually. The Company believes that its absorbable adhesive for
surgical closure of soft tissue would be fast, safe and easy to use, and would
provide advantages over sutures and staples such as cost effectiveness,
enhanced wound sealing and closing, maintenance of the healing environment,
reduced trauma, pain and patient discomfort and superior tissue adherence. In
addition, the Company believes that its absorbable surgical adhesives would be
well-suited for internal closure in laparoscopic procedures.
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The Company has initiated preliminary animal studies to test the feasibility
of absorbable formulations to close internal wounds, including soft tissue
wounds.
Additional Product Opportunities
The Company believes that there are other potential medical applications for
its proprietary cyanoacrylate technology. The Company has not yet developed
any programs or committed any funds for research and development of these
potential applications. Moreover, any potential products will be subject to
extensive and rigorous regulatory review. There can be no assurance that any
funds will be available for research programs for such potential products or
that any potential products will be successfully developed, be proven to be
safe and efficacious in clinical trials, meet applicable regulatory standards,
be capable of being produced in commercial quantities at acceptable costs or
be successfully marketed.
The Company believes that many consumers of over-the-counter ("OTC") wound
closure products would prefer the sealing and wound protection characteristics
of an adhesive as compared to the wound covering capabilities of a topical
bandage. The Company believes that incorporating its topical wound closure
product, TraumaSeal, into an OTC product could provide a fundamental
differentiating characteristic and marketing advantage over products currently
offered in the OTC market.
The Company also believes that its adhesive technology could be used as a
site-specific drug delivery system to deliver growth factors to stimulate
tissue regeneration, various hormones or pharmaceuticals to promote healing,
antibiotics and antivirals to inhibit infection or chemotherapeutic agents to
slow or stop tumor growth. Based on preliminary analyses, the Company believes
that encapsulations, matrix vehicles, liquids and other formed products may be
developed from its adhesive material.
In addition, the Company believes its technology could be useful for certain
orthopedic repair procedures.
MARKETING PARTNERS
An important element of the Company's strategy is to enter into marketing
agreements to enable it to take advantage of the wide range of opportunities
created by its technology. To exploit these opportunities, the Company has
entered into the agreements described below for the supply and distribution of
certain products. The Company is dependent on its marketing partners to market
and distribute its products. Although the Company believes that its marketing
partners have an economic motivation to succeed in performing their
contractual responsibilities, the amount and timing of resources to be devoted
to these activities are not within the control of the Company. See "Risk
Factors--Dependence on Marketing Partners."
Ethicon, Inc.
In March 1996, the Company entered into a renewable, eight-year supply and
distribution agreement with Ethicon, a subsidiary of Johnson & Johnson, which
provides Ethicon with exclusive worldwide rights to market, distribute and
sell TraumaSeal, the Company's nonabsorbable wound closure adhesive. The
agreement provides for certain up-front and milestone payments to the Company,
provides for the reimbursement of certain expenses associated with clinical
trials, requires Ethicon to make minimum purchases that escalate annually
after receipt of FDA or European Community approval and requires Ethicon to
pay royalties based upon net sales.
Ethicon may renew the agreement for additional one-year periods. The
agreement is terminable upon specified events, including (i) material breach
by either party, (ii) insolvency of either party and (iii) failure to obtain
regulatory approval for TraumaSeal in the United States within two years from
the date of submission of the Company's 510(k) notification or PMA. The
Company commenced human clinical trials of TraumaSeal in February 1996 and
anticipates that the trials will be completed by late 1996 and a PMA
application submitted shortly thereafter. Upon certain events of default,
including failure to provide an adequate supply of product, Ethicon may
terminate its arrangement to purchase TraumaSeal from the Company, and Ethicon
may itself then manufacture TraumaSeal and only pay the Company royalties
based on sales. See "Risk Factors--Dependence on Marketing Partners," "Risk
Factors--Limited Manufacturing Experience" and "--Manufacturing."
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Procter & Gamble/ALZA, Partners for Oral Health Care and ALZA Corporation
The Company entered into a supply agreement with the Procter & Gamble/ALZA
Partnership in March 1991, which was subsequently amended in April 1992. The
agreement grants the Procter & Gamble/ALZA Partnership the non-exclusive
worldwide rights to market and distribute Octyldent with Actisite(R), a
product manufactured by ALZA. The first shipment under this agreement was in
May 1994. In March 1993, the Company entered into a supply agreement with
ALZA, which grants ALZA non-exclusive rights to market Octyldent worldwide,
except in the United States, Canada, Mexico and Venezuela, where the Procter &
Gamble/ALZA Partnership has marketing rights. The first shipment under this
agreement was in May 1993. The agreements guarantee the Company minimum
purchases annually and provide for specified prices per unit for Octyldent,
which may be increased annually subject to certain limitations.
The agreements each have a term of three years from the first shipment date,
with automatic renewal for additional one-year periods, and each agreement is
terminable upon specified events, including (i) material breach by either
party, (ii) the publication of a scientific study, undertaken or reported by a
nationally recognized health research agency or government body, that links
any component of Octyldent to any health or safety hazard and (iii) any
revocation or suspension of the Company's 510(k) clearance for Octyldent.
Chiron Vision Corporation
The Company entered into a supply and distribution agreement with Chiron
effective July 1992, and amended in April 1995, which provides Chiron with the
exclusive rights to market, sell and distribute certain human ophthalmic
products on a worldwide basis. The agreement provides Chiron with an option to
expand its coverage to include new products. The Company received a payment
upon the execution of the agreement, and will receive a milestone payment upon
FDA marketing approval of its first ophthalmic product, Nexacryl. The
agreement guarantees the Company minimum purchases that escalate annually.
Pursuant to the agreement, pricing may be adjusted annually to reflect
increases in the U.S. Department of Labor Producer's Price Index. The
agreement has a term of 10 years from the effective date of U.S. regulatory
approval of the last-approved product. The agreement is terminable upon
specified events, including (i) material breach by either party, (ii) Chiron's
providing 30 days' notice as to any product for which FDA clearance or
approval is then pending, or (iii) Chiron's providing 180 days' notice for
products for which FDA clearance or approval is obtained. In certain
circumstances, Chiron may terminate its arrangement to purchase products from
the Company, and may itself then manufacture such products and only pay the
Company royalties based on sales.
Farnam Companies, Inc.
In December 1992, the Company entered into a renewable, seven-year
development and distribution agreement with Farnam. The Company granted Farnam
the exclusive rights to market, sell and distribute its Nexaband line of
veterinary products to the ethical veterinary market in North America. In
addition to the existing nonabsorbable Nexaband products covered by this
agreement, Farnam has exclusive rights in North America to any absorbable
veterinary adhesive products developed by the Company. Prices and minimum
sales volumes for new products will be negotiated upon product development
completion. Pursuant to the agreement, the Company received a nonrefundable
research, testing and development fee. The agreement also provides for minimum
purchases, which increase annually, and allows the Company to adjust prices
annually, but not in excess of increases in the U.S. Department of Labor
Wholesale Price Index. The agreement is terminable upon specified events,
including material breach by either party. The agreement will automatically
renew for successive one-year periods contingent on Farnam meeting required
levels of purchases.
PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS
The Company's success depends in large part on its ability to obtain
patents, maintain trade secret protection and operate without infringing on
the proprietary rights of third parties. The Company has seven U.S. patents
with expiration dates ranging from 2004 to 2013 and has filed applications for
seven additional U.S. patents, as well as certain patent applications outside
the United States, relating to the Company's technology. Three of the
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issued U.S. patents relate to the Company's scavenger process for its
absorbable formulations and pending U.S. patent applications relate to other
aspects of the scavenger process. In addition, the Company has four patents
directed to other areas of adhesive and delivery technology. Other U.S. patent
applications relate to the Company's delivery technology, biodegradation rate
control processes and high strength wound closure adhesives.
There can be no assurance that any of the pending patent applications will
be approved, that the Company will develop additional proprietary products
that are patentable, that any patents issued to the Company will provide the
Company with competitive advantages or will not be challenged by any third
parties or that the patents of others will not prevent the commercialization
of products incorporating the Company's technology. Furthermore, there can be
no assurance that others will not independently develop similar products,
duplicate any of the Company's products or design around the Company's
patents. Any of the foregoing results could have a material adverse effect on
the Company's results of operations and financial condition.
The commercial success of the Company also will depend, in part, on its
ability to avoid infringing patents issued to others. If the Company were
determined to be infringing any third party patent, the Company could be
required to pay damages, alter its products or processes, obtain licenses or
cease certain activities. If the Company is required to obtain any licenses,
there can be no assurance that the Company will be able to do so on
commercially favorable terms, if at all. The Company's failure to obtain a
license for any technology that it may require to commercialize its products
could have a material adverse impact on the Company's results of operations
and financial condition.
Litigation, which could result in substantial costs to and diversion of
effort by the Company, may also be necessary to enforce any patents issued or
licensed to the Company or to determine the scope and validity of third party
proprietary rights. If competitors of the Company that claim technology also
claimed by the Company prepare and file patent applications in the United
States, the Company may have to participate in interference proceedings
declared by the U.S. Patent and Trademark Office to determine priority of
invention, which could result in substantial costs to and diversion of effort
by the Company, even if the eventual outcome is favorable to the Company. Any
such litigation or interference proceeding, regardless of outcome, could be
expensive and time consuming. Litigation could subject the Company to
significant liabilities to third parties, require disputed rights to be
licensed from third parties or require the Company to cease using such
technology and, consequently, could have a material adverse effect on the
Company's results of operations and financial condition.
In addition to patent protection, the Company relies on unpatented trade
secrets and proprietary technological expertise. There can be no assurance
that others will not independently develop or otherwise acquire substantially
equivalent techniques, or otherwise gain access to the Company's trade secrets
and proprietary technological expertise or disclose such trade secrets, or
that the Company can ultimately protect its rights to such unpatented trade
secrets and proprietary technological expertise. The Company relies, in part,
on confidentiality agreements with its marketing partners, employees,
advisors, vendors and consultants to protect its trade secrets and proprietary
technological expertise. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach
or that the Company's unpatented trade secrets and proprietary technological
expertise will not otherwise become known or be independently discovered by
competitors. Failure to obtain or maintain patent and trade secret protection,
for any reason, could have a material adverse effect on the Company's results
of operations and financial condition.
GOVERNMENT REGULATIONS
The Company's products and operations are subject to substantial government
regulation in the United States and foreign countries.
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FDA Regulation
Most medical devices, including the Company's medical adhesives for humans,
are subject to stringent government regulation in the United States by the FDA
under the FDC Act, and, in many instances, by foreign and state governments.
The FDA regulates the clinical testing, manufacture, safety, labeling, sale,
distribution and promotion of medical devices. Included among these
regulations are premarket clearance and premarket approval requirements and
GMPs. Other statutory and regulatory requirements govern, among other things,
establishment registration and inspection, medical device listing,
prohibitions against misbranding and adulteration, labeling and postmarket
reporting. The regulatory process is lengthy, expensive and uncertain.
Securing FDA approvals and clearances may require the submission of extensive
clinical data and supporting information to the FDA. Failure to comply with
applicable requirements can result in Warning Letters, application integrity
proceedings, fines, recalls or seizures of products, injunctions, civil
penalties, total or partial suspensions of production, withdrawals of existing
product approvals or clearances, refusal to approve or clear new applications
or notifications and criminal prosecution. See "Risk Factors--FDA and Other
Government Regulation."
Under the FDC Act, medical devices are classified into one of three classes
(Class I, II or III) on the basis of the controls necessary to reasonably
ensure their safety and effectiveness. Class I devices are subject to general
controls (e.g., labeling, premarket notification and adherence to GMPs). Class
II devices are subject to general and special controls (e.g., performance
standards, postmarket surveillance and patient registries). Generally, Class
III devices must receive premarket approval from the FDA (e.g., certain life-
sustaining, life-supporting and implantable devices or new devices which have
been found not to be substantially equivalent to certain legally marketed
devices). Octyldent is a Class II medical device and TraumaSeal and Nexacryl
are Class III medical devices.
Before any new medical device may be introduced to the market, the
manufacturer generally must obtain either premarket clearance through the
510(k) premarket notification process or premarket approval through the
lengthier PMA process. A 510(k) premarket notification will be granted if the
submitted data establish that the proposed device is "substantially
equivalent" to a legally marketed Class I or Class II medical device, or to a
Class III medical device for which the FDA has not called for PMAs. The FDA
may request extensive data, including clinical studies of the device's safety
and effectiveness, before a substantial equivalence determination can be made.
It generally takes from four to 12 months from submission to obtain 510(k)
premarket clearance, although it may take longer. A PMA application must be
filed if a product is found to be not substantially equivalent to a legally
marketed Class I or II device or if it is a Class III device for which the FDA
has called for PMAs. A PMA application must be supported by extensive data,
including laboratory, preclinical and clinical trial data, to demonstrate the
safety and efficacy of the device, as well as extensive manufacturing
information. Before initiating human clinical trials, the manufacturer often
must first obtain an IDE for the proposed medical device. Toward the end of
the PMA review process, after issuing a preliminary approvable letter, the FDA
will generally conduct an inspection of the manufacturer's facilities to
ensure compliance with GMPs. Additionally, the FDA requires sterility
validation and that final labeling be reviewed by the FDA prior to granting a
PMA. Approval of a PMA could take two or more years from the date of
submission of the application. The PMA process can be expensive, uncertain and
lengthy, and there is no guarantee of ultimate approval.
Modifications or enhancements to products that are either cleared through
the 510(k) process or approved through the PMA process that could affect
safety or effectiveness or effect a major change in the intended use of the
device may require further FDA review through new 510(k) or PMA submissions.
Additionally, certain modifications of the Company's manufacturing facilities
and processes, such as those made in preparation for commercial-scale
production of its products, will subject the Company to further FDA
inspections and review prior to final approval of such products for commercial
sale.
Medical devices also are subject to postmarket reporting requirements for
deaths or serious injuries when the device may have caused or contributed to
the death or serious injury, and for certain device malfunctions that would be
likely to cause or contribute to a death or serious injury if the malfunction
were to recur. If safety
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or efficacy problems occur after the product reaches the market, the FDA may
take steps to prevent or limit further marketing of the product. Additionally,
the FDA actively enforces regulations prohibiting marketing of devices for
indications or uses that have not been cleared or approved by the FDA.
The Company's current human medical devices are at different stages of FDA
review. Octyldent, the Company's product sold to the Proctor & Gamble/ALZA
Partnership and ALZA for use as an adhesive in conjunction with Actisite(R),
received 510(k) clearance in 1990, and is subject to GMP, postmarket reporting
and other FDA requirements. Nexacryl, the Company's ophthalmic product, has
received an approvable letter from the FDA and is pending FDA review of
sterilization validation studies, FDA inspection of the manufacturing site and
FDA labeling review before the product can receive final FDA approval for
commercialization. TraumaSeal has been in clinical trials at 10 sites around
the country since February 1996 under an IDE granted by the FDA. The Company
expects clinical trials to be completed by late 1996 and to submit a PMA
application for TraumaSeal shortly thereafter. The Company expects that it
will need to make significant modifications to its manufacturing facilities
and processes in order to manufacture TraumaSeal on a commercial scale, which
will subject the Company to an additional FDA inspection of its manufacturing
facility prior to final approval for commercial sales of this product.
There can be no assurance that the Company will be able to obtain necessary
510(k) clearances or PMAs to market its products in the United States for
their intended use, on a timely basis, if at all, and delays in receipt of or
failure to receive such clearances or approvals, the loss of previously
received clearances or approvals, or failure to comply with existing or future
regulatory requirements could have a material adverse effect on the Company's
results of operations and financial condition. See "Risk Factors--Limited
Manufacturing Experience" and "Risk Factors--FDA and Other Government
Regulation."
Foreign Regulatory Matters
In order for the Company to market its products in Europe, Canada and
certain other foreign jurisdictions, the Company must obtain required
regulatory approvals or clearances and otherwise comply with extensive
regulations regarding safety and manufacturing processes and quality. These
regulations, including the requirements for approvals or clearances to market,
may differ from the FDA regulatory scheme. The time required to obtain
approval or clearance for sale of the Company's products in foreign countries
may be longer or shorter than that required for FDA clearance or approval, and
the requirements may differ. In addition, there may be foreign regulatory
barriers other than premarket approval or clearance. There can be no assurance
that the Company will obtain regulatory approvals in such countries or that it
will not be required to incur significant costs in obtaining or maintaining
its foreign regulatory approvals. Delays in receipt of approvals to market the
Company's products in foreign countries, failure to receive such approvals or
the future loss of previously received approvals could have a material adverse
effect on the Company's results of operations and financial condition.
Previous FDA requirements for device exports provided that the FDA must
first give export approval for an unapproved device. In April 1996, the United
States Congress passed and the President signed new FDA legislation that
provides that a non-FDA approved medical device can be exported to any
country, provided that the device (i) complies with the laws of that country
and (ii) has valid marketing authorization or the equivalent from the
appropriate authority in a "listed country." The listed countries are
Australia, Canada, Israel, Japan, New Zealand, Switzerland, South Africa and
countries in the European Union and the European Economic Area. Export of
devices that do not have marketing authorization in a listed country will
continue to require FDA export approval.
Medical devices that are marketed or put into service within the European
Union are required to comply with Council Directive 93/42/EEC, the medical
devices directive ("MDD"). Compliance with the MDD entitles a device to make
use of the CE mark and allows the device to be marketed, put into service and
circulated freely within the European Union. Medical devices that have not
obtained the right to affix the CE mark but which conform with the
requirements in force in an individual Member State on December 31, 1994, may
nonetheless be marketed and put into service in that Member State during a
five-year transition period, expiring June 13,
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1998. After the expiration of this transition period, the Company's medical
devices will not be able to be marketed or put into service anywhere in the
European Union without having complied with the MDD and obtained the right to
affix the CE mark.
The Company received authorization to display the CE mark for Octyldent in
the European Union in August 1995. The Company plans to pursue the right to
affix the CE mark on TraumaSeal, as well as on future human products that the
Company may develop. There can be no assurance that the Company will be
successful in obtaining the right to affix the CE mark on any additional
medical devices. Failure to obtain the right to affix the CE mark on its
medical devices could have a material adverse effect on the Company's results
of operations and financial condition. See "Risk Factors--FDA and Other
Government Regulation."
Environmental Regulations
The Company's activities involve the controlled use of hazardous materials
and chemicals. The Company is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such material and certain waste products. Although the Company believes that
its safety procedures for handling and disposing of such materials comply in
all material respects with the standards prescribed by such laws and
regulations, risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, the Company
could be held liable for any damages that result and such liability could have
a material adverse effect on the Company's results of operations and financial
condition and potentially could exceed the resources of the Company.
Environmental protection has been an area of substantial concern in recent
years, and regulation of activities involving the use and disposal of
potentially hazardous materials has increased. There can be no assurance that
such regulation will not increase in the future or that the Company will not
be required to incur significant costs to comply with environmental laws and
regulations in the future.
SALES AND MARKETING
Currently, the Company's nonabsorbable adhesive products are marketed and
sold by its marketing partners. The Company has entered into marketing
agreements with Ethicon for worldwide distribution of TraumaSeal, the topical
adhesive that seals wounds from skin lacerations and incisions, plastic
surgery and skin puncture sites from minimally invasive surgery such as
laparoscopy; with the Procter & Gamble/ALZA Partnership and ALZA for worldwide
distribution of Octyldent, the topical sealant which is sold in conjunction
with Actisite(R), a site-specific sustained release product for adult
periodontal disease; with Chiron for worldwide distribution of Nexacryl, the
topical sealant for use in repair of corneal ulcers and abrasions; and with
Farnam for distribution in North America of Nexaband, the Company's veterinary
line of products.
The Company's future products, which will primarily be absorbable
formulations, will be sold through additional marketing partners or a direct
sales force in the United States and other distributors outside the United
States. The Company intends to develop its own internal sales capacity as its
absorbable products progress toward commercialization.
MANUFACTURING
The Company has devoted considerable resources to the development of
manufacturing processes and technologies capable of providing its products
with clinical efficacy, ease of use and suitable shelf life. The Company has
developed a manufacturing process designed to produce a highly purified base
material which is not achievable by other existing methodologies. The Company
relies heavily on internal trade secrets and technological expertise and
expects to keep aspects of its manufacturing process in-house and, where
applicable, seek patent protection for specific manufacturing applications.
The Company currently manufactures all of its products in a 15,000 square
foot facility located adjacent to its corporate offices in Raleigh, North
Carolina. This facility integrates production, bottling, labeling and
packaging capabilities for products currently being marketed.
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As production requirements increase with the receipt of additional product
approvals and clearances and the initiation of new clinical trials, additional
personnel, equipment and space will be necessary in virtually all phases of
the production process. The Company is formulating plans for a significant
expansion of its manufacturing capabilities in conjunction with the
anticipated future launch of TraumaSeal in Canada and, eventually, the United
States and Europe, as well as for the manufacture of additional products which
may be commercialized in the future by the Company. Such expansion and scale-
up is expected to occur over the next two years. The Company expects to invest
resources in chemical manufacturing equipment and packaging machinery.
Production of commercial-scale quantities may involve technical challenges for
the Company and will require significant scale-up expenses for additions to
facilities and personnel. There can be no assurance that the Company will be
able to achieve large-scale manufacturing capabilities or to manufacture its
products in a cost-effective manner or in quantities necessary to allow the
Company to achieve profitability. If the Company is unable to expand
sufficiently its manufacturing capacity to meet Ethicon's requirements for
TraumaSeal as set forth under their agreement, Ethicon may itself then
manufacture TraumaSeal and only pay the Company royalties on sales. See "--
Marketing Partners."
The Company presently purchases cyanoacetate, the primary raw material used
in the manufacture of the Company's medical adhesives, from one source. The
Company has the capability of manufacturing cyanoacetate if necessary, and
cyanoacetate may be available from a second supplier. The Company would be
required to qualify the quality assurance systems of an additional supplier
prior to its use as a source of supply. The other raw materials used in
manufacturing and packaging the Company's products are readily available from
multiple sources, as are its process equipment and controls.
The Company presently hires filling and packaging employees on a temporary
basis, and the Company expects that a significant portion of the Company's
future packaging requirements will be completed by outside providers.
COMPETITION AND TECHNOLOGICAL CHANGE
The Company competes with many domestic and foreign competitors in various
rapidly evolving and technologically advanced fields in developing its
technology and products, including medical device, pharmaceutical and
biopharmaceutical companies. In the worldwide wound closure market, the
Company's products will compete with the suture products of Ethicon, the world
leader in the wound closure market, and American Home Products Corporation.
The Company also believes its products will compete with the staple products
of United States Surgical Corporation and Ethicon Endo-Surgery, Inc., a
subsidiary of Johnson & Johnson. In addition, there are two other
cyanoacrylate-based topical adhesives with which the Company's products may
compete, neither of which is approved for sale in the United States. B. Braun
GmbH markets Histoacryl(R) as a topical closure adhesive for small lacerations
and incisions in low skin tension areas of the body. Loctite Corporation has
recently test marketed a similar adhesive in the United Kingdom. In the
surgical sealants market, the Company's products will compete with the fibrin-
based sealants of Immuno AG and Behringwerke AG, and most likely with fibrin-
based sealants being developed by Baxter Healthcare Corporation and Bristol-
Myers Squibb Company. The Company's surgical sealants also may compete with
collagen-based hemostatic products of, among others, Collagen Corporation,
Fusion Medical Technologies, Inc. and MedChem Products Inc., a division of
C.R. Bard Inc. In addition, the Company's surgical sealants may compete with
protein-based products being developed by such biotechnology companies as
Protein Polymer Technologies, Inc. Many of the Company's competitors and
potential competitors have substantially greater financial, technological,
research and development, marketing and personnel resources than the Company.
In addition to those mentioned above, other recently developed technologies or
procedures are, or may in the future be, the basis of competitive products.
There can be no assurance that the Company's competitors will not succeed in
developing alternative technologies and products that are more effective,
easier to use or more economical than those which have been or are being
developed by the Company or that would render the Company's technology and
products obsolete and noncompetitive in these fields. These competitors may
also have greater experience in developing products, conducting clinical
trials, obtaining regulatory approvals, and manufacturing and marketing such
products.
35
<PAGE>
Certain of these competitors may obtain patent protection, approval or
clearance by the FDA or product commercialization earlier than the Company,
any of which could materially adversely affect the Company. Furthermore, if
the Company commences significant commercial sales of its products, it will
also be competing with respect to manufacturing efficiency and marketing
capabilities, areas in which it currently has limited experience. Finally,
under the terms of the Company's marketing agreements, the Company's marketing
partners may pursue parallel development of other technologies or products,
which may result in a marketing partner developing additional products that
will compete with the Company's products.
SCIENTIFIC ADVISORS
The Company has established a team of scientific advisors (the "Scientific
Advisors") who provide consulting services to the Company. The Scientific
Advisors consist of independent professionals who meet on an individual basis
with management when so requested. The Scientific Advisors have recognized
expertise in relevant sciences or clinical medicine and advise the Company
about present and long-term scientific planning, research and development.
There is no fixed term of service for the Scientific Advisors. Current
members may resign or be removed at any time, and additional members may be
appointed. Members do not serve on an exclusive basis with the Company, are
not under contract (other than with respect to confidentiality obligations)
and are not obligated to present corporate opportunities to the Company. To
management's knowledge, none of the members is working on the development of
competitive products. Inventions or products developed by a Scientific Advisor
who is not otherwise affiliated with the Company will not become the Company's
property, but will remain the Scientific Advisor's property.
Scientific Advisors who are not affiliated with the Company receive up to
$5,000 per year for their services. All members receive reimbursement for
expenses incurred in traveling to and attending meetings on behalf of the
Company. One of the Scientific Advisors, Anthony V. Seaber, previously
purchased an interest in the Partnership that will be exchanged for shares of
Common Stock in connection with the Exchange. The current Scientific Advisors
and their professional affiliations are as follows:
<TABLE>
<CAPTION>
NAME AFFILIATION
- ------------------------------------------- ---------------------------------------------
<S> <C>
Robert E. Clark, M.D., Ph.D................ Director of the Dermatologic Surgical Unit
Duke University Medical Center
Gary N. Foulks, M.D........................ Director of the Ophthalmology Unit
Duke University Medical Center
James V. Quinn, M.D., CCCFP................ Department of Emergency Medicine
University of Ottawa, Canada
Frederick Reno, Ph.D....................... Toxicology Consultant
Anthony V. Seaber.......................... Director of Orthopedic Research Laboratories
Duke University Medical Center
Dean M. Toriumi, M.D....................... Associate Professor Plastic and
Reconstructive Surgery College of Medicine at
University of Illinois-Chicago
</TABLE>
36
<PAGE>
EMPLOYEES
As of July 31, 1996, the Company had 36 full-time employees, of whom 25 were
dedicated to research, development, manufacturing, quality control and
regulatory affairs and nine were dedicated to administrative activities. Four
members of the Company's research and development staff have doctoral or
advanced degrees. The Company intends to recruit additional personnel in
connection with the research, development and manufacturing of its products.
None of the Company's employees is represented by a union, and the Company
believes relationships with its employees are good.
FACILITIES
The Company leases and occupies approximately 15,000 square feet of office,
laboratory and manufacturing space in Raleigh, North Carolina. These facilities
are leased through August 1998. The Company believes that it will require
additional space in late 1997 for, among other things, expanded manufacturing
capacity, and is beginning site selection for nearby rental property.
LEGAL PROCEEDINGS
The Company is currently not a party to any material legal proceedings.
37
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth the names, ages and titles of the persons who are
the executive officers and directors of the Company as of July 31, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------------
<S> <C> <C>
Rolf D. Schmidt.................... 63 Chairman of the Board of Directors
Robert V. Toni..................... 56 President and Chief Executive Officer and Director
J. Blount Swain.................... 39 Vice President of Finance and Chief Financial Officer
Jeffrey G. Clark................... 42 Vice President of Research and Development
Joe B. Barefoot.................... 46 Vice President of Regulatory Affairs and Quality Assurance
Dennis C. Carey, Ph.D.(1)(2)....... 46 Director
Michael K. Lorelli(2).............. 45 Director
F. William Schmidt(2).............. 56 Director
Randy H. Thurman(1)................ 47 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Rolf D. Schmidt, a co-founder of the Company in 1990, has served as Chairman
of the Board of Directors of the Company since February 1996. Mr. Schmidt has
served as Chief Executive Officer and Chairman of Performance Sports Apparel,
Inc. since 1995. In 1986, a significant portion of the business of Sharpoint,
Inc., a developer and manufacturer of surgical needles and sutures co-founded
by Mr. Schmidt and his brother, F. William Schmidt, was sold to its primary
distributor, Alcon Laboratories, Inc. In 1991, the remainder of such business
was sold to a management group. Since 1990, Mr. Schmidt has invested primarily
in and devoted substantial time and attention to healthcare-related entities,
including the Company. Mr. Schmidt is a senior level executive who brings over
30 years of engineering and management experience to the Company.
Robert V. Toni has served as President and Chief Executive Officer of the
Company since June 1994 and as a director of the Company since February 1996.
From 1989 to 1994, Mr. Toni was General Manager and Vice President of Sales
and Marketing for IOLAB Corporation, a Johnson & Johnson company that marketed
and manufactured surgical devices, equipment and pharmaceuticals for the
ophthalmic market. From 1987 to 1989, he served as President of Cooper Vision-
CILCO, and also served as its Executive Vice President of Operations and Chief
Financial Officer from 1984 to 1987. Mr. Toni holds a B.S. degree in Finance
from Iona College.
J. Blount Swain has served as Vice President of Finance and Chief Financial
Officer of the Company since September 1992. From 1983 until 1992, Mr. Swain
was Chief Financial Officer and Treasurer of The Record Bar, Inc., a national
music retailing entity. Prior to 1983, Mr. Swain served as a Senior Accountant
with Price Waterhouse in Raleigh, North Carolina. Mr. Swain holds a B.S.
degree from the University of North Carolina at Chapel Hill and is a certified
public accountant.
Jeffrey G. Clark has served as Vice President of Research and Development of
the Company since 1990. Prior to that time, Mr. Clark spent seven years at
Sharpoint, Inc. and its successor where he developed bioabsorbable and
polypropylene suture technology. From 1977 to 1983, Mr. Clark worked at
Extracorporeal Inc., a division of Johnson & Johnson. Mr. Clark holds a M.S.
degree in Organic Chemistry from Drexel University.
Joe B. Barefoot has served as Vice President of Regulatory Affairs and
Quality Assurance of the Company since 1990. From 1986 to 1990, Mr. Barefoot
managed the quality assurance program and regulatory submissions for
Sharpoint, Inc. and its successor. From 1982 to 1986, he was a member of the
quality assurance staff at C.R. Bard Inc. Prior to that time, he was a member
of the quality assurance staff at Becton, Dickinson & Co. Mr. Barefoot holds a
B.S. degree in Microbiology from Emporia State University.
38
<PAGE>
Dennis C. Carey, Ph.D has served as a director of the Company since May
1996. Mr. Carey has served as a Managing Director of Spencer Stuart, an
executive search firm, since 1988, and oversees the firm's board consulting
practice. Prior to joining Spencer Stuart, he served as a National Practice
Director for The Hay Group, a global compensation firm, and was Secretary of
Labor to former Governor Pierre S. duPont, IV of Delaware. Mr. Carey holds a
Ph.D. in finance and administration from the University of Maryland. He was a
co-founder of The Director's Institute at The Wharton School of the University
of Pennsylvania and serves on its board of directors.
Michael K. Lorelli has served as a director of the Company since May 1996.
On September 1, 1996, Mr. Lorelli became the Chief Executive Officer and a
director of MobileMedia Corporation, the second largest provider of paging and
personal communications services in the United States. From September 1994
through August 1996, Mr. Lorelli served as President-North/Latin Americas
Division for Tambrands, Inc., a feminine protection products company. From
1986 to 1994, Mr. Lorelli held a number of executive positions with Pepsi-Cola
U.S.A., most recently as President, Pizza Hut International Division. Mr.
Lorelli is a director of Trident International. He also serves as a trustee of
Sarah Lawrence College. Mr. Lorelli received his M.B.A. from New York
University.
F. William Schmidt, a co-founder of the Company in 1990, has served as a
director of the Company since February 1996. Mr. Schmidt co-founded Sharpoint,
Inc. with his brother, Rolf D. Schmidt, and completed the design work on
production and manufacturing equipment that led to product development within
that company. In 1986, a significant portion of the business of Sharpoint,
Inc. was sold to its primary distributor, Alcon Laboratories, Inc. In 1991,
the remainder of such business was sold to a management group. Since 1990, Mr
Schmidt has primarily invested in and devoted substantial time and attention
to healthcare-related entities, including the Company. Mr. Schmidt brings 25
years of management and business experience to the Company.
Randy H. Thurman has served as a director of the Company since May 1996. Mr.
Thurman also serves as Chief Executive Officer of Health Care Strategies 2000,
a health care consulting firm that he founded in 1995. From 1993 to 1995, Mr.
Thurman held a number of executive positions with Corning Incorporated, most
recently as Chairman and Chief Executive Officer of Corning Life Sciences,
Inc., a company engaged in providing clinical testing and pharmaceutical
services, laboratory products and research software. From 1985 to 1993, he
held a number of executive positions with Rhone-Poulenc Rorer, Inc., most
recently as President of Rhone-Poulenc Rorer Pharmaceuticals, Inc. Mr. Thurman
received his M.A. from Webster University. Mr. Thurman is also a director of
Enzon, Inc.
The Company's Board of Directors is divided into three classes. Members of
one class are elected each year to serve a three-year term and until their
successors have been elected and qualified or until their earlier resignation
or removal. The terms of Dennis C. Carey and F. William Schmidt will expire at
the 1997 annual meeting of stockholders, the terms of Michael K. Lorelli and
Rolf D. Schmidt will expire at the 1998 annual meeting and the terms of Randy
H. Thurman and Robert V. Toni will expire at the 1999 annual meeting.
The Board of Directors has recently established the Audit Committee and the
Compensation Committee. Mr. Thurman serves as Chair of the Audit Committee and
Mr. Carey serves as Chair of the Compensation Committee. The Audit Committee
will be responsible for recommending to the Board of Directors the engagement
of the independent auditors of the Company, reviewing with the independent
auditors the scope and results of the audits, reviewing the accounting
controls, operating, capital and research and development budgets and other
financial matters of the Company. The Compensation Committee will be
responsible for reviewing and approving compensation arrangements for the
officers of the Company, for recommending to the Board of Directors the
compensation of the Company's chief executive officer and non-employee
directors, for recommending stock option plans in which officers of the
Company are eligible to participate and for determining grants under and
administering the Company's Equity Compensation Plan.
The executive officers are currently elected annually by the Board of
Directors and hold office until their successors have been chosen and
qualified, or until death, resignation or removal by the Board of Directors.
See "--Employment Agreements."
39
<PAGE>
DIRECTOR COMPENSATION
Directors who are employees of the Company receive no compensation for
serving on the Board of Directors. Non-employee directors of the Company
receive annual compensation of $24,000 and $1,500 for each meeting of the
Board of Directors attended in person or participated in telephonically. In
addition, pursuant to the Company's Equity Compensation Plan, each non-
employee director will receive a one-time grant of options to purchase 25,000
shares of Common Stock and each non-employee director in office immediately
before and after the annual election of directors will receive options to
purchase 5,000 shares of Common Stock. See "--Equity Compensation Plan."
EXECUTIVE COMPENSATION
The following table provides information concerning the annual and long-term
compensation of the Company's Chief Executive Officer and the three most
highly compensated executive officers other than the Chief Executive Officer
who were executive officers as of December 31, 1995 (the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------ ------------
NUMBER OF
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) AWARDED ($)(3)
- --------------------------- ---- --------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert V. Toni.......... 1995 198,000 50,000 64,473(2) -- 1,273
President and Chief
Executive Officer
J. Blount Swain......... 1995 130,000 -- 14,481 -- 805
Vice President of
Finance and Chief
Financial Officer
Jeffrey G. Clark........ 1995 120,000 -- 14,481 -- 719
Vice President of
Research and
Development
Joe B. Barefoot......... 1995 90,000 -- 10,861 -- 463
Vice President of
Regulatory Affairs and
Quality Assurance
</TABLE>
- --------
(1) Includes the tax value of interests in the Partnership (the "Partnership
Interests") granted on December 31, 1995 to the Chief Executive Officer
and the Named Officers. The aggregate tax value of the Partnership
Interests on the date of grant to the Chief Executive Officer and the
Named Officers totaled $61,545. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Results of Operations."
(2) Includes payment for relocation expenses and a payment to cover the
related income tax liability in the aggregate amount of $42,751.
(3) Represents Company-paid life insurance premiums and 401(k) retirement plan
matching contributions.
The Chief Executive Officer and the other Named Officers have not received
from the Company or exercised any stock options or stock appreciation rights
during the fiscal year ended December 31, 1995 or any prior fiscal years. See
"--Equity Compensation Plan."
EMPLOYMENT AGREEMENTS
Messrs. Toni, Swain, Clark and Barefoot each entered into an employment
agreement with the Company in May 1996. The term of each agreement is from May
1, 1996 to May 31, 1999, with automatic one-year extensions unless 60 days'
prior notice is given by either party. The agreements provide for annual base
salaries of not
40
<PAGE>
less than $215,000, $138,450, $127,200 and $95,850, respectively, which
salaries may be increased as determined by the Compensation Committee or the
Board of Directors. Each agreement also provides for an annual bonus from 20%
of base salary to a maximum of 60% of base salary to be awarded based on
performance milestones to be established for each calendar year by the
Compensation Committee based on the recommendation of the Chief Executive
Officer. In connection with their employment agreements, the Company has
granted to Messrs. Toni, Swain, Clark and Barefoot, respectively, options to
purchase 66,600, 43,050, 40,100 and 30,458 shares of Common Stock under the
Equity Compensation Plan at an exercise price equal to the price per share to
the public in the Offering less $3.00. The option grants will be effective
only upon the consummation of the Exchange. The options have a term of ten
years and, provided their employment has not been terminated for "cause" (as
defined in the employment agreements), will vest in five equal annual
installments, commencing as of the date of grant. See "--Equity Compensation
Plan."
If, following a "change in control" (as defined in each agreement), any of
Messrs. Toni, Swain, Clark or Barefoot is terminated other than for "cause"
(as defined in each agreement) or terminates his employment for "good reason"
(as defined in each agreement), he will be entitled to receive all accrued and
any pro rata incentive compensation to the date of termination and a
continuation of his then current annual salary, incentive compensation and
benefits for three years after such termination. In the event of termination
for "cause," Messrs. Toni, Swain, Clark and Barefoot are entitled to a
continuation of base salary, incentive compensation and benefits for a period
of eighteen months in the case of Mr. Toni and one year for the others. The
Company has agreed to indemnify Messrs. Toni, Swain, Clark and Barefoot to the
maximum extent permitted by applicable law against all costs, charges and
expenses incurred by each in connection with any action, suit or proceeding to
which he may be a party or in which he may be a witness by reason of his being
an officer, director or employee of the Company or any subsidiary or affiliate
of the Company. Messrs. Toni, Swain, Clark and Barefoot have each agreed not
to compete with the Company for two years after termination of their
employment with the Company.
CONSULTING AGREEMENT
In May 1996, the Company entered into a consulting agreement with Steven A.
Kriegsman to provide consulting services to the Company for an annual
compensation of $120,000, payable monthly. Under the agreement, the Company
has granted to Mr. Kriegsman a nonqualified stock option to purchase 50,000
shares of Common Stock under the Company's Equity Compensation Plan at an
exercise price equal to the price per share to the public in the Offering less
$3.00. The option shall be effective only upon the consummation of the
Exchange, have a term of ten years and, provided that the agreement has not
been terminated for "cause" (as defined in the agreement), will vest in five
equal annual installments commencing as of the date of grant. Mr. Kriegsman
has agreed to provide consultation at the times requested by the Company in
relation to new business development, strategic planning and assistance with
strategic alliances. The consulting term shall be for five years, unless
terminated earlier for "cause," or in the event of Mr. Kriegsman's death or
disability. In the event that Mr. Kriegsman dies or becomes disabled during
the term, the Company must continue to pay his compensation to his executors,
legal representatives or administrators or to him, as applicable, as if the
consulting term were not terminated. The Company is permitted to obtain life
insurance on Mr. Kriegsman's life to fund such obligation.
EQUITY COMPENSATION PLAN
The Company maintains the 1996 Amended and Restated Equity Compensation Plan
(the "Plan"), adopted by the Board of Directors on May 28, 1996 (the
"effective date") and amended on September 24, 1996. The Plan provides for
grants of stock options to selected officers (including officers who are also
directors) of the Company or its subsidiaries, other employees of the Company
or its subsidiaries and independent contractors and consultants who perform
valuable services for the Company or its subsidiaries. Non-employee directors
of the Company are entitled to receive formula stock option grants under the
Plan. In addition, the Plan provides for grants of restricted stock and stock
appreciation rights ("SARs") (herein, together with grants of stock options,
collectively, "Grants") to participants other than non-employee directors of
the Company. By encouraging stock ownership, the Company seeks to attract,
retain and motivate such participants and to encourage such participants to
devote their best efforts to the business and financial success of the
Company.
41
<PAGE>
General. Subject to adjustment in certain circumstances as discussed below,
the Plan authorizes up to 1,000,000 shares of Common Stock for issuance
pursuant to the terms of the Plan. If and to the extent Grants under the Plan
expire or are terminated for any reason without being exercised, or the shares
subject to a Grant are forfeited, the shares of Common Stock subject to such
Grant will again be available for grant under the Plan.
Administration of the Plan. The Plan is administered and interpreted by a
committee (the "Committee") of the Board of Directors consisting of not fewer
than two persons appointed by the Board of Directors from among its members,
each of whom must be a "disinterested person" as defined in Rule 16b-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and an
"outside director" as defined by section 162(m) of the Internal Revenue Code
of 1986, as amended (the "Code"). The Committee has the sole authority to
determine (i) persons to whom Grants may be made under the Plan, (ii) the
type, size and other terms and conditions of each Grant, (iii) the time when
the Grants will be made and the duration of any applicable exercise or
restriction period, including the criteria for vesting and the acceleration of
vesting, and (iv) any other matters arising under the Plan. The Committee has
full power and authority to administer and interpret the Plan, to make factual
determinations and to adopt or amend such rules, regulations, agreements and
instruments for implementing the Plan, and for conduct of its business as it
deems necessary or advisable, in its sole discretion. The Board of Directors
has appointed the Compensation Committee to serve as this Committee.
Grants. Grants under the Plan may consist of (i) options intended to qualify
as incentive stock options ("ISOs") within the meaning of section 422 of the
Code or (ii) so-called "nonqualified stock options" that are not intended to
so qualify ("NQSOs"). In addition, Grants under the Plan may also consist of
grants of (i) restricted stock or (ii) SARs.
Eligibility for Participation. Grants may be made to any employee (including
officers and directors) of, or independent contractors and consultants to, the
Company or its subsidiaries. Non-employee directors of the Company are
entitled only to formula grants of NQSOs. Independent contractors or
consultants to the Company are not eligible to receive ISOs under the Plan. As
of July 31, 1996, 36 employees were eligible for Grants under the Plan. During
any calendar year, no participant may receive Grants under the Plan for more
than 75,000 shares of Common Stock. After the Offering, 550,000 options will
be outstanding under the Plan and held by all participants as a group, at an
estimated weighted average exercise price of $5.27 per share, of which 132,500
will be fully vested and exercisable.
Options. The option price of any ISO granted under the Plan will not be less
than the fair market value of the underlying shares of Common Stock on the
date of grant, except that the option price of an ISO granted to an employee
who owns more than 10% of the total combined voting power of all classes of
stock of the Company or its subsidiaries may not be less than 110% of the fair
market value of the underlying shares of Common Stock on the date of grant.
The option price of a NQSO may be greater than, equal to or less than the fair
market value of the underlying shares of Common Stock on the date of grant.
The Committee will determine the term of each option; provided, however, that
the exercise period may not exceed ten years from the date of grant, and the
exercise period of an ISO granted to an employee who owns more than 10% of the
total combined voting power of all classes of stock of the Company or its
subsidiaries may not exceed five years from the date of grant. A participant
may pay the option price (i) in cash, (ii) with the approval of the Committee,
by delivering shares of Common Stock owned by the participant and having a
fair market value on the date of exercise equal to the option price or (iii)
by a combination of the foregoing. The participant may instruct the Company to
deliver the shares of Common Stock due upon the exercise to a designated
broker instead of to the participant.
Formula Option Grants to Non-Employee Directors. Non-employee directors are
entitled to receive NQSOs pursuant to the formula grants under the Plan.
According to the formula grants, each non-employee director who first becomes
a member of the Board of Directors on or after the effective date of the Plan
and before the consummation of the Offering of Common Stock contemplated
hereby (a "pre-IPO initial grant") will receive a grant of a NQSO to purchase
25,000 shares of Common Stock as of the date the non-employee director first
becomes a member of the Board of Directors (which is the date of grant);
provided that such NQSO will become effective as of the consummation of the
Exchange, and, if the Exchange does not occur on or prior to
42
<PAGE>
September 30, 1996, any pre-IPO initial grants shall be null and void. Each
non-employee director who first becomes a member of the Board of Directors
after the consummation of the Offering will receive a grant of a NQSO to
purchase 25,000 shares of Common Stock as of the date the non-employee
director first becomes a member of the Board of Directors. Thereafter, on each
date on which the Company holds its annual meeting of stockholders, each non-
employee director in office immediately before and after the annual election
of directors will receive a grant of a NQSO to purchase 5,000 shares of Common
Stock. The option price of a NQSO granted pursuant to a formula grant under
the Plan will be the fair market value of a share of Common Stock on the date
of grant or, in the case of a pre-IPO initial grant, $1.00 less than the
offering price in the Offering. The term of each such option shall be ten
years, and each such option shall be exercisable with respect to 50% of the
shares on the date of grant and an additional 25% on each of the next two
anniversaries of the date of the grant.
Restricted Stock. The Committee may issue shares of Common Stock to
participants other than non-employee directors of the Company pursuant to the
Plan. Shares may be issued for cash consideration or for no cash
consideration, as the Committee determines. The number of shares of Common
Stock granted to each participant shall be determined by the Committee,
subject to the maximum limit described above. Grants of restricted stock will
be made subject to such performance requirements, vesting provisions, transfer
restrictions or other restrictions and conditions as the Committee may
determine in its sole discretion.
Stock Appreciation Rights. The Committee may grant SARs to participants
other than non-employee directors of the Company in tandem with any stock
option pursuant to the Plan. Unless the Committee determines otherwise, the
exercise price of a SAR will be the greater of (i) the exercise price of the
related stock option or (ii) the fair market value of a share of Common Stock
on the date of grant of the SAR. When the participant exercises a SAR, the
participant will receive the amount by which the fair market value of the
Common Stock on the date of exercise exceeds the exercise price of the SAR.
The participant may elect to have such amount paid in cash or in shares of
Common Stock, subject to Committee approval. To the extent a participant
exercises a SAR, the related option shall terminate. Similarly, upon exercise
of a stock option, the related SAR, if any, shall terminate.
Amendment and Termination of the Plan. The Board of Directors may amend or
terminate the Plan at any time; provided, however, that, the Board of
Directors may not amend the Plan, without stockholder approval, to (i)
increase (except for increases due to the adjustments discussed below) the
aggregate number of shares of Common Stock for which Grants may be made
thereunder, or the individual limit of shares of Common Stock for which Grants
may be made to any single individual under the Plan, (ii) modify the
requirements as to eligibility to participate in the Plan or (iii) make any
amendment that requires stockholder approval pursuant to Rule 16b-3 of the
Exchange Act or Section 162(m) of the Code. The Plan will terminate on the day
immediately preceding the tenth anniversary of its effective date, unless
terminated earlier by the Board of Directors or extended by the Board of
Directors with approval of the stockholders.
Adjustment Provisions. Subject to the change of control provisions described
below, in the event of certain transactions identified in the Plan, the
Committee may appropriately adjust (i) the number of shares of Common Stock
(and the option price per share) subject to the unexercised portion of any
outstanding options or SARs, (ii) the number of shares of Common Stock covered
by outstanding Grants, (iii) the number of shares of Common Stock for which
Grants may be made under the Plan and (iv) the individual limit of shares for
which Grants may be made to any individual under the Plan, and such
adjustments shall be effective and binding for all purposes of the Plan.
Change of Control of the Company. In the event of a change of control,
unless the Committee determines otherwise, all options, restricted stock and
SARs will become fully vested. Unless the Committee determines otherwise, each
participant will be provided with advance written notice by the Company prior
to the change of control (to the extent possible) and will have the right,
within a designated period after such notice, to exercise the options and SARs
in full or to surrender the options and SARs in exchange for a payment by the
Company, in cash or Common Stock as determined by the Committee, in an amount
equal to the excess of the then fair market value of the shares of Common
Stock over the option exercise price. Any options or SARs not timely exercised
or surrendered will terminate unless exchanged or substituted with options or
SARs of the successor corporation.
43
<PAGE>
A change of control is defined as (i) a tender offer, merger or other
transaction as a result of which any person or group (other than Rolf D.
Schmidt, F. William Schmidt or any entity controlled by either or both of
them) becomes the owner, directly or indirectly, of more than 50.1% of the
Common Stock or the combined voting power of the Company's then outstanding
securities, (ii) a liquidation or a sale of substantially all of the Company's
assets, or (iii) if, during any period of two consecutive years, the
individuals who, at the beginning of such period, constituted the Board of
Directors cease to constitute a majority of the Board of Directors, except as
otherwise provided in the Plan.
Section 162(m). Under Section 162(m) of the Code, the Company may be
precluded from claiming a federal income tax deduction for total remuneration
in excess of $1,000,000 paid to the chief executive officer or to any of the
other four most highly compensated officers in any one year. Total
remuneration includes amounts received upon the exercise of stock options
granted under the Plan and the value of shares received when shares of
restricted stock become vested (or such other time when income is recognized).
An exception does exist, however, for "performance-based compensation,"
including amounts received upon the exercise of stock options pursuant to a
plan approved by stockholders that meets certain requirements. The Plan has
been approved by the stockholder and is intended to allow grants of options
thereunder to meet the requirements of "performance-based compensation."
Grants of restricted stock generally will not qualify as "performance-based
compensation."
CERTAIN TRANSACTIONS
The Partnership is currently the sole stockholder of the Company.
Simultaneously with the execution and delivery by the Company, the Selling
Stockholder and the Underwriters of the Underwriting Agreement, in the
Exchange, obligations of and interests in the Partnership will be contributed
to the Company in exchange for an aggregate of 9,600,000 shares of Common
Stock pursuant to the Contribution and Exchange Agreement and the Partnership
will cease to exist. See "Prior Partnership Status."
Rolf D. Schmidt and F. William Schmidt, directors and founders of the
Company, and three partnerships controlled by one or both of them, will
receive, as successors to Sharpoint's economic interest in the Partnership,
5,453,750 shares of Common Stock in the Exchange. From the inception of the
Partnership until March 29, 1996, Sharpoint, the general partner of the
Partnership, provided the Company with loans in an aggregate principal amount
of $10,502,000, which accrued interest at rates ranging from 9.5% to 9.75%. On
March 29, 1996, in contemplation of the Exchange, Sharpoint contributed this
debt, together with the accrued interest thereon, in the aggregate amount of
$11,483,000, to the Partnership as partners' capital. The Schmidts are the
only stockholders of Sharpoint.
Caratec, the successor to the limited partnership interest of CRX, will
receive in the Exchange 1,776,250 shares of Common Stock in exchange for
certain rights to payments it had under the Partnership agreement and for its
limited partnership interest. Under the Partnership agreement, CRX and Caratec
were entitled to receive payments based on net revenues, subject to annual
minimum payments of $150,000 in 1992, 1993 and 1994 and $250,000 thereafter.
These payments aggregated approximately $988,000 as of June 30, 1996. CRX and
Caratec also were entitled as a limited partner in the Partnership to payment
of a percentage of the proceeds of a sale of all or substantially all of the
assets of the Partnership. See "Prior Partnership Status" and "Principal and
Selling Stockholders."
44
<PAGE>
PRIOR PARTNERSHIP STATUS
The Company was incorporated in Delaware on February 20, 1996. From May 10,
1990 to February 29, 1996, the business of the Company was conducted by the
Partnership. As of March 1, 1996, substantially all of the assets and
liabilities of the Partnership, except for the indebtedness to Sharpoint, were
transferred to the Company in exchange for one share of Common Stock. The
Partnership is currently the sole stockholder of the Company. Simultaneously
with the execution and delivery by the Company, the Selling Stockholder and
the Underwriters of the Underwriting Agreement, in the Exchange, obligations
of and interests in the Partnership will be contributed to the Company in
exchange for an aggregate of 9,600,000 shares of Common Stock to be issued to
13 individuals and entities. Upon consummation of the Exchange, the
Partnership will cease to exist. As of March 29, 1996, the long-term debt,
including accrued interest, of the Partnership held by Sharpoint, the general
partner of the Partnership and a corporation controlled by Rolf D. Schmidt and
F. William Schmidt, was contributed to the Partnership as $11,483,000 of
partners' capital. All obligations of and interests in the Partnership held by
Sharpoint and its successors will be contributed to the Company in exchange
for shares of Common Stock in connection with the Exchange. Under the
Partnership agreement, CRX and Caratec were entitled to receive payments based
on net revenues, subject to annual minimum payments of $150,000 in 1992, 1993
and 1994 and $250,000 thereafter. These payments aggregated approximately
$988,000 as of June 30, 1996. CRX and Caratec also were entitled as a limited
partner in the Partnership to payment of a percentage of the proceeds of a
sale of all or substantially all of the assets of the Partnership. In
connection with the Exchange, Caratec, the successor to CRX's limited
partnership interest in the Partnership, will exchange its right to receive
various payments from the Partnership and its limited partnership interest for
1,776,250 shares of Common Stock. This transaction will result in a non-cash
expense of $14,210,000 which equals the difference between the value of the
Common Stock issued to Caratec and its basis in the Partnership. The resulting
charge to accumulated deficit will be offset by a credit to additional paid-in
capital. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Certain Transactions" and "Principal and Selling
Stockholders."
45
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock as of July 31, 1996, assuming the
consummation of the Exchange as of that date, by (i) each person known by the
Company to own beneficially more than 5% of the Company's Common Stock, (ii)
the Selling Stockholder (iii) each of the Named Officers, (iv) each of the
Company's directors and (v) all directors and executive officers of the
Company as a group:
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES
OWNED BENEFICIALLY
PRIOR TO OWNED
OFFERING(1) AFTER OFFERING
----------------- SHARES -----------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT TO BE SOLD NUMBER PERCENT
- ------------------------ --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Rolf D. Schmidt(2).............. 3,026,831 31.5% -- 3,026,831 24.9%
F. William Schmidt(3)........... 3,026,831 31.5% -- 3,026,831 24.9%
Caratec, L.L.C.(4).............. 1,776,250 18.5% 450,000 1,326,250 10.9%
Robert V. Toni(5)............... 733,320 7.6% -- 733,320 6.0%
J. Blount Swain(5).............. 488,610 5.1% -- 488,610 4.0%
Jeffrey G. Clark(5)............. 488,020 5.1% -- 488,020 4.0%
Joe B. Barefoot(5)(6)........... 367,247 3.8% -- 367,247 3.0%
Dennis C. Carey(5).............. 12,500 * -- 12,500 *
Michael K. Lorelli(5)........... 12,500 * -- 12,500 *
Randy H. Thurman(5)............. 12,500 * -- 12,500 *
All directors and executive
officers as a group
(9 persons)(7)................. 7,568,447 78.2% -- 7,568,447 61.9%
</TABLE>
- --------
* Less than 1%.
(1) Nature of ownership consists of sole voting and investment power unless
otherwise indicated. The number of shares of Common Stock indicated
assumes the Exchange has been consummated as of July 31, 1996 and
includes shares of Common Stock issuable upon the exercise of stock
options to be outstanding upon the Exchange or exercisable within 60 days
after the Exchange.
(2) The address of the stockholder is 205 Sweltzer Road, Sinking Springs, PA
19608. Includes 2,246,945 shares held by Cacoosing Partners, L.P., a
limited partnership of which Mr. Rolf D. Schmidt is the sole general
partner, and for which shares he is deemed to have sole voting and
investing power. Also includes 599,912 shares held by OMI Partners, L.P.,
a limited partnership of which Rolf D. Schmidt and F. William Schmidt are
the sole general partners, and for which shares they are deemed to share
voting and investment power.
(3) The address of the stockholder is 534 Ridge Avenue, Ephrata, PA 17522.
Includes 2,246,945 shares held by Triangle Partners, L.P., a limited
partnership of which Mr. F. William Schmidt is the sole general partner,
and for which shares he is deemed to have sole voting and investing
power. Also includes 599,912 shares held by OMI Partners, L.P., a limited
partnership of which Rolf D. Schmidt and F. William Schmidt are the sole
general partners, and for which shares they are deemed to share voting
and investment power.
(4) The address of the stockholder is 206 Erskine Court, Cary, NC 27511.
Caratec is a limited liability company which held a limited partnership
interest in Tri-Point Medical L.P. prior to the Exchange. CRX and the
stockholders of CRX are members of Caratec.
(5) Includes the following shares of Common Stock issuable upon the exercise
of stock options to be outstanding upon the Exchange or exercisable
within 60 days after the Exchange: Mr. Robert V. Toni--
46
<PAGE>
13,320; Mr. J. Blount Swain--8,610; Mr. Jeffrey G. Clark--8,020; Mr. Joe B.
Barefoot--6,092; Mr. Dennis C. Carey--12,500; Mr. Michael K. Lorelli--
12,500; and Mr. Randy H. Thurman--12,500.
(6) Includes 1,155 shares of Common Stock issuable upon the exercise of stock
options to be outstanding upon the Exchange or exercisable within 60 days
after the Exchange by Ms. Debra Genovese-Barefoot. Ms. Genovese-Barefoot
is the spouse of Mr. Joe B. Barefoot. Mr. Barefoot disclaims beneficial
ownership of such shares.
(7) Includes 74,697 shares of Common Stock issuable upon the exercise of
stock options to be outstanding upon the Exchange or exercisable within
60 days after the Exchange.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 37,000,000 shares,
including 35,000,000 shares of Common Stock, par value $.01 per share, and
2,000,000 shares of Preferred Stock, par value $.01 per share (the "Preferred
Stock"). Immediately after the sale of the 3,000,000 shares of Common Stock
offered hereby, there will be issued and outstanding 12,150,000 shares of
Common Stock and no shares of Preferred Stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. The election of directors is determined by a
plurality of the votes cast, with the Board of Directors being divided into
three classes, as nearly equal in number as possible, initially of two
directors each, each class of which, after a transitional period, will serve
for a term of three years and until their successors have been elected and
qualified. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election and may exert considerable influence over the management
and policies of the Company. The Company's Restated Certificate of
Incorporation (the "Certificate") may generally be amended as permitted by
law. However, certain fundamental transactions, including the amendment of
certain anti-takeover provisions in the Certificate, amendment of the By-Laws
by the stockholders, the sale, lease, exchange or other disposition of all or
substantially all of the assets of the Company, or the merger, consolidation,
division, reorganization, recapitalization, dissolution, liquidation or
winding up of the Company, require either: (i) the affirmative vote of 75% of
the directors then in office and the minimum affirmative vote of the
stockholders entitled to vote thereon required by law and the express terms of
any class or series of shares or (ii) the affirmative vote of the holders of
75% of the voting power of all then outstanding shares entitled to vote in the
election of directors, voting as a single class, and, in addition, the
affirmative vote of the number of shares of any class or series, if any, as
shall at the time of such approval be required by law or the express terms of
any such class or series of shares. Except as otherwise required by law, all
other matters are determined by a majority of the votes cast. Holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors out of funds legally available therefor,
subject to any preferential dividend rights of outstanding Preferred Stock
(none of which is currently outstanding). Upon the liquidation, dissolution or
winding up of the Company, subject to any preferential liquidation rights of
outstanding Preferred Stock, the holders of Common Stock are entitled to
receive ratably the net assets of the Company available after the payment of
all debts and other liabilities. Holders of the Common Stock have no
preemptive, subscription, redemption or conversion rights. The shares of
Common Stock which will be outstanding upon the consummation of the Exchange
and the shares offered by the Company in the Offering will be, when issued and
paid for, fully paid and nonassessable. The rights, preferences and privileges
of holders of Common Stock are subject to, and may be adversely affected by,
the rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future. See "Risk Factors--Control by
Existing Stockholders; Anti-Takeover Provisions" and""--Preferred Stock."
PREFERRED STOCK
The Company also has authorized 2,000,000 shares of Preferred Stock which
the Board of Directors has discretion to issue in such series and with such
preferences and rights as it may designate without the approval of the holders
of Common Stock. Such preferences and rights may be superior to those of the
holders of Common Stock. For example, the holders of Preferred Stock may be
given a preference in payment upon liquidation of the Company, or for the
payment or accumulation of dividends before any distributions are made to the
holders of Common Stock. As of the date of this Prospectus, no Preferred Stock
has been designated or issued by the Company, and the Company has no plans,
agreements or understandings for the issuance of any shares of Preferred
Stock. For a description of the possible anti-takeover effects of the
Preferred Stock, see "Risk Factors--Control by Existing Stockholders; Anti-
Takeover Provisions" and "--Certain Anti-Takeover Provisions."
48
<PAGE>
LIMITATION OF LIABILITY
The Company's Certificate provides that a director of the Company shall not
be personally liable to the Company or its stockholders for monetary damages
for a breach of fiduciary duty as a director, except for liability (i) for any
breach of such person's duty of loyalty, (ii) for acts or omissions not in
good faith or involving intentional misconduct or a knowing violation of law,
(iii) for the payment of unlawful dividends and certain other actions
prohibited by Delaware corporate law and (iv) for any transaction resulting in
receipt by such person of an improper personal benefit.
The Company has applied for directors' and officers' liability insurance to
provide directors and officers with insurance coverage for losses arising from
claims based on breaches of duty, negligence, error and other wrongful acts to
be effective contemporaneously with this Offering. At present, there is no
pending litigation or proceeding, and the Company is not aware of any
threatened litigation or proceeding, involving any director, officer, employee
or agent where indemnification will be required or permitted under the
Certificate or By-Laws.
CERTAIN ANTI-TAKEOVER PROVISIONS
Classified Board and Other Matters
The Company's Board of Directors is divided into three classes, each of
which, after a transitional period, will serve for three years, with one class
being elected each year. Under the Delaware General Corporation Law and the
provisions of the Certificate, stockholders may remove a director only for
cause and, in accordance with the Certificate, only with the approval of 75%
of the voting power of the then outstanding shares entitled to vote in the
election of directors, voting as a single class. Vacancies on the Board of
Directors may be filled only by a vote of the majority of the directors then
in office, though less than a quorum, or by a sole remaining director. The
Certificate and the By-Laws provide that special meetings of stockholders of
the Company may be called only by the Board of Directors or the Chairman of
the Board. The Certificate and By-Laws also provide that no action required or
permitted to be taken by the stockholders at any annual or special meeting of
the stockholders of the Company may be taken without a meeting. The
classification of the Board of Directors, the limitations on the removal of
directors and the filling of vacancies, and the prohibitions against calling
of special meetings by stockholders and stockholder action without a meeting
could have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from acquiring, control of the Company.
In addition, the Company's supermajority voting provisions for certain
fundamental corporate transactions, including, among others, amendment of
certain anti-takeover provisions in the Certificate and amendment of the By-
Laws by the stockholders, and the ability of the Board of Directors to
establish the rights of, and to issue, substantial amounts of Preferred Stock
without the need for stockholder approval, which Preferred Stock, among other
things, may be used to create voting impediments with respect to changes in
control of the Company or to dilute the stock ownership of holders of Common
Stock seeking to obtain control of the Company, may have the effect of
discouraging, delaying or preventing a change in control of the Company. See
"Risk Factors--Control by Existing Stockholders; Anti-Takeover Provisions,"
"--Common Stock" and "--Preferred Stock."
Section 203 of Delaware General Corporation Law
Section 203 of the Delaware General Corporation Law prohibits certain
transactions between a Delaware corporation and an "interested stockholder,"
which is defined as a person who, together with any affiliates or associates
of such person, beneficially owns, directly or indirectly, 15% or more of the
outstanding voting shares of a Delaware corporation. This provision prohibits
certain business combinations (defined broadly to include mergers,
consolidations, sales or other dispositions of assets having an aggregate
value in excess of 10% of the consolidated assets of the corporation, and
certain transactions that would increase the interested stockholder's
proportionate share ownership in the corporation) between an interested
stockholder and a corporation. The prohibition is for a period of three years
commencing on the date the interested stockholder becomes an interested
stockholder, unless (i) the business combination is approved by the
corporation's board of directors prior to the date the interested stockholder
becomes an interested stockholder; (ii) the interested stockholder
49
<PAGE>
acquired at least 85% of the voting stock of the corporation (other than stock
held by directors who are also officers or by certain employee stock plans) in
the transaction in which it becomes an interested stockholder; or (iii) the
business combination is approved by a majority of the board of directors and
by the affirmative vote of 66 2/3% of the outstanding voting stock that is not
owned by the interested stockholder. See "Risk Factors--Control by Existing
Stockholders; Anti-Takeover Provisions."
REGISTRATION RIGHTS
Pursuant to two registration rights agreements that will become effective
upon the consummation of the Exchange, the Company has granted to the holders
of 9,270,000 shares of Common Stock (the "Registrable Securities") certain
rights with respect to the registration of the Registrable Securities under
the Securities Act. Of the 9,270,000 shares subject to such registration
rights, 450,000 shares of Common Stock are to be sold by the Selling
Stockholder in the Offering. See "Principal and Selling Stockholders."
Pursuant to a registration rights agreement, Caratec, which will be, upon
the consummation of the Exchange, the holder of 1,776,250 shares of Common
Stock (the "Caratec Registrable Securities"), may require, on two occasions
during the five-year period commencing six months after the consummation of
this Offering, that the Company register all or a portion of the Caratec
Registrable Securities for public resale under the Securities Act, provided,
among other limitations, that the anticipated aggregate gross proceeds will
not be less than $100,000. Of the 1,776,250 shares subject to such
registration rights, 450,000 shares are to be sold by Caratec in the Offering.
Pursuant to a registration rights agreement with Rolf D. Schmidt, F. William
Schmidt and three partnerships controlled by one or both of them, who will
hold, upon the consummation of the Exchange, 179,974, 179,974, 2,246,945,
2,246,945 and 599,912 shares of Common Stock, respectively (the "Schmidt
Registrable Securities"), and four employees of the Company who will hold,
upon the consummation of the Exchange, 720,000, 480,000, 480,000 and 360,000
shares of Common Stock, respectively (the "Employee Registrable Securities"),
each of the holders of the Schmidt Registrable Securities may require, on two
occasions during the five-year period commencing six months after the
consummation of this Offering, that the Company use its best efforts to
register all or a portion of the Schmidt Registrable Securities held by such
holder for public resale under the Securities Act, and each of the holders of
the Employee Registrable Securities, subject to certain exceptions and
limitations, may require, on one occasion after the later of (i) the
expiration of six months after the consummation of this Offering or (ii) the
termination of such employee's employment, that the Company use its best
efforts to register all or a portion of such holder's Employee Registrable
Securities for public resale under the Securities Act.
In addition, in the event the Company elects to register any Common Stock
under the Securities Act, either for its own account or for the account of any
other stockholders, the Company, during the five-year period commencing six
months after the consummation of the Offering, is required to notify the
holders of the Caratec Registrable Securities, the Schmidt Registrable
Securities and the Employee Registrable Securities (collectively, the
"Registrable Securities") of the proposed registration and, subject to certain
marketing and other limitations, is required, upon request, to use its best
efforts to include in such registration any Registrable Securities requested
to be included.
All registration expenses under the registration rights agreements are to be
borne by the Company and all selling expenses are to be borne by the holders
of the securities being registered.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has not been any public market for the Common
Stock. Except as described below, no shares of Common Stock outstanding prior
to the Offering will be available for sale immediately after the Offering due
to certain legal and contractual restrictions on resale. Sales of substantial
amounts of Common Stock in the public market following this Offering could
adversely affect the market price of the Common Stock and adversely affect the
Company's ability to raise capital at a time and on terms favorable to the
Company.
Of the 12,150,000 shares to be outstanding after this Offering (assuming
that the Underwriters' over-allotment option is not exercised), 9,150,000
shares of Common Stock to be issued to certain stockholders in the Exchange
and not sold in this Offering will constitute "restricted securities," as
defined in Rule 144 under the Securities Act. Such securities may be sold only
if registered under the Securities Act or sold in accordance with an available
exemption from registration. These shares will be eligible for sale in the
public market beginning two years after the Exchange, subject to the volume
limitations and other requirements of Rule 144. Of the 9,150,000 shares,
7,493,750 shares of Common Stock will be held by "affiliates" of the Company,
as defined in Rule 144(a). For purposes of Rule 144, an "affiliate" of an
issuer is a person that, directly or indirectly through one or more
intermediaries, controls, or is controlled by or is under common control with,
such issuer.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least two years, including an "affiliate," is
entitled to sell within any three-month period a number of shares that does
not exceed the greater of one percent of the then outstanding shares of Common
Stock (approximately 121,500 shares after giving effect to this Offering), or
the average weekly trading volume during the four calendar weeks preceding
filing of notice of such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about the Company. A person who is not an affiliate
at any time during the 90 days preceding a sale, and who has beneficially
owned shares for at least three years, is entitled to sell such shares under
Rule 144(k) without regard to the volume limitations, manner of sale
provisions or public information requirements.
In addition, after the Offering, there will be outstanding options to
purchase 550,000 shares of Common Stock, of which 132,500 will be fully vested
and exercisable. An additional 450,000 shares are reserved for issuance under
the Equity Compensation Plan. The Company intends to register the shares of
Common Stock issuable and reserved for issuance under the Equity Compensation
Plan as soon as practicable following the date of this Prospectus.
All directors and executive officers and certain other stockholders of the
Company who will beneficially own an aggregate 8,820,000 shares of Common
Stock upon completion of this Offering, and the Company, with certain limited
exceptions, have agreed, as described below under "Underwriting," with the
Underwriters not to offer for sale, sell or otherwise dispose of, directly or
indirectly, any shares of Common Stock for a period of 180 days from the date
of this Prospectus without the prior written consent of Lehman Brothers Inc.
Certain holders of 9,270,000 shares of Common Stock to be outstanding
immediately prior to the Offering, of which 450,000 shares are to be sold by
the Selling Stockholder in the Offering, will be entitled to certain
registration rights with respect to such shares, which registration rights
will become effective contemporaneously with the Offering. If such holders, by
exercising their registration rights, cause a large number of shares to be
registered and sold in the public market, such sales could have an adverse
effect on the market price for the Common Stock. Such rights may not be
exercised prior to the expiration of 180 days from the date of this
Prospectus. See "Description of Capital Stock--Registration Rights."
51
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement, of which this Prospectus is a part, the Underwriters named below
(the "Underwriters"), for whom Lehman Brothers Inc. and Sands Brothers & Co.,
Ltd. are acting as representatives (the "Representatives"), have severally
agreed to purchase from the Company and the Selling Stockholder, and the
Company and the Selling Stockholder have agreed to sell to each Underwriter,
the aggregate number of shares of Common Stock set forth opposite the name of
each such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Lehman Brothers Inc. .............................................. 945,000
Sands Brothers & Co., Ltd. ........................................ 945,000
Alex. Brown & Sons Incorporated.................................... 80,000
Cowen & Company.................................................... 80,000
A.G. Edwards & Sons, Inc. ......................................... 80,000
Montgomery Securities.............................................. 80,000
Oppenheimer & Co., Inc............................................. 80,000
UBS Securities LLC................................................. 80,000
Wasserstein Perella Securities, Inc................................ 80,000
Equitable Securities Corporation................................... 50,000
Interstate/Johnson Lane Corporation................................ 50,000
M.H. Meyerson & Co., Inc........................................... 50,000
Needham & Company, Inc. ........................................... 50,000
Pennsylvania Merchant Group Ltd ................................... 50,000
Piper Jaffray Inc.................................................. 50,000
Principal Financial Securities, Inc. .............................. 50,000
Scott & Stringfellow, Inc.......................................... 50,000
Starr Securities, Inc. ............................................ 50,000
Tucker Anthony Incorporated........................................ 50,000
Wheat, First Securities, Inc....................................... 50,000
---------
Total.......................................................... 3,000,000
=========
</TABLE>
The Company and the Selling Stockholder have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public at the initial public offering price set forth on the
cover page hereof, and to certain dealers at such initial public offering
price less a selling concession not in excess of $0.30 per share. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $0.10 per share to certain other Underwriters or to certain other
brokers or dealers. After the initial offering to the public, the offering
price and other selling terms may be changed by the Representatives.
The Underwriting Agreement provides that the obligations of the Underwriters
to pay for and accept delivery of the shares of Common Stock offered hereby
are subject to approval of certain legal matters by counsel and to certain
other conditions, including the condition that no stop order suspending the
effectiveness of the Registration Statement is in effect and no proceedings
for such purpose are pending or threatened by the Securities and Exchange
Commission (the "Commission") and that there has been no material adverse
change or any development involving a prospective material adverse change in
the condition of the Company from that set forth in the Registration Statement
otherwise than as set forth or contemplated in this Prospectus, and that
certain certificates, opinions and letters have been received from the Company
and its counsel, the Selling Stockholder and its counsel and independent
auditors. The Underwriters are obligated to take and pay for all of the above
shares of Common Stock if any such shares are taken.
The Company, the Selling Stockholder and the Underwriters have agreed in the
Underwriting Agreement to indemnify each other against certain liabilities,
including liabilities under the Securities Act.
52
<PAGE>
The Company has granted to the Underwriters an option to purchase up to an
additional 450,000 shares of Common Stock, exercisable solely to cover over-
allotments, at the initial public offering price, less the underwriting
discounts and commissions shown on the cover page of this Prospectus. Such
option may be exercised at any time until 30 days after the date of the
Underwriting Agreement. To the extent that the option is exercised, each
Underwriter will be committed to purchase a number of the additional shares of
Common Stock proportionate to each Underwriter's initial commitment as
indicated in the preceding table.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
All directors and executive officers and certain other stockholders of the
Company who will beneficially own an aggregate 8,820,000 shares of Common
Stock upon completion of this Offering have agreed not to offer for sale, sell
or otherwise dispose of (or enter into any transaction that is designed to
result in the disposition of), directly or indirectly, other than to the
Underwriters pursuant to the Underwriting Agreement, shares of Common Stock or
any securities convertible into or exchangeable or exercisable for Common
Stock, for a period of 180 days from the date of this Prospectus without the
prior written consent of Lehman Brothers Inc. Except for the Common Stock to
be sold in the Offering, the Company has agreed, with certain limited
exceptions relating to the grant of options and issuance of Common Stock
pursuant to the Equity Compensation Plan, not to offer for sale, sell or
otherwise dispose of (or enter into any transaction or device which is
designed to, or expected to, result in the disposition at any time in the
future of), directly or indirectly, any shares of Common Stock or other
capital stock or any securities convertible into or exchangeable or
exercisable for, or any rights to acquire, Common Stock or other capital
stock, prior to the expiration of 180 days from the date of this Prospectus
without the prior written consent of Lehman Brothers Inc.
At the request of the Company, the Underwriters have reserved 225,000 shares
of Common Stock for sale at the initial public offering price to certain of
the Company's employees and certain other persons. The number of shares of
Common Stock available for sale to the general public will be reduced to the
extent these persons purchase such reserved shares. If such reserved shares
are not purchased by such employees and other persons, they will be offered by
the Underwriters to the public upon the same terms and conditions set forth in
this Prospectus.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price has been determined through negotiations
between the Company and the Representatives. The material factors considered
in determining the initial public offering price of the Common Stock, in
addition to the prevailing market conditions, were the Company's historical
performance, capital structure, estimates of the business potential and
earnings prospects of the Company, an assessment of the Company's management
and consideration of the above factors in relation to market values of
companies in related businesses.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The financial statements as of December 31, 1994 and 1995 and for each of
the three years in the period ended December 31, 1995 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
53
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are summaries of the material provisions thereof. For
further information with respect to the Company and the Common Stock,
reference is made to the Registration Statement and the exhibits and schedules
filed as a part thereof. Copies of each contract or document referred to
herein are filed as exhibits to the Registration Statement. Copies of the
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the Commission's principal office in Washington,
D.C. or obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
REPORTS TO SECURITY HOLDERS
The Company intends to distribute to its stockholders annual reports
containing audited financial statements and will make available copies of
quarterly reports for the first three quarters of each fiscal year containing
unaudited interim financial information.
54
<PAGE>
TRI-POINT MEDICAL L.P.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Financial Statements:
Balance Sheet as of December 31, 1994 and 1995 and as of June 30, 1996
(unaudited) and Pro Forma Balance Sheet as of June 30, 1996
(unaudited)............................................................ F-3
Statement of Operations for the years ended December 31, 1993, 1994 and
1995 and for the six month periods ended June 30, 1995 and 1996
(unaudited)............................................................ F-4
Statement of Partners' Capital (Deficit) for the years ended December
31, 1993, 1994 and 1995 and for the six month period ended June 30,
1996 (unaudited)....................................................... F-5
Statement of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and for the six month periods ended June 30, 1995 and 1996
(unaudited)............................................................ F-6
Notes to Financial Statements........................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Tri-Point Medical L.P.
In our opinion, the accompanying balance sheet and the related statements of
operations, of partners' capital (deficit) and of cash flows present fairly,
in all material respects, the financial position of Tri-Point Medical L.P.
(the Partnership) at December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership'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.
Price Waterhouse LLP
Raleigh, North Carolina
June 3, 1996
F-2
<PAGE>
TRI-POINT MEDICAL L.P.
(A DELAWARE LIMITED PARTNERSHIP)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- JUNE 30, 1996
1994 1995 1996 PRO FORMA
----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS (NOTE 6)
Current assets:
Cash...................... $ 30,038 $ 19,698 $2,308,807 $2,308,807
Accounts receivable (Note
8)....................... 129,710 266,253 15,607 15,607
Inventories (Note 4)...... 119,319 119,158 141,075 141,075
Prepaid expenses.......... 22,625 26,918 639,548 639,548
----------- ------------ ---------- ----------
Total current assets.... 301,692 432,027 3,105,037 3,105,037
----------- ------------ ---------- ----------
Furniture, fixtures and
equipment (Note 3)......... 433,123 417,887 510,817 510,817
Less--accumulated
depreciation and
amortization............... (148,724) (142,083) (155,241) (155,241)
----------- ------------ ---------- ----------
284,399 275,804 355,576 355,576
----------- ------------ ---------- ----------
Intangible assets, net of
accumulated amortization of
$295,063 and $326,441 at
December 31, 1994 and 1995,
respectively, and $331,678
at June 30, 1996 (Note 5).. 198,001 200,164 225,248 225,248
----------- ------------ ---------- ----------
Total assets............ $ 784,092 $ 907,995 $3,685,861 $3,685,861
=========== ============ ========== ==========
LIABILITIES AND PARTNERS'
CAPITAL (DEFICIT)
Current liabilities:
Accounts payable.......... $ 184,886 $ 513,717 $1,096,556 $1,096,556
Accrued payroll and
vacation................. 54,353 28,023 69,280 69,280
Deferred revenue (Note
10)...................... -- 77,794 1,069,358 1,069,358
Payable to CRX Medical,
Inc. and Caratec, L.L.C.
(Note 2)................. 70,263 195,275 454 454
Capital lease obligations
(Note 7)................. 2,012 11,956 6,155 6,155
----------- ------------ ---------- ----------
Total current
liabilities............ 311,514 826,765 2,241,803 2,241,803
Notes payable to Sharpoint
Development Corporation
(Notes 6 and 10)........... 7,846,800 10,062,300 -- --
Accrued interest payable to
Sharpoint Development
Corporation (Notes 6 and
10)........................ -- 842,857 -- --
Capital lease obligations
(Note 7)................... 3,563 25,899 25,899 25,899
----------- ------------ ---------- ----------
Total liabilities....... 8,161,877 11,757,821 2,267,702 2,267,702
----------- ------------ ---------- ----------
Partners' capital
(deficit).................. (7,377,785) (10,849,826) 1,418,159 --
Common stock, $.01 par
value, 35,000,000 shares
authorized, 9,600,000
shares issued and
outstanding................ -- -- -- 96,000
Additional paid-in capital.. -- -- -- 1,322,159
----------- ------------ ---------- ----------
Total partners' capital
(deficit) and
stockholders' equity... (7,377,785) (10,849,826) 1,418,159 1,418,159
----------- ------------ ---------- ----------
Total liabilities and
partners' capital
(deficit) and
stockholders' equity... $ 784,092 $ 907,995 $3,685,861 $3,685,861
=========== ============ ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
TRI-POINT MEDICAL L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Product sales (Note 8).. $ 1,047,868 $ 1,478,109 $ 1,380,081 $ 617,635 $ 192,703
License and product
development revenues
(Notes 8 and 10)....... 161,551 25,000 -- -- 3,500,000
----------- ----------- ----------- ----------- ----------
Total revenues........ 1,209,419 1,503,109 1,380,081 617,635 3,692,703
----------- ----------- ----------- ----------- ----------
Cost of products sold... 366,239 527,644 530,546 260,788 173,291
----------- ----------- ----------- ----------- ----------
Gross profit.......... 843,180 975,465 849,535 356,847 3,519,412
----------- ----------- ----------- ----------- ----------
Research, development
and regulatory affairs
expenses............... 862,758 1,230,771 1,637,241 747,906 1,339,308
Selling and
administrative expenses
(Note 1)............... 1,036,900 1,366,603 5,088,979 628,085 1,014,091
Payments to CRX Medical,
Inc. and Caratec,
L.L.C. ................ 150,000 150,000 250,000 175,000 287,908
----------- ----------- ----------- ----------- ----------
Total operating
expenses............. 2,049,658 2,747,374 6,976,220 1,550,991 2,641,307
----------- ----------- ----------- ----------- ----------
Income (loss) from
operations............. (1,206,478) (1,771,909) (6,126,685) (1,194,144) 878,105
Interest expense to
Sharpoint Development
Corporation, net of
$46,543 interest income
for the six month
period ended June 30,
1996................... 341,559 442,783 845,356 396,194 93,336
----------- ----------- ----------- ----------- ----------
Net income (loss)....... $(1,548,037) $(2,214,692) $(6,972,041) $(1,590,338) $ 784,769
=========== =========== =========== =========== ==========
Unaudited pro forma data
(Note 9):
Net income (loss) per
common share........... $ (.69) $ .08
=========== ==========
Weighted average common
shares outstanding..... 10,150,000 10,150,000
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
TRI-POINT MEDICAL L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTH PERIOD ENDED
JUNE 30, 1996
(UNAUDITED) (NOTE 1)
<TABLE>
<CAPTION>
PARTNERS' CAPITAL (DEFICIT)
---------------------------------------------
GENERAL PARTNER LIMITED PARTNERS
--------------- -----------------------------
SHARPOINT
DEVELOPMENT
CORPORATION EMPLOYEES CRX MEDICAL, INC. TOTAL
--------------- ----------- ----------------- ------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1993................... $ (3,616,056) -- $1,000 $ (3,615,056)
Net loss................ (1,548,037) -- -- (1,548,037)
------------ ----------- ------ ------------
BALANCE AT DECEMBER 31,
1993................... (5,164,093) -- 1,000 (5,163,093)
Net loss................ (2,214,692) -- -- (2,214,692)
------------ ----------- ------ ------------
BALANCE AT DECEMBER 31,
1994................... (7,378,785) -- 1,000 (7,377,785)
Capital contribution.... -- $ 3,500,000 -- 3,500,000
Net loss................ (6,972,041) -- -- (6,972,041)
------------ ----------- ------ ------------
BALANCE AT DECEMBER 31,
1995................... (14,350,826) 3,500,000 1,000 (10,849,826)
Conversion of debt and
accrued interest to
partners' capital (Note
9) (unaudited)......... 11,483,216 -- -- 11,483,216
Net income (unaudited).. 557,185 227,584 -- 784,769
------------ ----------- ------ ------------
BALANCE AT JUNE 30, 1996
(UNAUDITED)............ $ (2,310,425) $ 3,727,584 $1,000 $ 1,418,159
============ =========== ====== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
TRI-POINT MEDICAL L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:--
Net income (loss)...... $(1,548,037) $(2,214,692) $(6,972,041) $(1,590,338) $ 784,769
Adjustments to
reconcile net income
(loss) to net cash
provided (used) by
operating activities:
Amortization expense.. 65,438 66,555 31,378 33,547 5,237
Depreciation expense.. 41,984 43,817 51,208 23,474 24,696
Employee Limited
Partnership
interest............. -- -- 3,500,000 -- --
Net loss on disposals
of fixed assets...... 18,302 4,129 55,161 -- 12,051
Net loss on disposals
of intangibles....... -- -- 13,559 -- --
Change in accounts
receivable........... (30,434) 57,659 (136,543) 110,850 250,646
Change in
inventories.......... (53,326) (23,223) 161 25,515 (21,917)
Change in prepaid
expenses............. 7,745 (13,736) (4,293) 7,786 (612,630)
Change in accounts
payable and accrued
expenses............. (32,813) 126,648 302,501 (41,912) 624,096
Change in deferred
revenue.............. -- -- 77,794 -- 991,564
Change in accrued
payable to CRX
Medical, Inc. and
Caratec, L.L.C. ..... (36,512) (24,026) 125,012 74,904 (194,820)
Change in accrued
interest due to
Sharpoint Development
Corporation.......... 341,693 442,775 842,857 395,169 138,058
----------- ----------- ----------- ----------- ----------
Net cash provided (used)
by operating
activities............. (1,225,960) (1,534,094) (2,113,246) (961,005) 2,001,750
----------- ----------- ----------- ----------- ----------
Cash flows from
investing activities:
Additions to furniture,
fixtures and
equipment............. (60,186) (69,771) (97,774) (53,559) (116,519)
Additions to intangible
assets................ (18,583) (66,424) (47,100) (13,109) (30,321)
----------- ----------- ----------- ----------- ----------
Net cash used by
investing activities... (78,769) (136,195) (144,874) (66,668) (146,840)
----------- ----------- ----------- ----------- ----------
Cash flows from
financing activities:
Proceeds from notes
payable to Sharpoint
Development
Corporation........... 1,290,000 1,683,500 2,215,500 1,020,001 440,000
Change in capital lease
obligation............ -- 5,575 32,280 -- (5,801)
----------- ----------- ----------- ----------- ----------
Net cash provided by
financing activities... 1,290,000 1,689,075 2,247,780 1,020,001 434,199
----------- ----------- ----------- ----------- ----------
Increase (decrease) in
cash................... (14,729) 18,786 (10,340) (7,672) 2,289,109
Cash at beginning of
period................. 25,981 11,252 30,038 30,038 19,698
----------- ----------- ----------- ----------- ----------
Cash at end of period... $ 11,252 $ 30,038 $ 19,698 $ 22,366 $2,308,807
=========== =========== =========== =========== ==========
</TABLE>
Non-Cash Transactions:
On December 31, 1994, accrued interest of $931,641 was converted to long-
term debt.
On December 31, 1995, the partnership agreement was amended to admit a
new class of limited partners. The fair value of the partnership
interest was reflected as a contribution to partners' capital.
On March 29, 1996, notes payable of $10,502,301 and related accrued
interest of $980,915 was converted to partners' capital.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
TRI-POINT MEDICAL L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Tri-Point Medical L.P. (the Partnership) was organized on May 10, 1990 to
develop, commercialize and manufacture, principally in the U.S., a line of
medical adhesives (cyanoacrylates) used primarily for human and veterinary
wound closure. Sharpoint Development Corporation (SDC), the general partner,
contributed $350,000 in cash for its general partner interest. SDC has
provided financing for the Partnership through various notes payable (Note 6).
The Partnership purchased the assets and product technology of CRX Medical,
Inc. (CRX) in 1990 for $700,000 and a limited partnership interest. The
purchase price was allocated as follows:
<TABLE>
<S> <C>
Inventories...................................................... $ 37,351
Property and equipment........................................... 248,637
Patents and trademarks........................................... 281,500
Non-compete agreements........................................... 100,000
Organization costs............................................... 10,000
Goodwill......................................................... 15,000
Prepaid expense.................................................. 7,512
--------
$700,000
========
</TABLE>
CRX contributed $1,000 for its limited partnership interest. The partnership
agreement requires that a percentage of the proceeds received by the
Partnership or its successors upon the sale of all or substantially all of the
net assets of the Partnership or its successors be paid to CRX (see unaudited
pro forma information in Note 9). The partnership agreement also stipulates
that CRX will receive payments based on net sales volume and gross margin,
subject to annual minimum amounts (see related parties section in Note 2).
On December 31, 1995, the partnership agreement was amended to admit certain
employee limited partners as a new class of limited partners who are entitled
to receive 28.5% of partnership income after payments to CRX. The general
partner receives the remainder of the income and all losses of the
Partnership. For financial statement purposes, compensation expense classified
as selling and administrative expenses and contributed capital in the amount
of $3,500,000 were recognized as of December 31, 1995 representing the
estimated fair value of the partnership interest granted to the employee
limited partners.
During 1995, approximately ninety-five percent of the Partnership's revenues
were from domestic sales; the remaining five percent was earned from the
western European market. Human products generated approximately seventy-five
percent of revenues while veterinary products comprised the remaining twenty-
five percent.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Furniture, fixtures and equipment
Furniture, fixtures and equipment are stated at cost. Depreciation expense
is computed using the straight-line method over estimated useful lives ranging
between four and ten years. Expenditures for repairs and maintenance are
charged to expense as incurred.
F-7
<PAGE>
TRI-POINT MEDICAL L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Intangible assets
Amounts incurred to secure patents and the estimated fair value of
registered patents acquired from CRX are capitalized and amortized over the
remaining life of the patent on a straight-line basis. Costs are capitalized
until either the related patent is accepted, in which case it is amortized, or
it is rejected and written off. Other intangible assets acquired from CRX were
amortized over a five year life on a straight-line basis.
Costs associated with the organization and formation of the Partnership,
primarily legal costs, were capitalized and amortized over a five year period.
Income taxes
No provision for federal or state income taxes is necessary in the financial
statements of the Partnership for the years ended December 31, 1993, 1994 or
1995 because, as a partnership, it is not subject to federal or state income
taxes and the tax effect of its activities accrues to the partners. A
provision for federal or state income tax for the six months ended June 30,
1996 is not considered necessary since Tri-Point Medical Corporation (Note 10)
does not expect to have a tax liability for the full year ending December 31,
1996. The Partnership's results of operations for the years ended December 31,
1993, 1994 and 1995 reflect a net loss for each period. However, if the
Partnership presented a pro forma tax provision or benefit as if it had been a
taxable entity since January 1, 1993 with the losses reported in those
periods, the deferred tax asset that might be recorded as a result of net
operating losses under Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," would be offset by a related valuation
allowance because realization of the asset is not probable. Accordingly, no
pro forma tax provision or benefit would be recognized for these periods.
The tax returns of the Partnership are subject to examination by federal and
state tax authorities. If such examinations occur and result in changes with
respect to the Partnership's qualification or to distributable Partnership
income or loss, the tax liability of the respective partners would be changed
accordingly.
Significant differences between the Partnership's financial statement basis
and the tax basis are as follows:
The financial statement basis loss exceeds the tax basis loss by
approximately $3,900,000 for the year ended December 31, 1995, which is
primarily due to the non-deductibility of certain expenses for tax
purposes.
The Partnership's net assets on a tax basis exceed those reported under
the financial statement basis by approximately $200,000 at December 31,
1995. The difference can be attributed to temporary tax deduction
differences.
The partners' capital account in total is the same for both financial
statement and tax reporting.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Related parties
The Partnership had notes payable to its general partner, SDC, until March
29, 1996. Details of the debt agreements are summarized in Note 6.
Beginning in 1992, CRX, a limited partner, received payments of 4% of
adjusted net sales of veterinary products. CRX also received a minimum of 2%
and a maximum of 8% of adjusted net sales of human products depending on the
gross margin on those sales. At the end of 1992, 1993 and 1994, such
percentage-based payments to CRX were less than $150,000, the stipulated
minimum, and the difference was paid at that time.
F-8
<PAGE>
TRI-POINT MEDICAL L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
For each year thereafter, such payments to CRX were required to be no less
than $250,000 until the Partnership terminates in 2020 (see unaudited pro
forma information in Note 9). These payments were expensed in the period
earned.
For tax purposes, CRX was allocated net income up to the amount of payments
received as described above. The general partner and employee limited partners
were allocated the remainder of any net income after allocation to CRX. The
general partner is allocated 100% of all losses.
During 1993, 1994 and 1995, the Partnership paid a consulting fee to an
individual who is also a shareholder of CRX amounting to $108,660, $116,390
and $20,510, respectively.
Fair value of financial instruments
As required by Statement of Financial Accounting Standards No. 107,
"Disclosure About Fair Value of Financial Instruments," the estimated fair
value of current assets and current liabilities approximates the financial
statement carrying value at December 31, 1995.
The estimated fair value of the notes payable to SDC cannot be readily
determined since the notes are payable to a related party who is also the
general partner. See Note 6 for the carrying amount, interest rate and
maturity dates of the notes payable.
Interim financial information
Interim financial information for the six month periods ended June 30, 1995
and 1996 included herein is unaudited; however, in the opinion of the
Partnership, the interim financial information includes all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the results for the interim periods. The results of operations
for the six months ended June 30, 1996 are not indicative of the results to be
expected for the year.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"), was issued in March 1995. SFAS 121 requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity
be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Partnership adopted SFAS 121 effective January 1, 1996; the adoption of this
statement did not have a material impact on its results of operations or
financial position.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), was issued in October 1995. SFAS 123 gives
companies the option to adopt the fair value method for expense recognition of
employee stock options and stock-based awards or to continue to account for
such items using the intrinsic value method as outlined under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), with pro forma disclosures of net income and net income per share
as if the fair value method had been applied. Tri-Point Medical Corporation
intends to continue to apply APB 25 for future stock options and stock-based
awards; consequently, SFAS 123 will not have an impact on the Company's
results of operations or financial positions.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
F-9
<PAGE>
TRI-POINT MEDICAL L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment includes the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment..................... $ 129,406 $ 134,327 $ 168,073
Machinery and equipment..................... 269,442 208,273 259,649
Leasehold improvements...................... 27,609 27,405 35,213
Machinery and equipment under capital leases
(Note 7)................................... 6,666 47,882 47,882
--------- --------- ---------
433,123 417,887 510,817
Accumulated depreciation and amortization... (148,724) (142,083) (155,241)
--------- --------- ---------
$ 284,399 $ 275,804 $ 355,576
========= ========= =========
</TABLE>
4. INVENTORY
Inventory includes the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Packaging......................................... $ 42,205 $ 34,574 $ 41,386
Raw materials..................................... 22,624 22,840 25,564
Work-in-process................................... 32,103 45,408 46,895
Finished goods.................................... 22,387 16,336 27,230
-------- -------- --------
$119,319 $119,158 $141,075
======== ======== ========
</TABLE>
5. INTANGIBLES
Intangible assets include the following:
<TABLE>
<CAPTION>
NON-COMPETE ORGANIZATION
PATENTS TRADEMARKS AGREEMENTS COSTS GOODWILL TOTAL
-------- ---------- ----------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net book value at
January 1, 1994........ $134,688 $10,889 $ 26,667 $ 21,805 $ 4,083 $198,132
1994 additions.......... 66,424 -- -- -- -- 66,424
1994 amortization....... (19,244) (8,000) (20,000) (16,311) (3,000) (66,555)
-------- ------- -------- -------- ------- --------
Net book value at
December 31, 1994...... 181,868 2,889 6,667 5,494 1,083 198,001
1995 additions.......... 47,100 -- -- -- -- 47,100
1995 disposals.......... (13,559) -- -- -- -- (13,559)
1995 amortization....... (15,245) (2,889) (6,667) (5,494) (1,083) (31,378)
-------- ------- -------- -------- ------- --------
Net book value at
December 31, 1995...... 200,164 -- -- -- -- 200,164
1996 additions (unau-
dited)................. 30,321 -- -- -- -- 30,321
1996 amortization (unau-
dited)................. (5,237) -- -- -- -- (5,237)
-------- ------- -------- -------- ------- --------
Net book value at June
30, 1996 (unaudited)... $225,248 -- -- -- -- $225,248
======== ======= ======== ======== ======= ========
Amortization period in
years.................. 5-17 5 5 5 5
</TABLE>
F-10
<PAGE>
TRI-POINT MEDICAL L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. NOTES PAYABLE AND RELATED ACCRUED INTEREST
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to Sharpoint Development
Corporation; interest payable
annually on December 31 at 9.5%,
principal payable on December 31,
1997; secured by substantially all
Partnership assets.................. $ 7,846,800 $ 7,846,800 --
Various notes payable to Sharpoint
Development Corporation; interest
payable annually on December 31 at
various rates ranging from 9.5% to
9.75%, principal payable on various
dates between January 1998 and
December 1998; secured by
substantially all Partnership
assets.............................. -- 2,215,500 --
----------- ----------- ------
$ 7,846,800 $10,062,300 --
=========== =========== ======
</TABLE>
As of December 31, 1995, the Partnership had not paid any of the accrued
interest; however, SDC has provided a waiver of this requirement until March
15, 1997. On March 29, 1996, notes payable of $10,502,301 and accrued interest
of $980,915 were converted to partners' capital by SDC.
7. LEASES
The Partnership leases office and manufacturing space and equipment under
operating leases which expire at various dates through 1998. Rent expense
related to these leases was approximately $88,000, $98,000 and $93,000 for
1993, 1994 and 1995, respectively. Rent expense for the six months ended June
30, 1995 and 1996 was approximately $52,442 and $59,513, respectively.
The Partnership leases equipment under capital leases. The lease terms are
four years and the Partnership has the option to purchase the equipment at the
end of the leases.
Future minimum lease payments under noncancellable capital leases and
operating leases with initial or remaining terms of one year or more are as
follows at December 31, 1995:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996...................................................... $15,246 $119,302
1997...................................................... 14,078 125,271
1998...................................................... 12,436 80,953
1999...................................................... 2,206 2,569
------- --------
Total minimum lease payments.............................. 43,966 $328,095
========
Less amount representing interest......................... (6,111)
-------
Present value of future minimum lease payments............ $37,855
=======
</TABLE>
F-11
<PAGE>
TRI-POINT MEDICAL L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. MAJOR CUSTOMERS AND COMMITMENTS
A seven year marketing agreement with Farnam Companies, Inc. (Farnam) was
signed in December 1992. This agreement gives Farnam exclusive rights to
market, sell and distribute the Partnership's veterinary products in North
America.
Revenues from Farnam aggregated approximately $402,000 or 33%, $400,000 or
27% and $370,000 or 27% of total revenue for the years ended December 31,
1993, 1994 and 1995, respectively, and approximately $202,000 or 33% and
$188,000 or 5% of total revenue for the six months ended June 30, 1995 and
1996, respectively.
The Partnership has a non-exclusive supply agreement with Procter &
Gamble/ALZA, Partners for Oral Health Care (Procter & Gamble/ALZA) for
Octyldent, an adhesive used in conjunction with a periodontal drug delivery
product. Net revenues under this agreement amounted to approximately $-0-,
$1,110,000 or 73% and $1,010,000 or 73% of total revenues during 1993, 1994
and 1995, respectively, and approximately $416,000 or 67% and $5,000 or .1% of
total revenues for the six months ended June 30, 1995 and 1996, respectively.
Accounts receivable related to these revenues were approximately $45,000 and
$243,500 at December 31, 1994 and 1995, respectively. In March 1994, the
Partnership entered into an agreement with On-Site Therapeutics, Inc. (On-
Site) for exclusive services to identify purchasers of Octyldent. Under this
agreement, On-Site receives a 5% royalty on net sales of Octyldent up to a
cumulative maximum royalty amount of $1,500,000. Amounts paid during 1993,
1994 and 1995 were $375, $55,675 and $50,686, respectively, and $21,049 and
$50 for the six months ended June 30, 1995 and 1996, respectively.
Two customers other than Farnam or Procter & Gamble/ALZA accounted for
approximately $250,000 or 20% of total revenues during 1993.
9. UNAUDITED PRO FORMA INFORMATION
On May 31, 1996, a contribution and exchange agreement was executed among
SDC, assignees of SDC's economic interest in the Partnership, Caratec, L.L.C.
(Caratec), the successor to CRX's limited partnership interest, and the
employee limited partners whereby each of these parties exchanged their
Partnership interests for shares of Common Stock of the Company (see Note 10),
subject to the completion of an initial public offering by the Company. Under
this agreement, individuals and entities representing SDC, Caratec and the
employee limited partners will receive 5,453,750, 1,776,250 and 2,370,000
shares of Common Stock of the Company, respectively. In conjunction with the
issuance to Caratec of Common Stock in the Company, Caratec has agreed to
surrender its rights to receive a percentage of sales-based payments (Note 2)
and a percentage of capital transaction proceeds (Note 1). The Company will
record a non-cash expense related to this issuance of $14,210,000 which will
be offset by a credit to additional paid-in capital.
Pro forma net income (loss) per share includes the effect of the exchange
and Common Stock equivalents for stock options granted at prices below the
anticipated initial public offering price per share in the twelve months
preceding the offering as if outstanding for all periods presented.
A tax provision related to the unaudited pro forma results of operations for
the six month period ended June 30, 1996 is not considered necessary because
Tri-Point Medical Corporation does not expect to have a tax liability for the
full year ending December 31, 1996.
10. SUBSEQUENT EVENTS
Tri-Point Medical Corporation (the Company) was incorporated on February 20,
1996 as a wholly-owned subsidiary of Tri-Point Medical L.P. and substantially
all of the assets of Tri-Point Medical L.P. were transferred at net book value
to the Company as of March 1, 1996. The Company also assumed all liabilities
of Tri-Point Medical L.P. except for the indebtedness to SDC and accrued
interest thereon.
F-12
<PAGE>
TRI-POINT MEDICAL L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On March 20, 1996, the Company entered into an eight-year exclusive supply
and distribution rights agreement with Ethicon, Inc. (Ethicon), a subsidiary
of Johnson & Johnson, whereby the Company will supply Ethicon with a product
for human topical wound closure. In consideration, Ethicon paid the Company
$4,500,000 and agreed to pay additional amounts upon written notification of
U.S. regulatory approval for the product. Of the $4,500,000, $3,500,000 is a
non-refundable licensing fee and $1,000,000 will be offset against either
future product purchases or royalties to be paid by Ethicon on product sales
and has been classified as deferred revenue on the accompanying balance sheet.
Ethicon also agreed to advance the Company additional amounts for direct costs
incurred in connection with clinical studies of the product, which amounts
will be credited against future royalties to be paid by Ethicon. Upon U.S. or
European Community approval of the product, Ethicon is obligated to purchase
certain minimum quantities annually at a predetermined price based on average
selling prices.
On March 29, 1996, notes payable and related accrued interest to SDC in the
amounts of $10,502,301 and $980,915, respectively, were contributed to
partners' capital.
The Company entered into employment agreements with four officers in May
1996 which provide for aggregate annual base compensation of approximately
$580,000 plus performance-based bonuses. The term of each agreement is from
May 1, 1996 to May 31, 1999, with automatic one-year extensions unless 60
days' prior notice is given by either party.
In May 1996 the Company entered into a five-year agreement with a consultant
which provides for annual compensation of $120,000 and includes a grant of
options for 50,000 shares of Common Stock under the Equity Compensation Plan.
On May 28, 1996, the Company adopted an Equity Compensation Plan which
provides for grants of stock options to selected officers, directors,
employees and consultants. The Company expects to grant options for 550,000
shares of Common Stock in connection with a planned 1996 initial public
offering of Common Stock which will result in compensation expense because
such options will have exercise prices below market value. Based upon the
expected vesting schedules, such expense will aggregate approximately
$1,500,000 with $323,000 recognized upon consummation of the offering,
$304,000 per year over the first two years and $285,000 per year over the next
two years.
F-13
<PAGE>
TraumaSeal and Nexacryl will not be
commercially available in the U.S. until
FDA approvals are received. There is no [TRI-POINT MEDICAL
assurance of such approvals. CORPORATION LOGO]
EMERGENCY ROOM
TRAUMASEAL
[PHOTO OF CHILD [PHOTO OF TraumaSeal closes wounds with
WITH PARENT AT APPLICATION OF an easily-applied liquid ad-
EMERGENCY ROOM] TRAUMASEAL] hesive. TraumaSeal does not
require injections of anes-
thetics, suturing procedures,
adhesive tape or antibiotic
ointment. Patients do not
have to make return visits to
have stitches removed.
TRAUMASEAL OPERATING ROOM
The Company is in-
vestigating the use
of TraumaSeal for
the closure of sur- [PHOTO OF [PHOTO OF
gical wounds. The OPERATING ROOM] APPLICATION OF
Company believes TRAUMASEAL]
that an adhesive
surgical closure
can reduce pain and
discomfort for pa-
tients--and trans-
late into less time
spent in the oper-
ating room for pa-
tients and medical
staff.
[PHOTO OF DOCTOR]
PERIODONTAL
OCTYLDENT
Tri-Point's
Octyldent periodon-
tal adhesive is a
topical sealant
used in conjunction
with a site spe-
cific sustained re- [PHOTO OF [PHOTO OF
lease anti-bacte- PERIODONTIST APPLICATION OF
rial drug therapy WITH PATIENT] OCTYLDENT]
to treat adult
periodontal dis-
ease.
OPHTHALMOLOGY
NEXACRYL
Nexacryl is a topi-
cal sealant to be
used in the repair
of corneal ulcers
and abrasions.
[PHOTO OF [PHOTO OF
APPLICATION OF OPHTHALMOLOGIST
NEXACRYL] WITH PATIENT]
Various medical supplies depicted are not products of the Company.
<PAGE>
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- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 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............................................................... 38
Certain Transactions..................................................... 44
Prior Partnership Status................................................. 45
Principal and Selling Stockholders....................................... 46
Description of Capital Stock............................................. 48
Shares Eligible for Future Sale.......................................... 51
Underwriting............................................................. 52
Legal Matters............................................................ 53
Experts.................................................................. 53
Additional Information................................................... 54
Reports to Security Holders.............................................. 54
Index to Financial Statements............................................ F-1
</TABLE>
-----------------
UNTIL OCTOBER 20, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEAL-
ERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN AD-
DITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,000,000 SHARES
[LOGO OF TRI-POINT MEDICAL CORPORATION]
COMMON STOCK
-----------------
PROSPECTUS
September 25, 1996
-----------------
LEHMAN BROTHERS
SANDS BROTHERS & CO., LTD.
- -------------------------------------------------------------------------------
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