<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 20, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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XOMED SURGICAL PRODUCTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3841 06-1393528
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NO.)
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
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6743 SOUTHPOINT DRIVE NORTH
JACKSONVILLE, FLORIDA 32216
(904) 296-9600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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JAMES T. TREACE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
XOMED SURGICAL PRODUCTS, INC.
6743 SOUTHPOINT DRIVE NORTH
JACKSONVILLE, FLORIDA 32216
(904) 296-9600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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Copies to:
MICHAEL A. SCHWARTZ, ESQ. BRUCE K. DALLAS, ESQ.
WILLKIE FARR & GALLAGHER DAVIS POLK & WARDWELL
ONE CITICORP CENTER 450 LEXINGTON AVENUE
153 EAST 53RD STREET NEW YORK, NEW YORK 10017
NEW YORK, NEW YORK 10022 (212) 450-4000
(212) 821-8000 ---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Class A Common Stock,
$.01 par value(3)...... 2,875,000 shares $21 $60,375,000 $20,819
</TABLE>
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(1) Includes 375,000 shares issuable upon exercise of the Underwriters' over-
allotment option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457.
(3) The Company intends to change the title of this class of securities to
"Common Stock, $.01 par value" prior to the closing of this offering.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
AUGUST 20, 1996
2,500,000 Shares
[Logo]
XOMED SURGICAL PRODUCTS, INC.
Class A Common Stock
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All of the shares of Class A Common Stock offered hereby are being sold by
Xomed Surgical Products, Inc. ("Xomed" or the "Company"). Prior to this
offering, there has been no public market for the Class A Common Stock of the
Company. It is currently estimated that the initial public offering price will
be between $19.00 and $21.00 per share. See "Underwriting" for the factors to
be considered in determining the initial public offering price.
-----------
THE CLASS A COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS," PAGE 7.
-----------
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.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
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<S> <C> <C> <C>
Per Share................................. $ $ $
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Total(2).................................. $ $ $
</TABLE>
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(1) Before deducting expenses of the offering estimated at $750,000.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to 375,000 additional shares of Class A Common Stock solely to cover over-
allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares at the Price to Public shown
above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
-----------
The shares of Class A Common Stock are offered by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by them, and
subject to the right of the Underwriters to reject any order in whole or in
part. It is expected that delivery of the shares of Class A Common Stock will
be made at the offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland,
on or about , 1996.
Alex. Brown & Sons UBS Securities
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
The Company intends to distribute to its stockholders annual reports
containing audited financial statements and quarterly reports containing
unaudited interim financial information for the first three quarters of each
fiscal year of the Company.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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EndoScrub(R), NIM-2(R), NIM-2(R) XL, Laser-Shield II(R), MPS 2000(R), Redi-
Bur (R) and Skeeter(R) are registered trademarks of the Company. Wizard,
Wizard Plus, Activent, Typhoon, Sharpsite, Lightstar, Digistar Plus, XPS and
Powerforma are trademarks of the Company. This Prospectus also includes
trademarks of companies other than the Company.
[Pictures to come]
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. This Prospectus contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in "Risk Factors."
THE COMPANY
Xomed is a leading developer, manufacturer and marketer of surgical products
for use by ear, nose and throat ("ENT") specialists. The Company offers a broad
line of products in its core ENT market that includes powered tissue-removal
systems and other microendoscopy instruments, implantable devices, nerve
monitoring systems and disposable fluid-control products. The Company also
offers a line of ophthalmic and other products. For the first half of 1996,
approximately 86% of Xomed's revenues were derived from disposable or
implantable products. The Company distributes its products worldwide through a
61-person direct sales force in the U.S. and selected other countries and
through a network of 95 independent distributors. Xomed is the only major
manufacturer and marketer of ENT surgical products with a direct U.S. sales
force exclusively serving ENT specialists. Approximately 34% of Xomed's
combined net sales was derived from international markets during the first half
of 1996, as compared to 23% of its combined net sales in 1993. With over 25
years of industry experience, Xomed believes that it has established a long-
standing reputation for innovative, high-quality products and is uniquely
positioned as the only major surgical products company focused on the ENT
market.
An estimated 15,000 ENT specialists practice worldwide, of which
approximately 58% or 8,700 practice in the United States. Diseases and
conditions addressed by ENT specialists affect sizable patient populations and
include chronic sinusitis, chronic infection of the middle ear, tonsils and
adenoids, nasal and laryngeal polyps and facial tumors. Increasingly, ENT
surgeons are expanding their practice to include facial plastic and
reconstructive surgery. The Company estimates that approximately three million
ENT procedures were performed in the U.S. in 1995 and that the U.S. market for
surgical instruments, devices and supplies used by ENT specialists was
approximately $200 million in 1995, as compared with $150 million in 1992.
Xomed believes that the ENT market is beginning a conversion from
conventional surgical approaches to less-traumatic approaches that involves the
use of advanced surgical tools, such as powered tissue-removal systems and
small-diameter surgical endoscopes, thereby minimizing patient trauma and
reducing procedure times. Xomed believes that the adoption of these less-
traumatic techniques may be driven by several factors, including economic
pressures and patient demand. Minimally invasive techniques have the potential
to expand the number of ENT procedures that can be performed in lower-cost
outpatient or day surgery settings. Patient demand is likely to increase due to
the reduced morbidity and improved outcomes. Xomed believes that the conversion
in the ENT market to less-traumatic approaches will be similar to recent
conversions in the general surgery market to less invasive techniques and the
orthopaedic surgery market to powered instrumentation systems.
Xomed's objective is to enhance its position in the ENT market. The principal
elements of its strategy to meet this objective include: (i) continued focus on
the ENT market; (ii) facilitation of the ENT market's conversion to less-
traumatic approaches; (iii) emphasis on product innovation through internal
research and development; (iv) maintenance of a broad product line, with
particular emphasis on disposable and implantable products; and (v) expansion
of the Company's global distribution network.
In April 1996, Xomed acquired TreBay Medical Corporation, a microendoscopy
company ("TreBay"). The senior management of TreBay, including James T. Treace,
F. Barry Bays and Thomas E. Timbie, assumed senior management positions at
Xomed at the time of the acquisition. These executives were formerly associated
with Concept, Inc., a minimally invasive surgical products company that was
acquired by Bristol-Myers Squibb Company in 1990.
3
<PAGE>
A substantial portion of the net proceeds of this offering will be used to
redeem shares of the Company's outstanding Series C Redeemable Preferred Stock,
approximately 78% of which is held by Warburg, Pincus Investors, L.P. ("WP
Investors"). The holders of the Series C Redeemable Preferred Stock have agreed
that the shares of Series C Redeemable Preferred Stock not redeemed will be
exchanged following the closing of this offering for shares of Class A Common
Stock at the initial public offering price. Upon completion of this offering
and the subsequent exchange of shares of Series C Redeemable Preferred Stock
for shares of Class A Common Stock, WP Investors will beneficially own
approximately 48.1% of the outstanding shares of Class A Common Stock. See "Use
of Proceeds" and "Principal Stockholders."
The Company's principal executive office is located at 6743 Southpoint Drive
North, Jacksonville, Florida 32216 and its telephone number is (904) 296-9600.
RISK FACTORS
The Class A Common Stock offered hereby involves a high degree of risk. See
"Risk Factors."
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock offered................... 2,500,000 shares
Class A Common Stock to be outstanding after
the offering(1)............................... 6,879,362 shares(1)
Use of Proceeds................................ Repayment of outstanding
indebted-ness, redemption of
preferred stock and, to the
extent of an exercise of the
Underwriters' over-allotment
option, for working capital and
general corporate purposes.
Proposed Nasdaq National Market symbol......... XOMD
</TABLE>
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(1) Excludes 501,191 shares of Class A Common Stock issuable upon the exercise
of outstanding stock options having a weighted average exercise price of
$9.76 per share. An aggregate of 167,909 additional shares of Class A Common
Stock have been reserved for future grants under the Xomed Surgical Products,
Inc. 1996 Stock Option Plan (the "Stock Option Plan"). See "Management--1996
Stock Option Plan."
Except as otherwise specified, information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option and has been adjusted to
give effect to: (i) the automatic conversion upon the closing of this offering
of all outstanding shares of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock and the accrued and unpaid dividends thereon into
an aggregate of 766,991 shares of Class A Common Stock and 2,191,674 shares of
Class B Common Stock ("Non-Voting Common Stock"), respectively; (ii) the
further conversion upon the closing of this offering of all then-outstanding
shares of Non-Voting Common Stock into 2,618,451 shares of Class A Common Stock
(collectively, the "Stock Conversion"); (iii) the redemption of 239,234 shares
of Series C Redeemable Preferred Stock from the net proceeds of this offering;
and (iv) the exchange within 31 days after the closing of this offering of the
remaining 60,225 shares of Series C Redeemable Preferred Stock for 314,650
shares of Class A Common Stock, based upon an assumed initial offering price of
$20.00 per share (the "Share Exchange"). Unless the context indicates or
requires otherwise, as used in this Prospectus, the "Company" or "Xomed" means
Xomed Surgical Products, Inc. and all of its subsidiaries and their respective
predecessors.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
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JULY 1, JUNE 29,
1991 1992 1993 1994 1995 1995 1996
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<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(HISTORICAL BASIS) (1):
Sales, net............ $6,787 $8,160 $10,071 $42,475 $59,865 $29,424 $32,942
Gross profit.......... 4,167 5,803 7,195 23,242 36,690 17,819 20,252
Selling, general and
administrative
expense.............. 3,155 3,914 6,074 19,126 27,077 12,440 14,129
Research and
development expense.. 84 211 311 1,958 2,405 1,158 1,669
Amortization of
intangibles.......... 436 391 394 2,652 2,579 1,224 1,168
Write-off of acquired
research and
development (2)...... -- -- -- -- -- -- 3,612
Restructuring charges
(3).................. -- -- -- -- -- -- 3,093
Operating income
(loss) from
continuing
operations........... 492 1,287 416 (494) 4,629 2,997 (3,419)
Income (loss) from
continuing
operations........... 231 669 219 (1,555) 325 427 (2,935)
Preferred stock
dividends............ -- -- -- -- -- -- 538
Income (loss) from
continuing operations
available to common
shareholders......... $ 231 $ 669 $ 219 $(1,555) $ 325 $ 427 $(3,473)
PRO FORMA STATEMENT OF
OPERATIONS DATA (4):
Income (loss) from continuing
operations......................... $ 68 $(2,934)
Income (loss) from continuing
operations per common share
available to common shareholders
(5)................................ $ 0.01 $ (0.75)
Weighted average common shares
outstanding (5).................... 4,632 4,635
OTHER STATISTICAL DATA (COMBINED
BASIS) (1):
Sales mix:
Core ENT products.................. $36,753 $39,531 $44,567 $21,810 $26,371
Other products..................... $16,682 $15,745 $15,298 $ 7,614 $ 6,571
Total............................. $55,435 $55,276 $59,865 $29,424 $32,942
Core ENT products sales growth...... -- 2% 13% 14% 21%
Percent of sales disposables and
implants........................... 79% 83% 84% 85% 86%
Percent of sales outside of U.S. ... 23% 26% 29% 31% 34%
Gross profit percentage............. 58% 54% 61% 61% 62%
</TABLE>
<TABLE>
<CAPTION>
JUNE 29, 1996
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED (6)(7)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital.................................... $11,061 $16,248
Cost in excess of net assets acquired, net......... 47,054 47,054
Total assets....................................... 96,087 96,174
Long-term debt including Series C Redeemable Pre-
ferred Stock...................................... 60,941 12,209
Total shareholders' equity......................... 17,714 70,170
</TABLE>
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See footnotes on following page.
5
<PAGE>
(1) The statement of operations data includes the results of operations of
Xomed-Treace, Inc. since the date of its acquisition by the Company in
April 1994. Other statistical data is presented on a combined basis by
combining the historical data of the Company with that of Xomed-Treace,
Inc. for the periods prior to such acquisition. No purchase accounting
adjustments have been reflected in the combined periods prior to
acquisition.
(2) The Company's acquisition of TreBay in April 1996 was accounted for under
the purchase method of accounting. Accordingly, the purchase price of
approximately $6.6 million was allocated to the individual TreBay assets
acquired and liabilities assumed, based upon their respective fair values
at the date of acquisition. The transaction resulted in cost in excess of
net assets acquired of approximately $4.4 million, of which $3.6 million
was allocated to in-process research and development and charged to expense
in the second quarter of 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
(3) In the second quarter of 1996, the Company's new management team initiated
cost savings programs that resulted in reductions in the number of
employees at the Company's Mystic, Connecticut and Jacksonville, Florida
facilities. The Company incurred a one-time restructuring charge of
approximately $3.1 million during the second quarter of 1996 primarily to
reflect the cost of severance payments to terminated employees. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
(4) Pro forma income (loss) from continuing operations has been adjusted to
reflect: (i) the Company's acquisition of TreBay as if the acquisition had
occurred on January 1, 1995 (see Notes to Consolidated Financial
Statements--Note 18--Pro Forma Statement of Operations (Unaudited)); (ii)
the capital contribution of accrued cumulative preferred stock dividends of
$7,560,000 in connection with the acquisition of TreBay; and (iii) the
Share Exchange.
(5) Pro forma income from continuing operations per common share available to
common shareholders and weighted average common shares outstanding have
been adjusted to give effect as of January 1, 1995 to: (i) the conversion
of all Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock outstanding as of December 31, 1995 into Class A Common
Stock and Non-Voting Common Stock, respectively; (ii) the conversion of
390,000 shares of Series A Convertible Preferred Stock issued in the April
1996 acquisition of TreBay into Class A Common Stock; (iii) the exercise of
all outstanding options to purchase Class A Common Stock; and (iv) the
Share Exchange.
(6) Adjusted to give effect to the receipt of the estimated net proceeds of
this offering based upon an assumed initial public offering price of $20.00
per share and the application of the net proceeds therefrom. See "Use of
Proceeds."
(7) Pro forma to give effect to: (i) the repayment of $1,275,000 in principal
amount of the Company's term loan on July 1, 1996 and the scheduled
repayment of $1,275,000 in principal amount of the term loan on October 1,
1996; (ii) the accretion of dividends on the Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock and the Series C Redeemable
Preferred Stock through October 1, 1996; (iii) the Stock Conversion; and
(iv) the Share Exchange.
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Class A Common Stock offered by this Prospectus.
Possible Obsolescence from Technological Change; Uncertainty as to Market
Acceptance. The health care industry is characterized by rapidly changing
technology and frequent new product introductions. The Company believes that
its ability to develop and commercialize new products and enhancements of
existing products is critical to its continued growth and profitability. There
can be no assurance that the Company will continue to be successful in
identifying, developing and marketing new products or enhancing its existing
products. The Company's business will be adversely affected if the Company
incurs delays in developing new products or enhancements or if such products
or enhancements do not gain market acceptance. Market acceptance of the
Company's products will be determined in large part by the Company's ability
to demonstrate the surgical advantages, safety and efficacy, cost
effectiveness and performance features of such products, as well as to train
surgeons and other operating staff in their use. The Company believes that use
and acceptance by physicians and hospitals will be essential for market
acceptance of certain of its products, and there can be no assurance that its
products will be used or accepted. There can be no assurance that products or
technologies developed by others will not render the Company's products or
technologies noncompetitive or obsolete.
Possible Adverse Effects of Competition. The Company encounters significant
competition in all markets in which it participates. Many of the Company's
competitors and potential competitors have substantially greater resources,
including capital, name recognition, research and development experience and
regulatory, manufacturing and marketing capabilities. Many of these
competitors offer well established, broad product lines and ancillary services
not offered by the Company. Some of the Company's competitors have long-term
or preferential supply arrangements with hospitals, which may act as a barrier
to market entry. Other large health care companies may enter the market for
the Company's products in the future. Competing companies may succeed in
developing products that are more efficacious or less costly than any that may
be developed and marketed by the Company, and such companies also may be more
successful than the Company in production and marketing. Competing companies
may also exert competitive pricing pressures that may adversely affect the
Company's sales levels and margins. Rapid technological development by others
may result in the Company's products becoming obsolete before the Company
recovers a significant portion of the research, development and
commercialization expenses incurred with respect to those products. There can
be no assurance that the Company will be able to continue to compete
successfully with existing competitors or will be able to compete successfully
with new competitors.
Dependence on New Management and Other Key Personnel. The Company's future
success depends to a significant extent on the efforts and abilities of its
executive officers, the majority of whom have joined the Company since April
1996. Although the Company's new management has extensive experience in
managing medical device companies, the inability of new management to become
integrated fully into the operations of the Company could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the loss of the services of certain of these
individuals could have a similar adverse effect on the Company. The Company
believes that its future success also will depend significantly upon its
ability to attract, motivate and retain additional highly skilled managerial,
operational, technical and sales and marketing personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting, assimilating and retaining the personnel it requires
to grow and operate profitably. See "Business--Employees" and "Management--
Executive Officers and Directors."
Risks Associated with Newly Established International Sales Operations;
Currency Exchange Risks. Within the past two years the Company has established
direct sales operations in five countries. The failure of these new direct
sales operations to develop successfully may have a material adverse effect
7
<PAGE>
on the Company's business, financial condition or results of operations.
International sales (including export sales) accounted for approximately 29%
of the Company's net sales in fiscal 1995 and 34% of net sales in the first
half of 1996, and the Company expects that international sales will continue
to be a significant portion of the Company's business. The Company's
international business may be affected by fluctuations in currency exchange
rates as well as increases in duty rates and difficulties in obtaining export
licenses. The Company's establishment of direct international sales operations
further increases its exposure to fluctuations in currency exchange rates,
which may adversely affect reported sales and earnings, because the sales of
these operations are denominated in local currency and not in U.S. dollars.
Seasonality and Quarterly Fluctuations. The Company's sales and operating
results have varied, and are expected to continue to vary, significantly from
quarter to quarter as a result of seasonal patterns, the timing of new product
introductions and promotional activities. The Company believes that its
business is seasonal in nature, with the third quarter of each year typically
having the lowest sales and the fourth quarter of each year typically having
the highest sales. Quarterly results of operations for any particular quarter
may not be indicative of results of operations for future periods. There can
be no assurance that future seasonal and quarterly fluctuations will not
adversely affect the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Uncertainty Relating to Third Party Reimbursement. Demand for the Company's
products is likely to depend in part on the extent to which reimbursement for
the cost of such products and the procedures in which such products are used
will be available from government third-party payors (including the Medicare
and Medicaid programs), government health administration authorities, private
health insurers and other organizations. These third-party payors may deny
coverage if they determine that a procedure was not reasonable or necessary as
determined by the payor, was experimental or was used for an unapproved
indication. In addition, certain health care providers are moving towards a
managed care system in which such providers contract to provide comprehensive
health care for a fixed cost per person, irrespective of the amount of care
actually provided. Such providers, in an effort to control health care costs
are increasingly challenging the prices charged for medical products and
services and, in some instances, have pressured medical suppliers to lower
their prices. The Company believes, however, that the development of
procedure-specific instrumentation for use in less-traumatic procedures may in
certain cases reduce overall operating time and therefore reduce the aggregate
cost of those procedures. In addition, the Company does not depend upon
reimbursement from third-party payors with respect to its products used in
surgical cosmetic procedures. The Company is unable to predict what changes
will be made in the reimbursement methods utilized by third party health care
payors. Furthermore, the Company could be adversely affected by changes in
reimbursement policies of governmental or private health care payors,
particularly to the extent any such changes affect reimbursement for
procedures in which the Company's products are used. If coverage and adequate
reimbursement levels are not provided by government or third-party payors for
use of the Company's technologies or products, the Company's business,
financial position and ability to market its technologies or products will be
adversely affected. Reimbursement and health care payment systems in
international markets vary significantly by country, and include both
government sponsored health care and private insurance. To the extent that any
of the Company's products are not entitled to reimbursement in an
international market, market acceptance of such products in such international
market would be adversely affected. See "Business--Third-Party Reimbursement."
Uncertainty of Health Care Reform Measures. Federal, state and local
officials and legislators (and certain foreign government officials and
legislators) have proposed or are reportedly considering proposing a variety
of reforms to the health care systems in the U.S. and abroad. The Company
cannot predict what health care reform legislation, if any, will be enacted in
the U.S. or elsewhere. Significant changes in the health care system in the
U.S. or elsewhere are likely to have a substantial impact over time on the
manner in which the Company conducts its business. Such changes could have a
material adverse effect on the Company. See "Business--Government Regulation."
8
<PAGE>
Government Regulation. The Company's products, product development
activities, promotional and marketing activities and manufacturing processes
are subject to extensive and rigorous regulation by the U.S. Food and Drug
Administration ("FDA") and comparable agencies in foreign countries. In the
U.S., the FDA regulates the interstate commerce of medical devices as well as
the manufacturing, labeling and recordkeeping procedures for such devices. In
order for the Company to market its products in the U.S., the Company must
obtain from the FDA marketing clearance through what is known as a 510(k) pre-
market notification or obtain approval through a more detailed application
process resulting in what is known as pre-market approval ("PMA"). The process
of obtaining marketing clearance for new medical devices from the FDA can be
costly and time consuming, and there can be no assurance that such clearance
will be granted for the Company's future products on a timely basis, if at
all, or that FDA review will not involve delays that will adversely affect the
Company's ability to commercialize additional products or expand permitted
uses of existing products.
Even if regulatory clearance to market a device is obtained from the FDA,
the clearance may entail limitations on the indicated uses of the device. The
clearance can also be withdrawn by the FDA due to the failure to comply with
regulatory standards or the occurrence of unforeseen problems following
initial clearance. The Company may be required to make further filings with
the FDA under certain circumstances such as the addition of new product
claims. The FDA could also limit or prevent the manufacture or distribution of
the Company's products and has the power to seize or require the recall of
such products. The Company has made modifications to its 510(k) cleared
devices which the Company believes do not require submission of new 510(k)s.
There can be no assurance, however, that the FDA would agree with any of the
Company's determinations and would not require the Company to submit new
510(k)s for any of the changes made to the devices.
All of the products currently marketed by the Company either have received
marketing clearance pursuant to 510(k) pre-market notifications filed by the
Company and cleared by the FDA, or are exempt from obtaining marketing
clearance by virtue of their status as pre-amendment devices (i.e. devices
introduced into interstate commerce prior to May 28, 1976). A 510(k) pre-
market notification requires the manufacturer of a medical device to establish
that the device is "substantially equivalent" to medical devices legally
marketed in the U.S. For future products, there can be no assurance that the
FDA will concur in the Company's 510(k) request for clearance, or that the FDA
will not require the Company to file PMA applications. The process of
obtaining a PMA can be expensive, uncertain and lengthy, frequently requiring
anywhere from one to several years from the date of submission, if approval is
obtained at all. Significant delay or cost in obtaining, or failure to obtain
FDA clearance to market products, or any FDA limitations on the use of the
Company's products, could have a material adverse effect on the business,
financial condition and results of operations of the Company.
In addition, all of the products manufactured by the Company and its
contract manufacturers must be manufactured in compliance with the FDA's Good
Manufacturing Practice ("GMP") regulations. Ongoing compliance with GMP and
other applicable regulatory requirements is monitored through periodic
inspection by state and federal agencies, including the FDA. The FDA may
inspect the Company and its facilities from time to time to determine whether
the Company is in compliance with regulations relating to medical device
manufacturing companies, including regulations concerning manufacturing,
testing, quality control, record keeping and product labeling practices.
FDA regulations depend heavily on administrative interpretation, and there
can be no assurance that future interpretations made by the FDA or other
regulatory bodies, with possible retroactive effect, will not adversely affect
the Company. In addition, changes in the existing regulations or adoption of
new governmental regulations or policies could prevent or delay regulatory
approval of the Company's products.
Failure to comply with applicable regulatory requirements could result in,
among other things, warning letters, fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension
9
<PAGE>
of production, refusal of the government to grant pre-market clearance or pre-
market approval for devices, withdrawal of approvals and criminal prosecution.
A portion of the Company's revenue is dependent upon sales of its products
outside the U.S. Foreign regulatory bodies have established varying
regulations governing product standards, packaging requirements, labeling
requirements, import restrictions, tariff regulations, duties and tax
requirements. After June 1998, medical devices may not be sold in European
Union ("EU") countries unless they display the CE mark, an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. In order to obtain the right to
affix the CE mark to its products, the Company must obtain certification that
its processes meet European quality standards, including certification that
its design and manufacturing facility complies with ISO 9001 standards. There
can be no assurance that the Company will be able to obtain CE mark
certification for its products. The inability or failure of the Company or its
international distributors to comply with varying foreign regulations or the
imposition of new regulations could restrict or, in certain countries, result
in the prohibition of the sale of the Company's products internationally and
thereby adversely affect the Company's business, financial condition and
results of operations. See "Business--Government Regulation."
Uncertainty Regarding Patents and Proprietary Rights. The Company's success
will depend in part on its ability to develop patentable products, obtain
patent protection for its products both in the U.S. and in other countries and
enforce its patents. However, the patent positions of medical device companies
are generally uncertain and involve complex legal and factual questions. No
assurance can be given that patents will issue from any patent applications
owned by or licensed to the Company or that, if patents do issue, the claims
allowed will be sufficiently broad to protect the Company's technology. In
addition, no assurance can be given that any issued patents owned by or
licensed to the Company will not be challenged, invalidated or circumvented,
or that the rights granted thereunder will provide competitive advantages to
the Company. The Company also relies on unpatented trade secrets to protect
its proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire substantially equivalent techniques
or otherwise gain access to the Company's proprietary technology or disclose
such technology or that the Company can ultimately protect meaningful rights
to such unpatented proprietary technology.
The commercial success of the Company will also depend in part on its
neither infringing patents issued to others nor breaching the licenses upon
which the Company's products might be based. The Company's licenses of patents
and patent applications impose various commercialization, sublicensing,
insurance, royalty and other obligations on the Company. Failure of the
Company to comply with these requirements could result in conversion of the
licenses from being exclusive to nonexclusive in nature or termination of the
licenses.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Litigation, which
would likely result in substantial cost to the Company, may be necessary to
enforce any patents issued or licensed to the Company and/or to determine the
scope and validity of others' proprietary rights. In particular, competitors
of the Company and other third parties hold issued patents and are assumed by
the Company to hold pending patent applications which may result in claims of
infringement against the Company or other patent litigation. The Company also
may have to participate in interference proceedings declared by the U.S.
Patent and Trademark Office, which could result in substantial cost to the
Company, to determine the priority of inventions. Furthermore, the Company may
have to participate at substantial cost in International Trade Commission
proceedings to abate importation of products which would compete unfairly with
products of the Company.
The Company relies on confidentiality agreements with its collaborators,
employees, advisors, vendors and consultants. There can be no assurance that
these agreements will not be breached, that the Company would have adequate
remedies for any breach or that the Company's trade secrets will not
10
<PAGE>
otherwise become known or be independently developed by competitors. Failure
to obtain or maintain patent and trade secret protection, for any reason,
could have a material adverse effect on the Company. See "Business--Patents,
Trade Secrets and Proprietary Rights."
Dependence Upon Key Suppliers. Although the Company believes that there are
a number of possible vendors for most of the components and subassemblies
required for its products, certain materials, including thermoplastic
elastomer (TPE)-based materials used in certain of its ventilation tubes and
medical grade silicone used in certain of its ventilation tubes and implants,
currently are obtained from a single source. Moreover, substitute materials
may not be immediately available in quantities needed by the Company. Delays
associated with any future material shortages could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Suppliers."
Product Liability Risk; Limited Insurance Coverage. The manufacture and sale
of medical instrumentation entail significant risk of product liability claims
in the event that the use of such instrumentation is alleged to have resulted
in adverse effects on a patient. The Company has taken and will continue to
take what it believes are appropriate precautions, including maintaining
general liability and commercial liability insurance policies which include
coverage for product liability claims. Although the Company maintains what it
believes to be adequate insurance, there can be no assurance that the
Company's existing insurance coverage limits are adequate to protect the
Company from any liabilities it might incur in connection with the sale of its
products. In addition, the Company may require, or desire to obtain, increased
product liability coverage in the future. Product liability insurance is
expensive and in the future may not be available on acceptable terms, if at
all. A successful product liability claim or series of claims brought against
the Company in excess of its insurance coverage could have a material adverse
effect on the Company's business, financial condition and results of
operations. Additionally, it is possible that adverse product liability
actions could negatively affect the Company's ability to obtain and maintain
regulatory approval for its products, as well as damage the Company's
reputation in any or all markets in which it participates. See "Business--
Product Liability and Insurance."
Environmental Matters. The past and present business operations of the
Company and the past and present ownership and operations of real property by
the Company are subject to extensive and changing federal, state, and local
environmental laws and regulations. The Company believes it is in material
compliance with all such applicable laws and regulations. The Company cannot
predict what environmental legislation or regulations will be enacted in the
future, how existing or future laws or regulations will be administered or
interpreted or what environmental conditions may be found to exist. Compliance
with more stringent laws or regulations or stricter interpretations of
existing laws may require additional expenditures by the Company, some of
which may be material. See "Business--Environmental Matters."
Influence by Existing Stockholders. Upon completion of this offering and the
Share Exchange, WP Investors will beneficially own approximately 48.1% of the
outstanding shares of Class A Common Stock. A stockholders agreement among the
Company and substantially all of its current stockholders provides that WP
Investors has the right to designate specified numbers of persons to the
Company's Board of Directors so long as WP Investors maintains specified
levels of ownership of the outstanding Class A Common Stock. Upon completion
of this offering, WP Investors will have under the stockholders agreement the
right to designate three persons to be appointed or nominated to the Company's
Board of Directors. Such share ownership and minority representation on the
Company's Board of Directors may confer upon WP Investors significant
influence over the affairs and actions of the Company. See "Management--
Stockholders Agreement" and "Principal Stockholders."
Shares Eligible for Future Sale; Potential for Adverse Effect on Stock
Price. Sales of a substantial number of shares of Class A Common Stock in the
public market or the prospect of such sales could
11
<PAGE>
adversely affect prevailing market prices for the Class A Common Stock. Upon
completion of this offering and the Share Exchange, the Company will have
outstanding 6,879,362 shares of Class A Common Stock, assuming no exercise of
the Underwriters' over-allotment option. Of these shares, the 2,500,000 shares
of Class A Common Stock to be sold in this offering will be freely tradable
without restriction under the Securities Act of 1933, as amended (the
"Securities Act"), except for any such shares which may be acquired by an
"affiliate" of the Company. Subject to certain "lock-up" agreements covering
an aggregate of 4,050,926 shares held by certain existing shareholders,
approximately 108,900 shares of Class A Common Stock (plus 137,816 shares
issuable upon exercise of then vested options) will be eligible for sale in
the public market pursuant to Rule 701 under the Securities Act 90 days after
the date of this offering, an additional 4,206,711 shares will be eligible for
sale in the public market subject to compliance with the resale volume
limitations and other restrictions of Rule 144 under the Securities Act 90
days after the date of this Prospectus and 48,399 shares will be eligible for
sale in the public market without restriction under Rule 144(k) under the
Securities Act. Promptly after the closing of this offering, the Company
intends to file a registration statement under the Securities Act covering the
sale of 669,100 shares of Class A Common Stock reserved for issuance under the
Stock Option Plan. Upon completion of this offering, there will be outstanding
options to purchase a total of 501,191 shares of Class A Common Stock. The
holders of approximately 4,340,429 shares of Class A Common Stock, after
giving effect to the Stock Conversion and the Share Exchange, will hold
certain registration rights with respect to their shares of Class A Common
Stock. The sale of such shares could have a material adverse effect on the
Company's ability to raise capital in the public markets. See "Management--
1996 Stock Option Plan," "Description of Capital Stock--Registration Rights,"
"Shares Eligible for Future Sale" and "Underwriting."
Effect of Certain Charter and By-Law Provisions. Prior to the closing of
this offering, the Company will amend its Restated Certificate of
Incorporation to authorize the issuance of Preferred Stock without stockholder
approval and upon such terms as the Board of Directors may determine. The
issuance of Preferred Stock could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring
or making a proposal to acquire, a majority of the outstanding stock of the
Company and could adversely affect the prevailing market price of the Class A
Common Stock. The rights of the holders of Class A Common Stock will be
subject to, and may be adversely affected by, the rights of holders of
Preferred Stock that may be issued in the future. The Company has no present
plans to issue any shares of Preferred Stock. See "Description of Capital
Stock--Preferred Stock."
Immediate and Substantial Dilution to New Investors. Investors purchasing
shares of Class A Common Stock in this offering will incur substantial and
immediate dilution in the pro forma net tangible book value of the Class A
Common Stock from the initial public offering price. In addition, these
investors will incur additional dilution upon the exercise of outstanding
stock options. See "Dilution."
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Class A Common Stock.
Although application will be made for approval for quotation of the Class A
Common Stock on the Nasdaq National Market, there can be no assurance that an
active trading market for the Class A Common Stock will develop or be
sustained following this offering or that the market price of the Class A
Common Stock will not decline below the initial public offering price. The
initial public offering price will be determined by negotiation between the
Company and the Representatives of the Underwriters based upon several factors
and may not be indicative of future market prices. The price at which the
Class A Common Stock will trade will depend upon a number of factors,
including, but not limited to, the Company's historical and anticipated
operating results and general market and economic conditions, some of which
factors are beyond the Company's control. Factors such as quarterly
fluctuations in the Company's financial and operating results, announcements
by the Company or others and developments affecting the Company, its products,
its clients, the markets in which it competes or the industry generally, also
could cause the market price of the Class A Common Stock to fluctuate
substantially. In addition, the stock market has from time to time experienced
extreme price and volume fluctuations. These broad market fluctuations may
adversely affect the market price of the Class A Common Stock. See
"Underwriting."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Class A Common Stock offered hereby are estimated to be $45.8 million ($52.7
million if the Underwriters' over-allotment option is exercised in full),
after deducting estimated underwriting discounts and expenses, assuming an
initial public offering price of $20.00 per share. Of the net proceeds of this
offering, $20.7 million will be used to repay the entire principal amount and
accrued interest under the Company's secured term loan facility (the "Term
Loan"). The Company will use the balance of the net proceeds of this offering,
after repayment of the Term Loan, plus the net proceeds from the sale of any
shares covered by the Underwriters' over-allotment option, for the redemption
of up to a maximum of $25.0 million of Series C Redeemable Preferred Stock,
with such redemption to be effected on the earlier of the closing date of the
sales of shares covered by the over-allotment option or the 30th day after the
date of the first closing of this offering. In the Share Exchange, all shares
of Series C Redeemable Preferred Stock remaining outstanding 31 days after the
date of the initial closing of this offering will be exchanged for shares of
Class A Common Stock, with the number of shares of Class A Common Stock to be
issued in such exchange to be determined by dividing the aggregate redemption
price of such Series C Redeemable Preferred Stock, plus accrued but unpaid
dividends, by the per share initial public offering price. Based upon an
assumed initial public offering price of $20.00 per share, 239,234 shares of
Series C Redeemable Preferred Stock having an aggregate redemption price of
$25.0 million would be redeemed and the remaining 60,225 shares of Series C
Redeemable Preferred Stock would be exchanged in the Share Exchange for
314,650 shares of Class A Common Stock. The balance of the net proceeds of any
exercise of the Underwriters' over-allotment option will be used for working
capital and general corporate purposes.
The principal amount of the Term Loan is due in twenty quarterly
installments commencing July 1, 1994 and ending April 15, 1999. The
indebtedness under the Term Loan bears interest, at the Company's election,
either at an annual rate of 1% plus a "base rate" (8.25% at July 31, 1996), or
at 2.25% plus a "LIBOR rate" (5.58% at July 31, 1996).
Pending application of the proceeds as described above, the Company intends
to invest such proceeds in government securities and other short-term
interest-bearing securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its Class A Common Stock. The
Company currently intends to retain any earnings to fund its business and
therefore does not anticipate paying cash dividends in the foreseeable future.
In addition, the Company's existing credit agreement restricts the Company's
ability to pay dividends to its stockholders. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
13
<PAGE>
CAPITALIZATION
The following table sets forth: (i) the current portion of long-term debt
and the capitalization of the Company as of June 29, 1996; and (ii) such
current portion of long-term debt and capitalization as adjusted on a pro
forma basis for (a) the sale by the Company of the 2,500,000 shares of Class A
Common Stock offered hereby at an assumed initial public offering price of
$20.00 per share and the application of the estimated net proceeds therefrom
as described in "Use of Proceeds," (b) the Stock Conversion and (c) the Share
Exchange. This table should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Prospectus:
<TABLE>
<CAPTION>
JUNE 29, 1996
--------------------
PRO FORMA
AS
ACTUAL ADJUSTED(1)
------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Short-term obligations:
Current portion of long-term debt and Capital Lease
Obligations........................................ $ 5,236 $ 136
======= ========
Long-term debt:
Term Loan (1)....................................... $18,113 $ --
Revolving Credit Facility and Note Payable under
Capital Lease Obligations.......................... 12,209 12,209
Series C Redeemable Preferred Stock, $1.00 par value,
600,000 shares authorized; 299,459 shares issued and
outstanding actual, no shares issued and outstanding
pro forma as adjusted (2)............................ 30,619 --
Shareholders' equity:
Series A Convertible Preferred Stock, $1.00 par
value, 1,200,000 shares authorized; 744,652 shares
issued and outstanding actual, no shares issued and
outstanding pro forma as adjusted.................. 7,241 --
Series B Convertible Preferred Stock, $1.00 par
value, 3,500,000 shares authorized; 2,127,838
shares issued and outstanding actual, no shares
issued and outstanding pro forma as adjusted....... 20,690 --
Undesignated Preferred Stock, $1.00 par value,
1,000,000 shares authorized (3), no shares issued
and outstanding actual or pro forma as adjusted.... -- --
Class A Common Stock, $.01 par value, 30,000,000
shares authorized (3); 679,270 shares issued and
outstanding actual (3), 6,879,362 shares issued and
outstanding pro forma as adjusted (4).............. 7 69
Non-Voting Common Stock, $.01 par value, 4,000,000
shares authorized; 426,777 shares issued and
outstanding actual, no shares issued and
outstanding pro forma as adjusted.................. 4 --
Additional paid-in capital.......................... 112 80,441
Accumulated deficit................................. (10,153) (10,153)
Shareholders' notes................................. (187) (187)
------- --------
Total shareholders' equity........................ 17,714 70,170
------- --------
Total capitalization............................ $83,891 $ 82,515
======= ========
</TABLE>
- -------
(1) On July 1, 1996, the Company repaid $1,275,000 million in principal amount
of the Term Loan and is obligated to repay an additional $1,275,000
million in principal amount of the Term Loan on October 1, 1996. The
Company expects cash flow from operations and available borrowings under
its revolving credit facility to be adequate to make the October payment.
Includes accretion of dividends on the Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock and the Series C Redeemable
Preferred Stock through October 1, 1996 of $107,000, $306,000 and
$674,000, respectively, and the redemption of up to $25,000,000 of the
Series C Redeemable Preferred Stock.
(2) Gives effect, based upon an assumed initial offering price of $20.00 per
share, to the redemption of 239,234 shares of Series C Redeemable
Preferred Stock from the net proceeds of this offering and the Share
Exchange.
(3) Gives effect to an amendment to the Company's Restated Certificate of
Incorporation to be filed prior to the closing of this offering.
(4) Does not include 501,191 shares of Class A Common Stock issuable upon the
exercise of outstanding stock options. An aggregate of 167,909 additional
shares of Class A Common Stock have been reserved for future grants under
the Company's stock plans. See "Management--1996 Stock Option Plan."
14
<PAGE>
DILUTION
The pro forma net tangible book deficit of the Company at June 29, 1996 was
$(21,171,000) or approximately $(4.83) per share. Pro forma net tangible book
value per share represents the amount of total assets, excluding intangibles
(excess of cost over fair value of net assets acquired) less total
liabilities, divided by the aggregate number of shares of Class A Common Stock
outstanding as of June 29, 1996 (on a pro forma basis after giving effect to
the accretion of dividends on the Series A Convertible Preferred Stock, Series
B Convertible Preferred Stock and Series C Redeemable Preferred Stock through
October 1, 1996 of $1,087,000 in the aggregate, the scheduled principal
payments of $2,550,000 in the aggregate on the Term Loan through October 1,
1996, the Stock Conversion and the Share Exchange). After giving effect to the
receipt of the net proceeds from the sale of the 2,500,000 shares of Class A
Common Stock offered hereby, assuming an initial public offering price of
$20.00 per share and after deducting the estimated underwriting discount and
offering expenses to be paid by the Company, the pro forma net tangible book
value of the Company at June 29, 1996 would have been $24,579,000, or $3.57
per share. This represents an immediate increase in net tangible book value of
$8.40 per share of Class A Common Stock to existing stockholders and an
immediate dilution of approximately $16.43 per share to new investors
purchasing shares in this offering. The following table illustrates the per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $20.00
Pro forma net tangible book deficit per share before
this offering................................................. $(4.83)
Increase per share attributable to new investors............... 8.40
------
Pro forma net tangible book value per share after this offering. 3.57
------
Dilution per share to new investors............................. $16.43
======
</TABLE>
The following table sets forth, on a pro forma basis as of June 29, 1996,
the number of shares of Class A Common Stock purchased from the Company, the
total consideration paid to the Company and the average price per share paid
by existing stockholders and by the new investors purchasing shares of Class A
Common Stock from the Company in this offering (before deducting estimated
underwriting discount and offering expenses):
<TABLE>
<CAPTION>
SHARES
PURCHASED(1) TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 4,379,362 64% $34,760,651 41% $ 7.94
--------- ---
New investors................. 2,500,000 36% $50,000,000 59% $20.00
--------- --- ----------- ---
Total......................... 6,879,362 100% $84,760,651 100%
========= === =========== ===
</TABLE>
- --------
(1) The foregoing tables exclude shares that were issuable upon exercise of
options outstanding at June 29, 1996. As of June 29, 1996, there were
options outstanding to purchase an aggregate of 441,191 shares at a
weighted average exercise price of $9.63 per share. Between June 29, 1996
and August 20, 1996, the Company granted options to purchase an aggregate
of 60,000 shares of Class A Common Stock at a weighted average exercise
price of $10.65 per share. To the extent that outstanding options are
exercised in the future, there will be further dilution to new investors.
See "Management--1996 Stock Option Plan."
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data,
which should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto included elsewhere herein and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Company, prior to April 15, 1994, consisted solely of Merocel Corporation. The
selected consolidated financial data for all years presented has been derived
from the Company's audited financial statements, which have been audited by
Ernst & Young LLP, the Company's independent auditors. The selected
consolidated financial data as of and for the six months ended July 1, 1995
and June 29, 1996 have been derived from the Company's unaudited financial
statements. In the opinion of management, the unaudited financial statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the financial position and the results of
operations as of such dates and for such periods. The results for the six
months ended June 29, 1996 are not necessarily indicative of the results to be
expected for the entire year or the periods following in 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
----------------------------------------- -----------------
JULY 1, JUNE 29,
1991 1992 1993 1994(1) 1995 1995 1996
------ ------ ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA (HISTORICAL BA-
SIS)(1):
Sales, net............. $6,787 $8,160 $10,071 $42,475 $59,865 $29,424 $ 32,942
Cost of sales.......... 2,620 2,357 2,876 15,350 22,256 10,686 12,690
Amortization of
acquisition costs
allocated to inventory. -- -- -- 3,883 919 919 --
------ ------ ------- ------- ------- ------- --------
Gross profit........... 4,167 5,803 7,195 23,242 36,690 17,819 20,252
Operating Expenses:
Selling, general and
administrative ....... 3,155 3,914 6,074 19,126 27,077 12,440 14,129
Research and
development........... 84 211 311 1,958 2,405 1,158 1,669
Amortization of
intangibles (2)....... 436 391 394 2,652 2,579 1,224 1,168
Write-off of acquired
research and
development........... -- -- -- -- -- -- 3,612
Restructuring charges.. -- -- -- -- -- -- 3,093
------ ------ ------- ------- ------- ------- --------
Total operating 3,675 4,516 6,779 23,736 32,061 14,822 23,671
expenses.............. ------ ------ ------- ------- ------- ------- --------
Operating income (loss)
from continuing
operations............ 492 1,287 416 (494) 4,629 2,997 (3,419)
Interest expense....... (125) (73) (102) (2,148) (3,063) (1,579) (1,536)
Other income (expense), 38 47 26 313 114 (136) 64
net................... ------ ------ ------- ------- ------- ------- --------
Income (loss) from
continuing operations
before income tax
expense (benefit)..... 405 1,261 340 (2,329) 1,680 1,282 (4,891)
Income tax expense 174 592 121 (774) 1,355 855 (1,956)
(benefit)............. ------ ------ ------- ------- ------- ------- --------
Income (loss) from
continuing operations. 231 669 219 (1,555) 325 427 (2,935)
Discontinued Operations
(3):
Income from operations
of discontinued
surgical drapes
segment (net of tax).. -- -- -- 463 306 295 --
Loss on disposal of
surgical drapes -- -- -- -- (2,485) -- --
segment (net of tax).. ------ ------ ------- ------- ------- ------- --------
Net income (loss)...... $ 231 $ 669 $ 219 $(1,092) $(1,854) $ 722 $ (2,935)
====== ====== ======= ======= ======= ======= ========
PRO FORMA STATEMENT OF
OPERATIONS DATA (4):
Income (loss) from
continuing operations. $ 68 $ (2,934)
Preferred stock -- 538
dividends............. ------- --------
Income (loss) from
continuing operations
available to common
shareholders (5)...... 68 (3,472)
Interest expense, net 1,300 581
of taxes.............. ------- --------
Supplementary income
(loss) from continuing $ 1,368 $ (2,891)
operations (6)........ ======= ========
Pro forma per share
Income (loss) from
continuing operations
available to common $ .01 $ (.75)
shareholders.......... ======= ========
Supplementary income
(loss) from continuing
operations available
to common $ .30 $ (.62)
shareholders.......... ======= ========
Pro forma weighted
average common shares 4,632 4,635
outstanding (5)....... ======= ========
Supplementary pro forma
weighted average
common shares 7,132 7,135
outstanding (6)....... ======= ========
</TABLE>
See accompanying notes.
16
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
JULY 1, JUNE 29,
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 2,146 $ 2,108 $ 3,126 $12,744 $12,234 $10,407 $11,061
Cost in excess of net
assets acquired, net... -- -- -- 54,300 46,381 53,182 47,054
Total assets............ 7,968 8,483 9,484 95,720 93,123 92,937 96,087
Long-term debt including
redeemable preferred
stock.................. 9,003 8,644 9,038 65,102 64,173 62,204 60,941
Total shareholders' eq-
uity................... 6,015 6,686 6,906 17,547 13,257 17,046 17,714
</TABLE>
- --------
(1) The statement of operations data includes the results of operations of
Xomed-Treace, Inc. since the date of its acquisition by the Company in
April 1994.
(2) Amortization of intangibles includes amortization of foreign distribution
rights of $838,000, $162,000 and $130,000, respectively, for the years
ended December 31, 1994 and 1995 and the six months ended July 1, 1995.
(3) In July 1995, the Company sold its surgical drapes segment to an unrelated
third party and simultaneously acquired from this party prosthetic implant
device and ventilation tube product lines. The Company has treated the
surgical drapes segment as a discontinued operation, and a loss on
disposition of $2,485,000 (after income tax benefit of $1,386,000) was
recorded upon completion of the transaction. The Company has restated its
Statement of Operations to reflect its treatment of this segment as a
discontinued operation. Income from continuing operations is after income
tax expense of $309,000, $203,000 and $136,000 for the years ended
December 31, 1994 and 1995 and for the six months ended July 1, 1995,
respectively.
(4) The pro forma income from continuing operations has been adjusted to
reflect: (i) the acquisition of TreBay as if the acquisition had occurred
on January 1, 1995 (see Notes to Consolidated Financial Statements--Note
18--Pro Forma Balance Sheet and Statement of Operations (Unaudited)); (ii)
the capital contribution of accrued cumulative preferred stock dividends
of $7,560,000 in connection with the acquisition of TreBay; and (iii) the
Share Exchange.
(5) Pro forma income from continuing operations per common share and weighted
average common shares outstanding have been adjusted to give effect as of
January 1, 1995 to: (i) the conversion of all Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock outstanding as of
December 31, 1995 into Class A Common Stock and Non-Voting Common Stock,
respectively; (ii) the conversion of 390,000 shares of Series A
Convertible Preferred Stock issued in the April 1996 acquisition of TreBay
into Class A Common Stock; (iii) the exercise of all outstanding options
to purchase Class A Common Stock; and (iv) the Share Exchange.
(6) Supplementary pro forma net income per share is computed upon the basis
stated above in notes 4 and 5 and giving effect to the sale by the Company
of the 2,500,000 shares of Class A Common Stock offered hereby and the
repayment of approximately $23,213,000 of principal amount of the Term
Loan and $25,000,000 of Series C Redeemable Preferred Stock as if the
offering was effected January 1, 1995. Interest expense, net of tax
benefit, totaling $1,299,770 and $580,632 for the year ended December 31,
1995 and six months ended June 29, 1996 has been eliminated as a result of
the assumed repayment of the Term Loan.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed in "Risk
Factors."
OVERVIEW
The Company is a leading developer, manufacturer and marketer of surgical
products for use by ENT specialists. The Company offers a broad line of
products in its core ENT market that includes powered tissue-removal systems
and other microendoscopy instruments, implantable devices, nerve monitoring
systems and disposable fluid-control products. The Company also offers a line
of ophthalmic and other products. The Company distributes its products on a
worldwide basis through a 61-person direct sales organization in the U.S. and
selected other countries and through a network of 95 independent distributors.
BACKGROUND
The business of Xomed, Inc. was established in 1970 to manufacture and
distribute ventilation tube implants for the middle ear. In 1979, the business
was acquired by Bristol-Myers Squibb Company ("Bristol-Myers"). In 1989,
Bristol-Myers acquired Treace Medical, Inc. and merged the two companies
together forming Xomed-Treace, Inc. On April 15, 1994, Bristol-Myers sold
Xomed-Treace, Inc. to the Company for a purchase price of approximately $81.0
million (the "Xomed Acquisition"). The Company is a Delaware corporation
formerly known as Merocel/Xomed Holdings, Inc., which was organized for the
purpose of acquiring all of the outstanding stock of Merocel Corporation
("Merocel") and of Xomed-Treace, Inc. and Xomed-Treace, P.R. Inc.
(collectively, "Xomed-Treace"). Merocel, which was formed in 1970,
manufactures and markets a line of disposable fluid-control products primarily
used in sinus surgery and rhinology.
In July 1995, the Company sold its surgical drapes segment to an unrelated
party and simultaneously acquired from this party several otology product
lines (the "Otology Acquisition"). In April 1996, the Company acquired TreBay,
a microendoscopy products company. The senior management of TreBay, including
James T. Treace, F. Barry Bays and Thomas E. Timbie, assumed senior management
positions at the Company at the time of the Company's acquisition of TreBay.
XOMED ACQUISITION
The Xomed Acquisition has significantly affected the Company's results of
operations following the April 15, 1994 consummation of the transaction. The
Xomed Acquisition has been accounted for under the purchase method of
accounting. Accordingly, the purchase price of approximately $81.0 million was
allocated to the assets acquired and liabilities assumed based upon their
respective fair values at date of acquisition. The excess of the purchase
price over the fair market value of the net assets acquired of approximately
$56.0 million ($50.0 million related to continuing operations) was allocated
to goodwill. As a result, amortization of intangibles (over a 25-year life)
has been significantly increased. Further, the value of inventory of
continuing operations was increased by $4.8 million and was charged to cost of
goods sold for the 1994 period following the Xomed Acquisition ($3.9 million)
and the first quarter of 1995 ($0.9 million) (the "Inventory Valuation
Adjustment"). These costs reduced gross profit in these periods. Other
intangible assets relating to foreign distribution rights were valued in
connection with the acquisition, and as a result, amortization of intangibles
was increased by $0.8 million for the 1994 period following the Xomed
Acquisition and $0.2 million for the first quarter of 1995 (the "International
Distribution Rights Amortization"). In addition, interest expense increased
due to the increased borrowings to finance the Xomed Acquisition.
The Xomed Acquisition and the Company's initial working capital were funded
primarily through the issuance of $43.5 million of preferred stock and from
the incurrence of approximately $46.4 million in
18
<PAGE>
long-term debt. In connection with the Xomed Acquisition, management
implemented a restructuring plan for Xomed-Treace that included the closing of
manufacturing operations in Puerto Rico and the elimination of certain
overhead in other facilities.
DISCONTINUED OPERATIONS
The surgical drapes segment sold in July 1995 in the Otology Acquisition has
been reflected as discontinued operations and a loss on discontinuance of
approximately $2.5 million (after a $1.4 million tax benefit) was recorded in
the third quarter of 1995.
CHANGE IN DISTRIBUTION CHANNELS
On January 1, 1996 the Company effected two changes in its product
distribution to focus the Company's resources on its core product lines of
sinus and rhinology, head and neck and otology. The first involved changing
from distributing its ophthalmic product line through its direct sales force
to distributing this line through an independent dealer network. As a result
of this change, the Company's net sales were approximately $1.0 million lower
in the first half of 1996 than they would have been if the ophthalmic product
line had continued to be distributed through the Company's direct sales force.
The second change involved moving the distribution of the Company's Merocel
fluid-control products from an independent dealer network to the Company's
U.S. direct sales force. As a result of this change, the Company's net sales
were approximately $0.5 million higher in the first half of 1996 than they
would have been if the Merocel product line had continued to be distributed
through independent dealers.
ACQUISITION OF TREBAY
The Company's acquisition of TreBay in April 1996 has been accounted for
under the purchase method of accounting. Accordingly, the purchase price of
approximately $6.6 million was allocated to the individual assets acquired and
liabilities assumed, based upon their respective fair values at the date of
acquisition. The transaction resulted in cost in excess of net assets acquired
of $4.4 million, of which $3.6 million was allocated to in-process research
and development and charged to expense in the second quarter of 1996. The
acquisition was funded through the issuance of $2.8 million redeemable
preferred stock and $3.8 million of convertible preferred stock.
RESTRUCTURING CHARGES
During the second quarter of 1996, the Company's new management team
initiated cost savings programs that resulted in reductions in the number of
employees at the Company's Mystic, Connecticut and Jacksonville, Florida
facilities. The restructuring eliminated redundant overhead at the two sites,
and the Company expects these actions to yield cost savings primarily in
general and administrative expense. The Company incurred a one-time
restructuring charge of approximately $3.1 million during the second quarter
of 1996 primarily to reflect the cost of the severance payments to terminated
employees.
OTHER RECENT EVENTS
In December 1995, the Company became the exclusive worldwide distributor of
Implantech Associates, Inc.'s line of facial plastic implants to the ENT
market. In April 1996, the Company became the exclusive distributor of BOSS
Instruments Ltd.'s line of hand instrumentation products to the U.S. ENT
market. The Company introduced in the second quarter of 1996 its Wizard Plus
powered tissue-removal system and NIM-2(R) XL nerve monitoring system. In
connection with the introduction of these new products, the Company reserved
significant numbers of the initial products manufactured as samples to be used
by its sales force in their marketing efforts, which resulted in a charge to
selling, general and administrative expenses of approximately $0.4 million
during the first half of 1996.
SEASONALITY
The Company's sales and operating results have varied, and are expected to
continue to vary significantly from quarter to quarter as a result of seasonal
patterns. The Company believes that its
19
<PAGE>
business is seasonal in nature, with the third quarter of each year typically
having the lowest sales and the fourth quarter of each year typically having
the highest sales. There can be no assurance that future seasonal fluctuations
will not adversely affect the Company's business, financial condition and
results of operations.
RESULTS OF OPERATIONS--COMBINED (CONSOLIDATED)
Xomed-Treace was acquired on April 15, 1994. As a result of Xomed-Treace's
inclusion in the Company's financial statements since the date of the Xomed
Acquisition, the revaluation of the net assets acquired and the related
impacts on cost of sales and expenses, the Consolidated Financial Statements
of the Company for periods prior to April 15, 1994 are not comparable to those
of subsequent periods.
The following table has been prepared by combining ("combined basis") the
historical data of Merocel with Xomed-Treace for periods prior to the Xomed
Acquisition. No purchase accounting adjustments have been reflected in the
combined periods prior to acquisition. The Company believes this presentation
provides a more meaningful basis for presenting "Management's Discussion and
Analysis of Financial Condition and Results of Operations" than using the
historical selected consolidated financial data also presented herein.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
------------------------- -----------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales, net (1)................... $55,435 $55,276 $59,865 $29,424 $32,942
Cost of sales (2) ............... 23,568 21,436 22,256 10,686 12,690
------- ------- ------- ------- -------
Amortization of acquisition costs -- 3,883 919 919 --
allocated to inventory........... ------- ------- ------- ------- -------
Gross profit..................... 31,867 29,957 36,690 17,819 20,252
Operating Expenses:
Selling, general and
administrative.................. 21,139 24,497 27,077 12,440 14,129
Research and development........ 3,077 2,650 2,405 1,158 1,669
Amortization of intangibles (3)
................................ 1,201 2,950 2,579 1,224 1,168
Write-off of acquired research
and development................. -- -- -- -- 3,612
Restructuring charge............ -- -- -- -- 3,093
------- ------- ------- ------- -------
Total operating expenses......... 25,417 30,097 32,061 14,822 23,671
------- ------- ------- ------- -------
Operating income (loss) from
continuing operations............ 6,450 (140) 4,629 2,997 (3,419)
Interest expense ................ (102) (2,148) (3,063) (1,579) (1,536)
Other income (expense), net...... 360 330 114 (136) 64
------- ------- ------- ------- -------
Income (loss) from continuing
operations before income tax
expense (benefit)............... 6,708 (1,958) 1,680 1,282 (4,891)
Income tax expense (benefit)..... 2,541 (633) 1,355 855 (1,956)
------- ------- ------- ------- -------
Income (loss) from continuing $ 4,167 $(1,325) $ 325 $ 427 $(2,935)
operations....................... ======= ======= ======= ======= =======
</TABLE>
- --------
(1) On January 1, 1996, the Company effected two changes in its product
distribution. The first involved changing from distributing its ophthalmic
product line through its direct sales force to distributing this line
through an independent dealer network. As a result of this change, the
Company's net sales were approximately $1.0 million lower in the first
half of 1996 than they would have been if the ophthalmic product line had
continued to be distributed through the Company's direct sales force. If
this change had taken place on January 1, 1994, the Company's combined net
sales would have been approximately $2.4 million and $2.1 million lower in
1994 and 1995, respectively, than they were historically. The second
change involved moving the distribution of the Company's Merocel fluid-
control products from an independent dealer network to the Company's U.S.
direct sales force. As a result of this change, the Company's net sales
were approximately $0.5 million higher in the first half of 1996 than they
would have been if the Merocel product line had continued to be
distributed through independent dealers. If this change had taken place on
January 1, 1994, the Company's combined net sales would have been
approximately $1.0 million higher in each of 1994 and 1995 than they were
historically.
(2) For historical periods, $3,883,000, $919,000 and $919,000 of the Inventory
Valuation Adjustment was charged to cost of sales for the years ended
December 31, 1994 and 1995 and the six months ended July 1, 1995,
respectively.
(3) For historical periods, $838,000, $162,000 and $162,000 of additional
amortization expense related to the International Distribution Rights
Amortization was incurred for the years ended December 31, 1994 and 1995
and the six months ended July 1, 1995, respectively.
20
<PAGE>
The following table sets forth certain sales and expense data as a
percentage of the Company's total sales on a combined basis for each period
presented:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
----------------------------- ---------------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Sales, net................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.............. 42.5 38.8 37.2 36.3 38.5
Amortization of acquisition
costs allocated to inven-
tory...................... 0.0 7.0 1.5 3.1 0.0
-------- -------- -------- ----- -----
Gross profit............... 57.5 54.2 61.3 60.6 61.5
-------- -------- -------- ----- -----
Operating Expenses:
Selling, general and ad-
ministrative.............. 38.1 44.3 45.3 42.3 42.9
Research and development.. 5.6 4.8 4.0 3.9 5.1
Amortization of intangi-
bles...................... 2.2 5.3 4.3 4.2 3.5
Write-off of acquired re-
search and development.... 0.0 0.0 0.0 0.0 11.0
Restructuring charges..... 0.0 0.0 0.0 0.0 9.4
-------- -------- -------- ----- -----
Total operating expenses... 45.9 54.4 53.6 50.4 71.9
-------- -------- -------- ----- -----
Operating income (loss)
from continuing opera-
tions..................... 11.6 (0.2) 7.7 10.2 (10.4)
Interest expense........... (0.2) (3.9) (5.1) (5.4) (4.7)
Other income (expense),
net....................... 0.7 0.6 0.2 (0.4) 0.2
-------- -------- -------- ----- -----
Income (loss) from
continuing operations
before income tax expense
(benefit)................. 12.1 (3.5) 2.8 4.4 (14.9)
-------- -------- -------- ----- -----
Income tax expense (bene-
fit)...................... 4.6 (1.1) 2.3 2.9 (6.0)
-------- -------- -------- ----- -----
Net income (loss) from con-
tinuing operations........ 7.5% (2.4)% 0.5% 1.5% (8.9)%
======== ======== ======== ===== =====
</TABLE>
21
<PAGE>
SALES COMPOSITION--RESULTS OF OPERATIONS (COMBINED)
The Company derives its sales from various markets within the ENT industry.
Sinus and rhinology, head and neck and otology are the three core markets in
which the Company operates. In addition to products for these markets, the
Company has other product offerings including a line of ophthalmic products,
which the Company has recently converted from distributing through its direct
sales force to distributing through independent dealers. The following table
summarizes the Company's worldwide product line sales during the periods
indicated and has been prepared by combining the historical data of Merocel
with Xomed-Treace for periods prior to the Xomed Acquisition:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
------------------------- -----------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SALES:
Sinus and Rhinology.............. $14,273 $15,641 $18,137 $ 8,977 $10,645
Head and Neck.................... 13,000 12,966 14,219 6,808 7,929
Otology.......................... 11,427 10,966 12,643 6,378 7,767
------- ------- ------- ------- -------
Total Core Business............ 38,700 39,573 44,999 22,163 26,341
Ophthalmic and Other............. 16,735 15,703 14,866 7,261 6,601
------- ------- ------- ------- -------
Total......................... $55,435 $55,276 $59,865 $29,424 $32,942
======= ======= ======= ======= =======
PERCENTAGE OF SALES:
Sinus and Rhinology.............. 25.7% 28.3% 30.3% 30.5% 32.3%
Head and Neck.................... 23.5 23.5 23.8 23.1 24.1
Otology.......................... 20.6 19.8 21.1 21.7 23.6
------- ------- ------- ------- -------
Total Core Business............ 69.8 71.6 75.2 75.3 80.0
Ophthalmic and Other............. 30.2 28.4 24.8 24.7 20.0
------- ------- ------- ------- -------
Total......................... 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= =======
</TABLE>
The Company distributes its products on a worldwide basis through a 61-
person direct sales force in the U.S. and selected other countries and through
a network of 95 independent distributors. The Company's core ENT products are
sold in the U.S. only on a direct sales basis.
22
<PAGE>
Prior to 1994, the Company's international sales and distribution were
conducted jointly with Zimmer International, a division of Bristol-Myers and a
former affiliate. Since that time, the Company has developed its own
international sales and distribution network. Approximately 29.4% of the
Company's net sales in 1995 and 34.3% of its net sales during the first half
of 1996 were made outside the U.S. through direct operations in the United
Kingdom, Canada, France, Germany and Australia, as well as through 75
independent international distributors, many of whom distribute the Company's
products exclusively. The following table summarizes the Company's U.S. and
international sales for the periods indicated and has been prepared by
combining the historical data of Merocel with Xomed-Treace for periods prior
to the Xomed Acquisition:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
------------------------- -----------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SALES:
U.S............................. $42,800 $40,800 $42,249 $20,398 $21,639
International................... 12,635 14,476 17,616 9,026 11,303
------- ------- ------- ------- -------
Total......................... $55,435 $55,276 $59,865 $29,424 $32,942
======= ======= ======= ======= =======
PERCENTAGE OF SALES:
U.S............................. 77.2% 73.8% 70.6% 69.3% 65.7%
International................... 22.8 26.2 29.4 30.7 34.3
------- ------- ------- ------- -------
Total......................... 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= =======
</TABLE>
The Company places particular emphasis on disposable products and
implantable devices, which represented 86.3% of sales during the first half of
1996, as compared with 78.9% of sales in 1993. One of the Company's principal
objectives is to continue to develop additional disposable products for use
with its instrumentation systems. Recently, the Company introduced the Typhoon
line of disposable blades, which is the only blade system in the market place
that is interchangeable among the various power hand pieces on the market. The
following table summarizes the Company's sales of equipment and
instrumentation products as well as disposable and implantable products for
the periods indicated and has been prepared by combining the historical data
of Merocel with Xomed-Treace for periods prior to the Xomed Acquisition:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
------------------------- -----------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SALES:
Equipment and Instrumentation
Products....................... $11,685 $ 9,546 $ 9,396 $ 4,448 $ 4,513
Disposable and Implantable Prod-
ucts........................... 43,750 45,730 50,469 24,976 28,429
------- ------- ------- ------- -------
Total......................... $55,435 $55,276 $59,865 $29,424 $32,942
======= ======= ======= ======= =======
PERCENTAGE OF SALES:
Equipment and Instrumentation
Products....................... 21.1% 17.3% 15.7% 15.1% 13.7%
Disposable and Implantable Prod-
ucts........................... 78.9 82.7 84.3 84.9 86.3
------- ------- ------- ------- -------
Total......................... 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= =======
</TABLE>
SIX MONTHS ENDED JUNE 29, 1996 COMPARED TO SIX MONTHS ENDED JULY 1, 1995
Net Sales. Net sales increased 12.0% to $32.9 million in the first half of
1996 from $29.4 million in the comparable period in 1995. In the core
businesses of sinus and rhinology, head and neck and otology, sales increased
18.9% in the first half of 1996 over the prior comparable period, which
resulted in these
23
<PAGE>
product lines representing 80.0% of the Company's revenue during the first
half of 1996 as compared to 75.3% in the first half of 1995. These increases
were principally the result of sales generated from several new products
introduced recently including the Company's Wizard and Wizard Plus powered
tissue-removal systems, the Activent anti-microbial vent tube line, an otology
implant line acquired in the Otology Acquisition in the third quarter of 1995
and a line of facial implant products. In addition, several existing product
lines showed strong sales growth over the prior period including the Merocel
fluid-control products and the NIM-2(R) XL nerve monitoring system. The
increase in Merocel products sales was due partly to price increases resulting
from moving the distribution of these products, effective on January 1, 1996,
from an independent dealer network to the Company's U.S. direct sales force.
Sales were adversely affected, however, by a change in the distribution system
for the Company's ophthalmic product line. On January 1, 1996, the Company
commenced distribution of its ophthalmic line through an independent dealer
network, with the Company selling to dealers at wholesale prices. During the
first half of 1995, these products were distributed through the Company's
direct sales force at retail pricing. This change was made to better focus the
direct sales force on the ENT market. Although unit volume in the ophthalmic
business was comparable between the two periods, net sales decreased as a
result of the price differential from changing the distribution channel.
Associated ophthalmic operating expenses also declined. Sales also increased
in several other product lines due to increased penetration of international
markets through recently established direct sales sites. International sales
increased 25.2% during the period and represented 34.3% of the Company's
revenue in the first half of 1996 compared to 30.7% in the first half of 1995.
Cost of Sales. Cost of sales increased 9.3% to $12.7 million in the first
half of 1996 from $11.6 million in the first half of 1995. As a percent of
sales, cost of sales decreased to 38.5% in the first half of 1996 from 39.4%
in the prior comparable period. In accounting for the Xomed Acquisition, the
Company effected the Inventory Valuation Adjustment by which a portion of the
excess cost of the acquisition over book value of the net assets acquired was
allocated to inventory. This allocation resulted in an increase in inventory
value of $5.3 million, of which $4.8 million was allocated to the inventory of
continuing operations. The inventory valued on this basis was charged to cost
of sales on a FIFO basis as it was sold. This increased cost of sales in the
first half of 1995 by $0.9 million. No such adjustment affected 1996. Without
this charge, cost of sales would have increased 18.8% to $12.7 million in the
first half of 1996 from $10.7 million in the prior comparable period and cost
of sales as a percent of sales would have increased to 38.5% in the first half
of 1996 from 36.3% in the prior comparable period. This increase was primarily
due to the change in the distribution method described above for the
ophthalmic line which resulted in lower average selling prices. This increase
was partially offset by an increase in the ratio of higher margin disposable
and implantable products to equipment and instrumentation products, as well as
the change in the distribution of the Merocel product line which resulted in a
higher average selling price.
Gross Profit. Gross profit as a percent of sales increased to 61.5% in the
first half of 1996 from 60.6% in the prior comparable quarter. Without the
effects of the Inventory Valuation Adjustment discussed above, gross profit as
a percent of sales would have decreased to 61.5% in the first half of 1996
from 63.9% in the prior comparable period for the reasons discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 13.6% to $14.1 million in the first half of
1996 from $12.4 million in the prior comparable period. This increase was due
primarily to higher commissions on a larger sales base, an increase in the
average commission rate, the operating expenses of a new direct sales
subsidiary in Germany, which began operations in the first quarter of 1996,
and promotional expenses related to the Company's line of sinus endoscopy
systems. As a percent of sales, selling, general and administrative expenses
increased to 42.9% in the first half of 1996 from 42.3% in the comparable 1995
period. The Company expects to leverage its selling, general and
administrative expense structure to reduce these expenses as a percent of
sales. In addition, the Company believes that certain restructuring actions
taken in the second quarter of
24
<PAGE>
1996 should result in savings that will further reduce these expenses as a
percent of sales. There can be no assurances, however, that management will be
able to decrease selling, general and administrative expenses as a percentage
of sales through such restructuring actions.
Research and Development. Research and development expenses increased 44.1%
to $1.7 million in the first half of 1996 from $1.2 million in the first half
of 1995 and increased as a percent of sales to 5.1% from 3.9% during the same
period. This increase is primarily the result of project expenses related to
the development of the new XPS powered tissue-removal system and the
Powerforma drill system. Although it has in the past relied in part on
strategic acquisitions and licensing of third-party technology to develop its
broad line of ENT products, the Company believes it has a strong base of
proprietary engineering, manufacturing and bio-material capabilities upon
which to build its future research and development efforts. The Company plans
to increase research and development expenses while maintaining spending as a
percent of sales to a ratio similar to that in the first half of 1996.
Amortization. Amortization expense in the first half of 1996 and in the
first half of 1995 related principally to approximately $50.0 million of
goodwill related to continuing operations generated from the Xomed Acquisition
in April 1994, which is being amortized over 25 years.
Write-off of Acquired Research and Development. The TreBay acquisition was
accounted for under the purchase method of accounting. Accordingly, the
purchase price of approximately $6.6 million was allocated to the individual
TreBay assets acquired and liabilities assumed, based upon their respective
fair values at the date of acquisition. The transaction resulted in cost in
excess of net assets acquired of approximately $4.4 million, of which $3.6
million was allocated to in-process research and development and charged to
expense in the second quarter of 1996.
Restructuring. In the second quarter of 1996, the Company's new management
team initiated cost savings programs that resulted in reductions in the number
of employees at the Company's Mystic, Connecticut and Jacksonville, Florida
facilities. The restructuring eliminated redundant overhead at the two sites,
and the Company expects these actions to yield cost savings primarily in
selling, general and administrative expenses, although there can be no
assurances that such cost savings will be achieved. The Company incurred a
one-time restructuring charge of approximately $3.1 million during the second
quarter of 1996 to reflect the cost of severance payments to terminated
employees as well as other restructuring expenses.
Interest and Other. Interest expense during the first half of 1996 was
consistent with the prior comparable quarter at approximately $1.5 million.
Interest expense related principally to the Term Loan and the Company's
secured revolving credit facility (the "Revolving Credit Facility") as
described below in "--Liquidity and Capital Resources." Other income of
$64,000 in the second half of 1996 was $50,000 higher than the $14,000
reported in the first half of 1995 and related principally to royalty income
on a product licensed to a third party.
Income Taxes. The benefit for income taxes in the first half of 1996 of $2.0
million was $2.9 million lower than the $0.9 million expense recorded in the
prior comparable period. The tax benefit in 1996 resulted primarily from the
recording of the write-off of acquired research and development and
restructuring expense discussed above. The Company's effective tax rate in the
first half of 1996 was 40% as compared to 67% in the prior comparable period.
The Company's effective tax rate was high in 1995 due principally to losses
incurred by foreign direct sales subsidiaries during their start-up stages,
the related tax benefits of which were not recorded because of uncertainty as
to their ultimate realization. The 1996 effective tax rate assumes that the
foreign direct sales subsidiaries become profitable during the year. There can
be no assurance that the foreign subsidiaries will be profitable in 1996. A
failure of the foreign subsidiaries to be profitable in 1996 could result in
an effective tax rate higher than the 40% currently being utilized.
25
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Sales. Historical net sales increased 40.9% to $59.9 million in 1995 from
$42.5 million in 1994, principally as a result of the inclusion of Xomed-
Treace's operations for the full year 1995 as compared to eight and one-half
months in 1994.
Combined net sales increased 8.3% to $59.9 million in 1995 from $55.3 million
in 1994. In the core businesses, sales increased 13.7% in 1995 over 1994, which
resulted in these product lines representing 75.2% of the Company's revenue
during 1995 as compared to 71.6% in 1994. This increase was primarily the
result of increased volume across several product lines, most notably in the
Company's NIM-2 (R) nerve monitoring system. In addition, new product sales
increased from the Company's Wizard powered tissue-removal system which was
introduced during the third quarter of 1995, a line of sinus microendoscopy
instrumentation and sales generated from the acquisition of an otology implant
line acquired in the Otology Acquisition during the third quarter of 1995. New
international direct sales operations were established in Canada and Australia
during the third quarter of 1994 and in the United Kingdom and France during
the first quarter of 1995, which resulted in increased penetration of existing
and new products in these markets, as well as higher pricing for these products
because of the change to distributing directly rather than through wholesale
distribution channels. International sales increased 21.7% during the year and
represented 29.4% of the Company's revenue in 1995 versus 26.2% in 1994.
Domestic sales in the Company's ophthalmic product line declined $0.6 million
in 1995 from 1994 as a result of efforts to focus the sales force on the
Company's ENT product lines. The ophthalmic line was moved to an independent
wholesale distribution channel effective January 1, 1996.
Cost of Sales. Historical cost of sales increased 20.5% to $23.2 million in
1995 from $19.2 million in 1994 principally as a result of the inclusion of
Xomed-Treace's operations for the full year 1995 as compared to eight and one-
half months in 1994. Historical cost of sales included charges related to the
Inventory Valuation Adjustment from the Xomed Acquisition consisting of $0.9
million in 1995 and $3.9 million in 1994.
Combined cost of sales decreased 8.3% to $23.2 million in 1995 from $25.3
million in 1994 and, as a percent of sales, decreased to 38.7% in 1995 from
45.8% in 1994. The decrease in cost of sales is primarily due to a reduction in
the charge related to the Inventory Valuation Adjustment to $0.9 million in
1995 from $3.9 million in 1994. Without the impact of this charge, cost of
sales would have increased 3.8% to $22.3 million in 1995 from $21.4 million in
1994. Cost of sales as a percent of sales would have decreased, however, to
37.2% in 1995 from 38.8% in 1994. The decrease in cost of sales as a percent of
sales was primarily due to higher margins on sales achieved through
international direct sales operations established during 1994 and early 1995 as
well as an increase in the ratio of higher-margin disposable and implantable
products to equipment and instrumentation products. In 1995, 84.3% of the
Company's revenue was derived from disposable and implantable products as
compared to 82.7% in 1994. In addition, 1995 benefited from a full year of
expense savings generated from restructuring actions that took place following
the Xomed Acquisition in 1994. The restructuring involved the closure of a
Puerto Rico manufacturing facility.
Gross Profit. Historical gross profit as a percent of sales increased to
61.3% in 1995 from 54.7% in 1994 principally due to the effect of the change in
amortization related to the Xomed Acquisition accounting discussed previously.
Combined gross profit as a percent of sales increased to 62.8% in 1995 from
54.2% in 1994 principally due to the effect of the Inventory Valuation
Adjustment related to the Xomed Acquisition accounting discussed previously.
Without the impact of this adjustment, gross profit as a percent of sales would
have increased to 62.8% in 1995 from 61.2% in 1994 for the reasons described
above.
Selling, General and Administrative Expenses. Historical selling, general and
administrative expenses increased 41.6% to $27.1 million in 1995 from $19.1
million in 1994. Of the increase, $5.4 million or 67.6% represents the
inclusion of Xomed-Treace's operations for the full year 1995 as compared to
eight and one-half months in 1994. The balance of this increase is due to
issues discussed below.
26
<PAGE>
Combined selling, general and administrative expenses increased 10.5% to
$27.1 million in 1995 from $24.5 million in 1994. The increase was primarily
due to higher international expenses related to the establishment of direct
sales operations in Canada, Australia, the United Kingdom and France during
the latter part of 1994 and early 1995 and expenses associated with the
integration of the prosthetic implant devices and ventilation tube product
lines acquired during the year in the Otology Acquisition. This increase was
partially offset by a full year of savings generated from restructuring
actions taken during 1994 to reduce administrative overhead. Selling, general
and administrative expenses increased as a percent of sales to 45.2% in 1995
from 44.3% in 1994.
Research and Development. Historical research and development expenses
increased 22.8% to $2.4 million in 1995 from $2.0 million in 1994 principally
as a result of the inclusion of Xomed-Treace's operations for the full year
1995 as compared to eight and one-half months in 1994. The increase was
partially offset by savings from restructuring actions implemented in 1994.
Combined research and development expenses decreased 9.2% to $2.4 million in
1995 from $2.7 million in 1994. As a percent of sales, combined research and
development expenses decreased to 4.0% in 1995 from 4.8% in 1994. This
reduction represents a full year of savings from restructuring actions taken
in late 1994 to eliminate overhead in the research and development area.
Actual spending on research and development projects was comparable between
the two years.
Amortization. Historical amortization decreased 2.8% to $2.6 million in 1995
from $2.7 million in 1994. The net decrease represents an increase due to the
inclusion of Xomed-Treace's operations for the full year 1995 as compared to
eight and one-half months in 1994 which was more than offset by International
Distribution Rights Amortization that was greater in 1995 than in the 1994
period.
Combined amortization expense of $2.6 million in 1995 was $0.4 million lower
than the $3.0 million incurred in 1994. The net decrease is due to lower
amortization of International Distribution Rights Amortization in 1995 which
was partially offset by increased amortization expense related to the
approximately $56 million of goodwill created in the Xomed Acquisition in
April 1994. The goodwill from this transaction is being amortized over 25
years.
Interest and Other. Interest expense increased 42.6% to $3.1 million in 1995
from $2.1 million in 1994 principally as a result of incurring a full year of
interest expense in 1995 related to the Xomed Acquisition in April 1994. Other
income of $0.3 million in 1994 represented royalty income from a product
licensed to a third party.
Income Taxes. An historical tax provision of $1.4 million was recorded in
1995 compared with a tax benefit of $0.8 million in 1994. The tax benefit in
1994 was primarily due to losses generated by amortization expenses related to
the Xomed Acquisition in that year.
A combined tax provision of $1.4 million was recorded in 1995 compared with
a tax benefit of $0.6 million in 1994. The tax benefit in 1994 was primarily
due to losses generated by amortization expenses related to the Xomed
Acquisition in that year. The effective tax rate increased to 81% in 1995 from
32% in 1994 primarily due to losses incurred by foreign direct sales
subsidiaries in 1995 during their start-up stages whose related tax benefits
were not recorded due to uncertainty about their ultimate realization.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
The principal reason for the increases in the Company's historical operating
data for 1993 to 1994 is the effect on results of operations and the related
balance sheet data of the Xomed Acquisition in April 1994. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview" and Note 1 to Notes to Consolidated Financial Statements.
27
<PAGE>
Net Sales. Combined net sales decreased slightly to $55.3 million in 1994
from $55.4 million in 1993. The decrease was the result of distribution
channel changes and disruptions during 1994 related to the Xomed Acquisition
in April 1994 and a subsequent sales force restructuring which resulted in
sales force turnover and lost revenues. In addition, during 1994 the medical
device industry in general experienced a slowdown as a result of concern over
healthcare reform. During this time, capital equipment purchases were
postponed and the number of surgical procedures performed in various
subspecialties grew slower or declined relative to historical levels. Despite
these factors, the Company's core businesses grew 2.3% worldwide in 1994 over
1993 primarily due to the Merocel fluid-control products and the international
otology product line. International sales increased 14.6% during the year and
represented 26.2% of the Company's revenue in 1994 compared to 22.8% in 1993.
Cost of Sales. Combined cost of sales increased 7.4% to $25.3 million in
1994 versus $23.6 million in 1993. As a percent of combined sales, combined
cost of sales increased to 45.8% in 1994 from 42.5% in 1993. The dollar and
percentage increase in cost of sales resulted primarily from the inclusion in
1994 of $3.9 million of charges related to the Inventory Valuation Adjustment.
Without the impact of this adjustment, combined cost of sales would have
decreased 9.1% to $21.4 million in 1994 from $23.6 million in 1993 and
combined cost of sales as a percent of combined sales would have decreased to
38.8% in 1994 from 42.5% in 1993. This decrease in combined cost of sales as a
percent of combined sales was due primarily to higher margins on sales through
international direct sales operations established during 1994, a larger
percentage of higher margin disposable and implantable products (82.7% of the
Company's revenue in 1994 compared to 78.9% in 1993), as well as the partial
year impact of the restructuring that took place during 1994 following the
Xomed Acquisition. The restructuring actions involved the closure of a Puerto
Rico manufacturing plant.
Gross Profit. Combined gross profit as a percent of combined sales decreased
to 54.2% in 1994 from 57.5% in 1993. Excluding the Inventory Valuation
Adjustment expense of $3.9 million in 1994 related to the Xomed Acquisition,
combined gross profit as a percent of combined sales would have increased to
61.2% in 1994 from 57.5% in 1993 as a result of the factors discussed above.
Selling, General and Administrative Expenses. Combined selling, general and
administrative expenses increased 15.9% to $24.5 million in 1994 from $21.1
million in 1993. The increase was primarily due to higher international
expenses related to the establishment of direct sales operations in Canada and
Australia during the latter part of 1994. In addition, the Company incurred
increased administration costs for legal and accounting and treasury services
to maintain Xomed-Treace as an independent corporation rather than a division.
These increases were somewhat offset by a partial year of savings from
restructuring actions that took place during 1994 to reduce overhead. As a
percent of combined sales, combined selling, general and administrative
expenses increased to 44.3% in 1994 from 38.1% in 1993 for the reasons
described above.
Research and Development. Combined research and development expenses
decreased 13.9% from $3.1 million in 1993 to $2.7 million in 1994. This
reduction represents a partial year of savings from restructuring actions
taken in late 1994 to eliminate overhead in the research and development area.
Actual spending on research and development projects in 1994 was comparable
with the prior year.
Amortization. Combined amortization expense increased to $3.0 million in
1994 from $1.2 million in 1993. The majority of the amortization expense in
1994 relates to goodwill generated from the Xomed Acquisition in April 1994,
which is being amortized over 25 years. In addition, 1994 included
approximately $0.8 million of International Distribution Rights Amortization
that was related to international distribution agreements with Bristol-Myers,
the former owner of Xomed-Treace. A portion of the excess cost of the Xomed
Acquisition over the fair market value of the net assets acquired was
allocated to these international distribution agreements.
Interest and Other. Combined net interest expense was $2.1 million in 1994
as compared with interest income of $0.1 million in 1993. The interest expense
in 1994 primarily relates to the Term Loan
28
<PAGE>
and the Revolving Credit Facility that were established in April 1994 in
connection with the Xomed Acquisition as described below under "--Liquidity
and Capital Resources."
Combined other income of $0.3 million in 1994 compared to $0.4 million in
1993 and was related to royalty income from a product licensed to a third
party.
Income Taxes. The combined provision for income taxes decreased to a benefit
of $0.6 million in 1994 from a provision of $2.5 million in 1993. The
effective tax rate decreased to 32% in 1994 from 38% in 1993 principally due
to losses incurred by foreign direct sales subsidiaries during their start-up
stages whose related tax benefits were not recorded due to uncertainty about
their ultimate realization.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations (including capital
expenditures) through cash flows from operations. Since the Xomed Acquisition
in April 1994, which was financed in part by the incurrence of $46.4 million
of debt under the Term Loan and the Revolving Credit Facility, all cash flow
generated from operations has been applied to repay the outstanding principal
on the Term Loan or the Revolving Credit Facility. By June 29, 1996, the
aggregate principal balance of the Term Loan and the Revolving Credit Facility
had been reduced to $35.0 million.
During the six months ended June 29, 1996, the Company generated cash from
operating activities of $1.4 million as compared with $4.4 million in the
prior comparable period. In the first half of 1996, the Company used $2.0
million of cash to increase inventories while in the prior comparable period,
the Company generated cash from inventory reductions of $1.4 million. The
inventory increase in 1996 principally related to new products introduced
during the latter part of 1995 and early 1996. In addition, the restructuring
expense of $3.1 million recorded during the first half of 1996 lowered cash
flow from operations by $0.7 million after taking into account the increase in
accrued restructuring costs of $2.4 million. During 1995, the Company
generated cash flow from operations of $6.3 million compared with $4.0 million
in 1994. The change in cash flow between the years relates principally to the
inclusion of the operations of Xomed-Treace for eight and one-half months in
1994 as compared with a full year in 1995. Working capital at June 29, 1996
was $9.9 million as compared with $11.0 million at July 1, 1995. The reduction
in working capital relates principally to increases in accrued restructuring
costs and the current portion of long-term debt. Working capital at December
31, 1995 was $12.2 million as compared to $12.7 million at December 31, 1994.
The Company believes cash flow from operations combined with the amounts
available for borrowing under the Revolving Credit Facility will be sufficient
to finance working capital needs during the next twelve months.
Cash generated in investing activities was $0.5 million in the first half of
1996 as compared to cash used in investing activities of $1.4 million in the
prior comparable period. During the second quarter of 1996, the Company
acquired TreBay by issuing preferred stock. The assets acquired in this
transaction included $2.0 million in cash, which is reported as a source of
cash from investing activities. In addition, certificates of deposit related
to a foreign subsidiary matured during the first half of 1996 generating $0.3
million in cash. Capital expenditures were $1.7 million during each of the
first half of 1996 and 1995 and related principally to purchases of
manufacturing equipment. Cash used in investing activities was $4.0 million in
1995 as compared with $83.4 million in 1994, during which period $80.9 million
related to the Xomed Acquisition.
Cash used in financing activities was $1.7 million in the first half of 1996
as compared with $2.9 million in the first half of 1995. In general, all cash
generated from operations that is not used in investing activities is used to
reduce outstanding debt under the Term Loan and the Revolving Credit Facility.
Cash used in financing activities in 1995 of $2.1 million compared with cash
provided by financing activities of $78.3 million in 1994, during which period
cash was received from the establishment of the Term Loan and the Revolving
Credit Facility as well as from the issuance of preferred stock related to the
Xomed Acquisition.
29
<PAGE>
Under the terms of the Revolving Credit Facility, the Company may borrow up
to $14.0 million for working capital and operating needs. The amount available
to the Company at any given time is based upon various percentages of the
Company's outstanding inventories and accounts receivable as determined
periodically throughout the year (the "Borrowing Base"). Any excess of the
principal amount outstanding under the Revolving Credit Facility over the
Borrowing Base must be repaid by the Company. The outstanding principal under
the Revolving Credit Facility is due and payable on April 15, 1999. Management
expects that the Borrowing Base will remain at a level for the next twelve
months that will not require the Company to make any repayments of principal
outstanding under the Revolving Credit Facility during such period. At August
1, 1996, the Borrowing Base under the Revolving Credit Facility was $13.8
million, of which $12.0 million was outstanding and $1.8 million was available
for additional borrowing. The Revolving Credit Facility is secured by
substantially all the assets of the Company, contains restrictions regarding
payment of dividends, incurrence of additional debt and capital expenditures
and requires compliance with various financial covenants.
The Company obtained waivers from its lenders with respect to noncompliance
with certain financial covenants of the Term Loan and the Revolving Credit
Facility as of December 31, 1995 and March 30, 1996. In addition, as of June
29, 1996, the Company was not in compliance with certain financial covenants
thereunder, including the interest coverage and operating cash flow ratios,
and does not expect to be in compliance with such covenants during the
remainder of 1996. The noncompliance results primarily from (i) the one-time
$3.1 million charge associated with the restructuring actions taken by the
Company in the second quarter of 1996; and (ii) the one-time $3.6 million
charge in the second quarter of 1996 for costs allocated to in-process
research and development in connection with the acquisition of TreBay. The
failure to be in compliance constitutes an event of default entitling the
Company's lenders to accelerate the payment of all outstanding principal and
interest. Management has had preliminary discussions with its lenders with
respect to these matters and has scheduled a meeting with the lenders for late
August 1996 to discuss amendments to the Revolving Credit Facility that would
adjust the financial covenants so that the Company is no longer in default.
Management has been successful in obtaining waivers of default from these
lenders in the past and anticipates that it will enter into such an amendment
of the Term Loan and the Revolving Credit Facility by the end of September
1996. However, there can be no assurance that management will be successful in
negotiating an amendment to the Term Loan and the Revolving Credit Facility.
The Company's Consolidated Financial Statements do not include any adjustments
which may result from the outcome of this situation.
Of the net proceeds of this offering, $20.7 million will be used to repay
the entire principal amount of and accrued interest on the Term Loan. The
Company will use the balance of the net proceeds of this offering, after
repayment of the Term Loan, plus the net proceeds from the sale of any shares
covered by the Underwriters' over-allotment option, for the redemption of up
to a maximum of $25.0 million of Series C Redeemable Preferred Stock. In the
Share Exchange, all shares of Series C Redeemable Preferred Stock remaining
outstanding 31 days after the date of the initial closing of this offering
will be exchanged for shares of Class A Common Stock, with the number of
shares of Class A Common Stock to be issued in such exchange to be determined
by dividing the aggregate redemption price of such Series C Redeemable
Preferred Stock, plus accrued but unpaid dividends, by the per share initial
public offering price. Based upon an assumed initial public offering price of
$20.00 per share, 239,234 shares of Series C Redeemable Preferred Stock having
an aggregate redemption price of $25.0 million would be redeemed and the
remaining 60,225 shares of Series C Redeemable Preferred Stock would be
exchanged in the Share Exchange for 314,650 shares of Class A Common Stock.
30
<PAGE>
BUSINESS
OVERVIEW
Xomed is a leading developer, manufacturer and marketer of surgical products
for use by ENT specialists. The Company offers a broad line of products in its
core ENT market that includes powered tissue-removal systems and other
microendoscopy instruments, implantable devices, nerve monitoring systems and
disposable fluid-control products. The Company also offers a line of
ophthalmic and other products. For the first half of 1996, approximately 86%
of Xomed's revenues were derived from disposable or implantable products. The
Company distributes its products on a worldwide basis through a 61-person
direct sales organization in the U.S. and selected other countries and through
a network of 95 independent distributors. Xomed is the only major manufacturer
and marketer of ENT surgical products with a direct U.S. sales force
exclusively serving ENT specialists. Approximately 34% of Xomed's combined net
sales was derived from international markets during the first half of 1996, as
compared to 23% of its combined net sales in 1993. With over 25 years of
industry experience, Xomed believes that it has established a long-standing
reputation for innovative, high-quality products and is uniquely positioned as
the only major surgical products company focused on the ENT market.
Xomed believes that the ENT market is beginning a conversion from
conventional surgical approaches to less-traumatic approaches that involves
the use of advanced surgical tools, such as powered tissue-removal systems and
small-diameter surgical endoscopes, thereby minimizing patient trauma and
reducing procedure times. Xomed believes that the adoption of these less-
traumatic techniques may be driven by several factors, including economic
pressures and patient demand. Minimally invasive techniques have the potential
to expand the number of ENT procedures that can be performed in lower-cost
outpatient or day surgery settings. Patient demand is likely to increase due
to the reduced morbidity and improved outcomes. Xomed believes that the
conversion in the ENT market to less-traumatic approaches will be similar to
recent conversions in the general surgery market to less invasive techniques
and the orthopaedic surgery market to powered instrumentation systems.
INDUSTRY BACKGROUND
An estimated 15,000 ENT specialists, also known as otorhinolaryngologists,
currently practice in the U.S., Canada, Western Europe, Japan, Australia,
South America and the Middle East (collectively, "worldwide"), with
approximately 58% or 8,700 of those specialists practicing in the U.S. The
Company estimates that sales in the U.S. market for medical instruments,
devices and supplies used by ENT surgeons were approximately $200 million in
1995. ENT practitioners specialize in the diagnosis and treatment of diseases
and conditions affecting the ear, nose and throat. ENT surgeons are also
typically experts in tumor-related diseases of the head and neck.
Increasingly, ENT surgeons are expanding their practice to include facial
plastic and reconstructive surgery. Of the estimated 15,000 ENT specialists
worldwide, an estimated 4,000 currently practice facial plastic and
reconstructive surgery.
Diseases and conditions addressed by ENT specialists affect sizable patient
populations. The Company estimates that ENT surgeons performed over three
million procedures in the U.S. in 1995. The following chart summarizes common
conditions currently treated by ENT surgeons, the Company's estimates of the
patient populations affected by these conditions in the U.S., as well as the
Company's estimates of the number of procedures performed in the U.S. in 1995.
31
<PAGE>
<TABLE>
<CAPTION>
U.S. PATIENT
POPULATION NUMBER OF
ENT WITH PROCEDURES IN
SUBSPECIALTY INDICATION/CONDITION CONDITION PROCEDURE U.S. IN 1995
------------ -------------------- ------------ --------- -------------
<C> <S> <C> <C> <C>
Sinus and Chronic sinusitis (sinus 30,000,000 Sinus surgeries* 250,000
Rhinology (nose) inflammation)
Cosmetic reconstruction, Elective Septoplasty/rhinoplasty 270,000
trauma or congenital
defects
Head and Neck Chronic infection of 600,000 Tonsillectomy/adenoidectomy 300,000
tonsils or adenoids
Vocal cord polyps or 175,000 Surgical removal 175,000
lesions
Acoustic neuromas or 75,000 Skull-base surgery 75,000
mastoid infection
Facial tumors 35,000 Surgical resection 35,000
Facial cosmetic Elective Face lift and facial sculpting 700,000
reconstruction
Chronic snoring or sleep Elective Uvulopharyngoplasty 100,000
disorders
Otology (ear) Acute otitis media 2,000,000 Myringotomy with vent tubes 1,000,000
(middle ear infection)
Conductive hearing loss 60,000 Middle ear reconstruction 60,000
</TABLE>
- --------
* Sinus surgeries include removal of polyps (polypectomy) and removal of
diseased and inflamed tissue (ethmoidectomy and sinusotomy).
Based on the ratio of ENT specialists in the U.S. to ENT specialists
worldwide, the Company estimates that in general the number of ENT procedures
performed in the U.S. represents approximately 60% of the total procedures
performed worldwide and believes that significant opportunities exist in the
ENT market outside the U.S.
MARKET OPPORTUNITY
ENT procedures currently pose the following challenges:
(i) In many of these procedures, the target tissue is adjacent to critical
anatomy, including the brain, sensory centers and facial motor nerves,
limiting the surgeon's maneuverability and requiring very small,
precise movements;
(ii) The anatomy in the region generally contains many blood vessels,
leading to significant blood loss during surgery that may obscure the
surgeon's vision, as well as increase patient complications, or
morbidity;
(iii) The affected areas are often very small in size and require the
surgeon to perform microsurgery through the use of magnifying devices
such as small-diameter surgical endoscopes ("microendoscopy"); and
(iv) The affected areas are often behind significant bony structures,
including the skull, the penetration of which can entail significant
patient trauma and lengthy procedure times.
Conventional hand-held surgical instruments typically used during ENT
procedures do not provide the surgeon with sufficient power or precision to
minimize trauma and blood loss during the procedure and can contribute to
unnecessary pain, swelling and scarring following the procedure. In addition,
the need to repeatedly remove and reinsert conventional hand-held
instrumentation from the surgical site during procedures can increase patient
trauma and operating time. The Company believes that the limitations of
conventional hand-held surgical instruments create a significant opportunity
for the development of instruments designed for specific ENT procedures,
including powered tissue-removal instrumentation and visualization products,
that will make these procedures easier and faster to perform and less
traumatic to the patient.
32
<PAGE>
The Company believes that the following factors will drive growth in the
market for surgical instruments, devices and supplies for ENT surgeons:
Advancements in Procedure-Specific Instrumentation. The Company believes
that the introduction of new tools and instrumentation will enable ENT
surgeons to better address the current challenges of ENT procedures. For
example, powered cutting devices adapted for use in particular surgical
procedures will allow surgeons to cut and extract tissue and penetrate bone
with more speed, control and precision than conventional hand-held
instruments, thereby minimizing patient trauma and reducing procedure times.
The Company anticipates that the blades for these newly developed powered
cutting devices will be disposable and thus sales of these blades will
represent a significant portion of the market growth of these devices. By
providing ENT surgeons with greater access to difficult-to-reach surgical
sites and reducing trauma to the patient, new procedure-specific instruments
potentially will increase the total number of procedures performed.
Clinical and Cost Benefits for Patient, Surgeon and Payor. The Company
believes that the adoption of these less-traumatic ENT procedures may be
driven, in part, by economic pressures. Due to the reduced patient morbidity
associated with less-traumatic techniques, certain procedures previously
performed in hospitals and requiring longer stays can now be performed in
lower-cost outpatient or day surgery settings. In addition, powered tissue-
removal instrumentation allows for reduced operating times.
Demand From Significant Patient Populations. Sizable patient populations
suffer from conditions which can be treated by ENT surgical procedures. As
less-traumatic instrumentation and techniques become available, the portion of
these patients who will elect to undergo these procedures is likely to
increase. In particular, patient demand for endoscopic sinus surgery as well
as facial plastic surgery will, in the Company's view, increase as the pain
and morbidity associated with these procedures is reduced through better
instrumentation and techniques.
Ease of Market Conversion. The Company believes that ENT surgeons will
readily adopt new devices and instrumentation designed to meet the challenges
of specific surgical procedures because of the advantages they offer over
conventional instrumentation. The Company further believes that physicians
will require minimal additional training (usually two to three days) to use
these instruments. In addition to its functional advantages, powered
instrumentation should, in the Company's view, be attractive to ENT surgeons
because it requires only a relatively modest capital investment.
STRATEGY
The Company's objective is to enhance its position in the ENT market. The
principal elements of its strategy to meet this objective are outlined below.
Focus on the ENT Market. The Company believes that, as the only major
provider of surgical products with a direct sales force exclusively serving
the ENT surgeon, it is well-positioned to participate in any growth in the ENT
surgical market. The Company intends to continue to develop and maintain close
relationships with ENT specialists from whom it has gained significant brand
recognition and loyalty. The Company believes that it presently sells products
to substantially all the ENT specialists in the U.S. Accordingly, the Company
believes that a significant opportunity exists to increase penetration of its
existing customer base.
Facilitate ENT Market Conversion to Less-Traumatic Approaches. The Company
believes that the ENT market is beginning a conversion to less-traumatic
approaches that is similar to recent conversions in the general surgery market
to less invasive techniques and the orthopaedic surgery market to powered
instrumentation systems. The Company intends to facilitate conversion of high
volume ENT procedures to less-traumatic techniques. The procedures targeted by
the Company include sinus surgery, the removal of tonsils and adenoids, face
and brow lifts and facial sculpting. To facilitate this conversion, the
Company
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plans to continue its collaborative efforts with leading ENT surgeons to
create products that allow physicians to re-engineer standard operating
procedures to reduce patient trauma and operating time. The Company believes
that the development of powered tissue-removal instrumentation systems for use
in ENT procedures will play a central role in this conversion and accordingly
will continue in its efforts to develop and introduce such powered
instrumentation.
Continue to Innovate; Emphasize Internal Research and Development. The
Company plans to develop new proprietary products and product enhancements
primarily through internal research and development efforts. The Company
expects that it will invest approximately $3.7 million in research and
development in 1996. The Company has introduced numerous technological
advancements in the ENT market.
Maintain a Broad Line of ENT Products; Emphasize Disposable and Implantable
Products. The Company seeks to maintain a broad product line that addresses
all of the surgical needs of ENT specialists. The Company's current product
line consists of approximately 4,000 stock keeping units (SKUs), including
equipment, disposable products and implantable devices. The Company places
particular emphasis on disposable products and implantable devices, which
represented 86% of sales during the first half of 1996, as compared with 79%
of sales in 1993. One of the Company's principal objectives is to continue to
develop additional disposable products for use with its instrumentation
systems.
Continue to Expand its Global Distribution Network. The Company believes
that significant growth opportunities exist through the expansion of its
global distribution network. The Company distributes its products worldwide
through a 61-person direct sales force in the U.S. and selected other
countries and through a network of 95 independent distributors. The Company's
core ENT products are sold in the U.S. only on a direct sales basis.
Approximately 29% of the Company's net sales in 1995 and 34% of its net sales
in the first half of 1996 were made outside the U.S. through direct operations
in the United Kingdom, Canada, France, Germany and Australia, as well as
through 75 independent international distributors, many of whom distribute the
Company's products exclusively.
MAJOR ENT SUBSPECIALTIES
The three major ENT subspecialties are sinus and rhinology, head and neck
and otology. The following table sets forth the Company's estimate of sales in
the U.S. market in 1995 for surgical instruments and related products used in
procedures within each of these subspecialties:
<TABLE>
<CAPTION>
1995 U.S. SALES OF
SURGICAL PRODUCTS
SUBSPECIALTY USED IN SUBSPECIALTY
------------ --------------------
<S> <C>
Sinus and Rhinology $87 million
Head and Neck $78 million
Otology $36 million
</TABLE>
SINUS AND RHINOLOGY
The majority of surgical procedures within the sinus and rhinology
subspecialty address disease and inflammation of the sinuses, due to enlarged
tissue, deviated septum, infection, trauma or allergies.
Endoscopic Sinus Surgery. An estimated 15% of the U.S. population, or
approximately 30 million people, suffer from chronic sinusitis. Although sinus
medications provide temporary relief from symptoms, they may not resolve the
underlying cause of the disease or inflammation and surgery is frequently
required. ENT specialists utilize several methods of treatment, including
medication and surgical intervention, to provide patients with symptomatic
relief of sinus disease. In traditional sinus surgical procedures, surgeons
remove the affected tissue or obstruction, such as a polyp, through the use of
forceps. However, with traditional surgical instruments, ENT surgeons may have
limited ability to
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visualize and gain access to the deeper sinus cavities through the natural
sinus passageways and also experience significant difficulty gaining the
control needed to remove the tissue effectively. This can result in uneven
cutting and tearing, which in turn causes trauma to the surrounding tissue. In
some cases, bony structures and tissue obstruct the nasal passageway, further
complicating the procedure.
Although a less-traumatic method for performing sinus surgery with powered
tissue-removal instrumentation was introduced in 1993, much of the
instrumentation used at the time was originally designed for arthroscopic
procedures (less invasive knee surgery). Since this instrumentation was not
designed specifically for sinus surgery, its use for these procedures was
cumbersome and prone to clogging. Despite these limitations, approximately 25%
of all sinus surgeries in the U.S. were performed with this less-traumatic
method in 1995. Overall operating time of procedures performed with this
method can be reduced by approximately 25% from that of traditional surgical
methods due to the greater ease of accessing structures, the improved
visualization at the site and the quicker removal of tissue with powered
instrumentation.
Rhinoplasty and Septoplasty. Rhinoplasty involves the surgical
reconstruction of the nose to treat bone defects or trauma or to improve the
appearance of the nose cosmetically. ENT surgeons generally use either a bone
shaver or a rasp to shape or reduce the targeted area or a chisel to cut the
bone. The use of a shaver or rasp results in significant post-operative
swelling and the use of a chisel carries with it a significant risk of error.
Septoplasty, the surgical correction of a defect, disease or trauma to the
septum, is often done in conjunction with sinus surgery or rhinoplasty.
HEAD AND NECK
The head and neck subspecialty encompasses a wide range of procedures,
including laryngeal (throat) surgery, skull-base surgery, facial tumor removal
and facial plastic surgery.
Laryngeal Surgery. Throat-based procedures include the removal of the
tonsils (tonsillectomy) and adenoids (adenoidectomy), the removal of lesions,
polyps and tumors on the throat or vocal cords and the surgical reduction of
the uvula (the flap of tissue at the back of the throat and the soft palate).
Tonsillectomies and adenoidectomies, which are performed to treat chronic
inflammation and soreness, represented approximately 300,000 procedures in the
U.S. in 1995, less than 10% of which are estimated by the Company to have been
performed using powered tissue-removal instrumentation. In traditional
tonsillectomies, surgeons use either forceps or snares to grasp and pull the
tonsils out, or alternatively they cut away the tonsils with an electrocautery
device. The use of these instruments can cause swelling, pain and post-
operative bleeding. For adenoidectomies, surgeons traditionally utilize a
curette, a small hand instrument, to scrape out the inflamed tissue. Due to
the limited precision of a curette in removing this tissue, adenoidectomies
involve many of the same problems experienced in tonsillectomies.
Lesions, polyps or tumors on the throat or vocal cords are presently removed
using either hand instrumentation, an electrocautery device or a laser. The
use of hand instrumentation, electrocautery devices or lasers may result in
damage to the surrounding tissue. In addition, lasers and electrocautery
devices can destroy the affected tissue and thus prevent the subsequent
pathological testing of a tissue sample.
Uvulopharyngoplasty is a procedure in which the uvula and the soft palate
are surgically reduced in the throat to reduce snoring and breathing
interruptions (sleep apnea). The use of electrocautery devices or lasers to
perform this procedure is again associated with swelling and pain.
Skull-base Surgery. Skull-base surgery includes those procedures in which
the affected anatomy, generally a tumor, is located within or near the skull.
A common skull-base procedure is the removal of
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an acoustic neuroma, a benign tumor located on the cranial nerve adjacent to
the inner ear. This condition afflicts approximately 20,000 people each year
in the U.S., and symptoms include hearing loss, ringing in the ears, loss of
balance, pain and headaches. Surgical removal is the only treatment
alternative for persons with an acoustic neuroma; however, the traditional
procedure involves drilling through the dense bone behind the ear to access
the nerve, a procedure that generally takes between six to eight hours to
perform and frequently results in a residual hearing loss.
Facial Tumor Removal. ENT surgeons perform numerous procedures in order to
remove facial tumors from the head and neck area. Surgical resections in this
area are particularly critical procedures to perform because of the numerous
motor nerve branches within the surgical area. Due to the potential
complications from severing a nerve, the identification and monitoring of
nerves during most facial tumor procedures are becoming a standard of care.
These surgeries frequently require laser incisions in cosmetically important
areas and post-operative cosmetic and functional defects are common.
Facial Plastic Surgery. Nearly one-third of ENT surgeons in the U.S.
currently perform facial plastic procedures. The number of elective procedures
for cosmetic purposes is likely to increase in conjunction with the general
aging demographic trend of the U.S. The procedures covered in this area
include: the placement of facial implants to correct defects or augment
features in the face; correction and smoothing of wrinkles; facial lifts,
which involve stretching the muscles and skin of the face; and facial
sculpting, which involves the removal of fat around the neck. The Company
estimates that less than 10% of the facial sculpting in the U.S. presently is
performed using powered tissue-removal instrumentation.
Approximately 700,000 face and brow lifts were performed in the U.S. in
1995. During this procedure, the surgeon peels the skin at the hair line,
pulls the facial muscles and skin taut and then stitches the long incision
made at the hair line. In addition to the post-operative swelling and bruising
from the procedure, the patient is left with a relatively large scar at the
hair line from the long incision needed to access the entire facial region.
During facial sculpting, the surgeon removes fat away from the neck area using
a suction cannula, a device which evacuates fat from the facial tissue. As a
result of the aggressive way in which the suction cannula evacuates the fat
from the neck area, the patient experiences significant swelling and bruising
following the surgical procedure.
OTOLOGY
Common otology procedures include myringotomies (which generally involve the
insertion of ventilation tubes in the middle ear) and stapedectomies (the
replacement of middle ear bones with middle ear prosthetic implants).
Ventilation tubes are used to treat chronic middle ear infection. Their
placement is one of the most common surgical procedures performed in children,
with over 1.0 million of these procedures performed in 1995 in the U.S.
Conductive hearing loss is caused by damage to the ossicular bone chain in the
middle ear from disease, trauma or aging. The replacement of diseased bones of
the middle ear with specially designed implants is the preferred method to
restore hearing to these patients, and over 60,000 reconstructive middle ear
procedures are performed in the U.S. each year. Re-engineering in the design
and material of the prostheses has, in recent years, improved surgeon
technique and patient hearing outcomes.
PRODUCTS
The Company designs, develops, manufactures, and markets surgical
instruments and related disposables and accessories for use by ENT surgeons.
The Company believes its broad product lines focused on ENT procedures allow
it to be a complete provider to its ENT customer base. The Company also
designs, develops and manufactures surgical products for use during ophthalmic
and orthopaedic procedures. Set forth below is a description of the Company's
products by related subspecialty:
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SINUS AND RHINOLOGY
Approximately 30% of the Company's net sales in 1995 and 32% of its net
sales in the first half of 1996 were derived from a broad line of powered
tissue-removal instrumentation systems, visualization products, fluid-control
products and hand instruments designed for microendoscopic sinus surgery. The
Company has devoted a significant portion of its investment in research and
development to the development of procedure-specific products to capitalize on
and facilitate the conversion to microendoscopic sinus surgery.
Powered Tissue-Removal Instrumentation Systems. To date, the most
significant product innovation facilitating the conversion of sinus procedures
to less-traumatic techniques has come from the introduction of powered
instrumentation designed for ENT procedures. In 1995, the Company introduced
the first powered microdebrider product designed exclusively for use in ENT
procedures. The Company's Wizard Plus product cuts soft tissue and bone
through a unique oscillating blade design powered by a small, lightweight,
surgical handpiece. This system, which employs disposable blades, enables the
surgeon to target and remove diseased tissue endoscopically with less trauma
to adjacent healthy tissue and less bleeding. Integrated suction and
irrigation aid in cutting and removal of the tissue, and reduce the incidence
of blade clogging. In 1995, the Company introduced the Typhoon family of
disposable endoscopic blades for use with most competitors' power handpieces.
The Company anticipates introducing in the fourth quarter of 1996 its XPS
powered tissue-removal system. This new system, which will employ disposable
blades, will offer the ENT surgeon significantly increased power with limited
blade clogging.
Visualization Products. The Company produces and distributes a competitive
line of visualization endoscopic equipment designed for use in less-traumatic
sinus, head and neck and otology surgery. These products include the Sharpsite
rigid endoscopes, Lightstar Xenon light source and Digistar Plus digital
enhanced camera system which were all introduced in October 1995. The Digistar
Plus camera system uses a single microchip along with digital enhancement to
produce picture quality approaching that of more expensive products using
three-microchip technology. Exclusive to the Company is its proprietary
EndoScrub(R) endoscope lens cleaning system, which was introduced in 1992 and
allows the ENT surgeon to clean a scope lens during surgical procedures
without the need to remove and reposition the scope repeatedly.
Merocel Fluid-Control Products. The Company maintains a strong franchise
with its proprietary disposable fluid-control products (surgical sponges),
developed with proprietary polymer technology to control blood loss and
simultaneously minimize adhesions at the surgical site. Under its Merocel
brand name, the Company markets its fluid-control products in a broad array of
sizes and shapes, designed primarily for use in sinus and rhinology
procedures.
Hand Instrumentation. In April 1996, the Company became the exclusive
distributor for BOSS Instruments, Ltd. in the U.S. ENT market, and as a result
now provides a complete line of sinus surgery hand instrumentation. Over 400
patterns have been developed to provide surgeons with an ergonomic design and
performance that affords surgeons precision during surgical procedures.
Rhinology Products. The Company's products for use during surgical repair of
the nose include internal and external nasal splints, nasal catheters and
airway and irrigation catheters.
HEAD AND NECK
Approximately 24% of the Company's net sales in 1995 and 24% of its net
sales in the first half of 1996 were derived from products and devices related
to the head and neck anatomy. The Company has a strong brand franchise in this
product subspecialty with its nerve monitoring, powered systems and facial
plastic implant products. Surgical techniques are being developed in the head
and neck subspecialty which use the more precise tissue removal of powered
instrumentation systems, similar to those being
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used in sinus surgery, to lessen trauma and bleeding. The Company believes
there is significant opportunity to capitalize on and facilitate the
conversion of this subspecialty to these new techniques.
Powered Tissue-Removal Instrumentation Systems. The Company is currently
developing powered tissue-removal instrumentation systems for use in various
head and neck procedures that incorporate the Company's technology for its
powered sinus tissue-removal instrumentation systems. These powered systems
are being designed for use in uvulopharyngoplasty and facial sculpting as well
as in the removal of polyps, lesions and tumors located on the vocal cords.
The Company anticipates that these powered systems will employ disposable
blades. In the case of vocal cord polyps, the Company believes that these new
procedures will not only decrease patient trauma associated with existing
methods but will also, unlike lasers and electrocautery devices, enable
samples of the affected tissue to be tested pathologically following surgical
removal. In the cases of uvuloplasty and facial sculpting, the Company
believes that the use of less-traumatic procedures employing powered tissue-
removal will increase patient demand for these procedures.
Powered Drill Systems. Precision, high-powered drilling is required in head
and neck surgery to access tumors or tissue behind bone structures. The
Company manufactures and markets a line of electric and air powered drilling
systems for such procedures, including the MPS 2000(R) electric drill system
which consists of a power console, surgical handpiece and disposable and
reusable cutting burrs. The Company anticipates introducing in the fourth
quarter of 1996 its Powerforma drill system to replace the MPS 2000(R)
electric drill system. This new system, which will employ disposable and
reusable cutting burrs, will provide the ENT surgeon with significantly
increased cutting speed and precision that will reduce the time necessary to
complete these head and neck surgical procedures.
Nerve Monitoring Systems. The Company's NIM-2(R) XL nerve monitor products,
which were first introduced in February 1995, identify and monitor crucial
motor nerve branches during various head and neck procedures. The
identification of nerves during many head and neck procedures is becoming a
standard of care because the inadvertent cutting of any branches of these
nerves could result in facial paralysis. The NIM-2(R) XL provides surgeons
with visual and audio indicators through a system which includes a battery-
powered electromyographic (EMG) monitor, disposable electrodes and nerve
stimulators.
Facial Plastics Products. Increasingly, ENT surgeons are performing more
facial plastic procedures, including face and brow lifts, facial sculpting and
cosmetic facial implants. The Company provides a broad array of products and
devices for the facial plastic market. In December 1995, the Company became
the exclusive worldwide distributor for Implantech Associates, Inc. in the ENT
market, and as a result now provides a broad line of facial plastic implants,
including implants to augment the chin, nose and cheek.
Hand Instrumentation. As the exclusive distributor for BOSS Instruments,
Ltd. in the U.S. ENT market, the Company provides a broad line of hand
instrumentation for facial plastic surgery. These products are designed to
increase surgeon precision and reduce patient swelling and recovery time.
Specialty Products. The Company's Laser-Shield II(R) is a laser resistant
endotracheal tube used in throat-related surgery performed with lasers. The
Company believes that the Laser-Shield II(R) is safer and more reliable than
current alternatives.
OTOLOGY
Approximately 21% of the Company's net sales in 1995 and 24% of its net
sales in the first half of 1996 were derived from otology products. The
Company possesses a strong franchise and significant market share in this
segment of the ENT market. The Company's otology products include ventilation
tubes, middle ear implants and instrumentation used to repair conductive
hearing loss and correct other problems associated with the ear. The Company
believes that the conversion of ENT procedures to less-
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traumatic techniques is more likely to have a significant effect on the sinus
and rhinology and head and neck subspecialties than on the otology
subspecialty.
Ventilation Tubes. Vent tubes are small tubes surgically implanted into the
ear drum to provide ventilation to the middle ear. Vent tubes are primarily
used in younger children with severe middle ear infection. The Company markets
a full line of vent tubes, including its proprietary Activent anti-microbial
tube.
Middle Ear Implants. The Company develops and markets middle ear prostheses
used to reconstruct any or all of the three bones of the middle ear, primarily
in cases of otosclerosis and chronic middle ear infection. These permanent
implants are made of stainless steel, porous polyethylene, hydroxylapatite and
other bio-compatible materials.
Microsurgical Instruments. The Company sells a broad line of microsurgical
hand-held instruments such as otoscopes, vent tube inserters, disposable
blades, proprietary suction irrigators and specialized instruments to insert
and implant middle ear prostheses.
Specialty Products. The Company's specialty otology products include
absorbent dressings, ear plugs, ear protectors, disposable kits for ear
surgery and other disposable surgical instruments. They also include the
Company's proprietary Redi-Bur(R), the only disposable micro drill available
for ENT procedures. The Company also produces and markets the Skeeter(R)
otologic drill system which is designed for middle ear procedures.
OPHTHALMIC AND OTHER
Approximately 25% of the Company's net sales in 1995 and 20% of its net
sales in the first half of 1996 were derived from ophthalmic and other
products, with substantially all of such sales from ophthalmic products. The
Company develops and manufactures instruments and disposable products for use
during various ophthalmic procedures. These products are marketed under the
Solan trademark through distributors specializing in the ophthalmic products
market. These instruments include forceps, needle holders, hooks, probes and
scissors. The Company's disposable products relating to ophthalmic surgery and
procedures are micro knives, cannulae, trephines, blades, sponges, cauteries,
pen lights and other miscellaneous products and kits. The Company recently has
dedicated a senior executive to managing the marketing of its ophthalmic
products. In connection with its acquisition of TreBay in April 1996, the
Company acquired certain devices and disposable products for use during
orthopaedic surgery which the Company plans to market through distributors
under the TreBay name.
SALES AND MARKETING
The Company has an established worldwide distribution system with an ENT-
focused direct sales force, international distributor alliances and
independent distributors for select product specialties and geographic
markets.
The Company sells to substantially all of the approximately 8,700 ENT
specialists in the U.S. through its direct sales force. The Company is the
only major manufacturer and marketer of ENT surgical products with a direct
sales force exclusively serving ENT specialists. The Company's U.S. sales
force focuses its efforts on developing and maintaining business relationships
with ENT specialists and those surgeons at leading academic institutions who
are considered to be influential in the ENT field. The ability of the Company
to build and maintain these relationships within the medical community
provides a powerful base for the distribution network and what the Company
believes to be a significant competitive advantage, especially in the area of
product development. The Company's direct U.S. sales representatives are
compensated exclusively through sales commissions. The Company's nine
marketing personnel specialize according to subspecialty within the ENT market
as well as by category of product.
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In the international market, the Company sells through both a direct sales
force and through distributors. The Company maintains a direct sales presence
in Canada, the United Kingdom, France, Australia and Germany. The Company
sells its products to other countries in Europe, Asia Pacific, Africa, Central
and South America using distribution partners. Prior to its divestiture from
Bristol-Myers in 1994, the Company shared sales and service personnel with
Zimmer International, a division of Bristol-Myers, in selected countries. The
Company believes it has experienced significant international sales gains as a
result of creating in certain markets a dedicated sales force focused
exclusively on selling its products.
The Company has an exclusive arrangement with the International Center for
Otologic Training (ICOT), an organization affiliated with the Georgia Ear
Institute in Savannah, Georgia. The charter of ICOT is to train
internationally-based ENT surgeons, many from developing countries, in new and
advanced ENT surgical techniques. The Company provides financial support to
the ENT surgeons attending ICOT in the form of partial tuition. As a result of
this relationship with the Company, the Company believes that these physicians
and their affiliated hospitals will be more inclined to purchase the Company's
products upon returning to their respective countries.
The Company utilizes specialty distributors to market its non-ENT products
in the U.S. The Company's Solan ophthalmic products are marketed in the U.S.
through a network of dealers specializing in ophthalmic product sales. Outside
of the U.S., the Solan ophthalmic product line is marketed through the same
direct and independent distributor system as the Company's ENT product lines.
The TreBay brand of orthopaedic products is marketed in the U.S. through
independent orthopaedic product distributors.
PRODUCT DEVELOPMENT
The Company believes that it has a strong base of proprietary engineering,
manufacturing and bio-materials capabilities. Although it has in the past
relied in part on strategic acquisitions and licensing of third-party
technology to develop a broad line of ENT products, the Company believes it
has gained expertise in the core research and development areas relevant to
the production of new ENT surgical products. Primarily through internal
research and development efforts, the Company plans to continue to develop new
proprietary products, often in collaboration with leading ENT surgeons, that
allow surgeons to perform their current or future procedures in a less-
traumatic manner with more precision, less surgical time and greater
simplicity. The Company believes that the strong network it has built through
its marketing focus on ENT specialists gives it a competitive advantage in
implementing this strategy. The Company also from time to time may evaluate
strategic acquisitions and licensing of third party technology to further
expand and enhance its product line.
The Company employs mechanical, electrical, materials and polymer engineers
to develop the various products offered or contemplated by the Company. The
Company's research and development department has a broad range of electro-
mechanical skills to address its variety of hand instruments, implants,
electrical powered systems, polymer products and disposable products.
Currently, the Company's research and development department consists of
eleven engineers experienced in various technical specialties that complement
the Company's core products.
The research and development engineers work closely with leading surgeons in
assessing new surgical procedures for opportunities to develop products that
will complement current products and new "state of the art" devices that fit
within the overall Company's business strategy of being the industry leader in
innovative microendoscopic instrumentation and implants. During 1993, 1994,
1995 and the first half of 1996, the Company spent $3.1 million, $2.7 million,
$2.4 million and $1.7 million, respectively, on a combined basis in connection
with research and development activities. However, actual spending on research
and development projects was comparable during these three years. The Company
expects that it will invest approximately $3.7 million in research and
development in 1996.
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SUPPLIERS
Although most of the purchased components utilized by the Company in
manufacturing are available from more than one vendor, certain materials,
including TPE-based materials used in its ventilation tubes and medical grade
silicone used in certain of its ventilation tubes and implants, are only
supplied by a single vendor. If the supply of materials from a single source
vendor were interrupted, replacement or alternative sources may not be readily
obtainable due to the regulatory requirements that the Company certify as to
the quality and suitability of the new or alternate material. In addition, a
new or supplemental filing would be required to be approved prior to the
Company's marketing a product containing new material. This approval process
may take a substantial period of time and there is no assurance that the
Company would be able to identify, certify or obtain the necessary regulatory
approval for the new material to be used in the Company's products. In
addition, certain suppliers could terminate or limit the sales of certain
materials to the Company for use in medical devices in an attempt to limit
their potential exposure to product liability claims. See "Risk Factors--
Dependence Upon Key Suppliers."
COMPETITION
The markets served by the Company are highly competitive. The Company
believes that the primary competitive factors affecting its business are the
reliability, cost-effectiveness, ease of use, safety and effectiveness of its
products, surgeon and purchaser familiarity with its instrumentation and
third-party reimbursement policies. For certain of the Company's potential
products, an important factor in competition may be the timing of market
introduction of its or its competitors' products. Accordingly, the relative
speed with which the Company can develop products and complete approval or
clearance processes and supply commercial quantities of the products to the
market are also important competitive factors. The Company believes that its
ability to compete successfully in the ENT markets will depend on its ability
to maintain market share of its core product base and to facilitate the
conversion of traditional surgical procedures to microendoscopy surgical
techniques using innovative technology developed by the Company. See "Risk
Factors--Possible Adverse Effects of Competition."
The Company competes with Smith & Nephew ENT (a division of Smith & Nephew
plc formerly known as Richards Medical) in substantially all of the Company's
ENT product lines. Stryker Corporation, Smith & Nephew Endoscopy (a division
of Smith & Nephew plc) and Linvatec Corporation (a division of Bristol-Myers)
offer endoscopic equipment and sinus power systems that compete with those of
the Company. A number of other medical products companies offer products which
are directly competitive to certain products or product lines marketed by the
Company. Many of the Company's competitors and potential competitors have
substantially greater capital resources than the Company. Some of the
Company's competitors may have long term or preferential supply arrangements
with hospitals. Such arrangements may act as a barrier to market entry.
GOVERNMENT REGULATION
The Company's products, product development activities, promotional and
marketing activities and manufacturing processes are subject to extensive and
rigorous regulation by the FDA and comparable agencies in foreign countries.
In the U.S., the FDA regulates the interstate commerce of medical devices as
well as manufacturing, labeling and recordkeeping procedures for such devices.
For purposes of these regulations, the Company's products are generally
treated as medical "devices." In order for the Company to market its products
in the U.S., the Company must obtain from the FDA marketing clearance through
what is known as a 510(k) pre-market notification or obtain approval through a
more detailed application process resulting in what is known as PMA. The
process of obtaining marketing clearance for new medical devices from the FDA
can be costly and time-consuming, and there can be no assurance that such
clearance will be granted for the Company's products that are under
development or future products on a timely basis, if at all, or that FDA
review will not involve delays that will adversely affect the Company's
ability to commercialize additional products or expand permitted uses of
existing products.
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A manufacturer may seek FDA clearance to distribute a new medical device by
filing a 510(k) pre-market notification. A 510(k) pre-market notification
requires the manufacturer of a medical device to establish that the device is
"substantially equivalent" to medical devices legally marketed in the U.S. The
510(k) pre-market notification must be accompanied by appropriate information
or data establishing the claim of substantial equivalence, which, depending on
the type of product, may require animal or human clinical data. If this
substantial equivalence is established to the satisfaction of the FDA, the
manufacturer will receive FDA clearance for marketing of the medical device.
If the manufacturer cannot establish substantial equivalence or if the FDA
determines that a device requires a more rigorous review, the FDA will require
that the manufacturer submit a PMA application prior to obtaining approval to
market the device in the U.S. The PMA process requires laboratory and animal
studies, the submission to the FDA of a request for permission to clinically
evaluate the medical device in humans under an Investigational Device
Exemption ("IDE"), the conduct of human studies meeting the requirements of
the institutional review board of the study institution, the written informed
consent of all participating patients, the submission of a PMA application,
the review of the human studies by an FDA-selected scientific advisory panel
and final review (including manufacturing facilities review) and approval by
the FDA. This process is expensive and time-consuming, generally taking more
than a year and often substantially longer.
All of the Company's currently-marketed products either have received FDA
marketing clearance pursuant to 510(k) pre-market notifications filed by the
Company and cleared by the FDA, or are exempt from obtaining marketing
clearance by virtue of their status as pre-amendment devices (i.e. devices
introduced into interstate commerce prior to May 28, 1976). Although the
Company anticipates that, at least in the near term, its products will be
evaluated under the 510(k) pre-market notification process, there can be no
assurance that the Company's current or future products may not be subjected
to the PMA process or that the Company's current or future products in
development will receive FDA marketing clearance.
Even if regulatory clearance to market a device is obtained from the FDA,
this clearance may entail limitations on the indicated uses of the device.
Marketing clearance can also be withdrawn by the FDA due to the failure to
comply with regulatory standards or the occurrence of unforeseen problems
following initial clearance. The Company may be required to make further
filings with the FDA under certain circumstances such as the addition of new
product claims. The Company has made modifications to its cleared products
which the Company believes do not require submission of new 510(k) notices.
There can be no assurance, however, that the FDA would agree with any of the
Company's determinations and not require the Company to submit new 510(k)
notices for any of the changes made to its products.
Failure to comply with applicable regulatory requirements could result in,
among other things, warning letters, fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production,
refusal of the government to grant pre-market clearance or pre-market approval
for devices, withdrawal of approvals and criminal prosecution.
The Company is also required to register with the FDA as a medical device
manufacturer. As such, the Company's manufacturing facilities are subject to
inspection on a routine basis for compliance with GMP. These regulations
require that the Company manufacture its products and maintain its documents
in a prescribed manner with respect to manufacturing, testing and quality
control activities. As a medical device manufacturer, the Company is further
required to comply with FDA requirements regarding the reporting of
allegations of death or serious injury associated with the use of its medical
devices, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur. Other FDA
requirements govern product labeling and prohibit a manufacturer from
marketing an approved device for unapproved applications. If the FDA believes
that a manufacturer is not in compliance with the law, it can institute
proceedings to detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against the manufacturer,
its officers and employees.
42
<PAGE>
The Company is also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future or that such laws or regulations will not have a
material adverse effect upon the Company's ability to do business.
The Company may become subject to future legislation and regulations
concerning the manufacture and marketing of medical devices. This could
increase the cost and time necessary to begin marketing new products and could
affect the Company in other respects not presently foreseeable. The Company
cannot predict the effect of possible future legislation and regulations.
Sales of medical devices outside the U.S. are subject to foreign regulatory
requirements that vary widely from country to country. These laws and
regulations range from simple product registration requirements in some
countries to complex clearance and production controls in others. As a result,
the processes and time periods required to obtain foreign marketing approval
may be longer or shorter than those necessary to obtain FDA approval. These
differences may affect the efficiency and timeliness of international market
introduction of the Company's products, and there can be no assurance that the
Company will be able to obtain regulatory approvals or clearances for its
products in foreign countries.
For countries in the EU, in January 1995, CE mark certification procedures
became available for medical devices, the successful completion of which would
allow certified devices to be placed on the market in all EU countries. In
order to obtain the right to affix the CE mark to its products, the Company
will need to obtain certification that its processes meet European quality
standards, including certification that its design and manufacturing facility
complies with ISO 9001 standards. After June 1998, medical devices may not be
sold in EU countries unless they display the CE mark. The Company or its
distributors plan to seek CE mark certification for the Company's products. In
addition, international sales of medical devices manufactured in the U.S. but
not approved by the FDA for distribution in the U.S. are subject to FDA export
requirements. Under these requirements, the Company must assure that the
product is not in conflict with the laws of the country for which it is
intended for export, in addition to complying with the other requirements of
Section 801(e) of the United States Food, Drug and Cosmetic Act.
THIRD-PARTY REIMBURSEMENT
In the U.S., health care providers that purchase medical devices generally
rely on third-party payors, such as Medicare, Medicaid, private health
insurance plans and health maintenance organizations, to reimburse all or a
portion of the cost of the devices. The Medicare program is funded and
administered by the Health Care Financing Administration ("HCFA"), while the
Medicaid program is jointly funded by HCFA and the states, which administer
the program under general federal oversight. The Company believes its current
products and the procedures in which such products are used are generally
eligible for coverage under these third-party reimbursement programs. The
Company also believes that the products it is developing and the procedures in
which such products will be used will be eligible for third-party
reimbursement. The competitive position of certain of the Company's products
will be partially dependent upon the extent of coverage and adequate
reimbursement for such products and for the procedures in which such products
are used.
The federal government and certain state governments are currently
considering a number of proposals to reform the Medicare and Medicaid health
care reimbursement system. The Company is unable to evaluate what legislation
may be drafted and whether or when any such legislation will be enacted and
implemented. Certain of the proposals, if adopted, could have an adverse
effect on the Company's business, financial condition and results of
operations.
During the past several years, the major third-party payors have
substantially revised their reimbursement methodologies in an attempt to
contain their health care reimbursement costs. Medicare
43
<PAGE>
reimbursement for inpatient hospital services is based on a fixed amount per
admission based on the patient's specific diagnosis. As a result, any illness
to be treated or procedure to be performed will be reimbursed only at a
prescribed rate set by the government that is known in advance to the health
care provider. If the treatment costs less, the provider is still reimbursed
for the entire fixed amount; if it costs more, the provider cannot bill the
patient for the difference. No separate payment is made in most cases for
products such as the Company's instrumentation when they are furnished or used
in connection with inpatient care. Many private third-party payors and some
state Medicaid programs have also adopted similar prospective payment systems.
Third-party payors have recently increased their emphasis on managed care,
which has led to an increased emphasis on cost-effective medical devices by
health care providers. In addition, through their purchasing power, these
payors often seek discounts, price reductions or other incentives from medical
products suppliers.
The Company intends to seek international reimbursement approvals for its
products, although there can be no assurance that such approvals will be
obtained in a timely manner or at all. Reimbursement and health care payment
systems in international markets vary significantly by country and include
both government sponsored health care and private insurance. To the extent
that any of the Company's products are not entitled to reimbursement in any
international market, market acceptance of such products in such international
market would be adversely affected.
PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS
Proprietary protection for the Company's products and know-how is important
to the Company's business. Thus, the Company's policy is to prosecute and
enforce its patents and proprietary technology. The Company intends to
continue to file patent applications to protect technology, inventions and
improvements that are considered important to the development of its business.
The Company also relies upon trade secrets, know-how, continuing technological
innovation and licensing opportunities to develop and maintain its competitive
position.
As of August 20, 1996, the Company held 56 U.S. patents and 21 foreign
patents, and had filed 20 additional U.S. patent applications and 13 patent
applications in certain major industrial countries. The Company is also
licensed under 9 patents owned by third parties.
The patent positions of medical device companies, including the Company, are
generally uncertain and involve complex legal and factual questions.
Consequently, even though the Company currently is prosecuting its patent
applications with the U.S. Patent and Trademark Office and certain foreign
patent authorities, the Company does not know whether any of its remaining
applications will result in the issuance of any patents or, if any patents are
issued, whether they will provide significant proprietary protection or will
be circumvented or invalidated. Because patent applications in the U.S. are
maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months and there may be material patents or
publications of which the Company is not aware, the Company cannot be certain
that it was the first creator of inventions claimed by pending patent
applications or that it was the first to file patent applications for such
inventions.
The medical device industry is characterized by frequent and substantial
intellectual property litigation, particularly with respect to newly developed
technology. Intellectual property litigation is complex and expensive, and the
outcome of such litigation is difficult to predict. Any future litigation,
regardless of the outcome, is likely to result in substantial expense to the
Company and significant diversion of the efforts of the Company's technical
and management personnel. An adverse determination in any such proceeding
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from such parties if licenses to such rights
could be obtained, and/or require
44
<PAGE>
the Company to cease using such technology. There can be no assurance that if
such licenses were obtainable, they would be obtainable at costs reasonable to
the Company. If forced to cease using such technology, there can be no
assurance that the Company would be able to develop or obtain alternate
technology. Additionally, if third-party patents containing claims affecting
the Company's technology are issued and such claims are determined to be
valid, there can be no assurance that the Company would be able to obtain
licenses to such patents at costs reasonable to the Company, if at all, or be
able to develop or obtain alternative technology. Accordingly, an adverse
determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing, using or
selling certain of its products, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's practice is to require its employees, consultants, outside
collaborators and researchers and other advisors to execute confidentiality
agreements upon the commencement of employment or consulting relationships
with the Company. These agreements provide that all confidential information
developed or made known to the individual during the course of the
individual's relationship with the Company is to be kept confidential and not
disclosed to third parties, subject to a right to publish certain information
in the scientific literature in certain circumstances and subject to other
specific exceptions. In the case of employees, the agreements provide that all
inventions conceived by the individual shall be the exclusive property of the
Company. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets or adequate
remedies in the event of unauthorized use or disclosure of such information.
PRODUCT LIABILITY AND INSURANCE
The business of the Company entails the risk of product liability claims and
any such claims could have an adverse impact on the Company. The Company has
taken and will continue to take what it believes are appropriate precautions,
including maintaining general liability and commercial liability insurance
policies which include coverage for product liability claims. The Company
evaluates its insurance requirements on an ongoing basis. There can be no
assurance that product liability claims will not exceed such insurance
coverage limits or that such insurance will be available on commercially
reasonable terms or at all. The Company currently is involved in certain legal
proceedings involving product liability claims. Based on information presently
available to the Company, the Company believes that it has adequate legal
defenses or insurance coverage for these actions, and that the ultimate
outcome of these actions will not have a material adverse effect on the
Company.
MANUFACTURING AND PROPERTIES
The Company owns its 52,000 square-foot corporate headquarters and
manufacturing facility and leases a 36,863 square-foot warehouse and
distribution facility in Jacksonville, Florida. At its Jacksonville
manufacturing facility, the Company produces all of the products that it
manufactures other than fluid-control products and ophthalmology products. The
Company has numerous manufacturing capabilities at the Jacksonville facility,
including: injection molding; insert molding; CNC machining; CAD/CAM; form,
fill and seal; ETO sterilization utilizing a Joslyn reclamation system;
specialty surgical instrument manufacturing; tool design and manufacturing;
design and production of manufacturing equipment; electronics assembly; bar
code technology; and automated storage systems.
The Company also owns a 34,000 square-foot manufacturing facility and a
6,300 square-foot distribution facility in Mystic, Connecticut and leases a
6,400 square-foot manufacturing facility in St. Louis, Missouri. The Company's
Merocel product line of fluid-control products is manufactured at the Mystic
facility and its ophthalmic product line is manufactured in part at the St.
Louis facility.
45
<PAGE>
The Company believes that the properties are adequate to serve the Company's
business operations for the foreseeable future. The Company believes that if
it were unable to renew the leases on any of its leased facilities, other
suitable facilities would be available to meet the Company's needs.
ENVIRONMENTAL MATTERS
The Company believes that it is in substantial compliance with all
applicable laws and regulations for the protection of the environment and the
health and safety of its employees. Compliance with federal, state and local
environmental regulations relating to the discharge of substances into the
environment, the disposal of hazardous waste and other related activities has
had and will continue to have an impact on the operations of the Company, but
has, since the formation of the Company, been accomplished without having a
material adverse effect on the operations of the Company. While it is
difficult to estimate the timing and ultimate costs to be incurred due to
uncertainties about the status of laws, regulations and technology, management
presently has no planned expenditures of a significant amount for future
environmental compliance.
EMPLOYEES
As of July 31, 1996, the Company had 455 full-time employees and 16
temporary employees, including 245 in production, 55 in professional and
technical positions, 51 in administration and 120 in sales and marketing. The
Company believes that its future success will depend in large part upon the
continued service of its senior management personnel, most of whom joined the
Company in April 1996, and upon the Company's continuing ability to attract
and retain highly qualified managerial, operational, technical and sales and
marketing personnel. Competition for highly qualified personnel is intense and
there can be no assurance that the Company will be able to retain its key
personnel or that it will be able to attract and retain additional qualified
personnel in the future. The Company has not experienced any work stoppage and
considers its relations with its employees to be satisfactory.
LITIGATION
The Company is currently involved in certain legal proceedings incidental to
the normal conduct of its business. The Company does not believe that any
liabilities relating to the legal proceedings to which it is a party are
likely to be, individually or in the aggregate, material to its consolidated
financial position or results of operations.
46
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company as of August 20, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
James T. Treace.................. 50 President, Chief Executive Officer and
Chairman of the Board of Directors
F. Barry Bays.................... 49 Senior Vice President, Operations and
Chief Operating Officer
Thomas E. Timbie................. 39 Vice President, Finance, Chief
Financial Officer and Secretary
John R. Treace................... 51 Vice President, U.S. Sales
R. Glen Coleman.................. 41 Vice President, Marketing
Guy K. Williamson................ 42 Vice President, International;
President, Xomed International, Inc.
Vice President, Research and
Fred B. Dinger, III.............. 35 Development
Vice President, Regulatory Affairs and
Dan H. Treace.................... 48 Quality Assurance
Vice President; President of Ophthalmic
Mark J. Fletcher................. 40 Products
Gerard Bussell................... 47 Vice President, Operations
Richard B. Emmitt (1)(2)......... 51 Director
Paul H. Klingenstein............. 40 Director
William R. Miller (1)............ 68 Director
Rodman W. Moorhead, III.......... 52 Director
James E. Thomas (2).............. 36 Director
Elizabeth H. Weatherman (1)(2)... 36 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
James T. Treace has been President, Chief Executive Officer and Chairman of
the Board of Directors of the Company since April 1996. From 1993 until its
acquisition by the Company in April 1996, Mr. Treace served as President,
Chairman of the Board of Directors and Chief Executive Officer of TreBay. From
1990 to 1993, Mr. Treace served as President of Linvatec Corporation
("Linvatec"), a medical device company formerly known as Concept, Inc.
("Concept"), which became a wholly owned subsidiary of Bristol-Myers in 1990.
Mr. Treace served as President and Chief Executive Officer of Concept from
1981 until its acquisition by Bristol-Myers in 1990. Mr. Treace is the brother
of John R. Treace and Dan H. Treace.
F. Barry Bays has been Senior Vice President, Operations and Chief Operating
Officer of the Company since April 1996. From 1993 to April 1996, Mr. Bays
served as Vice President and Chief Operating Officer and a Director of TreBay.
From 1990 to 1993, Mr. Bays served as Executive Vice President and Chief
Operating Officer of Linvatec. From 1981 to 1990, Mr. Bays served as Executive
Vice President and Chief Operating Officer of Concept.
Thomas E. Timbie has been Vice President, Finance and Chief Financial
Officer of the Company since April 1996. From 1994 to April 1996, Mr. Timbie
served as Vice President and Chief Financial Officer of TreBay. From 1990 to
1994, Mr. Timbie held financial management positions at Linvatec, including
Senior Director, Working Capital from 1992 to 1994 and Assistant Controller
from 1990 to 1992. From 1987 to 1990, Mr. Timbie served as Director, Financial
Accounting and Reporting of Concept.
John R. Treace has been Vice President, U.S. Sales of the Company since
April 1996. From 1995 to April 1996, Mr. Treace served as Vice President,
Sales and Marketing of TreBay. From 1981 to 1994, Mr. Treace was a distributor
for orthopaedic and microsurgery product divisions of Smith & Nephew plc. Mr.
Treace is the brother of James T. Treace and Dan H. Treace.
47
<PAGE>
R. Glen Coleman has been Vice President, Marketing of the Company since
August 1996. From January 1983 to August 1996, Mr. Coleman held several
management positions at Linvatec, including Vice President, Global Marketing
from June 1996 to July 1996, Vice President, Sales from October 1993 to June
1996, Vice President and General Manager of the Concept Division from May 1991
to October 1993 and Vice President, Research and Development. From 1976 to
1983, Mr. Coleman held engineering and marketing positions within divisions of
Smith & Nephew plc.
Guy K. Williamson has been Vice President, International of the Company and
President, Xomed International, Inc. since July 1996. From January 1988 to
June 1996, Mr. Williamson held various positions within the Bristol-Myers
Medical Device Group, including Vice President, Zimmer International from
January 1994 to June 1996, General Manager, China and Hong Kong from February
1992 to December 1993, Vice President, Marketing and International
Administration, Linvatec from January 1988 to January 1992, and General
Manager Canada, Edward Weck Inc. from 1980 to 1988.
Fred B. Dinger, III has been Vice President, Research and Development of the
Company since May 1996. From 1992 to 1996, Mr. Dinger held several positions
with Linvatec, including Vice President, Research and Development from 1994 to
1996, Director, New Product Development from 1993 to 1994 and Manager, Power
Systems Development from 1992 to 1993. From 1984 to 1992, Mr. Dinger was
Engineering Section Supervisor of Honeywell Incorporated.
Dan H. Treace has been Vice President, Regulatory Affairs and Quality
Assurance of the Company since May 1996. From 1994 to April 1996, Mr. Treace
served as Vice President and Quality Manager of TreBay. From 1989 to 1994, Mr.
Treace served as Vice President, Technical Affairs of Xomed-Treace, which was
acquired by the Company in 1994. Mr. Treace is the brother of John R. Treace
and James T. Treace.
Mark J. Fletcher has been Vice President of the Company and President of
Ophthalmic Products since July 1996. From April 1996 to July 1996, Mr.
Fletcher served as Vice President, U.S. Marketing of the Company and from 1994
to April 1996, he served as Vice President, Sales and Marketing of the
Company. From 1988 to 1994, Mr. Fletcher held several senior management
positions with Stryker Corporation, including Executive Vice President, Sales
and Marketing from 1993 to 1994, Vice President and General Manager, Stryker
Medical, the Netherlands from 1992 to 1993, and Vice President, Sales, Medical
Division from 1990 to 1992.
Gerard Bussell has been Vice President of Operations of the Company since
March 1996 and from 1993 to March 1996 was Director of Manufacturing
Operations and Director of Manufacturing of the Company. Prior to joining the
Company, Mr. Bussell served in senior management positions from 1979 to 1993
with Allergan, Inc., including Senior Director, Worldwide Materials, and
Managing Director.
Richard B. Emmitt has served as a Director of the Company since April 1994
and from December 1990 to 1994 was a Director of Merocel, which became a
subsidiary of the Company in 1994. Mr. Emmitt has been a Managing Director of
The Vertical Group, Inc., an investment firm, since February 1989. He is also
a Director of SurvivaLink Corporation and Cardiotronics Systems, Inc.
Paul H. Klingenstein has served as a Director of the Company since April
1994. Mr. Klingenstein has been with Accel Partners, a venture capital firm,
since 1986, where he has been a General Partner since 1988. He is also a
Director of several privately held health care and biopharmaceutical
companies.
William R. Miller has served as a Director of the Company since April 1994
and from 1991 to 1994 was a Director of Merocel. In January 1991, Mr. Miller
retired as Vice Chairman of the Board of Directors of Bristol-Myers. From 1985
to January 1991 Mr. Miller was a Director of Bristol-Myers. Mr. Miller served
as Chairman of the Board of the Pharmaceutical Manufacturers Association from
1986 until 1987 and was Vice President and a member of the council of the
International Federation of Pharmaceutical Manufacturers Associations from
1988 until 1990. Mr. Miller is a member of the Board of Trustees of the Cold
Spring Harbor Laboratory and is a Director of ImClone Systems, Inc., Isis
Pharmaceuticals, Inc., St. Jude Medical, Inc. and Westvaco Corporation, as
well as several private companies. In addition, Mr. Miller serves as Chairman
of the Board of Directors of SIBIA Neurosciences, Inc. and Vion
Pharmaceuticals, Inc. (formerly OncoRx).
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<PAGE>
Rodman W. Moorhead, III has served as a Director of the Company since 1994
and was a Director of Merocel from 1990 to 1994. Since 1973, he has been with
E.M. Warburg, Pincus & Co., Inc. ("Warburg, Pincus"), a private investment
firm, where he currently serves as a Senior Managing Director. Mr. Moorhead is
also a Director of NeXstar Pharmaceuticals, Inc., Value Health, Inc. and a
number of privately held companies.
James E. Thomas has served as a Director of the Company since April 1994.
Since 1989, he has been with Warburg, Pincus, where he currently serves as a
Managing Director. Mr. Thomas is also a Director of Anergen, Inc., Celtrix
Pharmaceuticals, Inc., Menley & James Laboratories, Inc., and several
privately held companies.
Elizabeth H. Weatherman has served as a Director of the Company since April
1994 and was a Director of Merocel from December 1990 until 1994. Since 1988,
she has been with Warburg, Pincus, where she currently serves as a Managing
Director. Ms. Weatherman is also a Director of Cardiotronics Systems, Inc.,
VitalCom Inc. and several privately held health care companies.
Each director serves until the expiration of his term and thereafter until
his successor is duly elected and qualified. A stockholders agreement among
the Company and substantially all of its current stockholders provides that WP
Investors has the right to designate specified numbers of persons to the
Company's Board of Directors so long as WP Investors maintains specified
levels of ownership of the outstanding Class A Common Stock. See "--
Stockholders Agreement." Executive officers of the Company are elected
annually by the Board of Directors and serve at its discretion or until their
successors are duly elected and qualified.
The Board of Directors has established a Compensation Committee, which
provides recommendations concerning salaries and incentive compensation for
employees of, and consultants to, the Company and administers the Stock Option
Plan and the Company's 401(k) and Profit Sharing Plan (the "401(k) Plan").
During 1995, the Compensation Committee was composed of Richard B. Emmitt,
James E. Thomas and Elizabeth H. Weatherman. The current members of the
Compensation Committee are Richard B. Emmitt, William R. Miller and Elizabeth
H. Weatherman. The Board of Directors has also established an Audit Committee,
which reviews the results and scope of the annual audit of the Company's
financial statements conducted by the Company's independent accountants, the
scope of other services provided by the Company's independent accountants,
proposed changes in the Company's financial and accounting standards and
principles, and the Company's policies and procedures with respect to its
internal accounting, auditing and financial controls and makes recommendations
to the Board of Directors on the engagement of the independent accountants, as
well as other matters which may come before the Audit Committee or at the
direction of the Board of Directors. The current members of the Audit
Committee are Richard B. Emmitt, James E. Thomas and Elizabeth H. Weatherman.
DIRECTORS' ANNUAL COMPENSATION
William R. Miller receives $1,000 in directors' fees per meeting from the
Company. No other member of the Board of Directors currently receives
directors' fees from the Company. The Company is obligated to reimburse its
Board members for all reasonable expenses incurred in connection with their
attendance at directors' meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is currently composed of Richard B. Emmitt,
William R. Miller and Elizabeth H. Weatherman.
EXECUTIVE COMPENSATION
Summary Compensation Table. As required by the rules and regulations of the
Securities and Exchange Commission, the following table sets forth information
regarding the compensation of the Company's Chief Executive Officer during
fiscal 1995 and the four other most highly compensated executive officers (the
"Executive Officer Group") for fiscal 1995. In April and May 1996, four
members of the Executive Officer Group were replaced. Information with respect
to the Company's new executive officers is included elsewhere in this section.
49
<PAGE>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION
--------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Mark K. Adams (1)................. $200,525 $58,890 $37,104(5) $2,345(8)
President and Chief Executive
Officer
Arthur Gertzman (2)............... 128,656 23,799 (6) 3,626(8)
Vice President, Research and
Development
Mark J. Fletcher.................. 140,000 4,200 17,224(7) --
Vice President, Sales and
Marketing
Marley Price (3).................. 116,029 2,644 -- 2,603(8)
Vice President, Operations
David R. Grant (4)................ 115,923 2,673 -- 2,594(8)
Vice President, Finance
</TABLE>
- --------
(1) Mr. Adams' last day of employment with the Company was May 20, 1996.
(2) Mr. Gertzman's last day of employment with the Company was April 30, 1996.
(3) Mr. Price's last day of employment with the Company was April 22, 1996.
(4) Mr. Grant's last day of employment with the Company was June 28, 1996.
(5) Represents $30,000 paid to Mr. Adams as a housing allowance and $7,104
paid to Mr. Adams as an automobile allowance.
(6) Other annual compensation in the form of perquisites and other personal
benefits has been omitted because the aggregate amount of such perquisites
and other personal benefits was less than $50,000 and constituted less
than 10% of the executive's total annual salary and bonus.
(7) Represents a reimbursement of Mr. Fletcher's moving expenses.
(8) Represents a matching contribution by the Company to the 401(k) Plan for
the benefit of the executive.
James T. Treace joined the Company as its President, Chief Executive Officer
and Chairman of the Board of Directors in April 1996. Mr. Treace receives an
annual salary of $230,000 and will be eligible to receive an annual cash bonus
under the Company's Key Executive Bonus Program. On April 16, 1996, the
Company granted to Mr. Treace an option under the Stock Option Plan to
purchase 73,000 shares of Class A Common Stock at an exercise price of $10.65
per share.
F. Barry Bays joined the Company as its Senior Vice President, Operations
and Chief Operating Officer in April 1996. Mr. Bays receives an annual salary
of $175,000 and will be eligible to receive an annual cash bonus under the
Company's Key Executive Bonus Program. On April 16, 1996, the Company granted
to Mr. Bays an option under the Stock Option Plan to purchase 42,000 shares of
Class A Common Stock at an exercise price of $10.65 per share.
John R. Treace joined the Company as its Vice President, U.S. Sales in April
1996. Mr. Treace receives an annual salary of $150,000 and will be eligible to
receive an annual cash bonus under the Company's Key Executive Bonus Program.
The Company granted to Mr. Treace on April 16, 1996 an option under the Stock
Option Plan to purchase 8,000 shares of Class A Common Stock at an exercise
price of $10.65 per share and on June 14, 1996 an option under such plan to
purchase 15,500 shares of Class A Common Stock at an exercise price of $10.65
per share.
50
<PAGE>
R. Glen Coleman joined the Company as its Vice President, Marketing in
August 1996. Mr. Coleman receives an annual salary of $150,000 and will be
eligible to receive an annual cash bonus under the Company's Key Executive
Bonus Program. On August 12, 1996, the Company granted to Mr. Coleman an
option under the Stock Option Plan to purchase 30,000 shares of Class A Common
Stock at an exercise price of $10.65 per share.
Guy K. Williamson joined the Company as its Vice President, International
and President, Xomed International, Inc. in July 1996. Mr. Williamson receives
an annual salary of $150,000 and will be eligible to receive an annual cash
bonus under the Company's Key Executive Bonus Program. On July 1, 1996, the
Company granted to Mr. Williamson an option under the Stock Option Plan to
purchase 30,000 shares of Class A Common Stock at an exercise price of $10.65
per share.
OPTION GRANTS DURING 1995
During fiscal 1995, the Company granted options under the Stock Option Plan
to purchase an aggregate of 8,000 shares of Class A Common Stock at an
exercise price of $9.58 per share. No stock options were granted to any member
of the Executive Officer Group during fiscal 1995.
In January 1996, the Company granted certain key employees options under the
Stock Option Plan to purchase an aggregate of 96,000 shares of Class A Common
Stock at an exercise price of $9.58 per share. Included among these grants was
a grant to Mark J. Fletcher of an option to purchase 10,000 shares of Class A
Common Stock at an exercise price of $9.58 per share. These options provide
that the right to purchase 25% of the shares of Class A Common Stock subject
to the options vests on each of the first four anniversaries of the date of
grant. The options expire five years after the date of grant.
In April 1996, the Company granted certain employees options under the Stock
Option Plan to purchase an aggregate of 131,000 shares of Class A Common Stock
at an exercise price of $10.65 per share. Included among these grants were
grants to James T. Treace, F. Barry Bays and John R. Treace of options to
purchase 73,000, 42,000 and 8,000 shares of Class A Common Stock,
respectively. In June 1996, the Company granted certain employees options
under the Stock Option Plan to purchase an aggregate of 79,500 shares of Class
A Common Stock at an exercise price of $10.65 per share. Included among these
grants were grants to John R. Treace and Thomas E. Timbie of options to
purchase 15,500 and 23,500 shares of Class A Common Stock, respectively. In
July 1996, the Company granted to Guy K. Williamson options under the Stock
Option Plan to purchase 30,000 shares of Class A Common Stock, at an exercise
price of $10.65 per share. On August 12, 1996, the Company granted to R. Glen
Coleman options under the Stock Option Plan to purchase 30,000 shares of Class
A Common Stock, at an exercise price of $10.65 per share. These options
provide that the right to purchase 25% of the shares of Class A Common Stock
subject to the options vests on each of the first four anniversaries of the
date of grant. The options expire five years after the date of grant.
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the number and value
of unexercised stock options held at the end of 1995 by each member of the
Executive Officer Group. No stock options were exercised by members of the
Executive Officer Group during fiscal 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FY-END (#) FY-END
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
---- ------------------------- ------------------------------
<S> <C> <C>
Mark K. Adams........... 47,125/42,375 $801,325/$539,475
Arthur Gertzman......... 7,000/11,000 110,840/152,520
Mark J. Fletcher........ 5,000/15,000 52,100/156,300
Marley Price............ 2,000/6,000 20,840/62,520
David R. Grant.......... 2,000/6,000 20,840/62,520
</TABLE>
- --------
(1) There was no public trading market for the Class A Common Stock on
December 31, 1995. Accordingly, solely for purposes of this table, the
values in this column have been calculated on the basis of an assumed
initial public offering price of $20.00 per share, less the aggregate
exercise price of the options.
51
<PAGE>
1996 STOCK OPTION PLAN
On April 15, 1996, the Board of Directors adopted and the stockholders
approved the Stock Option Plan. The Stock Option Plan was subsequently amended
and restated on June 14, 1996 and July 24, 1996 and approved by stockholders
on July 24, 1996. The Stock Option Plan is open to participation by directors,
officers, consultants, other key employees of the Company or of its
subsidiaries and certain other key persons who the Stock Option Committee (as
defined below) determines shall receive options under the Stock Option Plan.
The Stock Option Plan authorizes: (i) the grant of options to purchase Class
A Common Stock intended to qualify as incentive stock options ("Incentive
Options"), as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"); and (ii) the grant of options that do not so qualify
("Non-Statutory Options"). The number of shares of Class A Common Stock
reserved for issuance under the Stock Option Plan is 778,000 shares. As of
August 20, 1996, options to purchase an aggregate of 501,191 shares having a
weighted average exercise price of $9.76 per share were outstanding under the
Stock Option Plan, options for 108,900 shares had been exercised under the
Stock Option Plan and options to purchase 167,909 shares are available for
grant under the Stock Option Plan. The Stock Option Plan expires on April 16,
2004.
The Stock Option Plan is administered by a committee (the "Stock Option
Committee") appointed by the Board of Directors of the Company. The
Compensation Committee serves as the Stock Option Committee. The Stock Option
Committee has the sole authority, in its absolute discretion: (i) to determine
which of the eligible employees of the Company and its subsidiaries shall be
granted options; (ii) to authorize the granting of both Incentive Options and
Non-Statutory Options; (iii) to determine the times when options shall be
granted and the number of shares to be optioned; (iv) to determine the option
price of the shares subject to each option, which price shall be not less than
the fair market value of the Class A Common Stock at the time the option was
granted; (v) to determine the time or times when each option becomes
exercisable, the duration of the exercise period and any other restrictions on
the exercise of options issued under the Stock Option Plan; (vi) to prescribe
the form or forms of the option agreements under the Stock Option Plan; (vii)
to adopt, amend and rescind such rules and regulations as, in its opinion, may
be advisable in the administration of the Stock Option Plan; and (viii) to
construe and interpret the Stock Option Plan, the rules and regulations and
the option agreements under the Stock Option Plan and to make all other
determinations deemed necessary or advisable for the administration of the
Stock Option Plan. All decisions, determinations and interpretations of the
Stock Option Committee are final and binding on all optionees.
Incentive Options may be granted only to officers and other key employees of
the Company or its subsidiaries. Non-Statutory Options may be granted to
directors, consultants, or other key persons who the Stock Option Committee
determines shall receive options under the Stock Option Plan.
No option may be exercised after the date ten years from the date of grant
of such option (five years in the case of Incentive Options of individuals
holding more than ten percent of the total combined voting power of all
classes of stock of the Company or of any parent or subsidiary thereof
("greater-than-ten-percent-stockholders")) (the "Termination Date"). The
exercise price for Non-Statutory Options may not be less than 50% of the fair
market value of the Class A Common Stock on the date of grant. The exercise
price for Incentive Options may not be less than 100% of fair market value of
the Class A Common Stock on the date of grant (110% in the case of a greater-
than-ten-percent-stockholder). The aggregate fair market value (determined as
of the time the option is granted) of the Class A Common Stock with respect to
which any Incentive Options may be exercisable for the first time by the
optionee in any calendar year (under the Stock Option Plan or any other stock
option plan of the Company or any parent or subsidiary thereof) shall not
exceed $100,000.
Options are non-transferable except by will or the laws of descent and
distribution. Generally, unless otherwise provided by the Stock Option
Committee, options granted under the Stock Option Plan terminate upon the
earliest of: (i) the expiration date of the option; (ii) the date of voluntary
termination of the optionee's employment by the optionee; (iii) the date of
termination of the optionee's employment
52
<PAGE>
by the Company for cause; (iv) three months after the date of termination of
the optionee's employment by the Company without cause; (v) one year after the
cessation of the optionee's employment by reason of a disability within the
meaning of Section 105(d)(4) of the Code; and (vi) one year after the death of
an optionee prior to the Termination Date and while employed by the Company or
a subsidiary thereof or while entitled to exercise an option pursuant to (v)
above (such option shall be exercisable by the person to whom the optionee's
rights under the option pass by will or the applicable laws of descent and
distribution). For purposes of the Stock Option Plan, the Company shall have
"cause" to terminate an optionee's employment if the Company has cause to
terminate the optionee's employment under any existing employment agreement
between the optionee and the Company or, in the absence of such an employment
agreement, upon (a) determination by the Board of Directors that the optionee
has ceased to perform his duties to the Company (other than as a result of his
incapacity due to physical or mental illness or injury), which failure amounts
to an intentional and extended neglect of his duties to the Company, (b) the
Board of Directors' determination that the optionee has engaged or is about to
engage in conduct materially injurious to the Company, or (c) the optionee
having been convicted of a felony. If an option may be exercised during any
period after the termination of an optionee's employment with the Company,
such option may be exercised only to the extent that the optionee was entitled
to exercise such option at the time of such termination.
KEY EXECUTIVE BONUS PROGRAM
The Company maintains a Key Executive Bonus Program in which key management
personnel are eligible to participate. The plan allows participants to earn
bonuses up to stated percentages of their base salary. For 1995, the
percentages were as follows: 50% for the President, 30% for Vice Presidents,
25% for sales directors, 25% for regional sales managers, 25% for
international managers, 20% for first level managers and 10% for second level
managers. The bonuses are paid in part based on the Company's achievement of
operating results, and in part based on achievement of individual goals
established for the participant. During 1995, a total of 37 key managers
participated in the bonus plan. The Company presently intends to continue the
bonus plan for 1996 and future years.
401(K) PLAN
The Company presently maintains the 401(k) Plan for the benefit of
substantially all full-time employees. The 401(k) Plan is qualified under
Sections 401(a) and 401(k) of the Code. Participants in the plan may elect to
defer up to 16% of their eligible compensation and have such amount invested
in accordance with the investment alternatives available under the plan. The
Company may make matching contributions each year equal to 50% of participant
deferrals up to 4% of eligible compensation. The Company may also make
discretionary contributions.
EMPLOYMENT AGREEMENTS
In connection with its acquisition of TreBay, the Company executed
employment agreements with James T. Treace and F. Barry Bays. The Company
agreed to employ Mr. Treace as President, Chairman of the Board of Directors
and Chief Executive Officer at an annual salary of $230,000 and Mr. Bays as
Senior Vice President of Operations and Chief Operating Officer at an annual
salary of $175,000. In addition, Messrs. Treace and Bays are eligible for the
Key Executive Bonus Program adopted by the Company, which program provides for
a bonus in an amount up to and at the 50% level of an employee's salary upon
attainment of the bonus criteria. The employment agreements have an initial
term of three years, and may be extended upon good faith negotiations between
the parties, which negotiations shall begin not later than 90 days prior to
the expiration of the stated term of the agreement.
The agreements entitle these executive officers to participate in such
fringe benefits as shall be generally provided to the executives of the
Company, including medical insurance and retirement programs which may be
adopted from time to time by the Company. In addition, the Company has granted
to Messrs. Treace and Bays 73,000 and 42,000 stock options, respectively,
under the Stock Option
53
<PAGE>
Plan, and each of Messrs. Treace and Bays are eligible for additional grants
of stock options as target bonuses pursuant to corporate performance
objectives established by the Company's Compensation Committee. The
Compensation Committee will review each executive officer's compensation and
award such bonuses or make such increases to the annual salary as the
Compensation Committee, in its sole discretion, determines are merited.
The employment agreements contain covenants prohibiting the improper
disclosure and use of any of the Company's and its predecessors' trade
secrets, know-how and proprietary processes, as well as provisions assigning
to the Company all inventions made or conceived by the executive officer
during his employment with the Company. Each executive officer agreed with the
Company that until twelve months after the termination of his employment with
the Company he would not (whether as an officer, director, owner, employee,
partner or other direct or indirect participant) engage in any Competitive
Business (defined as the manufacturing, supplying, producing, selling,
distributing or providing for sale of (i) any product, device or instrument
manufactured from or using polyvinal acetal (PVAc) material or technology or
(ii) any eye, ear, nose or throat product, device or instrument (x) of a type
manufactured or sold by the Company or its subsidiaries or (y) in clinical
development sponsored by the Company or its subsidiaries, in each case, as of
the date of termination of employment).
The Company may terminate the employment of the executive officers under the
employment agreements (i) upon 30 days' notice if the employee becomes
physically or mentally incapacitated or is injured so that he is unable to
perform the services required of him and such inability to perform continues
for a period in excess of six months and is continuing at the time of such
notice, (ii) for cause upon notice of such termination to the employee or
(iii) without cause upon 30 days' notice of such termination to the employee.
If an employment agreement is terminated pursuant to (i) above, the executive
officer shall receive salary continuation pay from the date of such
termination until April 16, 1999, reduced by applicable payroll taxes and
amounts received by the executive officer under any Company-maintained
disability insurance policy or plan under Social Security or similar laws. If
an employment agreement is terminated pursuant to (ii) above, the executive
officer shall receive no salary continuation pay or severance pay. If an
employment agreement is terminated pursuant to (iii) above, the executive
officer shall receive salary continuation pay for a period of twelve months
from and after the date of such termination.
STOCKHOLDERS AGREEMENT
Under a stockholders agreement among the Company and substantially all of
its existing stockholders, the parties agree to take all action within their
respective power, including but not limited to, the voting of capital stock of
the Company, required to cause the Board of Directors of the Company to
consist of seven members. The stockholders agreement provides that, so long as
WP Investors owns 40% or more of the total number of outstanding shares of
Class A Common Stock, WP Investors will have the right to designate three
persons to be appointed or nominated for election to the Company's Board of
Directors. If at any time WP Investors owns less than 40%, but 20% or more, of
the total number of outstanding shares of Class A Common Stock, WP Investors
will have the right to designate two persons to be appointed or nominated for
election to the Company's Board of Directors. If at any time WP Investors owns
less than 20%, but 10% or more, of the total number of outstanding shares of
Class A Common Stock, WP Investors will have the right to designate one person
to be appointed or nominated for election to the Company's Board of Directors.
WP Investors has informed the Company that it intends, upon the closing of
this offering, to convert all of its Non-Voting Common Stock into Class A
Common Stock, provided that, in no event will such conversion result in its
holding more than 49% of the outstanding shares of Class A Common Stock
following such conversion. Upon completion of this offering and the Share
Exchange, WP Investors will have under the stockholders agreement the right to
designate three persons to be appointed or nominated to the Company's Board of
Directors. In addition, the stockholders agreement provides each current
stockholder with certain rights to inspect the Company's properties and its
books and records and to discuss its affairs with management so long as the
stockholder holds at least 2% of the combined outstanding Class A Common Stock
and Non-Voting Common Stock.
54
<PAGE>
CERTAIN TRANSACTIONS
As part of the financing of the Xomed Acquisition, the Company issued to
certain institutional investors, including WP Investors, an aggregate of: (i)
340,454 shares of Series A Convertible Preferred Stock for approximately
$3,261,549 in aggregate consideration; (ii) 2,127,838 shares of Series B
Convertible Preferred Stock for approximately $20,384,688 in aggregate
consideration; and (iii) 198,561 shares of Series C Redeemable Preferred Stock
for approximately $19,856,100 in aggregate consideration. Of the shares issued
by the Company, WP Investors purchased all of the shares of Series B
Convertible Preferred Stock for approximately $20,384,688 in aggregate
consideration and 171,173 of the shares of Series C Redeemable Preferred Stock
for approximately $17,173,000 in aggregate consideration.
The Company is a party to a stockholders agreement with substantially all of
its existing stockholders relating to, among other things, the composition of
the Company's Board of Directors. See "Management--Stockholders Agreement."
On November 7, 1995, TreBay loaned $833,000 to James T. Treace, its
President and Chief Executive Officer. Following the Company's acquisition of
TreBay in April 1996, Mr. Treace became the Company's President and Chief
Executive Officer. The loan is payable on demand at any time following
November 7, 2000 and matures on November 7, 2002. Interest accrues on the loan
at an annual rate of 10% and is payable, at Mr. Treace's election, upon each
anniversary of the loan or its maturity. The loan is secured by a pledge of
40,280 shares of Series A Convertible Preferred Stock and 2,940 shares of
Series C Redeemable Preferred Stock.
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with regard to the
beneficial ownership of the Class A Common Stock as of August 20, 1996, and as
adjusted to reflect the sale of the shares of Class A Common Stock being
offered hereby, by (i) each person known by the Company to own beneficially
more than 5% of the outstanding shares of Class A Common Stock, (ii) each
director of the Company, its Chief Executive Officer, certain of its other
most highly compensated current executive officers of the Company and each
member of the Executive Officer Group and (iii) all current directors and
executive officers of the Company as a group. Except as otherwise noted, the
named beneficial holder has sole voting and investment power.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
NAMES AND ADDRESSES OF OWNED BEFORE SHARES BENEFICIALLY
BENEFICIAL HOLDERS OFFERING OWNED AFTER OFFERING
---------------------- ------------------------ --------------------------
NUMBER(1) PERCENT(3) NUMBER(1)(2) PERCENT(3)
--------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
5% Stockholders:
Warburg, Pincus Investors,
L.P. (4)................. 2,997,453 75.3% 3,306,204(5) 48.1%
466 Lexington Avenue
New York, NY 10017
Accel IV L.P. ............ 259,880 6.5% 287,594(6) 4.2%
1 Embarcadero Center
San Francisco, CA 94111
Directors and executive of-
ficers:
James T. Treace........... 136,172(7) 3.4% 150,587(7) 2.2%
F. Barry Bays............. 80,596(8) 2.0% 88,907(8) 1.3%
R. Glen Coleman........... -- * -- *
Guy K. Williamson......... -- * -- *
Thomas E. Timbie.......... 17,643(9) * 18,831(9) *
Mark J. Fletcher.......... 10,000(10) * 10,000(10) *
John R. Treace............ 11,007(11) * 11,488(11) *
Richard B. Emmitt......... 159,594(12) 4.0% 173,193(12) 2.5%
Paul H. Klingenstein...... 277,470(13) 7.0% 307,060(13) 4.5%
William R. Miller......... 5,500 * 5,500 *
Rodman W. Moorhead, III... 2,997,453(14) 75.3% 3,306,204(14) 48.1%
James E. Thomas........... 2,997,453(14) 75.3% 3,306,204(14) 48.1%
Elizabeth H. Weatherman... 2,997,453(14) 75.3% 3,306,204(14) 48.1%
Mark K. Adams (15)........ 80,000 2.0% 80,000 1.2%
David R. Grant (16)....... 9,679 * 10,283 *
Arthur Gertzman (17)...... 7,840 * 8,143 *
Marley Price (18)......... -- * -- *
All current directors and
executive officers as a
group (16 persons)
(12)(13)(14)............. 3,708,308 92.4% 4,085,217 59.1%
</TABLE>
- --------
*Less than 1%.
(1) Except as otherwise indicated, the persons in this table have sole voting
and investment power with respect to all shares of Class A Common Stock
shown as beneficially owned by them, subject to community property laws
where applicable and subject to the information contained in the
footnotes to this table. Amounts shown for each stockholder include all
shares of Class A Common Stock obtainable upon the Stock Conversion
(except that shares obtainable with respect to accreted dividends upon
the conversion of preferred stock are not included in shares beneficially
owned before this offering), together with shares subject to stock
options exercisable within 60 days of August 20, 1996. Shares not
outstanding but deemed beneficially owned by virtue of the right of a
person or group to acquire them within 60 days are treated as outstanding
only for purposes of determining the number of and percent owned by such
person or group.
(2) Amounts shown for each stockholder include all shares of Class A Common
Stock issuable in the Share Exchange, based upon an assumed initial
offering price of $20.00 per share.
56
<PAGE>
(3) The number of shares of Class A Common Stock deemed outstanding before
this offering consists of 679,270 shares of Class A Common Stock
outstanding as of August 20, 1996, 744,652 shares of Class A Common Stock
issuable upon conversion of outstanding shares of Series A Convertible
Preferred Stock, 426,777 shares of Class A Common Stock issuable upon
conversion of outstanding shares of Non-Voting Common Stock and 2,127,838
shares of Class A Common Stock issuable upon conversion of the shares of
Non-Voting Common Stock which are issuable upon conversion of outstanding
shares of Series B Convertible Preferred Stock. The number of shares of
Class A Common Stock deemed outstanding after this offering includes an
additional 2,500,000 shares of Class A Common Stock being offered for
sale by the Company in this offering, 314,650 shares of Class A Common
Stock issued in the Share Exchange and 86,175 shares of Class A Common
Stock issued in the Stock Conversion with respect to accreted dividends
on preferred stock.
(4) The sole general partner of WP Investors is Warburg, Pincus & Co., a New
York general partnership ("WP"). Lionel I. Pincus is the managing partner
of WP and may be deemed to control it. E.M. Warburg, Pincus & Company, a
New York general partnership that has the same general partners as WP
("E.M. Warburg"), manages WP Investors. WP has a 20% interest in the
profits of WP Investors and, through its wholly-owned subsidiary,
Warburg, Pincus, owns 1.13% of the limited partnership interests in WP
Investors. Messrs. Moorhead and Thomas and Ms. Weatherman, each a
director of the Company, are Managing Directors of Warburg, Pincus and
general partners of WP and E.M. Warburg. As such, Messrs. Moorhead and
Thomas and Ms. Weatherman may be deemed to have an indirect pecuniary
interest (within the meaning of Rule 16a-1 under the Exchange Act) in an
indeterminate portion of the shares beneficially owned by WP Investors,
Warburg, Pincus, and WP.
(5) Includes 244,915 shares of Class A Common Stock issuable within 31 days
of the closing of this offering in exchange for 46,874 shares of Series C
Redeemable Preferred Stock. An additional 186,217 shares of Series C
Redeemable Preferred Stock held by WP Investors will be redeemed from the
net proceeds of this offering.
(6) Includes 19,918 shares of Class A Common Stock issuable within 31 days of
the closing of this offering in exchange for 3,812 shares of Series C
Redeemable Preferred Stock. An additional 15,144 shares of Series C
Redeemable Preferred Stock held by such person will be redeemed from the
net proceeds of this offering.
(7) Includes 1,083 shares of Class A Common Stock subject to options
exercisable within 60 days of August 20, 1996. Shares beneficially owned
after this offering include 10,362 shares of Class A Common Stock
issuable within 31 days of the closing of this offering in exchange for
1,983 shares of Series C Redeemable Preferred Stock. An additional 7,879
shares of Series C Redeemable Preferred Stock held by Mr. Treace will be
redeemed from the net proceeds of this offering. Mr. Treace has pledged
certain of his shares to the Company to secure repayment of a loan. Mr.
Treace has pledged 91,929 shares of Class A Common Stock and 6,711 shares
of Series C Redeemable Preferred Stock to WP Investors to secure
repayment of a loan of $1,649,998 from WP Investors used to purchase such
shares. The loan bears interest at an annual rate of 7% and matures on
April 16, 2001. See "Certain Transactions."
(8) Includes 2,708 shares of Class A Common Stock subject to options
exercisable within 60 days of August 20, 1996. Shares beneficially owned
after this offering include 5,974 shares of Class A Common Stock issuable
within 31 days of the closing of this offering in exchange for 1,143
shares of Series C Redeemable Preferred Stock. An additional 4,543 shares
of Series C Redeemable Preferred Stock held by Mr. Bays will be redeemed
from the net proceeds of this offering. Mr. Bays has pledged 52,928
shares of Class A Common Stock and 3,864 shares of Series C Redeemable
Preferred Stock to WP Investors to secure repayment of a loan of $949,998
from WP Investors used to purchase such shares. The loan bears interest
at an annual rate of 7% and matures on April 16, 2001.
(9) Includes 6,500 shares of Class A Common Stock subject to options
exercisable within 60 days of August 20, 1996. Shares beneficially owned
after this offering include 854 shares of Class A Common Stock issuable
within 31 days of the closing of this offering in exchange for 163 shares
of Series C Redeemable Preferred Stock. An additional 650 shares of
Series C Redeemable Preferred Stock held by Mr. Timbie will be redeemed
from the net proceeds of this offering. Mr. Timbie has pledged 11,143
shares of Class A Common Stock and 813 shares of Series C Redeemable
Preferred Stock to WP Investors to secure repayment of a loan of $200,004
from WP Investors used to purchase such shares. The loan bears interest
at an annual rate of 7% and matures on April 16, 2001.
(10) Represents shares of Class A Common Stock subject to options exercisable
within 60 days of August 20, 1996.
(11) Includes 6,500 shares of Class A Common Stock subject to options
exercisable within 60 days of August 20, 1996. Shares beneficially owned
after this offering include 346 shares of Class A Common Stock issuable
within 31 days of the closing of this offering in exchange for 66 shares
of Series C Redeemable Preferred Stock. An additional 263 shares of
Series C Redeemable Preferred Stock held by Mr. Treace will be redeemed
from the net proceeds of this offering.
(12) Includes only shares held by Vertical Fund Associates, L.P., Vertical
Medical Partners, L.P. and Vertical Partners, L.P. (collectively, the
"Vertical Funds"). Mr. Emmitt is a Managing Director of The Vertical
Group, Inc., the general partner of each of the Vertical Funds. As such,
Mr. Emmitt may be deemed to have an indirect pecuniary interest (within
the meaning of Rule 16a-1 of the Exchange Act) in an indeterminate
portion of the shares beneficially held by the Vertical Funds. Mr. Emmitt
disclaims beneficial ownership of the shares held by the Vertical Funds.
Shares beneficially owned after this offering include 11,897 shares of
Class A Common Stock held by the Vertical Funds issuable within 31 days
of the closing of this offering in exchange for 2,277 shares of Series C
Redeemable Preferred Stock. An additional 9,046 shares of Series C
Redeemable Preferred Stock held by the Vertical Funds will be redeemed
from the net proceeds of this offering.
(13) Includes only shares held by Accel IV L.P., Accel Keiretsu L.P., Accel
Investors '94 L.P. and Prosper Partners (collectively, the "Funds"). Mr.
Klingenstein is (i) a general partner of the general partner of Accel IV
L.P.; (ii) an officer of the general partner
57
<PAGE>
of Accel Keiretsu L.P.; (iii) a general partner of Accel Investors '94
L.P.; and (iv) attorney-in-fact for Prosper Partners. As such, Mr.
Klingenstein may be deemed to have an indirect pecuniary interest (within
the meaning of Rule 16a-1 of the Exchange Act) in an indeterminate portion
of the shares beneficially held by the Funds. Mr. Klingenstein disclaims
beneficial ownership of the shares held by the Funds. Shares beneficially
owned after this offering by the Funds include 21,266 shares of Class A
Common Stock issuable within 31 days of the closing of this offering in
exchange for 4,070 shares of Series C Redeemable Preferred Stock. An
additional 16,169 shares of Series C Redeemable Preferred Stock held by the
Funds will be redeemed from the net proceeds of this offering.
(14) Includes only shares held by WP Investors, of which Messrs. Moorhead and
Thomas and Ms. Weatherman may be deemed to have beneficial ownership.
Messrs. Moorhead and Thomas and Ms. Weatherman disclaim beneficial
ownership of the shares held by WP Investors.
(15) Mr. Adams's last day of employment with the Company was May 20, 1996.
Includes 60,000 shares of Class A Common Stock subject to options
exercisable within 60 days of August 20, 1996.
(16) Mr. Grant's last day of employment with the Company was June 28, 1996.
Includes 4,000 shares of Class A Common Stock subject to options
exercisable within 60 days of August 20, 1996. Shares beneficially owned
after this offering include 434 shares of Class A Common Stock issuable
within 31 days of the closing of this offering in exchange for 83 shares
of Series C Redeemable Preferred Stock. An additional 330 shares of
Series C Redeemable Preferred Stock held by Mr. Grant will be redeemed
from the net proceeds of this offering.
(17) Mr. Gertzman's last day of employment with the Company was April 30,
1996. Shares beneficially owned after this offering include 218 shares of
Class A Common Stock issuable within 31 days of the closing of this
offering in exchange for 42 shares of Series C Redeemable Preferred
Stock. An additional 165 shares of Series C Redeemable Preferred Stock
held by Mr. Gertzman will be redeemed from the net proceeds of this
offering.
(18) Mr. Price's last day of employment with the Company was April 22, 1996.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company currently consists of (i)
6,500,000 shares of Class A Common Stock, par value $.01 per share; (ii)
4,000,000 shares of Non-Voting Common Stock, par value $.01 per share; (iii)
1,200,000 shares of Series A Convertible Preferred Stock, par value $1.00 per
share; (iv) 3,500,000 shares of Series B Convertible Preferred Stock, par
value $1.00 per share; and (v) 600,000 shares of Series C Redeemable Preferred
Stock, par value $1.00 per share.
After giving effect to the amendment to the Company's Restated Certificate
of Incorporation (the "Restated Certificate") upon the closing of this
offering, the authorized capital stock of the Company will consist of
30,000,000 shares of Class A Common Stock, par value $.01 per share, 4,000,000
shares of Non-Voting Common Stock, par value of $.01 per share, 600,000 shares
of Series C Redeemable Preferred, par value $1.00 per share, and 1,000,000
shares of Preferred Stock, par value $1.00 per share.
CLASS A COMMON STOCK
As of August 20, 1996, there were outstanding 679,270 shares of Class A
Common Stock held of record by 15 persons. Upon the closing of this offering,
there will be outstanding 6,879,362 shares of Class A Common Stock, after
giving effect to the Stock Conversion and the Share Exchange and assuming no
exercise of the Underwriters' over-allotment option or exercise of outstanding
options to purchase an aggregate of 501,191 shares of Class A Common Stock.
Holders of Class A Common Stock are entitled to one vote per share in all
matters to be voted on by the stockholders of the Company and do not have
cumulative voting rights. Subject to preferences that may be applicable to any
Preferred Stock outstanding at the time, holders of Class A Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, holders of Class A Common Stock are entitled to share ratably in all
assets remaining after payment of the Company's liabilities and the
liquidation preference, if any, of any outstanding Preferred Stock. Holders of
shares of Class A Common Stock have no preemptive, subscription, redemption or
conversion rights. There are no redemption or sinking fund provisions
applicable to the Class A Common Stock. All of the outstanding shares of Class
A Common Stock are, and the shares offered by the Company in this offering
will be, when issued and paid for, fully paid and non-assessable. The rights,
preferences and privileges of holders of Class A 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 "Dividend Policy."
NON-VOTING COMMON STOCK
As of August 20, 1996, there were outstanding 426,777 shares of Non-Voting
Common Stock held of record by one institution. Upon the closing of this
offering, there will be outstanding no shares of Non-Voting Common Stock,
after giving effect to the conversion into shares of Non-Voting Common Stock
of all outstanding shares of Series B Convertible Preferred Stock and the
subsequent conversion of all then outstanding Non-Voting Common Stock into
shares of Class A Common Stock.
Holders of Non-Voting Common Stock are not entitled to vote on any matter to
be voted on by the stockholders, except as required by law. Holders of shares
of Non-Voting Common Stock other than WP Investors or its affiliates may elect
at any time to convert their shares of Non-Voting Common Stock into an
equivalent number of fully paid and nonassessable shares of Class A Common
Stock. WP Investors and its affiliates may elect to convert shares of Non-
Voting Common Stock that they hold into an equivalent number of fully paid and
nonassessable shares of Class A Common Stock so long as after giving effect to
the conversion WP Investors and its affiliates collectively own beneficially
and of record no more than
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<PAGE>
50% of the then outstanding shares of Class A Common Stock. Except with
respect to voting rights and the conversion rights of the Non-Voting Common
Stock, shares of Non-Voting Common Stock have the same powers, rights and
qualifications (including relative, participating, optional and other special
rights, dividend rights, and rights on liquidation, dissolution or winding up)
as shares of Class A Common Stock and rank pari passu with shares of Class A
Common Stock.
PREFERRED STOCK
As of August 20, 1996, there were outstanding 744,652 shares of Series A
Convertible Preferred Stock held of record by 16 persons, 2,127,838 shares of
Series B Convertible Preferred Stock held of record by one institution and
299,459 shares of Series C Redeemable Preferred Stock held of record by 22
persons.
The terms of the Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock provide that, upon the closing of this offering in
connection with the Stock Conversion, the outstanding shares of Series A
Convertible Preferred Stock and the accrued and unpaid dividends thereon will
automatically convert into 766,991 shares of Class A Common Stock and the
outstanding shares of Series B Convertible Preferred Stock and the accrued and
unpaid dividends thereon will automatically convert into 2,191,674 shares of
Non-Voting Common Stock. Immediately thereafter, the holder of all then
outstanding shares of Non-Voting Stock will convert such shares into Class A
Common Stock. Upon the closing of this offering, the Company intends to amend
the Restated Certificate to eliminate the Series A Convertible Preferred Stock
and the Series B Convertible Preferred Stock. Upon the closing of the Share
Exchange, the Company intends to amend the Restated Certificate to eliminate
the Series C Redeemable Preferred Stock.
Holders of Series C Redeemable Preferred Stock are not entitled to vote on
any matter to be voted on by the stockholders, except as required by law. The
holders of shares of Series C Redeemable Preferred Stock are entitled to
receive quarterly cash dividends (to the extent of legally available funds) at
the rate of nine percent per annum. At the option of the Company, dividends on
the Series C Redeemable Preferred Stock may be paid in additional shares of
Series C Redeemable Preferred Stock instead of in cash. Dividends on the
Series C Redeemable Preferred Stock must be paid before any dividends may be
set apart for or paid upon the Class A Common Stock or Non-Voting Common Stock
in any year. Dividends on the Series C Redeemable Preferred Stock began
accruing from April 16, 1996 and are cumulative, whether or not in any fiscal
year there are net profits or surplus available for the payment of dividends
in such fiscal year.
The Company is obligated on April 15, 2001 to redeem all outstanding shares
of Series C Preferred Stock (to the extent that such redemption does not
violate any applicable provisions of Delaware law) at a price of $100 per
share, plus an amount equal to any and all dividends accrued and unpaid, but
without interest (the "Series C Redemption Price"). The Company may at any
time, and with the affirmative vote or written consent of the holders of
record of a majority of the shares of Series C Redeemable Preferred Stock then
outstanding, redeem shares of Series C Redeemable Preferred Stock at the
Series C Redemption Price.
The Company will use the balance of the net proceeds of this offering, after
repayment of the Term Loan, plus the net proceeds from the sale of any shares
covered by the Underwriters' over-allotment option, for the redemption of up
to a maximum of $25.0 million of Series C Redeemable Preferred Stock. In the
Share Exchange, all shares of Series C Redeemable Preferred Stock remaining
outstanding 31 days after the date of the initial closing will be exchanged
for shares of Class A Common Stock, with the number of shares of Class A
Common Stock to be issued in such exchange to be determined by dividing the
aggregate redemption price of such Series C Redeemable Preferred Stock, plus
accrued but unpaid dividends, by the per share initial public offering price.
Effective upon the closing of this offering and after giving effect to the
amendment to the Restated Certificate, the Board of Directors will have the
authority, without any further vote or action by the
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<PAGE>
stockholders, to provide for the issuance of up to 1,000,000 shares of
Preferred Stock from time to time in one or more series with such
designations, rights, preferences and limitations as the Board of Directors
may determine, including the consideration received therefor. The Board also
will have the authority to determine the number of shares comprising each
series, dividend rates, redemption provisions, liquidation preferences,
sinking fund provisions, conversion rights and voting rights without approval
by the holders of Class A Common Stock. Although it is not possible to state
the effect that any issuance of Preferred Stock might have on the rights of
holders of Class A Common Stock, the issuance of Preferred Stock may have one
or more of the following effects: (i) to restrict Class A Common Stock
dividends if Preferred Stock dividends have not been paid; (ii) to dilute the
voting power and equity interest of holders of Class A Common Stock to the
extent that any Preferred Stock series has voting rights or is convertible
into Class A Common Stock; or (iii) to prevent current holders of Class A
Common Stock from participating in the Company's assets upon liquidation until
any liquidation preferences granted to holders of Preferred Stock are
satisfied. In addition, the issuance of Preferred Stock may, under certain
circumstances, have the effect of discouraging a change in control of the
Company by, for example, granting voting rights to holders of Preferred Stock
that require approval by the separate vote of the holders of Preferred Stock
for any amendment to the Restated Certificate or any reorganization,
consolidation, merger or other similar transaction involving the Company. As a
result, the issuance of such Preferred Stock may discourage bids for the Class
A Common Stock at a premium over the market price therefor, and could have a
materially adverse effect on the market value of the Class A Common Stock. See
"Risk Factors--Effect of Certain Charter and By-Law Provisions."
REGISTRATION RIGHTS
In connection both with the formation of the Company and its acquisition of
TreBay, the Company granted certain rights with respect to the registration of
an aggregate of 4,340,429 shares of Class A Common Stock held by certain
stockholders (the "Investors"), after giving effect to the Stock Conversion
and the Share Exchange (collectively, the "Registrable Securities"). Such
registration rights also extend to any capital stock of the Company issued as
a dividend or other distribution with respect to, or in exchange for or in
replacement of, the shares of Class A Common Stock referred to above and any
additional shares of Class A Common Stock which any of the Investors may
hereafter acquire. Certain of the Investors hold options to purchase an
aggregate of 298,416 shares of Class A Common Stock. The shares obtained upon
the exercise of such options also will be Registrable Securities. A holder or
holders of the Registrable Securities (each a "Holder") who (i) prior to this
offering, are a Holder or Holders of more than 50% of the then outstanding
Registrable Securities; or (ii) following this offering, are a Holder or
Holders of more than 20% of the then outstanding Registrable Securities (each,
an "Initiating Holder") are entitled to request that the Company file a
registration statement under the Securities Act covering the sale of some or
all of the Registrable Securities owned by such holders, subject to certain
conditions. The Company is required to effect no more than two such
registrations (three if the prior two registrations did not include WP
Investors as an Initiating Holder). The Company is not required to effect any
such registration if the anticipated aggregate public offering price of the
shares of Class A Common Stock proposed to be registered is less than $5.0
million. If officers or directors of the Company holding other securities of
the Company shall request inclusion in any such registration, or if holders of
securities of the Company other than Registrable Securities who are entitled,
by contract with the Company or otherwise, to have securities included in such
a registration (the "Other Stockholders") request such inclusion, the Holders
shall offer to include the securities of such officers, directors and Other
Stockholders in any underwriting involved in such registration, provided,
among other conditions, that the underwriter representative of any such
offering has the right, subject to certain conditions, to limit the number of
Registrable Securities included in the registration. In addition, in the event
that the Company proposes to register any of its securities under the
Securities Act (other than registrations relating solely to employee benefit
plans or pursuant to Rule 145 or on a form which does not permit secondary
sales or does not include substantially the same information as would be
required to be included in a registration statement covering the sale of
Registrable Securities), either for its own account or for the account of
other security holders or holders exercising their respective demand
registration rights, holders of Registrable Securities may require the
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<PAGE>
Company to include all or a portion of their Registrable Securities in the
registration and in any underwriting involved therein, provided, among other
conditions, that the underwriter representative of any such offering has the
right, subject to certain conditions, to limit the number of Registrable
Securities included in the registration. Further, once the Company is qualified
to use Form S-3 to register securities under the Securities Act, the holders of
Registrable Securities shall have the right to request three registrations on
Form S-3 to register all or a portion of such shares under the Securities Act,
subject to certain conditions. In general, all fees, costs and expenses of such
registrations (other than underwriting discounts and selling commissions
applicable to sales of the Registrable Securities and all fees and
disbursements of counsel for each of the Holders) will be borne by the Company.
LIMITATIONS ON DIRECTORS' LIABILITY
The Restated Certificate and By-laws, which will go into effect upon the
closing of this offering, limit the liability of directors and officers to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, including gross negligence, except
liability for (i) breach of the directors' and officers' duty of loyalty; (ii)
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of the law; (iii) the unlawful payment of a dividend or
unlawful stock purchase or redemption; and (iv) any transaction from which the
director or officer derives an improper personal benefit. Delaware law does not
permit a corporation to eliminate a director's or an officer's duty of care,
and this provision of the Restated Certificate has no effect on the
availability of equitable remedies, such as injunction or rescission, based
upon a director's breach of the duty of care.
These provisions will not limit liability under state or federal securities
laws. The Company believes that these provisions will assist the Company in
attracting and retaining qualified individuals to serve as directors.
POSSIBLE ISSUANCES OF PREFERRED STOCK
Effective upon the closing of this offering, the Company will amend its
Restated Certificate to authorize the issuance of Preferred Stock without
stockholder approval and upon such terms as the Board of Directors may
determine. This amendment could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring or
making a proposal to acquire, a majority of the outstanding stock of the
Company. The rights of the holders of Class A Common Stock will be subject to,
and may be adversely affected by, the rights of holders of Preferred Stock that
may be issued in the future. The Company has no present plans to issue any
shares of Preferred Stock. See "Description of Capital Stock-- Preferred Stock"
and "Risk Factors--Effect of Certain Charter and By-Law Provisions."
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Under Section 203, certain "business
combinations" between a Delaware corporation whose stock generally is publicly
traded or held of record by more than 2,000 stockholders and an "interested
stockholder" are prohibited for a three-year period following the date that
such a stockholder became an interested stockholder, unless (i) the corporation
has elected in its original certificate of incorporation not to be governed by
Section 203 (the Company did not make such an election); (ii) the business
combination was approved by the Board of Directors of the corporation before
the other party to the business combination became an interested stockholder;
(iii) upon consummation of the transaction that made it an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the commencement of the transaction
(excluding voting stock owned by directors who are also officers or held in
employee benefit plans in which the employees do not have a confidential right
to tender or vote stock held by the plan); or (iv) the business combination was
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approved by the Board of Directors of the corporation and ratified by two-
thirds of the voting stock which the interested stockholder did not own. The
three-year prohibition also does not apply to certain business combinations
proposed by an interested stockholder following the announcement or
notification of certain extraordinary transactions involving the corporation
and a person who had not been an interested stockholder during the previous
three years or who became an interested stockholder with the approval of the
majority of the corporation's directors. The term "business combination" is
defined generally to include mergers or consolidations between a Delaware
corporation and an interested stockholder, transactions with an interested
stockholder involving the assets or stock of the corporation or its majority-
owned subsidiaries and transactions which increase an interested stockholder's
percentage ownership of stock. The term "interested stockholder" is defined
generally as a stockholder who, together with affiliates and associates, owns
(or, within three years prior, did own) 15% or more of a Delaware
corporation's voting stock. Section 203 could prohibit or delay a merger,
takeover or other change in control of the Company and therefore could
discourage attempts to acquire the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar of the Company's Class A Common Stock is
.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering there has been no market for the shares of the Class A
Common Stock of the Company. The Company can make no predictions as to the
effect, if any, that sales of shares or the availability of shares for sale
will have on the market price prevailing from time to time. Nevertheless,
sales of significant amounts of the Class A Common Stock in the public market,
or the perception that such sales may occur, could adversely affect prevailing
market prices. See "Risk Factors--Shares Eligible for Future Sale; Potential
for Adverse Effect on Stock Price."
Upon completion of this offering, the Company expects to have 6,879,362
shares of Class A Common Stock outstanding, assuming no exercise of the
Underwriters' over-allotment option. Of these shares, the 2,500,000 shares of
Class A Common Stock sold in this offering will be freely tradeable without
restriction under the Securities Act, except for any such shares which may be
acquired by an "affiliate" of the Company (an "Affiliate") as that term is
defined in Rule 144 under the Securities Act, which shares will be subject to
the resale limitations of Rule 144.
An aggregate of approximately 4,379,362 shares of Class A Common Stock held
by existing stockholders upon completion of this offering and the Share
Exchange will be "restricted securities" (as that phrase is defined in Rule
144) and may not be resold in the absence of registration under the Securities
Act or pursuant to exemptions from such registration, including among others,
the exemption provided by Rule 144 under the Securities Act. Except as
described below, ninety days after the date of this Prospectus, approximately
108,900 shares of Class A Common Stock (plus 137,816 shares issuable upon
exercise of then vested options) will be eligible for sale in the public
market pursuant to Rule 701 under the Securities Act. In addition,
approximately 4,206,711 shares will be eligible for sale in the public market
under Rule 144, subject to the volume limitations and other restrictions
described below, 90 days after the date of this Prospectus and 48,399 shares
will be eligible for sale without restriction under Rule 144(k).
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, if a period of at least two years has elapsed
since the later of the date the "restricted securities" were acquired from the
Company and the date they were acquired from an Affiliate, then the holder of
such restricted securities (including an Affiliate) is entitled to sell a
number of shares within any three-month period that does not exceed the
greater of 1% of the then outstanding shares of the Class A Common Stock
(approximately 68,794 shares immediately after this offering) or the average
weekly reported volume of trading of the Class A Common Stock on the Nasdaq
National Market during the four calendar weeks preceding such sale. The holder
may only sell such shares through unsolicited brokers' transactions. Sales
under Rule 144 are also subject to certain requirements pertaining to the
manner of such sales, notices of such sales and the availability of current
public information concerning the Company. Affiliates may sell shares not
constituting restricted shares in accordance with the foregoing volume
limitations and other requirements but without regard to the two-year holding
period. Under Rule 144(k), if a period of at least three years has elapsed
between the later of the date restricted securities were acquired from the
Company and the date they were acquired from an Affiliate, as applicable, a
holder of such restricted securities who is not an Affiliate at the time of
the sale and has not been an Affiliate for at least three months prior to the
sale would be entitled to sell the shares immediately without regard to the
volume limitations and other conditions described above.
Any employee of the Company who purchased his or her shares of Class A
Common Stock pursuant to a written compensation plan or contract may be
entitled to rely on the resale provisions of Rule 701 under the Securities
Act, which permits nonaffiliates to sell their Rule 701 shares without having
to comply with the current public information, holding period, volume
limitation or notice provision of Rule 144 and permits affiliates to sell
their Rule 701 shares without having to comply with Rule 144's holding period
restrictions.
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The Company intends to file as soon as practicable after the closing of this
offering a registration statement on Form S-8 under the Securities Act to
register approximately 669,100 shares of Class A Common Stock reserved for
issuance under the Stock Option Plan, including, in some cases, shares for
which an exemption under Rule 144 or Rule 701 would also be available, thus
permitting the resale of shares issued under the Stock Option Plan by non-
affiliates in the public market without restriction under the Securities Act.
Such registration statement is expected to become effective immediately upon
filing, whereupon shares registered thereunder will become eligible for sale
in the public market, subject to vesting and, in certain cases, subject to the
lock-up agreements described below. At the date of this Prospectus, options to
purchase an aggregate of 501,191 shares of Class A Common Stock are
outstanding under the Stock Option Plan.
Notwithstanding the foregoing, in connection with this offering, the Company
and certain of its executive officers, directors and stockholders, who will
own an aggregate of approximately 4,050,926 shares of Class A Common Stock
after this offering and the Share Exchange, have agreed that, without the
prior written consent of Alex. Brown & Sons Incorporated on behalf of the
Underwriters, they will not offer, sell, sell short or otherwise dispose of
any shares of Class A Common Stock or other capital stock of the Company, or
any other securities convertible, exchangeable or exercisable for Class A
Common Stock or derivatives of Class A Common Stock owned by such person or
request the registration for the offer or sale of any of the foregoing (or as
to which such person has the right to direct the disposition of) for a period
of 180 days after the date of this Prospectus, directly or indirectly. In its
sole discretion and at any time without notice, Alex. Brown & Sons
Incorporated may release all or any portion of the shares subject to lock-up
agreements.
The holders of approximately 4,340,429 shares, after giving effect to the
Stock Conversion and the Share Exchange, will be entitled to certain
registration rights with respect to their shares. See "Description of Capital
Stock--Registration Rights."
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and UBS Securities LLC, have severally agreed
to purchase from the Company the following respective numbers of shares of
Class A Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated...................................
UBS Securities LLC................................................
---------
Total........................................................... 2,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Class A Common Stock offered hereby if any of such
shares are purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Class A Common Stock to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other dealers.
After the initial public offering, the offering price and other selling terms
may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 375,000
additional shares of Class A Common Stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Class A Common Stock to
be purchased by it shown in the above table bears to 2,500,000, and the
Company will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of the Class A Common Stock
offered hereby. If purchased, the Underwriters will offer such additional
shares on the same terms as those on which the 2,500,000 shares are being
offered.
Up to five percent of the shares of Class A Common Stock offered hereby may
be reserved for sale to the Company's employees and certain other persons.
Sales of shares to such persons will be at the initial public offering price.
The number of shares available for sale to the general public may be reduced
to the extent such persons purchase such reserved shares. Any reserved shares
not so purchased will be offered by the Underwriters to the general public on
the same terms as the other shares offered hereby.
The Company has agreed to indemnify the Underwriters and certain controlling
persons against certain liabilities, including liabilities under the
Securities Act.
The Company and each of its directors and executive officers and certain of
its shareholders have agreed not to offer, sell or otherwise dispose of any
shares of Class A Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of Alex. Brown & Sons
Incorporated, except that the Company may issue, and grant options to
purchase, shares of Class A Common Stock under the Stock Option Plan, and
other currently outstanding options. See "Shares Eligible for Future Sale."
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The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Class A
Common Stock of the Company. Consequently, the initial public offering price
of the Class A Common Stock will be determined by negotiations between the
Company and the Representatives of the Underwriters. Among the factors to be
considered in such negotiations are prevailing market conditions, the results
of operations of the Company in recent periods, the market capitalization and
stages of development of other companies which the Company and the
Representatives of the Underwriters believe to be comparable to the Company,
estimates of the business potential of the Company, the present stage of the
Company's development and other factors deemed relevant.
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed upon
for the Company by Willkie Farr & Gallagher, New York, New York. Certain legal
matters relating to this offering will be passed upon for the Underwriters by
Davis Polk & Wardwell.
EXPERTS
The consolidated financial statements as of December 31, 1995 and for each
of the three years in the period ended December 31, 1995 of the Company, the
combined financial statements as of December 31, 1993 and April 15, 1994 and
for the year ended December 31, 1993 and for the three and one-half months
ended April 15, 1994 of Xomed, Inc. and the financial statements as of
December 31, 1994 and December 31, 1995 and for each of the two years in the
period ended December 31, 1995 of TreBay Medical Corporation included in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as stated in their reports appearing herein and
elsewhere in the registration statement and have been so included in reliance
on their reports given on their authority as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission under the Securities Act a
Registration Statement on Form S-1 with respect to the Class A Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement in accordance with the rules and
regulations of the Commission. For further information pertaining to the
Company and the Class A Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits thereto and the financial
statements, notes and schedules filed as a part hereof. Statements contained
in this Prospectus as to the contents of any contract or other document are
not necessarily complete and, in each instance, reference is made to the copy
of such contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Commission's Regional Offices in New
York (Seven World Trade Center, New York, New York 10007) and Chicago (Suite
1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60611).
Copies of such material can be obtained from the public reference section of
the Commission at prescribed rates by writing to the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a Web site that contains reports and information
statements and other materials that are filed through the Commission's
Electronic Data Gathering, Analysis, and Retrieval System. The Web site can be
accessed at http://www.sec.gov.
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INDEX TO FINANCIAL STATEMENTS
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets at December 31, 1995 and 1994, and June 29,
1996 (Unaudited) and July 1, 1995 (Unaudited)............................. F-4
Consolidated Statements of Operations for the Three Years Ended December
31, 1995 and the Six Months Ended June 29, 1996 (Unaudited) and July 1,
1995 (Unaudited).......................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity for the Three
Years Ended December 31, 1995 and the Six Months Ended June 29, 1996 (Un-
audited) ................................................................. F-6
Consolidated Statements of Cash Flows for the Three Years Ended December
31, 1995 and the Six Months Ended June 29, 1996 (Unaudited) and July 1,
1995 (Unaudited).......................................................... F-8
Notes to Consolidated Financial Statements................................. F-9
</TABLE>
XOMED, INC.
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-22
Combined Balance Sheets at December 31, 1993 and April 15, 1994........... F-23
Combined Statements of Income and Retained Earnings for the Year Ended
December 31, 1993 and Three and One-Half Months Ended April 15, 1994..... F-24
Combined Statements of Cash Flows for the Year Ended December 31, 1993 and
the Three and
One-Half Months Ended April 15, 1994..................................... F-25
Notes to the Combined Balance Sheet....................................... F-26
</TABLE>
TREBAY MEDICAL CORPORATION
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-32
Balance Sheets at December 31, 1994 and 1995 and April 1, 1995 (Unaudited)
and March 30, 1996 (Unaudited)........................................... F-33
Statements of Operations for the Two Years Ended December 31, 1995 and the
Three Months Ended April 1, 1995 (Unaudited) and March 30, 1996 (Unau-
dited)................................................................... F-34
Statements of Shareholders' Equity for the Two Years Ended December 31,
1995 and the Three Months Ended March 30, 1996 (Unaudited)............... F-35
<CAPTION>
Statements of Cash Flows for the Two Years Ended December 31, 1995 and the
Three Months Ended April 1, 1995 (Unaudited) and March 30, 1996
(Unaudited).............................................................. F-36
<S> <C>
Notes to Financial Statements............................................. F-37
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Xomed Surgical Products, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Xomed
Surgical Products, Inc. and Subsidiaries (the Company) as of December 31, 1994
and 1995, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Xomed Surgical Products, Inc. and Subsidiaries at December 31, 1994 and
1995, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
As discussed in Note 8 to the consolidated financial statements, the Company
expects to not be in compliance with certain financial covenants of loan
agreements with banks during 1996. In such circumstances, the banks have the
option to accelerate payment of all outstanding principal and interest which
raises substantial doubt about the Company's ability to continue as a going
concern. Management has been successful in obtaining waivers of default from
these lenders in the past and intends to request such waivers if events of
default do occur in the future. However, there can be no assurance that
management will be successful in obtaining these waivers. The 1995 financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
Ernst & Young LLP
Jacksonville, Florida
June 19, 1996
F-2
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-3
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
JULY 1, JUNE 29,
1994 1995 1995 1996
------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 260 $ 417 $ 446 $ 521
Accounts receivable, less allowance for
doubtful accounts of $358 and $483 at De-
cember 31, 1994 and 1995, respectively... 8,889 11,951 9,104 9,666
Other receivables......................... 479 1,348 444 225
Inventories............................... 12,529 11,994 11,104 14,412
Prepaid expenses.......................... 668 564 448 507
Income taxes receivable................... 442 274 -- --
Deferred income taxes..................... 1,816 1,379 1,816 2,718
------- ------- ------- -------
Total current assets....................... 25,083 27,927 23,362 28,049
Investments................................ 1,199 861 861 531
Notes receivable from officers............. 332 332 332 --
Property, plant and equipment, net......... 13,854 15,355 14,541 16,383
Cost in excess of net assets acquired, net. 54,300 46,381 53,182 47,054
Other assets............................... 952 2,068 659 2,841
Deferred income taxes...................... -- 199 -- 1,229
------- ------- ------- -------
Total assets............................... $95,720 $93,123 $92,937 $96,087
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 2,177 $ 5,841 $ 3,099 $ 4,616
Accrued expenses.......................... 5,061 4,512 4,667 4,075
Accrued restructuring costs............... 1,740 695 578 3,061
Current portion long-term debt and capital
lease obligations........................ 3,361 4,645 4,611 5,236
------- ------- ------- -------
Total current liabilities.................. 12,339 15,693 12,955 16,988
Long-term debt and capital lease
obligations, less current portion......... 36,106 32,719 31,980 30,322
Deferred income taxes...................... 732 -- 732 444
Redeemable preferred stock:
Series C, nonvoting, cumulative, $1.00 par
value, 600,000 shares authorized, 299,459
shares issued and outstanding (aggregate
liquidation value of $30,619)............ 28,996 31,454 30,224 30,619
Shareholders' equity (deficit):
Redeemable convertible preferred stock:
Series A, convertible, voting,
cumulative, $1.00 par value; 800,000
shares authorized, 744,652 shares issued
and outstanding (aggregate liquidation
value of $7,241)........................ 3,632 3,841 3,736 7,241
Series B, convertible, nonvoting, cumula-
tive, $1.00 par value; 3,500,000 shares
authorized, 2,127,838 shares issued and
outstanding (aggregate liquidation value
of $20,690)............................. 21,251 22,474 21,863 20,690
Common stock:
Class A, voting, $.01 par value;
6,000,000 shares authorized, 679,270
shares issued and outstanding........... 6 6 6 7
Class B, nonvoting, $.01 par value;
4,000,000 shares authorized, 426,777
shares issued and outstanding........... 4 4 4 4
Accumulated deficit....................... (6,997) (12,719) (8,214) (10,153)
Shareholders' notes receivable............ (349) (349) (349) (187)
Additional paid-in capital................ -- -- -- 112
------- ------- ------- -------
Total shareholders' equity................. 17,547 13,257 17,046 17,714
------- ------- ------- -------
Total liabilities and shareholders' equity. $95,720 $93,123 $92,937 $96,087
======= ======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31, SIX MONTHS ENDED
------------------------- -----------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales, net....................... $10,071 $42,475 $59,865 $29,424 $ 32,942
Cost of sales.................... 2,876 19,233 23,175 11,605 12,690
------- ------- ------- ------- --------
Gross profit..................... 7,195 23,242 36,690 17,819 20,252
Operating expenses:
Selling, general and adminis-
trative....................... 6,074 19,126 27,077 12,440 14,129
Research and development....... 311 1,958 2,405 1,158 1,669
Amortization of intangibles.... 394 2,652 2,579 1,224 1,168
Write-off of acquired research
and development............... -- -- -- -- 3,612
Restructuring charges.......... -- -- -- -- 3,093
------- ------- ------- ------- --------
Total operating expenses......... 6,779 23,736 32,061 14,822 23,671
------- ------- ------- ------- --------
Operating income (loss) from
continuing operations........... 416 (494) 4,629 2,997 (3,419)
Interest expense................. (102) (2,148) (3,063) (1,579) (1,536)
Other income (expense), net...... 26 313 114 (136) 64
------- ------- ------- ------- --------
Income (loss) from continuing
operations before income tax
expense (benefit)............... 340 (2,329) 1,680 1,282 (4,891)
Income tax expense (benefit)..... 121 (774) 1,355 855 (1,956)
------- ------- ------- ------- --------
Income (loss) from continuing
operations...................... 219 (1,555) 325 427 (2,935)
Discontinued operations:
Income from operations of dis-
continued surgical drapes seg-
ment (less applicable income
tax expense of $309, $203 and
$197 for the period ended De-
cember 31, 1994, 1995 and July
1, 1995, respectively)........ -- 463 306 295 --
Loss on disposal of surgical
drapes segment (less applica-
ble income tax benefit of -- -- (2,485) -- --
$1,386)....................... ------- ------- ------- ------- --------
Net income (loss)................ $ 219 $(1,092) $(1,854) $ 722 $ (2,935)
======= ======= ======= ======= ========
Pro forma:
Income (loss) from continuing
operations.................... $ 68 $ (2,934)
Preferred stock dividends...... -- 538
------- --------
Income (loss) from continuing
operations available to common
shareholders.................. 68 (3,472)
Interest expense, net of taxes. 1,300 581
------- --------
Supplementary income (loss) $ 1,368 $ (2,891)
from continuing operations.... ======= ========
Pro forma per share:
Income (loss) from continuing
operations available to common $ .01 $ (.75)
shareholders.................. ======= ========
Supplementary income (loss)
from continuing operations
available to common $ .30 $ (.62)
shareholders.................. ======= ========
Pro forma weighted average common 4,632 4,635
shares outstanding.............. ======= ========
Supplementary pro forma weighted
average common shares 7,132 7,135
outstanding..................... ======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-----------------------------------
SERIES A SERIES B
--------------- ------------------
SHARES AMOUNT SHARES AMOUNT
------- ------ --------- -------
<S> <C> <C> <C> <C>
Balance at December 31, 1992.............. 68,900 $8,268 8,498 $ 985
Net income................................ -- -- -- --
Stock options exercised................... -- -- -- --
Accretion of cumulative preferred stock -- 689 -- 68
dividends................................ ------- ------ --------- -------
Balance at December 31, 1993.............. 68,900 8,957 8,498 1,053
Recapitalization of company, April 15,
1994:
Exchange of outstanding shares.......... (68,900) (8,957) (8,498) (1,053)
Issuance of shares...................... 340,454 3,262 2,127,838 20,385
Net loss.................................. -- -- -- --
Stock repurchase, August 1994............. -- -- -- --
Stock sale................................ 23,761 227 -- --
Dividends paid, August 1994............... -- -- -- --
Accretion of cumulative preferred stock
dividends................................ -- 143 -- 866
Shareholders' notes receivable............ -- -- -- --
------- ------ --------- -------
Balance at December 31, 1994.............. 364,215 3,632 2,127,838 21,251
Net loss.................................. -- -- -- --
Stock options exercised................... -- -- -- --
Accretion of cumulative preferred stock -- 209 -- 1,223
dividends................................ ------- ------ --------- -------
Balance at December 31, 1995.............. 364,215 3,841 2,127,838 22,474
Unaudited:
Net loss................................. -- -- -- --
Accretion of cumulative preferred stock
dividends............................... -- 159 -- 611
Forgiveness of cumulative preferred stock
dividends............................... -- (404) -- (2,395)
Stock options exercised.................. -- -- -- --
Shareholders stock returned.............. (9,563) (91) -- --
Acquisition of TreBay Medical............ 390,000 3,736 -- --
------- ------ --------- -------
Balance at June 29, 1996.................. 744,652 $7,241 2,127,838 $20,690
======= ====== ========= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
- ------------------------------------------
CLASS A CLASS B RETAINED SHAREHOLDERS' ADDITIONAL PREDECESSOR
- ------------------------------------------ EARNINGS NOTE PAID-IN BASIS
SHARES AMOUNT SHARES AMOUNT (DEFICIT) RECEIVABLE CAPITAL ADJUSTMENT TOTAL
- ----------- -------- ---------- -------- --------- ------------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
290,355 $ 3 -- $-- $(1,180) $ -- $ 287 $(1,677) $ 6,686
1,375 -- -- -- -- -- 1 -- 1
-- -- -- -- 219 -- -- -- 219
-- -- -- -- (757) -- -- -- --
- ----------- ------ ---------- ------- -------- ----- ----- ------- -------
291,730 3 -- -- (1,718) -- 288 (1,677) 6,906
(291,730) (3) -- -- 2,270 -- (288) 1,677 (6,354)
574,471 6 426,777 4 (3,653) -- -- -- 20,004
-- -- -- -- (1,092) -- -- -- (1,092)
(1,351) -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- 227
-- -- -- -- (105) -- -- -- (105)
-- -- -- -- (2,699) -- -- -- (1,690)
-- -- -- -- -- (349) -- -- (349)
- ----------- ------ ---------- ------- -------- ----- ----- ------- -------
573,120 6 426,777 4 (6,997) (349) -- -- 17,547
-- -- -- -- (1,854) -- -- -- (1,854)
19,000 -- -- -- -- -- 22 -- 22
-- -- -- -- (3,868) -- (22) -- (2,458)
- ----------- ------ ---------- ------- -------- ----- ----- ------- -------
592,120 6 426,777 4 (12,719) (349) -- -- 13,257
-- -- -- -- (2,935) -- -- -- (2,935)
-- -- -- -- (2,058) -- -- -- (1,288)
-- -- -- -- 7,559 -- -- -- 4,760
87,150 1 -- -- -- -- 112 -- 113
-- -- -- -- -- 162 -- -- 71
-- -- -- -- -- -- -- -- 3,736
- ----------- ------ ---------- ------- -------- ----- ----- ------- -------
679,270 $ 7 426,777 $ 4 $(10,153) $(187) $ 112 $ -- $17,714
=========== ====== ========== ======= ======== ===== ===== ======= =======
</TABLE>
F-7
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
-------------------------- -----------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
------ -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............... $ 219 $ (1,092) $ (1,854) $ 722 $ (2,935)
Adjustments to reconcile net
income (loss) to net cash
provided by
operating activities:
Depreciation................... 349 1,549 2,038 1,014 1,209
Amortization of intangibles.... 394 2,825 2,702 1,346 1,168
Loss on disposal of property
and equipment................. -- 742 4,963 -- --
Write-off of acquired research
and development............... -- -- -- -- 3,612
Changes in operating assets
and liabilities net of
effects of
purchased business
(Increase) decrease in
accounts and other
receivables, net............ (587) (1,038) (3,228) (180) 3,545
(Increase) decrease in
inventories, net............ (62) 3,786 535 1,425 (1,990)
(Increase) decrease in
deferred income taxes....... 49 628 (494) -- (3,016)
(Increase) decrease in other
assets...................... (88) (538) 130 732 (850)
Increase (decrease) in
accounts payable and accrued
expenses.................... 298 2,442 2,510 528 (1,736)
(Decrease) increase in
accrued restructuring -- (5,315) (1,045) (1,162) 2,366
costs....................... ------ -------- -------- ------- --------
Net cash provided by operating
activities..................... 572 3,989 6,257 4,425 1,373
INVESTING ACTIVITIES
Purchases of property and equip-
ment........................... (448) (2,183) (2,969) (1,701) (1,668)
Loans to officers............... -- (332) -- -- --
Proceeds from certificates of
deposit........................ -- -- 338 338 330
Purchase of other assets........ -- -- (1,388) -- (32)
Other........................... -- -- -- (166)
Purchases of businesses......... (155) (80,873) -- -- 2,000
------ -------- -------- ------- --------
Net cash (used in) provided by
investing activities........... (603) (83,388) (4,019) (1,363) 464
FINANCING ACTIVITIES
Proceeds from issuance of debt.. -- 45,919 -- -- --
Proceeds from revolving line of
credit......................... 600 9,275 28,810 11,611 14,706
Payments on revolving line of
credit......................... (117) (15,692) (24,986) (11,708) (13,725)
Payments on term notes payable.. -- (2,684) (5,732) (2,500) (2,771)
Payments on capital lease obli-
gation......................... -- (117) (195) (279) (56)
Issuance of stock............... 1 43,503 22 -- 113
Repurchases of redeemable pre- -- (1,870) -- -- --
ferred stock................... ------ -------- -------- ------- --------
Net cash provided by (used in) 484 78,334 (2,081) (2,876) (1,733)
financing activities........... ------ -------- -------- ------- --------
Net increase (decrease) in cash
and cash equivalents........... 453 (1,065) 157 186 104
Cash and cash equivalents at be- 872 1,325 260 260 417
ginning of period.............. ------ -------- -------- ------- --------
Cash and cash equivalents at end $1,325 $ 260 $ 417 $ 446 $ 521
of period...................... ====== ======== ======== ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period
for:
Interest....................... $ 102 $ 2,205 $ 3,118 $ 1,681 $ 1,172
====== ======== ======== ======= ========
Taxes.......................... $ 161 $ 428 $ 228 $ -- $ --
====== ======== ======== ======= ========
Increase in preferred stock
attributable to accretion of
cumulative
preferred stock dividends:
Series A....................... $ 699 $ 143 $ 209 $ 104 $ 52
Series B....................... -- 866 1,223 614 306
Series C....................... -- 143 2,458 1,228 614
------ -------- -------- ------- --------
$ 699 $ 1,152 $ 3,890 $ 1,946 $ 972
====== ======== ======== ======= ========
</TABLE>
See accompanying notes.
F-8
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
1. ORGANIZATION
Xomed Surgical Products, Inc. (the Company), a Delaware corporation,
acquired all of the outstanding stock of Xomed-Treace, Inc. and Xomed-Treace,
P.R. Inc. (collectively Xomed-Treace) and Merocel Corporation (Merocel) on
April 15, 1994. As the owners of the Company are also owners of Merocel, these
transactions have been accounted for as if Xomed-Treace were acquired by
Merocel. Therefore, the assets and liabilities of Merocel were not revalued
and are presented in the accompanying balance sheet at historical cost.
The acquisition of Xomed-Treace has been accounted for under the purchase
method of accounting. Accordingly, the purchase price of approximately $81,000
was allocated to the individual assets acquired and liabilities assumed of
Xomed-Treace based upon their respective fair values at the date of
acquisition. The transaction resulted in cost in excess of net assets acquired
of $55,988. The acquisition was funded primarily through the issuance of
preferred stock ($43,503) and proceeds from long-term debt.
Xomed is a leading developer, manufacturer and marketer of surgical products
for use by ear, nose and throat (ENT) specialists. The Company offers a broad
line of products in its core ENT market that includes powered tissue-removal
systems and other microendoscopy instruments, implantable devices, nerve
monitoring systems and disposable fluid-control products. The Company also
offers a line of ophthalmic and other products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company includes the accounts
of Merocel and subsidiary and Xomed and subsidiaries. Significant intercompany
transactions and balances between entities have been eliminated.
Basis of Presentation--Unaudited Interim Financial Statements
The accompanying unaudited financial statements as of July 1, 1995 and June
29, 1996 have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the six
months ended June 29, 1996 is not necessarily indicative of the results that
may be expected for the year ended December 31, 1996.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with original
maturities of three months or less when purchased to be cash equivalents.
F-9
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventory Valuation
Inventories are generally stated at average cost on a first-in, first-out
valuation basis not in excess of market. Market for raw materials is based on
replacement costs and for work-in-process and finished goods on net realizable
value.
Investments
Investments consist of certificates of deposit with maturities ranging from
one to three years and are stated at cost which approximates market value.
These certificates of deposit were purchased in connection with a tax
exemption grant from the government of Puerto Rico, for a period not to exceed
five years.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to income as incurred. Additions,
improvements and major replacements are capitalized. The costs and accumulated
depreciation related to assets sold or retired are removed from the accounts
and any gain or loss is credited or charged to income. Depreciation is
computed using the straight-line method based on the estimated useful lives of
the related assets not exceeding forty years.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes", which
requires the use of the liability method of accounting for deferred income
taxes.
Translation Adjustments
The remeasurement gains and losses of foreign currencies related to foreign
operations are included in income (loss) from operations and totaled $50,000
(loss) and $67,000 (gain) for the years ended December 31, 1994 and 1995,
respectively. There were no foreign operations in 1993.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
New Accounting Pronouncements
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-
lived assets that are expected to be disposed of.
The FASB also issued Statement No. 123, Accounting for Stock-Based
Compensation, which provides an alternative for income statement recognition
of costs associated with stock-based employee compensation plans and requires
expanded disclosures with respect to such plans.
The Company will adopt Statement No. 121 and the disclosure requirements of
No. 123 in 1996 and, based on current information, does not believe the effect
of adoption will be material to the financial position or results of
operations of the Company.
F-10
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
3. DISCONTINUED OPERATIONS
During July 1995, the Company finalized an agreement for the disposal of all
operating assets, inventory, patents and license agreements of its surgical
drapes segment in exchange for cash, notes receivable, inventory, fixed
assets, patents and license agreements of several otology product lines of
another nonrelated entity. Management decided the surgical drapes were not
part of the Company's core business and disposed of this product line in
exchange for the head and neck product line of another entity which is more
compatible with the Company's other products. The operating results of the
otology product lines were not significant to the Company's overall results of
operations during 1995.
Certain financial information related to the surgical drapes product line,
which was acquired from Xomed-Treace on April 15, 1994, is as follows:
<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS
DECEMBER 31, ENDED
------------------ JULY 1,
1993 1994 1995 1995
---- ------ ------ -------
<S> <C> <C> <C> <C>
Sales................................................ $-- $5,586 $5,385 $3,699
==== ====== ====== ======
Pre-tax income....................................... $-- $ 772 $ 509 $ 493
==== ====== ====== ======
Income tax expense................................... $-- $ 309 $ 203 $ 198
==== ====== ====== ======
Net income........................................... $-- $ 463 $ 306 $ 295
==== ====== ====== ======
</TABLE>
The surgical drapes business accounts consisted principally of inventory and
fixed assets aggregating approximately $1,250 on the date of disposition.
Interest expense attributed to the drapes business was $79 and $56 for 1994
and 1995, respectively. The Company realized a net loss of $2,485, after
income tax benefits of $1,386, on this transaction and has restated its
financial statements for the discontinued operations. Cash received on the
transaction totaled $1,316. Included in other receivables and other assets at
December 31, 1995 are notes receivable of approximately $1,000 and $750,
respectively, related to this transaction. As part of the transaction both
parties agreed to manufacture their existing products through the end of 1995
and supply those products to the other party at cost. As a result of this
agreement, amounts totaling $1,704 and $1,564 are included in trade
receivables and accounts payable, respectively, at December 31, 1995.
4. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE
--------------- JULY 1, 29,
1994 1995 1995 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Finished goods................................. $ 6,581 $ 6,695 $ 5,881 $ 7,519
Work in process................................ 1,675 1,572 2,219 1,867
Raw materials and packaging.................... 4,273 3,727 3,004 5,026
------- ------- ------- -------
$12,529 $11,994 $11,104 $14,412
======= ======= ======= =======
</TABLE>
F-11
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, less allowances for depreciation, is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------- -------
<S> <C> <C>
Land and land improvements.............................. $ 1,413 $ 1,413
Building and building improvements...................... 5,525 6,061
Machinery and equipment................................. 8,026 10,625
------- -------
14,964 18,099
Allowances for depreciation............................. (2,315) (4,353)
------- -------
12,649 13,746
Capital projects in process............................. 1,205 1,609
------- -------
$13,854 $15,355
======= =======
</TABLE>
Depreciation expense, including expense on assets under capital lease
obligations, is approximately $349, $1,549 and $2,038 for the years ended
December 31, 1993, 1994 and 1995, respectively.
6. COST IN EXCESS OF NET ASSETS ACQUIRED
The cost in excess of net assets acquired relates to goodwill in the
acquisition of Xomed, which is being amortized over 25 years and is summarized
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------- -------
<S> <C> <C>
Cost in excess of net assets acquired at purchase
date................................................. $55,988 $55,988
Other/purchase price adjustments...................... (105) (105)
Surgical drape product line disposition............... -- (5,805)
Amortization.......................................... (1,583) (3,697)
------- -------
Cost in excess of net assets acquired at end of peri-
od................................................... $54,300 $46,381
======= =======
</TABLE>
The Company periodically assesses the recoverability of goodwill based on
the cash flows, profitability and changes in the operations of the businesses
acquired.
7. ACCRUED RESTRUCTURING COSTS
Incident to the acquisition of Xomed, the Company initiated a plan to
restructure certain of its operations. Included in accrued restructuring costs
of $1,740 and $695 at December 31, 1994 and 1995, respectively, are the
remaining estimated costs associated with closing a plant facility and
significantly reducing the Company's workforce.
F-12
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
The Company was obligated under long-term debt and capital lease obligations
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1995
------- -----------
<S> <C> <C> <C>
Term notes payable to financial institutions in
quarterly principal installments ranging from $975
to $1,775 through April 15, 1999, plus interest
payable quarterly (interest at LIBOR (5.71875% at
December 31, 1995) plus 2.25% or lender's base
rate plus 1%)..................................... $31,750 $25,985
Revolving line-of-credit agreement with interest
payable quarterly and all outstanding principal
due April 15, 1999 (interest at LIBOR (5.71875% at
December 31, 1995) plus 2.25% or lender's base
rate plus 1%)..................................... 6,942 10,765
Note payable under capital lease obligation to ven-
dor in quarterly principal and interest install-
ments of $38 through October 1, 1998. The Note
carries interest at 10.8% and is collateralized by
equipment with a net book value of $592 at Decem-
ber 31, 1995. Total future interest payments are
$93............................................... 775 614
------- -------
39,467 37,364
Less current portion............................... 3,361 4,645
------- -------
$36,106 $32,719
======= =======
</TABLE>
Annual maturities of long-term debt and the capital lease obligations
outstanding at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
REVOLVING
LINE-OF- TERM NOTES CAPITAL LEASE
YEAR ENDING DECEMBER 31, CREDIT PAYABLE OBLIGATIONS TOTAL
------------------------ --------- ---------- ------------- -------
<S> <C> <C> <C> <C>
1996................................ $ -- $ 4,500 $145 $ 4,645
1997................................ -- 6,100 136 6,236
1998................................ -- 7,100 333 7,433
1999................................ 10,765 8,285 -- 19,050
-------- -------- ---- -------
$ 10,765 $ 25,985 $614 $37,364
======== ======== ==== =======
</TABLE>
Commencing March 31, 1995, the Company was required to make additional
principal payments on the term notes payable based on excess cash flow, if
any, from the preceding year. Also, the Company is required to pay at least
50% of the proceeds from any sale of capital stock or other securities (net of
any fees, commissions or expenses incurred in the sale of such securities),
which are required to be registered under the Securities Act of 1933, toward
the outstanding principal on the term notes at the time of such sale.
During 1995, the Company was required to make an additional principal
payment of $1,440 based on excess cash flow. Also, the Company was required to
make an additional principal payment of $1,125 based on the proceeds from the
disposal of the surgical drapes segment.
F-13
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
Under the terms of the revolving line-of-credit, the Company may borrow up
to a maximum capacity of $14,000 to be used for working capital and operating
needs. The amount available to the Company at any given time is based upon
various percentages of the Company's outstanding inventories and accounts
receivable as determined periodically throughout the year (borrowing base).
Any principal amounts outstanding on the line-of-credit in excess of the
borrowing base must be repaid by the Company. In any event, all outstanding
principal on the line-of-credit is due and payable on April 15, 1999.
Management expects that the borrowing base will remain at a sufficient level
for the next 12 months such that no payment on the line-of-credit will be
required. Accordingly, the line-of-credit outstanding at December 31, 1995 is
classified as long-term. The Company pays a quarterly commitment fee equal to
0.5% per annum on the average daily unused balance on the line-of-credit
during the preceding calendar quarter from April 15, 1994 through April 15,
1999.
The Company was not in compliance with certain financial covenants of loan
agreements with banks as of December 31, 1995 and March 30, 1996 for which
waivers were obtained. In addition, the Company expects to not be in
compliance with certain financial covenants during the remainder of 1996,
including the interest coverage and operating cash flow ratios, which
conditions would constitute an event of default and allow the banks the option
of accelerating payment of all outstanding principal and interest. The
noncompliance results primarily from (i) the one-time $3.1 million charge
associated with restructuring actions taken by the Company in the second
quarter of 1996; and (ii) the one-time $3.6 million charge in the second
quarter of 1996 for costs allocated to in-process research and development in
connection with the acquisition of TreBay Medical Corporation (TreBay).
Management has been successful in obtaining waivers of default from these
lenders in the past and intends to request such waivers if events of default
do occur in the future. However, there can be no assurance that management
will be successful in obtaining these waivers. The 1995 financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Both the term notes and line-of-credit are collateralized by all assets of
the Company except for those collateralized under the capital lease
obligations. The debt agreements have restrictions regarding payment of
dividends, incurrence of additional debt and require compliance with various
financial covenants.
9. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
On April 15, 1994, the Company issued 574,471 shares of Class A Common
Stock; 426,777 shares of Class B Common Stock; 340,454 shares of Series A
Convertible Preferred Stock; 2,127,838 shares of Series B Convertible
Preferred Stock; and 289,853 shares of Series C Redeemable Preferred Stock in
exchange for the outstanding stock of Merocel and the acquisition of Xomed,
except that cash equal to the redemption value of $100.00 per share was
received for 198,561 shares of the Series C Redeemable Preferred Stock.
The recapitalization of the Company as described above resulted in the
excess of the carrying value of the stock issued over the net assets received
of $3,653 being included in the retained deficit at April 15, 1994.
In August 1994, the Company repurchased 18,698 shares of its outstanding
Series C Redeemable Preferred Stock, which were originally issued at April 15,
1994, from holders of the stock. The stock was repurchased at a price of
$1,870 which represented the amount originally paid by the shareholders for
F-14
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
9. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
the stock. The repurchase was the result of the partial refund of the purchase
price by the seller for Xomed (see Note 1). In addition, cash dividends of
$105 were paid in August 1994 to the remaining holders of the Series C
Redeemable Preferred Stock, also from the proceeds of the partial refund of
the Xomed purchase price.
Also in August 1994, the Company issued 23,761 shares of its Series A
Convertible Preferred Stock and 1,908 shares of its Series C Redeemable
Preferred Stock to certain officers and members of management (purchasers) of
the Company. The Series A Convertible Preferred Stock was issued at $9.58 per
share (equal to its redemption value) for a total price of approximately $227.
The Series C Redeemable Preferred Stock was issued at $100.00 per share (equal
to its redemption value) for a total price of approximately $191. Of the total
purchase price for all shares issued of $418, the Company has received $69 in
cash and the remaining $349 of notes receivable have been reflected as a
component of shareholders' equity in the accompanying balance sheets (see Note
13).
During the year ended December 31, 1995, the Company issued 19,000 of Class
A Common Stock under the employee stock incentive plan. The stock was issued
at option prices of between $1.00 to $2.00 per share and resulted in $22 of
additional paid-in capital (see Note 11).
COMMON STOCK
Each share of Class A and Class B Common Stock (collectively Common Stock)
entitles its holder to receive dividends as declared by the Company's Board of
Directors, subject to the preferences and other rights of the Series A, Series
B and Series C Redeemable Preferred Stock. Each share of Class B Common Stock
is convertible into one share of Class A Common Stock at the election of the
shareholder.
Redeemable Preferred Stock
Each share of Series A and Series B Convertible Preferred Stock
(collectively Convertible Preferred Stock) entitles its holder to receive an
annual cumulative cash dividend at the rate of six percent per annum, payable
on a quarterly basis. At the election of the Board of Directors, dividends may
be paid in shares of Series A or Series B Convertible Preferred Stock,
respectively, in lieu of cash. Dividends are cumulative and must be paid prior
to any dividends being paid on the Common Stock. The Company at its option,
with the majority consent of the holders of the Convertible Preferred Stock,
may redeem any or all of the outstanding shares of the Convertible Preferred
Stock at a price of $9.58 per share, plus accrued dividends. At December 31,
1995, dividends in arrears on the Series A and Series B Convertible Preferred
Stock were $352 ($0.97 per share) and $2,089 ($0.98 per share), respectively
(see Note 17). The Series A Convertible Preferred Stock is voting along with
the Common Stock on an as converted basis, whereas the Series B has no voting
rights.
In any event, all outstanding shares of the Convertible Preferred Stock at
April 15, 2001 are required to be redeemed on that date by the Company at
$9.58 per share, plus accrued dividends. Each share of Convertible Preferred
Stock, at the election of the holder, may be converted for one share of like
Common Stock (the conversion rate being subject to adjustment from time-to-
time). All shares of Convertible Preferred Stock will be automatically
converted into Common Shares at the conversion rate in effect upon the closing
of an underwritten public offering made pursuant to an effective registration
statement under the Securities Act of 1933.
Each share of Series C Redeemable Preferred Stock (Series C Preferred Stock)
entitles its holder to receive an annual cumulative cash dividend at the rate
of nine percent per annum, payable on a quarterly basis. At the election of
the Board of Directors, dividends may be paid in shares of Series C Preferred
Stock
F-15
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
9. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
in lieu of cash. Dividends are cumulative and must be paid prior to any
dividends being paid on the Common Stock. The Company at its option, with the
majority consent of the holders of the Series C Preferred Stock, may redeem
any or all of the outstanding shares of the Series C Preferred Stock at a
price of $100.00 per share, plus accrued dividends. At December 31, 1995,
dividends in arrears on Series C Preferred Stock were $4,148 ($15.19 per
share, see Note 17).
In any event, all outstanding shares of the Series C Preferred Stock at
April 15, 2001 are required to be redeemed on that date by the Company at
$100.00 per share, plus accrued dividends.
10. RETIREMENT BENEFITS
Retirement benefits are provided to all eligible employees through the
participation in defined contribution plans maintained by the Company which
comply with the provisions of Section 401(k) of the Internal Revenue Code (the
"Savings Plans"). The provisions of the Savings Plans differ with respect to
employee contributions, employer matching percentages and profit sharing
depending on the country in which the employees work. Expense recorded by the
Company for the various plans for the years ended December 31, 1993, 1994 and
1995 was approximately $401, $295 and $520, respectively.
11. EMPLOYEE STOCK INCENTIVES
The Company has reserved an aggregate of 415,000 shares of its Class A
Common Stock (see Note 9) for grant or sale to key employees of the Company.
These shares may be issued in such amounts and in such a manner (including
stock options, restricted stock grants, stock bonuses, or other stock
incentive programs) as determined by the Company's Board of Directors from
time-to-time. The options are granted at exercise prices equal to the fair
market value of common stock on the date of grant. The following table
summarizes option activity which may be exercised at various dates through
January 2000:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ------- -------
<S> <C> <C> <C>
Options outstanding
beginning of the year.. 91,950 132,850 257,100
Options granted......... 45,900 131,000 8,000
Options exercised....... (5,000) (6,750) (6,750)
Options canceled........ -- -- (7,000)
---------- ------- -------
Options outstanding end
of year................ 132,850 257,100 251,350
========== ======= =======
Range of option prices
on options granted..... $1.00-2.00 $9.58 $9.58
========== ======= =======
</TABLE>
12. INCOME TAXES
The provision for income taxes (benefit) from continuing operations consists
of the following:
<TABLE>
<CAPTION>
1993 1994 1995
---- ----- ------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 30 $(292) $ 206
State................................................ 41 (47) 33
---- ----- ------
71 (339) 239
Deferred............................................... 50 (435) 1,116
---- ----- ------
$121 $(774) $1,355
==== ===== ======
</TABLE>
F-16
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
12. INCOME TAXES (CONTINUED)
Income tax expense (benefit) from continuing operations reconciled to the
amount computed at statutory rates is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ----- ------
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate.............. $116 $(815) $ 588
State income taxes (benefit) (net of federal income
tax effect)......................................... 14 (78) 136
Unrecognized loss from foreign operations............ -- 45 387
Loss from unconsolidated subsidiary for tax purposes. -- 114 192
Other, net........................................... (9) (40) 52
---- ----- ------
$121 $(774) $1,355
==== ===== ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ ------
<S> <C> <C>
Deferred income tax assets:
Amortization of goodwill............................... $ -- $ 84
Net operating loss carryforwards....................... 872 --
Losses from foreign operations and unconsolidated
subsidiary............................................ 159 579
Severance accruals..................................... 687 275
Patents................................................ 405 358
Inventory.............................................. 350 291
AMT credit............................................. -- 161
Non-deductible accrued expenses........................ 124 778
------ ------
2,597 2,526
Valuation allowance.................................... (159) (579)
------ ------
2,438 1,947
------ ------
Deferred income tax liabilities:
Amortization of goodwill............................... (1,160) --
Depreciation........................................... (152) (339)
Deductible prepaid expenses............................ (42) (30)
------ ------
(1,354) (369)
------ ------
$1,084 $1,578
====== ======
</TABLE>
The valuation allowance at December 31, 1994 and 1995 related to recurring
losses from foreign operations and an unconsolidated subsidiary which
management believes the ultimate realization of the related tax benefits is
not more likely than not at the present time.
F-17
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
13. RELATED PARTY TRANSACTIONS
At December 31, 1994 and 1995, the Company had notes receivable from its
officers for advances made to acquire the Company's stock (see Note 9) and for
other purposes as follows:
<TABLE>
<CAPTION>
DECEMBER
31,
----------
1994 1995
---- ----
<S> <C> <C>
Total notes outstanding................................... $681 $681
Shareholders' notes receivable............................ (349) (349)
---- ----
Other notes receivable.................................... $332 $332
==== ====
</TABLE>
The notes bear interest at rates ranging from 7% to 8% and are due in annual
installments payable from the annual bonuses (if any) paid to the officers. In
any event, all remaining principal, including accrued interest thereon, is due
and payable on August 15, 1998.
The loans made to the officers to acquire the Company's stock and other
notes from officers have been reflected as shareholders' notes receivable as a
component of shareholder's equity and non-current notes receivable from
officers, respectively, in the accompanying balance sheets.
14. LEASE COMMITMENTS
The Company was committed under noncancelable operating leases with terms in
excess of one year involving certain property and equipment. Annual minimum
rental commitments under these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996........................................................... $ 549
1997........................................................... 509
1998........................................................... 297
1999........................................................... 138
2000 and thereafter............................................ 224
------
$1,717
======
</TABLE>
15. CONTINGENCIES
The Company is subject to various claims and legal proceedings covering a
wide range of matters that arise in the ordinary course of its business
activities, including product liability claims. Management believes that any
liability that may ultimately result from the resolution of these matters will
not have a material adverse effect on the financial condition or results of
operations of the Company.
F-18
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
16. SEGMENT INFORMATION
The Company's subsidiaries operate distribution facilities in a number of
foreign countries. Currently, international subsidiaries are present in Canada,
Australia, United Kingdom, France and Germany. These subsidiaries represent
approximately 14% of 1995 total sales of the Company, with France representing
the largest portion of this with 4% of total sales. Inter-area sales are not
significant to the total sales of any one geographic area.
<TABLE>
<CAPTION>
INFORMATION ABOUT THE COMPANY'S OPERATIONS IN DIFFERENT GEOGRAPHIC
AREAS
----------------------------------------------------------------------
1994 1995
----------------------------------- ----------------------------------
UNITED INTERNATIONAL UNITED INTERNATIONAL
STATES OPERATIONS CONSOLIDATED STATES OPERATIONS CONSOLIDATED
------- ------------- ------------ ------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales................... $40,716 $1,759 $42,475 $51,644 $ 8,221 $59,865
Income (loss) from oper-
ations................. $(2,102) $ (227) $(2,329) $ 2,801 $(1,121) $ 1,680
Identifiable assets..... $93,709 $2,011 $95,720 $87,873 $ 5,250 $93,123
</TABLE>
The Company had export sales of $12.7 million in 1994 and $9.4 million in
1995 representing 30% and 15% of total sales, respectively.
17. SUBSEQUENT EVENTS
In April 1996, the Company acquired all of the outstanding stock of TreBay
which was involved in the development of ear, nose and throat surgical
specialties. The acquisition will be accounted for under the purchase method of
accounting. Accordingly, the purchase price of approximately $6.6 million will
be allocated to the individual assets acquired and liabilities assumed based
upon their respective fair values at the date of acquisition. The transaction
resulted in cost in excess of net assets acquired of approximately $4.4
million, of which $3.6 million was allocated to in-process research and
development and was subsequently written off. Also, as part of the acquisition
accrued cumulative preferred stock dividends of approximately $7.6 million at
March 30, 1996 were waived by the holders, and accounted for as a capital
contribution by the Company.
The executive management of TreBay replaced former management of the Company.
As a result of the above transaction and a plan by new management to combine
certain operations and provide severance benefits to terminated employees the
Company recorded restructuring charges of approximately $3.1 million related
principally to termination benefits during the quarter ending June 29, 1996.
F-19
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
18. PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
Pro Forma Statement of Operations
The following unaudited pro forma statements of operations for the year
ended December 31, 1995 and for six months ended June 29, 1996 reflects: 1)
the statement of operations of the Company for the periods presented as if
TreBay was purchased on January 1, 1995; and 2) excludes the discontinued
operations of the Company for the year ended December 31, 1995. The pro forma
statement of operations should be read in conjunction with the financial
statements and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 29, 1996 MARCH 30, 1996
---------------- ------------------
PRO
XOMED TREBAY ADJUSTMENTS FORMA
---------------- ------------------ ----------- -------
<S> <C> <C> <C> <C>
Sales, net.............. $32,942 $ 279 $-- $33,221
Cost of sales........... 12,690 219 -- 12,909
------- ----- ---- -------
Gross profit............ 20,252 60 -- 20,312
Operating Expenses:
Selling, general and
administrative....... 14,129 299 (209)(a) 14,219
Research and develop-
ment................. 1,669 138 (116)(a) 1,691
Amortization of intan-
gibles............... 1,168 -- -- 1,168
Write-off of acquired
research and
development.......... 3,612 -- -- 3,612
Restructuring charges. 3,093 -- -- 3,093
Total operating ex- 23,671 437 (325) 23,783
penses................. ------- ----- ---- -------
Interest expense........ (1,536) -- -- (1,536)
Other income (expense), 64 54 -- 118
net.................... ------- ----- ---- -------
Income (loss) before in-
come tax expense (bene-
fit)................... (4,891) (323) 325 (4,889)
Income tax expense (ben- (1,956) -- 1(a) (1,955)
efit).................. ------- ----- ---- -------
Net income (loss)....... $(2,935) $(323) $324 $(2,934)
======= ===== ====
Preferred stock divi- 538
dends.................. -------
Net (loss) attributable
to common shareholders. $(3,472)
-------
Pro forma net (loss) per $ (.75)
share (b).............. =======
Pro forma weighted aver-
age shares outstanding
(b).................... 4,635
=======
</TABLE>
- --------
(a) Elimination of general and administrative expenses which are duplicative
and will not be incurred subsequent to the purchase date and closing of
the TreBay facility; and calculation of income tax benefit on the TreBay
loss after adjustment.
(b) See Note 19.
F-20
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
18. PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
----------------
XOMED TREBAY ADJUSTMENTS PRO FORMA
------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Sales, net............................ $59,865 $450 $ -- $60,315
Cost of sales......................... 23,175 528 -- 23,703
------- ------- ------ -------
Gross profit.......................... 36,690 (78) -- 36,612
Operating expenses:
Selling, general and administrative.. 27,077 1,084 (825)(a) 27,336
Research and development............. 2,405 443 (249)(a) 2,599
Amortization......................... 2,579 -- -- 2,579
------- ------- ------ -------
Total operating expenses.............. 32,061 1,527 (1,074) 32,514
------- ------- ------ -------
Interest expense...................... (3,063) -- -- (3,063)
Other income (expense), net........... 114 109 -- 223
------- ------- ------ -------
Income (loss) before income tax
expense (benefit).................... 1,680 (1,496) 1,074 1,258
Income tax expense (benefit).......... 1,355 -- (165)(a) 1,190
------- ------- ------ -------
Net income (loss)..................... $ 325 $(1,496) $1,239 $ 68
======= ======= ======
Dividends on preferred stock.......... --
-------
Net income available to common
shareholders......................... $ 68
=======
Pro forma net income per share(b)..... $ 0.01
=======
Pro forma weighted average shares
outstanding(b)....................... 4,632
=======
</TABLE>
- --------
(a) Elimination of general and administrative expenses which are duplicative
and will not be incurred subsequent to the purchase date, closing of the
TreBay facility and calculation of income tax benefit on the TreBay loss
after adjustment.
(b) See Note 19.
19. PRO FORMA AND SUPPLEMENTARY PRO FORMA NET INCOME PER SHARE
Pro forma net income per share is computed based on the weighted average
number of shares of common stock outstanding assuming conversion on January 1,
1995 of: 1) all Series A and B Convertible Preferred Stock outstanding as of
December 31, 1995; 2) 390,000 shares of Series A Convertible Preferred Stock
issued in the purchase of TreBay; 3) all stock options including the options
issued after December 31, 1995 which have been assumed to be outstanding as of
January 1, 1995; and 4) the conversion of 60,225 shares of Series C Redeemable
Preferred Stock into 314,650 shares of Class A Common Stock on the date of the
initial public offering, based upon an assumed initial public offering price
of $20.00 per share.
Supplementary pro forma net income per share is computed upon the basis
stated above and giving effect to the Company's proposed initial public
offering of 2,500,000 shares of Class A Common Stock and paydown of
approximately $23,213,000 of term notes payable and $25,000,000 of Series C
Redeemable Preferred Stock as if the offering was effective January 1, 1995.
Interest expense, net of tax benefit, totaling $1,299,770 and $580,632 for the
year ended December 31, 1995 and six months ended June 29, 1996 has been
eliminated as a result of the assumed paydown of debt.
F-21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Xomed, Inc.
We have audited the accompanying combined balance sheets of Xomed, Inc.
(formerly Xomed-Treace, Inc. and Xomed Treace P.R. Inc.) (the Company) as of
December 31, 1993 and April 15, 1994, and the related combined statements of
income and retained earnings and cash flows for the year ended December 31,
1993 and the three and one-half months ended April 15, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Xomed, Inc. at
December 31, 1993 and April 15, 1994, and the combined results of their
operations and their cash flows for the year ended December 31, 1993 and the
three and one-half months ended April 15, 1994 in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Jacksonville, Florida
May 31, 1996
F-22
<PAGE>
XOMED, INC.
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 15,
1993 1994
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 417 $ 90
Accounts receivable, less allowance for doubtful
accounts
of $328--1993 and $278--1994......................... 8,005 6,438
Other receivables..................................... -- 427
Inventories........................................... 9,800 10,124
Prepaid expenses...................................... 290 220
------- -------
Total current assets.................................... 18,512 17,299
Investments............................................. 1,199 1,199
Property, plant and equipment, net...................... 9,785 10,403
Goodwill................................................ 7,711 7,413
Other assets............................................ 326 309
------- -------
Total assets............................................ $37,533 $36,623
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 2,727 $ 1,992
Accrued expenses...................................... 2,351 1,264
Due to parent......................................... 7,164 7,532
Current portion capital lease obligation.............. 267 178
------- -------
Total current liabilities............................... 12,509 10,966
Obligation under capital lease.......................... 686 715
------- -------
Total liabilities....................................... 13,195 11,681
Shareholders' equity:
Common stock, $1.00 par value; 1,000 shares
authorized,
issued and outstanding............................... 1 1
Additional paid-in capital............................ 12,579 12,579
Retained earnings..................................... 11,758 12,362
------- -------
Total shareholders' equity.............................. 24,338 24,942
------- -------
Total liabilities and shareholders' equity.............. $37,533 $36,623
======= =======
</TABLE>
See accompanying notes.
F-23
<PAGE>
XOMED, INC.
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE AND
ONE-HALF
YEAR ENDED MONTHS ENDED
DECEMBER 31, APRIL 15,
1993 1994
------------ ------------
<S> <C> <C>
Sales, net........................................... $45,364 $12,801
Cost of sales........................................ 20,692 6,086
------- -------
Gross profit......................................... 24,672 6,715
Operating expenses:
Selling, general and administrative................. 15,065 5,371
Research and development............................ 2,766 692
Amortization of intangibles......................... 807 298
------- -------
Total operating expenses............................. 18,638 6,361
Operating income from continuing operations.......... 6,034 354
Other income, net.................................... 334 17
------- -------
Income from continuing operations before income tax
expense............................................. 6,368 371
Allocation for income tax expense.................... 2,420 141
------- -------
Income from continuing operations.................... 3,948 230
Discontinued operations:
Income from operations of discontinued surgical
drapes segment (less applicable income taxes of
$1,243 and $230 at December 31, 1993 and April 15,
1994, respectively)............................... 2,029 374
------- -------
Net income........................................... 5,977 604
Retained earnings, beginning of period............... 5,781 11,758
------- -------
Retained earnings, end of period..................... $11,758 $12,362
======= =======
</TABLE>
See accompanying notes.
F-24
<PAGE>
XOMED, INC.
COMBINED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE AND
ONE-HALF
YEAR ENDED MONTHS ENDED
DECEMBER 31, APRIL 15,
1993 1994
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................... $ 5,977 $ 604
Adjustments to reconcile net income to cash flow
provided
by operating activities:
Depreciation and amortization...................... 1,810 642
Loss on disposal of assets......................... -- 230
(Increase) decrease in accounts and other receiv-
able, net......................................... (1,660) 1,140
Decrease (increase) in inventories, net............ 1,660 (324)
Decrease in prepaid expenses and other assets...... 152 87
Increase (decrease) in accounts payable and accrued
expenses.......................................... 1,444 (1,822)
(Decrease) increase due to parent.................. (6,360) 367
------- -------
Net cash provided by operating activities............ 3,023 924
INVESTING ACTIVITIES
Purchases of property, plant and equipment........... (2,018) (1,170)
Purchases of other assets............................ (495) --
------- -------
Net cash used in investing activities................ (2,513) (1,170)
FINANCING ACTIVITIES
Proceeds from capital lease obligation............... 90 --
Principal payments on capital lease obligation....... (267) (81)
------- -------
Net cash used in financing activities................ (177) (81)
------- -------
Increase (decrease) in cash and cash equivalents..... 333 (327)
Cash and cash equivalents, beginning of period....... 84 417
------- -------
Cash and cash equivalents, end of period............. $ 417 $ 90
======= =======
</TABLE>
See accompany notes.
F-25
<PAGE>
XOMED, INC.
NOTES TO COMBINED BALANCE SHEET--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
APRIL 15, 1994
1. ORGANIZATION
Xomed-Treace, Inc. and Xomed-Treace, P.R., Inc. (collectively, Xomed, Inc.
or the Company) designs, manufactures and sells otolaryngology/head and neck
and ophthalmology surgical specialties to domestic and foreign hospitals,
medical care facilities and physicians. The Company performs ongoing credit
evaluations of its customers' financial condition and generally no collateral
is required. Xomed-Treace, Inc. and Xomed-Treace, P.R. Inc. are wholly-owned
subsidiaries of Bristol-Myers Squibb Company ("BMS"). As of April 15, 1994,
the Company was purchased by Xomed Surgical Products, Inc. (see Note 13).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The combined financial statements of the Company include the accounts of
Xomed-Treace, Inc. and Xomed-Treace, P.R. Inc. Significant intercompany
transactions and balances between entities have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with original
maturities of three months or less to be cash equivalents.
Inventory Valuation
Inventories are stated at the lower of cost, as determined on the average
cost method, or market. Market for raw materials is based on replacement costs
and for other inventory classifications on net realizable value.
Investments
Investments consist of certificates of deposit with maturities ranging from
one to three years and are stated at cost which approximates market value.
These certificates of deposit were purchased in connection with a tax
exemption grant from the government of Puerto Rico, for a period not to exceed
five years.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to income as incurred. Additions,
improvements and major replacements are capitalized. The costs and accumulated
depreciation related to assets sold or retired are removed from the accounts
and any gain or loss is credited or charged to income. Depreciation is
computed using the straight-line method based on the estimated useful lives of
the related assets which do not exceed forty years.
Income Taxes
The Company files federal consolidated tax returns with BMS. Under a tax
sharing agreement BMS allocates federal and state income tax expense to the
Company at an effective tax rate of approximately 38% and makes all income tax
payments on the Company's behalf. The balance sheet does not reflect any
current or deferred income tax assets or liabilities as such amounts will be
realized by BMS. Amounts payable or receivable from BMS related to income
taxes are included in due to parent in the 1993 and 1994 balance sheets.
F-26
<PAGE>
XOMED, INC.
NOTES TO COMBINED BALANCE SHEET--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
APRIL 15, 1994
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
New Accounting Pronouncements
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying value. Statement No. 121 also addresses the accounting for the
expected disposition of long-lived assets.
The FASB also issued Statement No. 123, Accounting for Stock-Based
Compensation, which provides an alternative for income statement recognition
of costs associated with stock-based employee compensation plans and requires
expanded disclosures with respect to such plans.
The Company will adopt Statement No. 121 and No. 123 in 1996 and, based on
current information, does not believe the effect of adoption will be material
to the financial condition or results of operations of the Company.
3. DISCONTINUED OPERATIONS
The Company was acquired by Xomed Surgical Products, Inc., the successor
company, in April 1994. During July 1995, the successor company sold the
surgical drapes segment and disclosed the effect of the transaction as
discontinued operations. The surgical drapes segment in the accompanying
financial statements has been reported as discontinued operations to be
consistent with the presentation in the successor company financial
statements.
Certain financial information related to the discontinued operations of the
surgical drapes segment is as follows:
<TABLE>
<CAPTION>
THREE AND ONE-
YEAR ENDED HALF MONTHS
DECEMBER 31, ENDED APRIL 15,
1993 1994
------------ ---------------
<S> <C> <C>
Sales........................................ $8,480 $1,915
====== ======
Pre-tax income............................... $3,272 $ 604
====== ======
Income tax expense........................... $1,243 $ 230
====== ======
Net income................................... $2,029 $ 374
====== ======
</TABLE>
F-27
<PAGE>
XOMED, INC.
NOTES TO COMBINED BALANCE SHEET--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
APRIL 15, 1994
4. INVENTORIES
<TABLE>
<CAPTION>
APRIL
DECEMBER 31, 15,
1993 1994
------------ -------
<S> <C> <C>
Finished goods........................ $ 9,504 $11,438
Work in process....................... 866 714
Raw materials and packaging........... 6,768 6,474
------- -------
17,138 18,626
Less reserves for slow-
moving/obsolescence.................. 7,338 8,502
------- -------
$ 9,800 $10,124
======= =======
</TABLE>
The reserve for slow-moving/obsolescence on January 1, 1993 was $6,621.
Write-offs for the periods ended December 31, 1993 and April 15, 1994 were
$343 and $242, respectively, and the provision for the reserve was $1,060 and
$1,406, respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, less allowances for depreciation, is a
follows:
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 15,
1993 1994
------------ ---------
<S> <C> <C>
Land and land improvements.......... $ 911 $ 911
Building and building improvements.. 3,988 4,065
Machinery and equipment............. 8,466 9,921
------- -------
13,365 14,897
Less allowances for depreciation.... 6,490 6,812
------- -------
6,875 8,085
Capital projects in process......... 2,910 2,318
------- -------
$ 9,785 $10,403
======= =======
</TABLE>
Depreciation expense for the year ended December 31, 1993 and the three and
one-half months ended April 15, 1994 was approximately $1,014 and $343,
respectively, and is reflected in selling, general and administrative
expenses.
6. GOODWILL
Goodwill represents the excess of cost over net tangible identifiable assets
received in business acquisitions and is being amortized over periods of 10
and 40 years.
<TABLE>
<CAPTION>
APRIL
DECEMBER 31, 15,
1993 1994
------------ -------
<S> <C> <C>
Goodwill.............................. $12,936 $12,936
Less accumulated amortization......... 5,225 5,523
------- -------
$ 7,711 $ 7,413
======= =======
</TABLE>
F-28
<PAGE>
XOMED, INC.
NOTES TO COMBINED BALANCE SHEET--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
APRIL 15, 1994
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 15,
1993 1994
------------ ---------
<S> <C> <C>
Payroll and related costs........................ $1,154 $ 467
Other............................................ 1,197 797
------ ------
$2,351 $1,264
====== ======
</TABLE>
8. OBLIGATION UNDER CAPITAL LEASE
The Company was obligated under a capital lease as follows:
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 15,
1993 1994
------------ ---------
<S> <C> <C>
Note payable under capital lease obligation to
vendor in quarterly installments ranging from
$34 to $69 which includes interest through Oc-
tober 1, 1997, with interest payable at rates
ranging from 6% to 10.8% collateralized by
equipment with a net book value of approxi-
mately $890 at April 15, 1994................. $953 $893
Less current portion........................... 267 178
---- ----
$686 $715
==== ====
</TABLE>
Annual maturities of the capital lease obligation for the eight and one-half
month period ending December 31, 1994 and years ending 1995 through 1998 are
as follows:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
--------------------------
<S> <C>
1994.............................................................. $138
1995.............................................................. 189
1996.............................................................. 87
1997.............................................................. 87
1998.............................................................. 392
----
$893
====
</TABLE>
9. RETIREMENT AND POSTRETIREMENT BENEFITS
Retirement benefits are provided to all eligible employees through the
Bristol-Myers Squibb Retirement Income Plan and the Bristol-Myers Squibb
Puerto Rico Retirement Income Plan (the "Pension Plans"). The Pension Plans
are noncontributory, defined benefit plans. Benefits are based primarily on
years of credited service and on participants' compensation. The Company's
employees also participate in defined contribution plans maintained by BMS
which comply with the provisions of Section 401(k) of the Internal Revenue
Code (the "Savings Plans").
F-29
<PAGE>
XOMED, INC.
NOTES TO COMBINED BALANCE SHEET--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
APRIL 15, 1994
9. RETIREMENT AND POSTRETIREMENT BENEFITS (CONTINUED)
The assets, projected benefit obligations and the related costs associated
with the Pension Plans of the Company are not separately identifiable. The
Company receives an allocation from BMS to record its estimated share of
pension expense. Pension expense allocated to the Company by BMS was
approximately $1,273 and $263 for the year ended December 31, 1993 and the
three and one-half months ended April 15, 1994, respectively.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits". Statement No. 106 requires that postretirement health costs be
recorded in the financial statements as earned by employees. The Company
receives an allocation from BMS to record its estimated share of
postretirement benefit expense. The allocated expense was $303 and $89 for the
year ended December 31, 1993 and the three and one-half months ended April 15,
1994, respectively. The liability associated with the adoption of this
Statement is not separately identifiable and has not been reflected in the
accompanying financial statements.
10. RELATED PARTY TRANSACTIONS
The Company is charged for various services provided by BMS. The more
significant services include employee benefits and insurance. BMS provides
medical and life insurance benefits for certain employees and allocates the
related costs to the Company as the benefits are paid by BMS. The expense
allocated to the Company by BMS for these benefits was approximately $2,275
and $511 for the year ended December 31, 1993 and the three and one-half
months ended April 15, 1994, respectively.
The Company provides certain products to other BMS subsidiaries which sell
in international markets. Net sales to these BMS subsidiaries were $6,794 and
$782 and related cost of sales were $3,678 and $402 for the year ended
December 31, 1993 and the three and one-half months ended April 15, 1994,
respectively. No direct sales costs such as commissions and marketing were
charged to the Company by these BMS subsidiaries; therefore, no such amounts
have been recorded in the accompanying financial statements. Additionally, the
Company is not charged interest on its outstanding intercompany balances,
which amounted to $7,164 and $7,841 as of December 31, 1993 and April 15,
1994.
11. LEASE COMMITMENTS
At April 15, 1994, the Company was committed under noncancelable operating
leases with terms in excess of one year involving certain property and
equipment. Minimum rental commitments under these leases for the eight and
one-half month period ending December 31, 1994 and year ending December 31,
1995 are as follows:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
--------------------------
<S> <C>
1994................................................................. $229
1995................................................................. 27
----
$256
====
</TABLE>
Rental expenses for the above commitments for the year ended December 31,
1993 and the three and one-half month period ended April 15, 1994 was
approximately $421 and $158, respectively.
F-30
<PAGE>
XOMED, INC.
NOTES TO COMBINED BALANCE SHEET--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
APRIL 15, 1994
12. CONTINGENCIES
The Company is subject to various claims and legal proceedings covering a
wide range of matters that arise in the ordinary course of its business
activities, including product liability claims. Management believes that any
liability that ultimately results from the resolution of these matters will
not have a material adverse effect on the financial position or results of
operations of the Company.
13. SUBSEQUENT EVENT: SALE OF XOMED, INC.
On April 15, 1994, all of the outstanding stock of Xomed, Inc. was acquired
from BMS by Xomed Surgical Products, Inc. for approximately $81,000. The
acquisition was funded primarily through the issuance of preferred stock
($43,503) and proceeds from long-term debt.
F-31
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
TreBay Medical Corporation
We have audited the accompanying balance sheets of TreBay Medical
Corporation (the Company) as of December 31, 1994 and 1995, and the related
statements of operations, shareholders' equity and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TreBay Medical Corporation
at December 31, 1994 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Jacksonville, Florida
May 31, 1996
F-32
<PAGE>
TREBAY MEDICAL CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- APRIL 1, MARCH 30,
1994 1995 1995 1996
------ ------ -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 668 $ 297 $1,130 $ 345
Investments............................... 2,960 1,448 1,937 1,000
Accounts receivable, less allowance for
doubtful accounts of $5 and $74 at
December 31, 1994 and 1995, respectively. 38 127 28 174
Other receivables......................... 24 44 50 55
Inventories............................... 127 404 218 424
Other current assets...................... 15 34 38 37
------ ------ ------ ------
Total current assets........................ 3,832 2,354 3,401 2,035
Investments................................. 1,505 703 1,504 701
Note receivable from officer................ -- 883 -- 883
Equipment and leasehold improvements, net... 480 503 509 479
Cost in excess of net assets acquired, net.. 141 -- 140 --
Other assets................................ 65 86 62 105
------ ------ ------ ------
Total assets................................ $6,023 $4,529 $5,616 $4,203
====== ====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 133 $ 117 $ 76 $ 115
Accrued expenses.......................... 72 98 65 101
Current portion capital lease obligations. 12 13 12 13
------ ------ ------ ------
Total current liabilities................... 217 228 153 229
Long-term capital lease obligations, less
current portion............................ 45 31 42 28
Deferred rent and other..................... 10 15 10 14
------ ------ ------ ------
Total liabilities........................... 272 274 205 271
Shareholders' equity:
Common stock, $.01 par value, 1,000,000
shares authorized, 650,000 shares issued
and outstanding.......................... 7 7 7 7
Additional paid-in capital................ 6,480 6,480 6,480 6,480
Accumulated deficit....................... (736) (2,232) (1,076) (2,555)
------ ------ ------ ------
Total shareholders' equity.................. 5,751 4,255 5,411 3,932
------ ------ ------ ------
Total liabilities and shareholders' equity.. $6,023 $4,529 $5,616 $4,203
====== ====== ====== ======
</TABLE>
See accompanying notes.
F-33
<PAGE>
TREBAY MEDICAL CORPORATION
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, THREE MONTHS ENDED
-------------- ------------------
APRIL 1, MARCH 30,
1994 1995 1995 1996
----- ------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales, net................................... $ 82 $ 450 $ 47 $ 279
Cost of sales................................ 42 528 84 219
----- ------- ----- -----
Gross profit................................. 40 (78) (37) 60
Operating expenses:
Selling, general and administrative......... 721 1,084 269 299
Research and development.................... 211 443 97 138
----- ------- ----- -----
Total operating expenses..................... 932 1,527 366 437
----- ------- ----- -----
Loss from operations......................... (892) (1,605) (403) (377)
Interest income.............................. 171 250 68 55
Other expense, net........................... (15) (141) (5) (1)
----- ------- ----- -----
Net loss..................................... $(736) $(1,496) $(340) $(323)
===== ======= ===== =====
</TABLE>
See accompanying notes.
F-34
<PAGE>
TREBAY MEDICAL CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------- RETAINED PAID-IN
SHARES AMOUNT DEFICIT CAPITAL TOTAL
------- ------ -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994......... -- $ -- $ -- $ -- $ --
Issuance of common stock........... 650,000 7 -- 6,480 6,487
Net loss for the year ended
December 31, 1994................. -- -- (736) -- (736)
------- ----- ------- ------ -------
Balance at December 31, 1994....... 650,000 7 (736) 6,480 5,751
Net loss for the year ended
December 31, 1995................. -- -- (1,496) -- (1,496)
------- ----- ------- ------ -------
Balance at December 31, 1995....... 650,000 7 (2,232) 6,480 4,255
Net loss for the three months ended
March 30, 1996 (unaudited)........ -- -- (323) -- (323)
------- ----- ------- ------ -------
Balance at March 30, 1996.......... 650,000 $ 7 $(2,555) $6,480 $3,932
======= ===== ======= ====== =======
</TABLE>
See accompanying notes.
F-35
<PAGE>
TREBAY MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, THREE MONTHS ENDED
--------------- ----------------------------
1994 1995 APRIL 1, 1995 MARCH 30, 1996
------ ------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................ $ (736) $(1,496) $ (340) $(323)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization. 25 130 26 37
Write-off of costs in excess
of net assets acquired....... -- 131 -- --
Bond discount amortization.... (72) (61) (22) (2)
Increase in accounts and other
receivables, net............. (35) (109) (16) (58)
Increase in inventories....... (100) (277) (91) (20)
Increase (decrease) in
deferred rent................ 10 5 -- (1)
Increase in other assets...... (82) (923) (20) (22)
Increase (decrease) in
accounts payable and accrued
expenses..................... 163 9 (64) 1
------ ------- ------ -----
Net cash used in operating ac-
tivities....................... (827) (2,591) (527) (388)
INVESTING ACTIVITIES
Purchases of investments........ (6,142) (1,818) -- --
Purchases of property, plant and
equipment...................... (399) (142) (54) (13)
Purchase of River Medical, Inc.,
net of cash acquired........... (201) -- -- --
Proceeds from maturity of
investments.................... 1,752 4,193 1,046 452
------ ------- ------ -----
Net cash (used in) provided by
investing activities........... (4,990) 2,233 992 439
FINANCING ACTIVITIES
Proceeds from sale of common
stock.......................... 6,487 -- -- --
Principal payments on capital
lease obligations.............. (2) (13) (3) (3)
------ ------- ------ -----
Net cash provided by (used in)
financing activities........... 6,485 (13) (3) (3)
------ ------- ------ -----
Net increase (decrease) in cash
and cash equivalents........... 668 (371) 462 48
Cash and cash equivalents at
beginning of period............ -- 668 668 297
------ ------- ------ -----
Cash and cash equivalents at end
of period...................... $ 668 $ 297 $1,130 $ 345
====== ======= ====== =====
</TABLE>
See accompanying notes.
F-36
<PAGE>
TREBAY MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
1. ORGANIZATION
TreBay Medical Corporation (the Company), a Delaware corporation, was formed
in December of 1993 and commenced operations in January 1994. The Company did
not report significant operating revenues in 1994 and was deemed to be a
development stage company until January 1, 1995. The Company develops and
markets microsurgical products for ear, nose and throat surgeons and
orthopaedic surgical instruments.
Basis of Presentation--Unaudited Interim Financial Statements
The accompanying unaudited financial statements as of April 1, 1995 and March
30, 1996 have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three months
ended March 30, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with original
maturities of three months or less when purchased to be cash equivalents.
Inventory Valuation
Inventories are generally stated at average cost on a first-in, first-out
valuation basis not in excess of market. Market for raw materials is based on
replacement costs and for work-in-process and finished goods on net realizable
value.
Investments
Investments consist of U.S. Treasury and Government Agency notes. All
investments are classified as held- to-maturity and are carried at amortized
cost.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Expenditures for
maintenance and repairs are charged to income as incurred. Depreciation is
computed using the straight-line method based on the estimated useful lives of
the related assets not exceeding ten years.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes", which
requires the use of the liability method of accounting for deferred income
taxes.
F-37
<PAGE>
TREBAY MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
New Accounting Pronouncements
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of.
The FASB also issued Statement No. 123, Accounting for Stock-Based
Compensation, which provides an alternative for income statement recognition of
costs associated with stock-based employee compensation plans and requires
expanded disclosures with respect to such plans.
The Company will adopt Statements No. 121 and No. 123 in 1996 and, based on
current information, does not believe the effect of adoption will be material
to the financial condition or results of operations of the Company.
3. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995
------ ------
<S> <C> <C>
Finished goods........................................... $ 43 $ 173
Work in process.......................................... 10 11
Raw materials and packaging.............................. 74 220
------ ------
$127 $404
====== ======
</TABLE>
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements, at cost, less allowances for
depreciation, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ ------
<S> <C> <C>
Equipment............................................... $ 260 $ 478
Leasehold improvements.................................. 74 131
------ ------
334 609
Allowances for depreciation............................. (21) (141)
------ ------
313 468
Capital projects in process............................. 167 35
------ ------
$ 480 $ 503
====== ======
</TABLE>
F-38
<PAGE>
TREBAY MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS (CONTINUED)
Depreciation expense, including expense on assets under capital lease
obligations, was approximately $21 and $120 for the years ended December 31,
1994 and 1995, respectively.
5. COST IN EXCESS OF NET ASSETS ACQUIRED
In June 1994, the Company acquired River Medical, Inc. in an acquisition
accounted for as a purchase for $204. Assets acquired included accounts
receivable, inventory and equipment and liabilities assumed consisted of
accounts payable. Costs in excess of net assets acquired amounted to
approximately $145, which was being amortized over 15 years. In December 1995,
management determined that the business acquired from River Medical, Inc. had
no significant continuing value. As a result, the remaining cost in excess of
net assets acquired of $131 was written off.
6. INVESTMENTS
The following is a summary of investments, all of which are U.S. Treasury and
Government Agency notes to be held-to-maturity:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------
AMORTIZED FAIR UNREALIZED
COST VALUE LOSS
--------- ------ ----------
<S> <C> <C> <C>
Due within one year........................... $2,960 $2,939 $21
Due in one to three years..................... 1,505 1,464 41
<CAPTION>
DECEMBER 31, 1995
---------------------------
AMORTIZED FAIR UNREALIZED
COST VALUE GAIN
--------- ------ ----------
<S> <C> <C> <C>
Due within one year........................... $1,448 $1,450 $2
Due in one to three years..................... 703 709 6
</TABLE>
Fair value is determined by quoted market price.
7. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under agreements classified as capital
leases. These leases have terms ranging from three to five years.
Annual maturities under capital lease obligations outstanding at December 31,
1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996.............................................................. $13
1997.............................................................. 12
1998.............................................................. 12
1999.............................................................. 7
---
$44
===
</TABLE>
F-39
<PAGE>
TREBAY MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
8. EMPLOYEE STOCK OPTION PLANS
The Company has granted options to key employees to acquire 68,609 shares of
common stock at $10 a share, which was the estimated fair market value of the
stock at the date of grant. In addition, the Company has reserved 3,613 options
to be granted at a later date. As a result of the acquisition of the Company by
Xomed Surgical Products, Inc. on April 16, 1996 (See Note 13), 43,332 of the
options became immediately exercisable. The remaining 25,277 options granted
become exercisable at 25% a year from December 1995 through December 1998.
9. RELATED PARTY TRANSACTION
At December 31, 1995, the Company had a note receivable from an officer in
the amount of $883 which is due on demand. The note bears interest at 10%
compounded annually and is secured by 88,333 shares of stock of the Company.
10. INCOME TAXES
At December 31, 1995, the Company had accumulated net operating losses for
financial reporting and tax purposes of approximately $2.2 million and $1.6
million, respectively, to be carried forward to future periods. These
carryforwards expire for tax purposes beginning in 2009. Due to a history of
net operating losses, the Company's management has concluded that it is more
likely than not that the tax benefit of the carryforward will not be realized
and has established a valuation allowance to offset the deferred tax asset
related to the net operating loss carryforward for 1994 and 1995.
11. LINE OF CREDIT AGREEMENT
The Company has a $150 line of credit payable on demand. The line of credit
bears interest at prime, payable monthly and is secured by $225 of the
Company's investments. There was no balance outstanding at year end.
12. LEASE COMMITMENTS
The Company was committed under a noncancelable operating lease with a term
in excess of one year related to the building it occupies. Annual minimum lease
commitments under the lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996............................................................. $ 56
1997............................................................. 57
1998............................................................. 59
1999............................................................. 30
----
$202
====
</TABLE>
The Company's rental expense was $40 and $68 for the years ending 1994 and
1995, respectively.
13. SUBSEQUENT EVENTS
In April 1996, the Company was acquired by Xomed Surgical Products, Inc. in
an acquisition accounted for under the purchase method of accounting. The
purchase price was approximately $6.6 million.
F-40
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CON- NECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTA-TION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESEN-TATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UN-DERWRITER.
THIS PROSPECTUS DOES NOT CONSTI-TUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE
IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUN- DER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CON- TAINED HEREIN IS CORRECT AS OF ANY DATE SUBSE-QUENT TO THE
DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Capitalization............................................................ 14
Dilution.................................................................. 15
Selected Consolidated Financial Data...................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 31
Management................................................................ 47
Certain Transactions...................................................... 55
Principal Stockholders.................................................... 56
Description of Capital Stock.............................................. 59
Shares Eligible for Future Sale........................................... 64
Underwriting.............................................................. 66
Legal Matters............................................................. 67
Experts................................................................... 67
Additional Information.................................................... 67
Index to Financial Statements............................................. F-1
</TABLE>
------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECT- ING TRANSACTIONS IN THE COMMON STOCK OF-FERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,500,000 Shares
[LOGO]
XOMED SURGICAL PRODUCTS, INC.
Class A Common Stock
------------
PROSPECTUS
------------
Alex. Brown & Sons
INCORPORATED
UBS Securities
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered which will be paid
solely by the Company. All the amounts shown are estimates, except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee:
<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
SEC registration fee............................................. $20,819
NASD filing fee.................................................. 6,538
Nasdaq listing fee............................................... 34,699
Transfer agent and registrar fees and expenses................... *
Printing and engraving expenses.................................. *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Blue Sky fees and expenses....................................... *
Miscellaneous expenses .......................................... *
-------
Total.......................................................... $ *
=======
</TABLE>
- --------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Restated Certificate of Incorporation (the "Restated
Certificate") provides that the Company shall indemnify each person who is or
was a director, officer or employee of the Company to the fullest extent
permitted under Section 145 of the Delaware General Corporation Law. Section
145 of the Delaware General Corporation Law empowers a Delaware corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or
in the right of such corporation) by reason of the fact that such person is or
was a director, officer, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee or
agent of another corporation or enterprise. A corporation may indemnify such
person against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. A
corporation may, in advance of the final disposition of any civil, criminal,
administrative or investigative action, suit or proceeding, pay the expenses
(including attorneys' fees) incurred by any officer or director in defending
such action, provided that the director or officer undertakes to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation.
A Delaware corporation may indemnify officers and directors in an action by
or in the right of the corporation to procure a judgment in its favor under
the same conditions, except that no indemnification is permitted without
judicial approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses (including attorneys' fees) which he
actually and reasonably incurred in connection therewith. The indemnification
provided is not deemed to be exclusive of any other rights to which an officer
or director may be entitled under any corporation's bylaw, agreement, vote or
otherwise.
II-1
<PAGE>
The Restated Certificate provides that a director of the Company will not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, which concerns unlawful payments of
dividends, stock purchases or redemption, or (iv) for any transaction from
which the director derived an improper personal benefit.
While the Restated Certificate provides directors with protection from
awards for monetary damages for breaches of their duty of care, it does not
eliminate such duty. Accordingly, the Restated Certificate will have no effect
on the availability of equitable remedies such as an injunction or rescission
based on a director's breach of his or her duty of care. The provisions of the
Restated Certificate described above apply to an officer of the Company only
if he or she is a director of the Company and is acting in his or her capacity
as director, and do not apply to officers of the Company who are not
directors.
Reference is made to the Underwriting Agreement (Exhibit 1) which provides
for indemnification of the Company, its directors, officers and controlling
persons.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information is furnished with regard to all securities sold by
the Company within the past three years which were not registered under the
Securities Act.
On April 15, 1994, in connection with the Xomed Acquisition, the Company:
1. Issued an aggregate of 573,120 shares of Class A Common Stock, 426,777
shares of Non-Voting Common Stock and 91,292 shares of Series C
Redeemable Preferred Stock to the stockholders of Merocel in exchange
for an aggregate consideration of 291,730 shares of Merocel Common
Stock, 68,900 shares of Merocel Series A Preferred Stock and 8,498
shares of Merocel Series B Preferred Stock;
2. Issued an aggregate of 340,454 shares of Series A Convertible Preferred
Stock to certain institutional investors for an aggregate consideration
of $3,261,549.32;
3. Issued 2,127,838 shares of Series B Convertible Preferred Stock to WP
Investors for an aggregate consideration of $20,384,688.04; and
4. Issued an aggregate of 198,561 shares of Series C Redeemable Preferred
Stock to certain institutional investors for an aggregate consideration
of $19,856,100.
On August 15, 1994, the Company issued 9,563 shares of Series A Convertible
Preferred Stock to Mark K. Adams for an aggregate consideration of $91,613.54
in connection with the concurrent execution of an Employment Agreement and
Loan and Pledge Agreement with Mr. Adams.
On August 15, 1994, the Company issued 768 shares of Series C Redeemable
Preferred Stock to Mark K. Adams for an aggregate consideration of $76,800 in
connection with the concurrent execution of an employment agreement and loan
and pledge agreement with Mr. Adams.
On August 15, 1994, the Company issued 5,679 shares of Series A Convertible
Preferred Stock to David R. Grant for an aggregate consideration of $54,404.82
in connection with the concurrent execution of a Loan, Stock Purchase and
Pledge agreement with Mr. Grant.
On August 15, 1994, the Company issued 456 shares of Series C Redeemable
Preferred Stock to David R. Grant for an aggregate consideration of $45,600 in
connection with the concurrent execution of a Loan, Stock Purchase and Pledge
agreement with Mr. Grant.
On August 15, 1994, the Company issued 5,679 shares of Series A Convertible
Preferred Stock to Thomas J. Drury for an aggregate consideration of
$54,404.82 in connection with the concurrent execution of a Loan, Stock
Purchase and Pledge agreement with Mr. Drury.
II-2
<PAGE>
On August 15, 1994, the Company issued 456 shares of Series C Redeemable
Preferred Stock to Thomas J. Drury for an aggregate consideration of $45,600
in connection with the concurrent execution of a Loan, Stock Purchase and
Pledge agreement with Mr. Grant.
On August 15, 1994, the Company issued 2,840 shares of Series A Convertible
Preferred Stock to Arthur A. Gertzman for an aggregate consideration of
$27,207.20 in connection with the concurrent execution of a Loan, Stock
Purchase and Pledge agreement with Mr. Gertzman.
On August 15, 1994, the Company issued 228 shares of Series C Redeemable
Preferred Stock to Arthur A. Gertzman for an aggregate consideration of
$22,800 in connection with the concurrent execution of a Loan, Stock Purchase
and Pledge agreement with Mr. Gertzman.
On April 15, 1996, in connection with the Company's acquisition of TreBay,
the Company:
1. Issued an aggregate of 390,000 shares of Series A Convertible Preferred
Stock and 28,470 shares of Series C Redeemable Preferred Stock to
certain stockholders of TreBay for an aggregate consideration of 650,000
shares of TreBay Common Stock; and
2. Issued stock options (outside of the Stock Option Plan) to purchase an
aggregate of 41,166 shares of Class A Common Stock for an aggregate
exercise price of $385,313.76 to certain optionholders of TreBay for an
aggregate consideration of stock options to purchase an aggregate of
68,609 shares of TreBay Common Stock.
The sales described in this Item 15 were made in reliance upon the exemption
from registration set forth in Section 4(2) of the Securities Act relating to
sales by an issuer not involving any public offering. The foregoing
transactions did not involve a distribution or public offering. No
underwriters were engaged in connection with the foregoing issuances of
securities and no commissions or discounts were paid.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
*1 Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation
3.2 By-Laws
*4 Specimen of Registrant's Class A Common Stock certificate
*5 Opinion of Willkie Farr & Gallagher as to the Legality of the
Class A Common Stock
10.1 Stockholders Agreement, dated as of April 16, 1996, among the
Company, Warburg, Pincus Investors, L.P., Accel IV L.P., Accel
Investors '94 L.P., Accel Keiretsu L.P., Elmore C. Patterson
Partners, Prosper Partners, Vertical Fund Associates, L.P.,
Vertical Medical Partners, L.P., Vertical Partners, L.P., Mark K.
Adams, Solomon Rosenblatt, Ronald J. Cercone, William R. Miller,
Robert A. Reeves, First Union Capital Partners, Inc., James T.
Treace, John R. Treace, Daniel H. Treace and F. Barry Bays.
10.2 Credit Agreement, dated as of April 15, 1994, by and among
Merocel/Xomed Holdings, Inc., Merocel Corporation, Xomed-Treace,
Inc., Xomed-Treace, P.R. Inc., Bank of Boston Connecticut, certain
other lenders which are or may become parties and Bank of Boston
Connecticut, as Agent.
10.3 Fourth Amendment and Waiver Agreement, dated as of June 7, 1996,
by and among Xomed Surgical Products, Inc., formerly known as
Merocel/Xomed Holdings, Inc., Merocel Corporation, Xomed, Inc.,
formerly known as Xomed-Treace, Inc., Xomed-Treace, P.R. Inc.,
TreBay Medical Corporation, Bank of Boston Connecticut, Chemical
Bank, Bank of Scotland, Internationale Nederlanden (U.S.) Capital
Corporation and Bank of Boston Connecticut, as Agent.
10.4 Third Amendment and Waiver Agreement, dated as of April 15, 1996,
by and among Xomed Surgical Products, Inc., formerly known as
Merocel/Xomed Holdings, Inc., Merocel Corporation, Xomed, Inc.,
formerly known as Xomed-Treace, Inc., Xomed-Treace, P.R. Inc.,
Bank of Boston Connecticut, Chemical Bank, Bank of Scotland,
Internationale Nederlanden (U.S.) Capital Corporation and Bank of
Boston Connecticut, as Agent.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
10.5 Second Amendment and Waiver Agreement, dated as of July 3, 1995, by and
among Merocel/Xomed Holdings, Inc., Merocel Corporation, Xomed-Treace,
Inc., Xomed-Treace, P.R. Inc., Bank of Boston Connecticut, Chemical
Bank, Bank of Scotland, Internationale Nederlanden (U.S.) Capital
Corporation and Bank of Boston Connecticut, as Agent.
10.6 Amendment and Waiver Agreement, dated as of March 31, 1995, by and
among Merocel/Xomed Holdings, Inc., Merocel Corporation, Xomed-Treace,
Inc., Xomed-Treace, P.R. Inc., Bank of Boston Connecticut, Chemical
Bank, Bank of Scotland, Internationale Nederlanden (U.S.) Capital
Corporation and Bank of Boston Connecticut, as Agent.
10.7 First Amendment Agreement, dated as of June 24, 1994, by and among
Merocel/Xomed Holdings, Inc., Merocel Corporation, Xomed-Treace, Inc.,
Xomed-Treace, P.R. Inc., Bank of Boston Connecticut, Chemical Bank,
Bank of Scotland, Internationale Nederlanden (U.S.) Capital Corporation
and Bank of Boston Connecticut, as Agent.
10.8 1996 Stock Option Plan
10.9 Employment Agreement, dated as of April 16, 1996, between the Company
and James T. Treace.
10.10 Employment Agreement, dated as of April 16, 1996, between the Company
and F. Barry Bays.
21 Subsidiaries
*23.1 Consent of Willkie Farr & Gallagher (included in their opinion filed as
Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
24 Power of Attorney (included on the signature page of this Registration
Statement)
27 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
(b) Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS
(1) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to its Restated Certificate, Bylaws, the Underwriting
Agreement or otherwise, the Registrant has been advised that, in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(3) The Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN JACKSONVILLE, FLORIDA ON AUGUST 20,
1996.
Xomed Surgical Products, Inc.
/s/ James T. Treace
By:
----------------------------------
Name: James T. Treace
Title: President, Chief Executive
Officer and Chairman of the
Board of Directors
POWER OF ATTORNEY
EACH OF THE UNDERSIGNED OFFICERS AND DIRECTORS OF XOMED SURGICAL PRODUCTS,
INC. HEREBY SEVERALLY CONSTITUTES AND APPOINTS JAMES T. TREACE, F. BARRY BAYS
AND THOMAS E. TIMBIE AND EACH OF THEM AS THE ATTORNEYS-IN-FACT FOR THE
UNDERSIGNED, IN ANY AND ALL CAPACITIES, WITH FULL POWER OF SUBSTITUTION, TO
SIGN ANY AND ALL PRE- OR POST-EFFECTIVE AMENDMENTS TO THIS REGISTRATION
STATEMENT, ANY SUBSEQUENT REGISTRATION STATEMENT FOR THE SAME OFFERING WHICH
MAY BE FILED UNDER RULE 462(B) UNDER THE SECURITIES ACT OF 1933 AND ANY AND
ALL PRE- OR POST-EFFECTIVE AMENDMENTS THERETO, AND TO FILE THE SAME WITH
EXHIBITS THERETO AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEY-IN-FACT, AND
EACH OF THEM, FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT
AND THING REQUISITE AND NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS
FULLY TO ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY
RATIFYING AND CONFIRMING ALL THAT EACH SAID ATTORNEY-IN-FACT, OR EITHER OF
THEM, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
/s/ James T. Treace President, Chief August 20, 1996
- ------------------------------------- Executive Officer
JAMES T. TREACE and Chairman of the
Board of Directors
(Principal
Executive Officer)
/s/ Thomas E. Timbie Vice President, August 20, 1996
- ------------------------------------- Finance and Chief
THOMAS E. TIMBIE Financial Officer
(Principal
Financial and
Accounting Officer)
/s/ Richard B. Emmitt Director August 20, 1996
- -------------------------------------
RICHARD B. EMMITT
II-5
<PAGE>
SIGNATURES TITLE DATE
/s/ Paul H. Klingenstein Director August 20, 1996
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PAUL H. KLINGENSTEIN
/s/ William R. Miller Director August 20, 1996
- -------------------------------------
WILLIAM R. MILLER
/s/ Rodman W. Moorhead, III Director August 20, 1996
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RODMAN W. MOORHEAD, III
/s/ James E. Thomas Director August 20, 1996
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JAMES E. THOMAS
/s/ Elizabeth H. Weatherman Director August 20, 1996
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ELIZABETH H. WEATHERMAN
II-6
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
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<C> <S> <C>
*1 Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation
3.2 By-Laws
*4 Specimen of Registrant's Class A Common Stock
certificate
*5 Opinion of Willkie Farr & Gallagher as to the Legality
of the Class A Common Stock
10.1 Stockholders Agreement, dated as of April 16, 1996,
among the Company, Warburg, Pincus Investors, L.P.,
Accel IV L.P., Accel Investors '94 L.P., Accel Keiretsu
L.P., Elmore C. Patterson Partners, Prosper Partners,
Vertical Fund Associates, L.P., Vertical Medical
Partners, L.P., Vertical Partners, L.P., Mark K. Adams,
Solomon Rosenblatt, Ronald J. Cercone, William R.
Miller, Robert A. Reeves, First Union Capital Partners,
Inc., James T. Treace, John R. Treace, Daniel H. Treace
and F. Barry Bays.
10.2 Credit Agreement, dated as of April 15, 1994, by and
among Merocel/Xomed Holdings, Inc., Merocel
Corporation, Xomed-Treace, Inc., Xomed-Treace, P.R.
Inc., Bank of Boston Connecticut, certain other lenders
which are or may become parties and Bank of Boston
Connecticut, as Agent.
10.3 Fourth Amendment and Waiver Agreement, dated as of June
7, 1996, by and among Xomed Surgical Products, Inc.,
formerly known as Merocel/Xomed Holdings, Inc., Merocel
Corporation, Xomed, Inc., formerly known as Xomed-
Treace, Inc., Xomed-Treace, P.R. Inc., TreBay Medical
Corporation, Bank of Boston Connecticut, Chemical Bank,
Bank of Scotland, Internationale Nederlanden (U.S.)
Capital Corporation and Bank of Boston Connecticut, as
Agent.
10.4 Third Amendment and Waiver Agreement, dated as of April
15, 1996, by and among Xomed Surgical Products, Inc.,
formerly known as Merocel/Xomed Holdings, Inc., Merocel
Corporation, Xomed, Inc., formerly known as Xomed-
Treace, Inc., Xomed-Treace, P.R. Inc., Bank of Boston
Connecticut, Chemical Bank, Bank of Scotland,
Internationale Nederlanden (U.S.) Capital Corporation
and Bank of Boston Connecticut, as Agent.
10.5 Second Amendment and Waiver Agreement, dated as of July
3, 1995, by and among Merocel/Xomed Holdings, Inc.,
Merocel Corporation, Xomed-Treace, Inc., Xomed-Treace,
P.R. Inc., Bank of Boston Connecticut, Chemical Bank,
Bank of Scotland, Internationale Nederlanden (U.S.)
Capital Corporation and Bank of Boston Connecticut, as
Agent.
10.6 Amendment and Waiver Agreement, dated as of March 31,
1995, by and among Merocel/Xomed Holdings, Inc.,
Merocel Corporation, Xomed-Treace, Inc., Xomed-Treace,
P.R. Inc., Bank of Boston Connecticut, Chemical Bank,
Bank of Scotland, Internationale Nederlanden (U.S.)
Capital Corporation and Bank of Boston Connecticut, as
Agent.
10.7 First Amendment Agreement, dated as of June 24, 1994,
by and among Merocel/Xomed Holdings, Inc., Merocel
Corporation, Xomed-Treace, Inc., Xomed-Treace, P.R.
Inc., Bank of Boston Connecticut, Chemical Bank, Bank
of Scotland, Internationale Nederlanden (U.S.) Capital
Corporation and Bank of Boston Connecticut, as Agent.
10.8 1996 Stock Option Plan
10.9 Employment Agreement, dated as of April 16, 1996,
between the Company and James T. Treace.
10.10 Employment Agreement, dated as of April 16, 1996,
between the Company and F. Barry Bays.
21 Subsidiaries
*23.1 Consent of Willkie Farr & Gallagher (included in their
opinion filed as Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
24 Power of Attorney (included on the signature page of
this Registration Statement)
27 Financial Data Schedule
</TABLE>
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* To be filed by amendment.
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
MEROCEL/XOMED HOLDINGS, INC.
* * * * *
MEROCEL/XOMED HOLDINGS, INC., a Delaware corporation, hereby certifies
as follows:
The Certificate of Incorporation of MEROCEL/XOMED HOLDINGS, INC. (the
"Corporation") was filed in the office of the Secretary of State of the State of
Delaware on April 5, 1994, and is hereby restated pursuant to Section 241 and
Section 245 of the Delaware General Corporation Law and all amendments to the
Certificate reflected herein have been duly authorized and adopted by the
Corporation's Board of Directors in accordance with the provisions of such
Sections. The Corporation has not received any payment for any of its stock.
This Restated Certificate of Incorporation restates and integrates and
further amends the Certificate of Incorporation of the Corporation. The text of
the Certificate of Incorporation is amended hereby to read as herein set forth
in full:
ARTICLE I
The name of the corporation is:
MEROCEL/XOMED HOLDINGS, INC. (the "Corporation").
ARTICLE II
The address of the registered office of the Corporation in the State
of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of the registered agent of the
Corporation at such address is The Corporation Trust Company.
ARTICLE III
The nature of the business to be conducted or promoted by and the
purposes of the Corporation are as follows:
(a) To acquire, own and hold the capital stock of Merocel Corporation,
Xomed-Treace, Inc. and Xomed-Treace P.R., Inc. and such other subsidiaries as
the Board of Directors of the Corporation may from time to time designate; and
<PAGE>
(b) To engage in any other lawful act or activity for which corporations
may be organized under the General Corporation Law of the State of Delaware.
In furtherance of such business and purposes, the Corporation shall
possess and exercise all the powers and privileges granted by the General
Corporation Law of the State of Delaware or by any other law of the State of
Delaware or by this certificate of incorporation together with any powers
incidental thereto, so far as such powers and privileges are necessary or
convenient to the conduct, promotion or attainment of the business or purposes
of the Corporation.
ARTICLE IV
The total authorized capital stock of the Corporation shall be
Fourteen Million Nine Hundred Thousand (14,900,000) shares consisting of (i) Six
Million (6,000,000) shares of Class A Common Stock of the par value of One Cent
($0.01) per share (the "Class A Common Stock"); (ii) Four Million (4,000,000)
shares consisting of Class B Common Stock of the par value of One Cent ($0.01)
per share (the "Class B Common Stock"); (iii) Eight Hundred Thousand (800,000)
shares of Series A Convertible Preferred Stock of the par value of One Dollar
($1.00) per share (the "Series A Preferred Stock"); (iv) Three Million Five
Hundred Thousand (3,500,000) shares of Series B Convertible Preferred Stock of
the par value of One Dollar ($1.00) per share (the "Series B Preferred Stock")
and (v) Six Hundred Thousand (600,000) shares of Series C Redeemable Preferred
Stock of the par value of One Dollar ($1.00) per share (the "Series C Preferred
Stock"). The Class A Common Stock and the Class B Common Stock are collectively
referred to herein as the "Common Stock," and the Series A Preferred Stock, the
Series B Preferred Stock and the Series C Preferred stock are collectively
referred to herein as the "Preferred Stock."
The relative powers, preferences and rights of, and the
qualifications, limitations and restrictions granted to and imposed upon, the
Preferred Stock and the Common Stock are as follows:
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<PAGE>
SECTION A: PREFERRED STOCK
(I) General Provisions.
------------------
The following provisions shall be applicable to all shares of
Preferred Stock regardless of series designation:
(a) Preference. So long as any shares of any series of the Preferred
----------
Stock remains outstanding, in no event shall any dividend whatsoever, whether in
cash or other property (other than shares of Common Stock), be paid or declared
or any distribution be made on the Common Stock, nor shall any shares of the
Common Stock be purchased, retired or otherwise acquired for a consideration by
the Corporation (except shares of Common Stock repurchased through the operation
of vesting provisions of employee incentive programs or agreements adopted by
the Board of Directors) (i) unless the full dividends of the Preferred Stock for
all past dividend periods from the date on which they became cumulative shall
have been paid or declared and a sum set apart sufficient for the payment
thereof; and (ii) unless, if at any time the Corporation is obligated to retire
or return shares of the Preferred Stock, all arrears, if any, in respect of the
retirement of the Preferred Stock shall have been made good. Subject to the
foregoing provisions and not otherwise, such dividends (payable in cash, stock
or otherwise) as may be determined by the Board of Directors may be declared and
paid on the Common Stock from time to time out of the remaining funds of the
Corporation legally available therefor, and the Series A Preferred Stock and
Series B Preferred Stock shall be entitled to participate in any such dividend,
whether payable in cash, stock or otherwise. The amount of any dividend per
share declared on the Series A Preferred Stock or Series B Preferred Stock shall
be an amount equal to the product of (i) the same amount as is declared as a
dividend by the Board of Directors on each share of Common Stock and (ii) the
number of shares of Class A Common Stock or Class B Common Stock, as the case
may be, into which the Series A Preferred Stock and Series B Preferred Stock is
then convertible pursuant to Section II(f) hereof.
(b) Redemption Procedure. In case of redemption of only part of the
--------------------
shares of any series of Preferred Stock at any time outstanding, the Corporation
shall redeem the shares pro rata among all of the holders of such series of
Preferred Stock (as closely pro rata as reasonably practical without the
creation of fractional share interests).
Notice of every redemption provided for in this Section A of Article
IV shall be given by mailing the same to every
-3-
<PAGE>
holder of record, any of whose shares are then to be redeemed, not less than
fifteen (15) nor more than thirty (30) days prior to the date fixed as the date
of the redemption thereof, at the respective addresses of such holders as the
same shall appear on the stock transfer books of the Corporation. The notice
shall state that the shares specified in such notice will be redeemed by the
Corporation at the redemption price and on the date specified in such notice,
upon the surrender for cancellation at the places designated in such notice, of
the certificates representing the shares so to be redeemed, properly endorsed in
blank for transfer, or accompanied by proper instruments of assignment and
transfer in blank, bearing any necessary transfer tax stamps thereto affixed and
cancelled, or accompanied by cash or a certified check in the amount of any
stock transfer tax applicable to such transaction. On and after the date
specified in the notice described above, each holder of shares called for
redemption, upon presentation and surrender in accordance with such notice of
the certificates for shares held by such holder and called for redemption, shall
be entitled to receive therefor the applicable redemption price. If the
Corporation shall give notice of redemption as aforesaid (and unless the
Corporation shall fail to pay the redemption price of shares presented for
redemption in accordance with such notice), all shares called for redemption
shall be deemed to have been redeemed on the date specified in such notice
whether or not the certificates for such shares be surrendered for redemption
and cancellation, and such shares so called for redemption shall from and after
such date cease to represent any interest whatever in the Corporation or its
property, and the holders thereof shall have no rights other than the right to
receive such redemption price but without any interest thereon from or after
such date.
(c) Cancellation of Redeemed Shares. All shares of the Preferred
-------------------------------
Stock purchased or redeemed by the Corporation shall be forthwith retired and
cancelled and shall not be reissued, nor shall any other stock be issued in
place thereof, but the Corporation may, nevertheless, from time to time
thereafter increase its capital stock in the manner and to the extent permitted
by law and by the Certificate of Incorporation of the Corporation.
(d) Rights on Liquidation. In the event of any liquidation,
---------------------
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the holders of shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock then outstanding shall be entitled to receive,
respectively, prior and in preference to any distribution of any of the assets
of the Corporation to the holders of the Common
-4-
<PAGE>
Stock by reason of their ownership thereof, full payment of any dividends
declared and unpaid on the Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock, and an amount equal to $9.58 per share for each
outstanding share of Series A Preferred Stock and Series B Preferred Stock and
$100.00 per share for each outstanding share of Series C Preferred Stock. If
upon the occurrence of such event the assets thus distributed among the holders
of the Series A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock shall be insufficient to permit the payment to such holders of
the full preferential amount, the entire assets of the Corporation legally
available for distribution shall be distributed ratably among the holders of the
Series A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock in proportion to the respective amounts which would otherwise be
payable in respect to the shares held by them upon said distribution if all
amounts payable on or with respect to said shares were paid in full. After the
payment or distribution to the holders of the Series A Preferred Stock, the
Series B Preferred Stock and the Series C Preferred Stock of the full
preferential amounts aforesaid, the holders of the Common Stock then outstanding
shall be entitled to receive ratably all remaining assets of the Corporation to
be distributed.
(e) Consents. (1) Except as otherwise provided below, so long as any
--------
shares of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock are outstanding, the Corporation shall not, without the
affirmative vote or written consent of the holders of record of two-thirds of
the shares of each series of Preferred Stock then outstanding, voting or
consenting, as the case may be, separately as a class, alter or change any of
the provisions of the Certificate of Incorporation of the Corporation which
would in any way adversely affect the rights of the holders of such series of
Preferred Stock.
(2) Except as otherwise provided below, so long as any shares of
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock
are outstanding, the Corporation shall not, without the affirmative vote or
written consent of (x) the holders of record of a majority of the shares of the
Series A Preferred Stock and Series B Preferred Stock, voting or consenting, as
the case may be, together as a single class, and (y) the holders of record of a
majority of the shares of the Series C Preferred Stock:
(i) authorize or reclassify any other class or series of capital
stock ranking prior to or on a parity with the
-5-
<PAGE>
Preferred Stock as to dividends or redemption or upon liquidation,
dissolution or winding up;
(ii) increase the authorized number of shares of Preferred Stock or
authorize the reissuance thereof after repurchase or redemption;
(iii) authorize any liquidation, dissolution, winding up of the affairs
of the Corporation, consolidation or merger of the Corporation into or with
another corporation or corporations;
(iv) authorize the sale of twenty percent (20%) of the Corporation's
assets or distribution of such amount of the Corporation's assets by way of
return of capital; or
(v) authorize the acquisition of a business through purchase of
assets, purchase of stock, licensing arrangement or otherwise which would
constitute a "significant subsidiary" under Rule 305 of Regulation S-X
promulgated under the Securities Act of 1933, as amended, at the 20% level.
(II) Series A Preferred Stock and
Series B Preferred Stock.
----------------------------
The relative powers, preferences and rights of, and the
qualifications, limitations and restrictions granted to and imposed upon, the
Series A Preferred Stock and the Series B Preferred Stock (collectively, the
"Convertible Preferred Stock") are as follows:
(a) Designation. The Series A Preferred Stock shall consist of
-----------
800,000 shares and shall be known as the Series A Convertible Preferred Stock,
and the Series B Preferred Stock shall consist of 3,500,000 shares and shall be
known as the Series B Convertible Preferred Stock.
(b) Dividends. (1) The holders of each share of Series A Preferred
---------
Stock and Series B Preferred Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any funds legally available therefor,
dividends in cash at the rate of six percent (6%) per annum, payable quarterly
on the last day of March, June, September and December, commencing June 30,
1994. At the option of the Corporation, dividends on the Series A Preferred
Stock and Series B Preferred Stock may be paid, instead of in cash, on
declaration of the Board of Directors, in additional shares of Series A
Preferred
-6-
<PAGE>
Stock and Series B Preferred Stock, respectively. If a dividend is to be paid
in additional shares, the number of shares of Series A Preferred Stock and
Series B Preferred Stock to be issued in payment of the dividend with respect to
each outstanding share of Series A Preferred Stock and Series B Preferred Stock
shall be determined by dividing the amount of the dividend that would have been
payable had such dividend been paid in cash by $9.58. To the extent that all or
any part of dividends consisting of additional shares of Series A Preferred
Stock or Series B Preferred Stock would result in the issuance of a fractional
share of Series A Preferred Stock or Series B Preferred Stock (which shall be
determined with respect to the aggregate number of shares of Series A Preferred
Stock or Series B Preferred Stock held of record by each holder) then the amount
of such fraction multiplied by $9.58 shall be paid in cash (unless there are not
legally available funds with which to make such cash payment, in which event a
fractional share will be issued).
(2) Dividends on the Convertible Preferred Stock shall be paid before
any dividends may be set apart for or paid upon the Common Stock or any other
capital stock ranking on liquidation junior to the Preferred Stock (such stock
being referred to hereinafter collectively as "Junior Stock") in any year. All
dividends declared upon the Convertible Preferred Stock shall be declared pro
rata per share.
(3) Dividends on the Convertible Preferred Stock shall accrue from
the date of issuance and shall be cumulative, whether or not in any fiscal year
there shall be net profits or surplus available for the payment of dividends in
such fiscal year, so that if in any fiscal year or years, dividends in whole or
in part are not paid upon the Convertible Preferred Stock, unpaid dividends
shall accumulate as against the holders of the Junior Stock.
(4) For so long as shares of the Convertible Preferred Stock remain
outstanding, the Corporation shall not pay any dividend upon the Junior Stock,
whether in cash or other property (other than shares of Junior Stock), or
purchase, redeem or otherwise acquire any such Junior Stock unless, in addition
to the payment of the dividend to the holders of the Convertible Preferred Stock
as described above, the Corporation has redeemed all shares of Convertible
Preferred Stock which it would theretofore have been required to redeem under
Section (II)(c) hereof.
-7-
<PAGE>
(c) Mandatory Redemption. The Corporation shall redeem on April 15,
--------------------
2001 (the "Redemption Date") all outstanding shares of Convertible Preferred
Stock (to the extent that such redemption shall not violate any applicable
provisions of the laws of the State of Delaware) at a price of Nine Dollars and
Fifty Eight Cents ($9.58) per share, plus an amount equal to any and all
dividends accrued and unpaid, but without interest (the "Convertible Redemption
Price"). If the Corporation is unable on the Redemption Date to redeem any
shares of Convertible Preferred Stock then to be redeemed because such
redemption would violate the applicable laws of the State of Delaware, then the
Corporation shall redeem such shares as soon thereafter as redemption would not
violate such laws.
(d) Optional Redemption. The Corporation shall have the right at its
-------------------
option, and with the affirmative vote or written consent of the holders of
record of a majority of the Convertible Preferred Stock then outstanding to
redeem as a whole, or from time to time in part, shares of Convertible Preferred
Stock at the Convertible Redemption Price.
(e) Voting Rights. (1) Series A Preferred Stock. Each issued and
------------- ------------------------
outstanding share of Series A Preferred Stock shall be entitled to the number of
votes equal to the number of shares of Class A Common Stock into which each such
share of Series A Preferred Stock is convertible (as adjusted from time to time
pursuant to Section A(II)(g) hereof), at each meeting of stockholders of the
Corporation with respect to any and all matters presented to the stockholders of
the Corporation for their action or consideration. Subject to the provision for
adjustment hereinafter set forth, each share of Series A Preferred Stock shall
entitle the holder thereof to one (1) vote on all matters submitted to a vote of
the stockholders of the Corporation. Except as otherwise provided herein or by
law, the holders of shares of Series A Preferred Stock shall vote together with
the holders of Class A Common Stock as a single class.
(2) Series B Preferred Stock. Except as otherwise provided by law,
------------------------
the holders of Series B Preferred Stock shall not be entitled to notice of, or
to vote at, any meeting of the stockholders of the Corporation nor to vote on
any matter relating to the business or affairs of the Corporation.
(f) Conversion. The holders of Convertible Preferred Stock shall
----------
have conversion rights as follows (the "Conversion Rights"):
-8-
<PAGE>
(1) Optional Conversion. Each share of Series A Preferred Stock and
-------------------
each share of Series B Preferred Stock may be converted at any time, at the
option of the holder thereof, in the manner hereinafter provided, into fully-
paid and nonassessable shares of Class A Common Stock and Class B Common Stock,
respectively, at its then effective Conversion Price (as defined below),
provided, however, that on any redemption of any Convertible Preferred Stock or
- -------- -------
any liquidation of the Corporation, the right of conversion shall terminate at
the close of business on the business day preceding the date fixed for such
redemption or for the payment of any amounts distributable on liquidation to the
holders of Convertible Preferred Stock.
(2) Mandatory Conversion. (i) Qualified Public Offering. Each
-------------------- -------------------------
share of Series A Preferred Stock and each share of Series B Preferred Stock
shall automatically be converted into shares of Class A Common Stock and Class B
Common Stock, respectively, at its then effective Conversion Price at any time
upon the closing of an underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offer and sale of Class A Common Stock for the account of the Corporation to
the public generally in which the market valuation (determined by multiplying
the initial price to the public upon the offering times the number of shares
outstanding immediately prior to the offering) for the Corporation shall be not
less than $100 million and the net proceeds to the Corporation are not less than
$15 million.
(ii) Vote or Consent of Holders. Each share of Series A Preferred
--------------------------
Stock and each share of Series B Preferred Stock shall automatically be
converted into shares of Class A Common Stock and Class B Common Stock,
respectively, at its then effective Conversion Price upon the vote or written
consent to so convert of the holders of a majority of the shares of Convertible
Preferred Stock then outstanding taken together as a single class.
(iii) Notice. All holders of record of shares of Convertible
------
Preferred Stock will be given at least ten (10) days' prior written notice of
the date fixed and the place designated for mandatory conversion of all of such
shares of Convertible Preferred Stock. On the date fixed for conversion,
subject to Section A(II)(f)(3), all rights with respect to the Convertible
Preferred Stock so converted will terminate except only the rights of the
holders thereof, upon surrender of their certificate or certificates therefore,
to receive certificates for the number of shares of Common Stock into which such
Convertible Preferred Stock has been converted. Such notice will
-9-
<PAGE>
be sent by mail, first class, postage prepaid, to each record holder of shares
of Convertible Preferred Stock at such holder's address appearing on the stock
register. On or before the date fixed for conversion each holder of shares of
Convertible Preferred Stock shall surrender his or its certificate or
certificates for all such shares to the Corporation at the place designated in
such notice, and shall thereafter receive certificates for the number of shares
of Common Stock to which such holder is entitled pursuant to this Section
A(II)(f).
(3) Accrued and Unpaid Dividends Upon Conversion. Upon any
--------------------------------------------
conversion of Convertible Preferred Stock, the holders of such Convertible
Preferred Stock shall be entitled to receive all accrued and unpaid dividends on
such Convertible Preferred Stock in shares of Common Stock, the number of which
shares of Common Stock shall be determined by dividing the amount of such
accrued and unpaid dividends by the Conversion Price then in effect.
(4) Conversion Price. (i) The initial conversion rate for the
----------------
Convertible Preferred Stock shall be one (1) share of Common Stock for each one
share of Convertible Preferred Stock surrendered for conversion, representing an
initial Conversion Price of $9.58 per share of the Corporation's Common Stock.
The applicable conversion rate and Conversion Price from time to time in effect
is subject to adjustment as provided in Section A(II)(g) hereof.
(ii) Whenever the conversion rate and Conversion Price shall be
adjusted as provided in Section A(II)(g) hereof, the Corporation shall forthwith
file at each office designated for the conversion of Convertible Preferred
Stock, a statement, signed by the President and any Vice President or Treasurer
of the Corporation, showing in reasonable detail the facts requiring such
adjustment and the conversion rate that will be effective after such adjustment.
The Corporation shall also cause a notice setting forth any such adjustments to
be sent by mail, first class, postage prepaid, to each record holder of
Convertible Preferred Stock at his or its address appearing on the stock
register.
(iii) Upon any conversion, no adjustment to the conversion rate shall
be made for accumulated and unpaid dividends on the Convertible Preferred Stock
surrendered for conversion or on the Common Stock delivered.
(5) Conversion Mechanics. (i) In order to exercise the conversion
--------------------
privilege, the holder of any Convertible Preferred
-10-
<PAGE>
Stock to be converted shall surrender his or its certificate or certificates
therefor to the principal office of the transfer agent for the Convertible
Preferred Stock (or if no transfer agent is at the time appointed, then the
Corporation at its principal office), shall give written notice to the
Corporation at such office that the holder elects to convert the Convertible
Preferred Stock represented by such certificates, or any number thereof. Such
notice shall also state the name or names (with address) in which the
certificate or certificates for shares of Common Stock which shall be issuable
on such conversion shall be issued, subject to any restriction on transfer
relating to shares of the Convertible Preferred Stock or shares of Common Stock
upon conversion thereof. If so required by the Corporation, certificates
surrendered for conversion shall be endorsed or accompanied by written
instrument or instruments of transfer, in form satisfactory to the Corporation,
duly authorized in writing. In respect of all optional conversions, the date of
receipt by the transfer agent (or by the Corporation if the Corporation serves
as its own transfer agent) of the certificates and notice shall be the
conversion date. As soon as practicable after receipt of such notice and the
surrender of the certificate or certificates for Convertible Preferred Stock as
aforesaid, the Corporation shall cause to be issued and delivered at such office
to such holder, or on his or its written order, a certificate or certificates
for the number of full shares of Common Stock issuable on such conversion in
accordance with the provisions hereof and cash as provided in paragraph (ii) of
this section in respect of any fraction of a share of Common Stock otherwise
issuable upon such conversion.
(ii) The Corporation shall not issue fractions of shares of Common
Stock upon conversion of Convertible Preferred Stock or scrip in lieu thereof.
If any fraction of a share of Common Stock would, except for the provisions of
this paragraph (ii), be issuable upon conversion of any Convertible Preferred
Stock, the Corporation shall in lieu thereof pay to the person entitled thereto
an amount in cash equal to the current value of such fraction as determined by
the Board of Directors.
(iii) The Corporation shall at all times when the Convertible
Preferred Stock shall be outstanding reserve and keep available out of its
authorized but unissued stock, for the purposes of effecting the conversion of
the Convertible Preferred Stock, such number of its duly authorized shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding Convertible Preferred Stock. Before taking any action which
would cause an adjustment reducing the conversion price below the then par value
of the shares of Common
-11-
<PAGE>
Stock issuable upon conversion of the Convertible Preferred Stock, the
Corporation will take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Corporation may validly and legally
issue fully-paid and nonassessable shares of such Common Stock at such adjusted
conversion price.
(iv) All shares of Convertible Preferred Stock which shall have been
surrendered for conversion as herein provided shall no longer be deemed to be
outstanding and all rights with respect to such shares, including the rights, if
any, to receive notices and to vote, shall forthwith cease and terminate except
only the right of the holder thereof to receive shares of Common Stock in
exchange therefor.
(g) Anti-dilution Provisions. (1) In order to prevent dilution of
------------------------
the rights granted hereunder, the Conversion Price shall be subject to
adjustment from time to time in accordance with this paragraph (g)(1). At any
given time the Conversion Price, whether as the initial Conversion Price ($9.58
per share) or as last adjusted, shall be that dollar (or part of a dollar)
amount the payment of which shall be sufficient at the given time to acquire one
share of the Corporation's Common Stock upon conversion of shares of Convertible
Preferred Stock. Upon each adjustment of the Conversion Price, the record holder
of shares of Convertible Preferred Stock shall thereafter be entitled to acquire
upon exercise, at the Conversion Price resulting from such adjustment, the
number of shares of the Corporation's Common Stock obtainable by multiplying the
Conversion Price in effect immediately prior to such adjustment by the number of
shares of the Corporation's Common Stock acquirable immediately prior to such
adjustment and dividing the product thereof by the Conversion Price resulting
from such adjustment.
(2) Except as provided in paragraph (g)(3) or (g)(6) below, if and
whenever on or after the date of initial issuance of the Convertible Preferred
Stock (the "Initial Issuance Date"), the Corporation shall issue or sell, or
shall in accordance with subparagraphs (g)(2)(i) to (viii), inclusive, be deemed
to have issued or sold any shares of its Common Stock for a consideration per
share less than the Conversion Price in effect immediately prior to the time of
such issue or sale, then forthwith upon such issue or sale (the "Triggering
Transaction"), the Conversion Price shall, subject to subparagraphs (i) to
(viii) of this section, be reduced to the Conversion Price (calculated to the
nearest tenth of a cent) determined by dividing:
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(A) an amount equal to the sum of (x) the product derived by
multiplying the Number of Common Shares Deemed Outstanding immediately
prior to such Triggering Transaction by the Conversion Price then in
effect, plus (y) the consideration, if any, received by the Corporation
upon consummation of such Triggering Transaction, by
(B) an amount equal to the sum of (x) the Number of Common
Shares Deemed Outstanding immediately prior to such Triggering Transaction
plus (y) the number of shares of Common Stock issued (or deemed to be
issued in accordance with subparagraphs (g)(2)(i) to (viii)) in connection
with the Triggering Transaction.
For purposes of this Section (g), the term "Number of Common Shares
Deemed Outstanding" at any given time shall mean the sum of (x) the number of
shares of the Corporation's Common Stock outstanding at such time, (y) the
number of shares of the Corporation's Common Stock issuable assuming conversion
at such time of the Corporation's Convertible Preferred Stock and (z) the number
of shares of the Corporation's Common Stock deemed to be outstanding under
subparagraphs (g)(2)(i) to (viii), inclusive, at such time.
For purposes of determining the adjusted Conversion Price under this
paragraph (g)(2), the following subsections (i) to (viii), inclusive, shall be
applicable:
(i) In case the Corporation at any time shall in any manner grant
(whether directly or by assumption in a merger or otherwise) any rights to
subscribe for or to purchase, or any options for the purchase of, Common
Stock or any stock or other securities convertible into or exchangeable for
Common Stock (such rights or options being herein called "Options" and such
convertible or exchangeable stock or securities being herein called
"Convertible Securities"), whether or not such Options or the right to
convert or exchange any such Convertible Securities are immediately
exercisable and the price per share for which the Common Stock is issuable
upon exercise, conversion or exchange (determined by dividing (x) the total
amount, if any, received or receivable by the Corporation as consideration
for the granting of such Options, plus the minimum aggregate amount of
additional consideration payable to the Corporation upon the exercise of
all such Options, plus, in the case of such Options which relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of
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such Convertible Securities and upon the conversion or exchange thereof, by
(y) the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities) shall be less than the Conversion Price in effect immediately
prior to the time of the granting of such Option, then the total maximum
amount of Common Stock issuable upon the exercise of such Options or in the
case of Options for Convertible Securities, upon the conversion or exchange
of such Convertible Securities shall (as of the date of granting of such
Options) be deemed to be outstanding and to have been issued and sold by
the Corporation for such price per share. No adjustment of the Conversion
Price shall be made upon the actual issue of such shares of Common Stock or
such Convertible Securities upon the exercise of such Options, except as
otherwise provided in subparagraph (iii) below.
(ii) In case the Corporation at any time shall in any manner issue
(whether directly or by assumption in a merger or otherwise) or sell any
Convertible Securities, whether or not the rights to exchange or convert
thereunder are immediately exercisable, and the price per share for which
Common Stock is issuable upon such conversion or exchange (determined by
dividing (x) the total amount received or receivable by the Corporation as
consideration for the issue or sale of such Convertible Securities, plus
the minimum aggregate amount of additional consideration, if any, payable
to the Corporation upon the conversion or exchange thereof, by (y) the
total maximum number of shares of Common Stock issuable upon the conversion
or exchange of all such Convertible Securities) shall be less than the
Conversion Price in effect immediately prior to the time of such issue or
sale, then the total maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall (as of the
date of the issue or sale of such Convertible Securities) be deemed to be
outstanding and to have been issued and sold by the Corporation for such
price per share. No adjustment of the Conversion Price shall be made upon
the actual issue of such Common Stock upon exercise of the rights to
exchange or convert under such Convertible Securities, except as otherwise
provided in subparagraph (iii) below.
(iii) If the purchase price provided for in any Options referred to
in subparagraph (i), the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in
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subparagraphs (i) or (ii), or the rate at which any Convertible Securities
referred to in subparagraph (i) or (ii) are convertible into or
exchangeable for Common Stock shall change at any time (other than under or
by reason of provisions designed to protect against dilution of the type
set forth in paragraphs (g)(2) or (g)(4)), the Conversion Price in effect
at the time of such change shall forthwith be readjusted to the Conversion
Price which would have been in effect at such time had such Options or
Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at
the time initially granted, issued or sold. If the purchase price provided
for in any Option referred to in subparagraph (i) or the rate at which any
Convertible Securities referred to in subparagraphs (i) or (ii) are
convertible into or exchangeable for Common Stock, shall be reduced at any
time under or by reason of provisions with respect thereto designed to
protect against dilution, then in case of the delivery of Common Stock upon
the exercise of any such Option or upon conversion or exchange of any such
Convertible Security, the Conversion Price then in effect hereunder shall
forthwith be adjusted to such respective amount as would have been obtained
had such Option or Convertible Security never been issued as to such Common
Stock and had adjustments been made upon the issuance of the shares of
Common Stock delivered as aforesaid, but only if as a result of such
adjustment the Conversion Price then in effect hereunder is hereby reduced.
(iv) On the expiration of any Option or the termination of any right
to convert or exchange any Convertible Securities, the Conversion Price
then in effect hereunder shall forthwith be increased to the Conversion
Price which would have been in effect at the time of such expiration or
termination had such Option or Convertible Securities, to the extent
outstanding immediately prior to such expiration or termination, never been
issued.
(v) In case any Options shall be issued in connection with the issue
or sale of other securities of the Corporation, together comprising one
integral transaction in which no specific consideration is allocated to
such Options by the parties thereto, such Options shall be deemed to have
been issued without consideration.
(vi) In case any shares of Common Stock, Options or Convertible
Securities shall be issued or sold or deemed to have been issued or sold
for cash, the consideration
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received therefor shall be deemed to be the amount received by the
Corporation therefor. In case any shares of Common Stock, Options or
Convertible Securities shall be issued or sold for a consideration other
than cash, the amount of the consideration other than cash received by the
Corporation shall be the fair value of such consideration. In case any
shares of Common Stock, Options or Convertible Securities shall be issued
in connection with any merger in which the Corporation is the surviving
corporation, the amount of consideration therefor shall be deemed to be the
fair value of such portion of the net assets and business of the non-
surviving corporation as shall be attributable to such Common Stock,
Options or Convertible Securities as the case may be.
(vii) The number of shares of Common Stock outstanding at any given
time shall not include shares owned or held by or for the account of the
Corporation, and the disposition of any shares so owned or held shall be
considered an issue or sale of Common Stock for the purpose of this
paragraph (g)(2).
(viii) For purposes of this paragraph (g)(2), in case the Corporation
shall take a record of the holders of its Common Stock for the purpose of
entitling them (x) to receive a dividend or other distribution payable in
Common Stock, Options or in Convertible Securities, or (y) to subscribe for
or purchase Common Stock, Options or Convertible Securities, then such
record date shall be deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or
the date of the granting of such right or subscription or purchase, as the
case may be.
(3) In the event the Corporation shall declare a dividend upon the
Common Stock (other than a dividend payable in Common Stock covered by
subparagraph (g)(4)) payable otherwise than out of earnings or earned surplus,
determined in accordance with generally accepted accounting principles,
including the making of appropriate deductions for minority interests, if any,
in subsidiaries (herein referred to as "Liquidating Dividends"), then as soon as
possible after the conversion of any Convertible Preferred Stock, the
Corporation shall pay to the person converting such Convertible Preferred Stock
an amount equal to the aggregate value at the time of such exercise of all
Liquidating Dividends (including but not limited to the Common Stock which would
have been issued at the time of such earlier
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<PAGE>
exercise and all other securities which would have been issued with respect to
such Common Stock by reason of stock splits, stock dividends, mergers or
reorganizations, or for any other reason). For the purposes of this paragraph
(g)(3), a dividend other than in cash shall be considered payable out of
earnings or earned surplus only to the extent that such earnings or earned
surplus are charged an amount equal to the fair value of such dividend as
determined in good faith by the Board of Directors of the Corporation.
(4) In case the Corporation shall at any time subdivide its
outstanding shares of Common Stock into a greater number of shares or, in case
the Corporation shall declare a dividend or make any other distribution upon the
stock of the Corporation payable in Common Stock, Options or Convertible
Securities, the Conversion Price in effect immediately prior to such subdivision
shall be proportionately reduced, and, conversely, in case the outstanding
shares of Common Stock of the Corporation shall be combined into a smaller
number of shares, the Conversion Price in effect immediately prior to such
combination shall be proportionately increased.
(5) If any capital reorganization or reclassification of the capital
stock of the Corporation, or consolidation or merger of the Corporation with
another corporation, or the sale of all or substantially all of its assets to
another corporation shall be effected in such a way that holders of Common Stock
shall be entitled to receive stock, securities, cash or other property with
respect to or in exchange for Common Stock, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby the holders of the Convertible
Preferred Stock shall have the right to acquire and receive upon conversion of
the Convertible Preferred Stock, which right shall be prior to the rights of the
holders of Common Stock (but after and subject to the rights of holders of
Preferred Stock senior to the Convertible Preferred Stock, if any), such shares
of stock, securities, cash or other property issuable or payable (as part of the
reorganization, reclassification, consolidation, merger or sale) with respect to
or in exchange for such number of outstanding shares of the Corporation's Common
Stock as would have been received upon conversion of the Convertible Preferred
Stock at the Conversion Price then in effect. The Corporation will not effect
any such consolidation, merger or sale, unless prior to the consummation thereof
the successor corporation (if other than the Corporation) resulting from such
consolidation or merger or the corporation purchasing such assets shall assume
by written instrument mailed or delivered to the holders of the
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<PAGE>
Convertible Preferred Stock at the last address of each such holder appearing on
the books of the Corporation, the obligation to deliver to each such holder such
shares of stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to purchase. If a purchase, tender or
exchange offer is made to and accepted by the holders of more than 50% of the
outstanding shares of Common Stock of the Corporation, the Corporation shall not
effect any consolidation, merger or sale with the person having made such offer
or with any Affiliate of such person, unless prior to the consummation of such
consolidation, merger or sale the holders of the Convertible Preferred Stock
shall have been given a reasonable opportunity to then elect to receive upon the
conversion of the Convertible Preferred Stock either the stock, securities or
assets then issuable with respect to the Common Stock of the Corporation or the
stock, securities or assets, or the equivalent, issued to previous holders of
the Common Stock in accordance with such offer. For purposes hereof the term
"Affiliate" with respect to any given person shall mean any person controlling,
controlled by or under common control with the given person.
(6) The provisions of this Section (g) shall not apply to any Common
Stock issued, issuable or deemed outstanding under subparagraphs (g)(2)(i) to
(viii) inclusive: (i) to any person pursuant to any stock option, stock
purchase or similar plan or arrangement for the benefit of employees,
consultants or directors of the Corporation or its subsidiaries in effect on the
Initial Issuance Date or thereafter adopted by the Board of Directors of the
Corporation, (ii) pursuant to options and warrants in existence on the Initial
Issuance Date, (iii) as a dividend on the Convertible Preferred Stock, (iv) on
conversion of the Class B Common Stock into Class A Common Stock or (v) on
conversion of the Convertible Preferred Stock.
(7) In the event that:
(i) the Corporation shall declare any cash dividend upon its Common
Stock, or
(ii) the Corporation shall declare any dividend upon its Common Stock
payable in stock or make any special dividend or other distribution to the
holders of its Common Stock, or
(iii) the Corporation shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or other
rights, or
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<PAGE>
(iv) there shall be any capital reorganization or reclassification of
the capital stock of the Corporation, including any subdivision or
combination of its outstanding shares of Common Stock, or consolidation or
merger of the Corporation with, or sale of all or substantially all of its
assets to, another corporation, or
(v) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in connection with such event, the Corporation shall give to the holders
of the Convertible Preferred Stock:
(a) at least twenty (20) days prior written notice of the date
on which the books of the Corporation shall close or a
record shall be taken for such dividend, distribution or
subscription rights or for determining rights to vote in
respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or
winding up; and
(b) In the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or
winding up, at least twenty (20) days prior written notice
of the date when the same shall take place. Such notice in
accordance with the foregoing clause (i) shall also specify,
in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common
Stock shall be entitled thereto, and such notice in
accordance with the foregoing clause (ii) shall also specify
the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or
other property deliverable upon such reorganization,
reclassification consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be.
Each such written notice shall be given by first class mail, postage prepaid,
addressed to the holders of the Convertible Preferred Stock at the address of
each such holder as shown on the books of the Corporation.
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<PAGE>
(8) If at any time or from time to time on or after the Initial
Issuance Date, the Corporation shall grant, issue or sell any Options,
Convertible Securities or rights to purchase property (the "Purchase Rights")
pro rata to the record holders of any class of Common Stock of the Corporation
and such grants, issuances or sales do not result in an adjustment of the
Conversion Price under paragraph (g)(2) hereof, then each holder of Convertible
Preferred Stock shall be entitled to acquire (within thirty (30) days after the
later to occur of the initial exercise date of such Purchase Rights or receipt
by such holder of the notice concerning Purchase Rights to which such holder
shall be entitled under paragraph (g)(8)) and upon the terms applicable to such
Purchase Rights either:
(i) the aggregate Purchase Rights which such holder could have
acquired if it had held the number of shares of Common Stock
acquirable upon conversion of the Convertible Preferred Stock
immediately before the grant, issuance or sale of such Purchase
Rights; provided that if any Purchase Rights were distributed to
--------
holders of Common Stock without the payment of additional
consideration by such holders, corresponding Purchase Rights
shall be distributed to the exercising holders of the Convertible
Preferred Stock as soon as possible after such exercise and it
shall not be necessary for the exercising holder of the
Convertible Preferred Stock specifically to request delivery of
such rights; or
(ii) in the event that any such Purchase Rights shall have expired or
shall expire prior to the end of said thirty day period, the
number of shares of Common Stock or the amount of property which
such holder could have acquired upon such exercise at the time or
times at which the Corporation granted, issued or sold such
expired Purchase Rights.
(9) If any event occurs as to which, in the opinion of the Board of
Directors of the Corporation, the provisions of this Section (g) are not
strictly applicable or if strictly applicable would not fairly protect the
rights of the holders of the Series B Preferred Stock in accordance with the
essential intent and principles of such provisions, then the Board of Directors
shall make an adjustment in the application of such provisions, in accordance
with such essential intent and principles, so as to protect such rights as
aforesaid, but in no event shall any adjustment have the effect of increasing
the Conversion Price as otherwise determined pursuant to any of the provisions
of this
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Section (g) except in the case of a combination of shares of a type contemplated
in paragraph (g)(4) and then in no event to an amount larger than the Conversion
Price as adjusted pursuant to paragraph (g)(4).
(III) Series C Preferred Stock.
------------------------
The relative powers, preferences and rights of, and the
qualifications, limitations and restrictions granted to and imposed upon, the
Series C Preferred Stock are as follows:
(a) Designation. The series shall consist of 600,000 shares and shall
-----------
be known as the Series C Preferred Stock of the Corporation.
(b) Dividends. (1) The holders of each share of Series C Preferred
---------
Stock shall be entitled to receive, when and as declared by the Board of
Directors, out of any funds legally available therefor, dividends in cash at the
rate of nine percent (9%) per annum, payable quarterly on the last day of March,
June, September and December, commencing June 30, 1994. At the option of the
Corporation, dividends on the Series C Preferred Stock may be paid, instead of
in cash, on declaration of the Board of Directors, in additional shares of
Series C Preferred Stock. If a dividend is to be paid in additional shares, the
number of shares of Series C Preferred Stock to be issued in payment of the
dividend with respect to each outstanding share of Series C Preferred Stock
shall be determined by dividing the amount of the dividend that would have been
payable had such dividend been paid in cash by $100. To the extent that all or
any part of dividends consisting of additional shares of Series C Preferred
Stock would result in the issuance of a fractional share of Series C Preferred
Stock (which shall be determined with respect to the aggregate number of shares
of Series C Preferred Stock held of record by each holder) then the amount of
such fraction multiplied by $100 shall be paid in cash (unless there are not
legally available funds with which to make such cash payment, in which event a
fractional share will be issued).
(2) Dividends on the Series C Preferred Stock shall be paid before
any dividends may be set apart for or paid upon the Common Stock or Junior Stock
in any year. All dividends declared upon the Series C Preferred Stock shall be
declared pro rata per share.
(3) Dividends on the Series C Preferred Stock shall accrue from the
date of issuance and shall be cumulative, whether or not in any fiscal year
there shall be net profits or surplus
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available for the payment of dividends in such fiscal year, so that if in any
fiscal year or years, dividends in whole or in part are not paid upon the Series
C Preferred Stock, unpaid dividends shall accumulate as against the holders of
the Junior Stock.
(4) For so long as shares of the Series C Preferred Stock remain
outstanding, the Corporation shall not pay any dividend upon the Junior Stock,
whether in cash or other property (other than shares of Junior Stock), or
purchase, redeem or otherwise acquire any such Junior Stock unless, in addition
to the payment of the dividend to the holders of the Series C Preferred Stock as
described above, the Corporation has redeemed all shares of Series C Preferred
Stock which it would theretofore have been required to redeem under Section
(III)(c) hereof.
(c) Mandatory Redemption. The Corporation shall redeem on the
--------------------
Redemption Date all outstanding shares of Series C Preferred Stock (to the
extent that such redemption shall not violate any applicable provisions of the
laws of the State of Delaware) at a price of One Hundred Dollars ($100) per
share, plus an amount equal to any and all dividends accrued and unpaid, but
without interest (the "Series C Redemption Price"). If the Corporation is
unable on the Redemption Date to redeem any shares of Series C Preferred Stock
then to be redeemed because such redemption would violate the applicable laws of
the State of Delaware then the Corporation shall redeem such shares as soon
thereafter as the restrictions precluding such redemption shall no longer be
applicable.
(d) Optional Redemption. At any time, the Corporation shall have the
-------------------
right at its option, and with the affirmative vote or written consent of the
holders of record of a majority of the shares of Series C Preferred Stock then
outstanding, to redeem as a whole, or from time to time in part, shares of
Series C Preferred Stock at the Series C Redemption Price.
(e) Voting Rights. Except as otherwise provided by law, the holders
-------------
of Series C Preferred Stock shall not be entitled to notice of, or to vote at,
any meeting of the stockholders of the Corporation nor to vote on any matter
relating to the business or affairs of the Corporation.
SECTION B: COMMON STOCK
(a) Dividends. Subject to the preferences and other rights of the
---------
Preferred Stock as set out above, the holders of
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Common Stock shall be entitled to receive dividends when and as declared by the
Board of Directors out of funds legally available therefor. Holders of shares
of Class A Common Stock and Class B Common Stock shall be entitled to share
equally, share for share, in such dividends, except that if dividends are
declared which are payable in shares of Class A Common Stock or Class B Common
Stock, dividends shall be declared which are payable at the same rate in both
classes of stock and the dividends payable in shares of Class A Common Stock
shall be payable to the holders of that class of stock and the dividends payable
in shares of Class B Common Stock shall be payable to the holders of that class
of stock.
(b) Liquidation. In the event of any liquidation, dissolution or
-----------
winding up of the affairs of the Corporation, voluntary or involuntary, after
payment or provision for payment to the holders of Preferred Stock of the
amounts to which they may be entitled as set out above, the remaining assets of
the Corporation available to stockholders shall be distributed equally per share
to the holders of Common Stock irrespective of class.
(c) Voting Rights. Except as otherwise provided herein or by law,
-------------
each holder of Class A Common Stock shall be entitled to one vote in respect of
each share of Class A Common Stock held of record on all matters submitted to a
vote of stockholders. Except as otherwise provided by law, the holders of Class
B Common Stock shall not be entitled to notice of, or to vote at, any meeting of
the stockholders of the Corporation nor to vote upon any matter relating to the
business or affairs of the Corporation.
(d) Conversion of Class B Common Stock. (1) Each share of Class B
----------------------------------
Common Stock shall be convertible into one fully paid and nonassessable share of
Class A Common Stock at any time at the election of the holder thereof subject
to the condition that the holder thereof delivers to the Corporation, together
with the notice of election so to convert and the applicable stock certificates
(as described below), a certificate of such holder (a "Conversion Eligibility
Certificate") to the effect that (i) such holder is a person other than Warburg,
Pincus Investors, L.P. ("Warburg") or any affiliate (as defined in Rule 12b-2
promulgated under the Securities Exchange Act of 1934, as amended, and any
successor rule) of Warburg, or (ii) upon such conversion and after giving effect
thereto, such holder and all affiliates of such holder will collectively own
beneficially and of record no more than fifty percent (50%) of the then
outstanding shares of Class A Common Stock. The Corporation or
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its transfer agent shall rely on any such certificate as accurately setting
forth the facts therein stated, unless the Corporation has actual knowledge of
the falseness of any such statements of fact.
(2) In order to exercise the foregoing conversion privilege, a holder
of Class B Common Stock shall surrender to the Corporation at its principal
offices, or to any transfer agent for the Corporation, a certificate or
certificates for Class B Common Stock to be converted together with (i) a
Conversion Eligibility Certificate and (ii) a written notice to the Corporation
that such holder has elected to convert such shares, or, if less than all shares
represented by such certificate are to be converted, the portion of the shares
represented thereby to be converted. Such notice shall also state the name or
names (with addresses) in which the certificates for shares of Class A Common
Stock issuable upon such conversion shall be issued. Class B Common Stock shall
be deemed converted for all purposes including without limitation the taking of
a record date for a meeting of the stockholder of the Corporation, upon receipt
by the Corporation or its transfer agent of such certificates evidencing such
shares accompanied by a Conversion Eligibility Certificate and such notice of
election to convert.
(3) Upon conversion of any certificate evidencing Class B Common
Stock which is converted in part only, the Corporation shall cause to be
executed and delivered to the holder thereof, at the expense of the Corporation,
a new certificate evidencing the balance of the Class B Common Stock which was
not so converted.
(4) The Corporation shall not be required to issue or deliver any
certificate unless and until the holder of the shares so surrendered has paid to
the Corporation the amount of any tax which may be payable in respect of any
transfer involved in such issuance or shall establish to the satisfaction of the
Corporation that such tax has been paid.
(5) The Corporation shall at all times reserve and keep available out
of its authorized but unissued Class A Common Stock the full number of shares of
such stock into which all shares of Class B Common Stock from time to time
outstanding are convertible.
(6) Shares of Class B Common Stock which are converted into shares of
Class A Common Stock as provided in this Section shall not be reissued.
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(e) Reclassifications. In the event of any stock split, combination
-----------------
or other reclassification of shares of Common Stock, each share of Common Stock
shall be treated equally; provided, that in any such transaction, only holders
--------
of Class A Common Stock shall receive shares of Class A Common Stock and only
holders of Class B Common Stock shall receive shares of Class B Common Stock.
(f) No Preemptive Rights. No holder of Common Stock of the
--------------------
Corporation shall, by virtue of this Certificate of Incorporation or Delaware
law generally, have any preemptive right to subscribe to any additional issue of
stock of the Corporation of any or all class or series thereof or to any
security convertible into such stock.
ARTICLE V
The Corporation is to have perpetual existence.
ARTICLE VI
In furtherance and not in limitation of the powers conferred by
statute, the By-Laws of the Corporation may be made, altered, amended or
repealed by the stockholders or by the Board of Directors.
ARTICLE VII
The Corporation shall indemnify any and all of its directors or
officers, including former directors or officers, and any employee, who shall
serve as an officer or director of any corporation at the request of
Corporation, to the fullest extent permitted under and in accordance with the
laws of the State of Delaware.
ARTICLE VIII
Meetings of stockholders may be held within or without the State of
Delaware, as the By-Laws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-Laws of the Corporation.
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ARTICLE IX
A Director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 174 of the Delaware General Corporation
Law; or (iv) for any transaction from which the Director derived any improper
personal benefit. If the Delaware General Corporation Law is amended after the
date of incorporation of the Corporation to authorize corporate action further
eliminating or limiting the personal liability of Directors, then the liability
of a Director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a Director of the Corporation existing at the time of such repeal
or modification.
ARTICLE X
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this certificate of incorporation, in any manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
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IN WITNESS WHEREOF, said Corporation has caused this Certificate to be
signed by its President, and attested by its Secretary, this 14th day of April,
1994.
MEROCEL/XOMED HOLDINGS, INC.
By:/s/ Mark K. Adams
-------------------------
Mark K. Adams
President
ATTEST:
/s/ Elizabeth H. Weatherman
- -----------------------------
Elizabeth H. Weatherman
Secretary
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CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
MEROCEL/XOMED HOLDINGS, INC.
----------------------------------------
Under Section 242 of the General
Corporation Law of the State of Delaware
----------------------------------------
The undersigned, Mark K. Adams, President of Merocel/Xomed Holdings, Inc.,
a Delaware corporation (the "Company"), does hereby certify as follows:
FIRST: That the following resolution was duly adopted by the Board of
Directors of the Company in accordance with the provisions of Section 141(f) and
242 of the General Corporation Law of the State of Delaware ("DGCL"):
RESOLVED, that Article I of the Restated Certificate of Incorporation
of the Company be amended and restated as follows:
"I
The name of the corporation is Xomed Surgical Products, Inc. (the
"Corporation")."
SECOND: That in lieu of a meeting and vote of the stockholders, the
holders of all of the issued and outstanding shares of stock of the Company
entitled to consent with respect to the foregoing amendment have given their
written consent thereto in accordance with the provisions of Sections 228 and
242 of the DGCL, and such written consent has been filed in the minute book of
the Company.
THIRD: That the foregoing amendment was duly adopted in accordance with
the applicable provisions of Section 242 of the DGCL.
<PAGE>
IN WITNESS WHEREOF, said Company has caused this Certificate of Amendment
to the Restated Certificate of Incorporation of the Company to be signed by the
undersigned, this 8th day of June 1995.
MEROCEL/XOMED HOLDINGS, INC.
By: /s/ Mark K. Adams
----------------------------
Mark K. Adams, President
-2-
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
XOMED SURGICAL PRODUCTS, INC.
____________________________________________________
Under Section 242 of the General
Corporation Law of the State of Delaware
____________________________________________________
THE undersigned, Mark K. Adams, President of Xomed Surgical Products,
Inc., a Delaware corporation (the "Company"), does hereby certify as follows:
FIRST: That the following resolutions were duly adopted by the
Board of Directors of the Company in accordance with the provisions of Sections
141(f) and 242 of the General Corporation Law of the State of Delaware ("DGCL"):
RESOLVED, that the first paragraph of Article IV of the Restated
Certificate of Incorporation, as amended, of the Company be amended in
its entirety as follows:
The total authorized capital stock of the Corporation shall be Fifteen
Million Eight Hundred Fifty Thousand (15,850,000) shares consisting of (i)
Six Million Five Hundred Fifty Thousand (6,550,000) shares of Class A
Common Stock of the par value of One Cent ($0.01) per share (the "Class A
Common Stock"); (ii) Four Million (4,000,000) shares consisting of Class B
Common Stock of the par value of One Cent ($0.01) per share (the "Class B
Common Stock"); (iii) One Million Two Hundred Thousand (1,200,000) shares
of Series A Convertible Preferred Stock of the par value of One Dollar
($1.00) per share (the "Series A Preferred Stock"); (iv) Three Million Five
Hundred Thousand (3,500,000) shares of Series B Convertible Preferred Stock
of the par value of One Dollar ($1.00) per share (the "Series B Preferred
Stock") and (v) Six Hundred Thousand (600,000) shares of Series C
Redeemable Preferred Stock of the par value of One Dollar ($1.00) per share
(the "Series C Preferred Stock"). The Class A Common Stock and the Class B
Common Stock are collectively referred to herein as the "Common Stock," and
the Series A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock are collectively referred to herein as the "Preferred
Stock."
; and further
<PAGE>
RESOLVED, that Section A(II)(b)(3) of Article IV of the Restated
Certificate of Incorporation, as amended, of the Company be amended in
its entirety as follows:
(3) Dividends on the Convertible Preferred Stock shall accrue from
April 16, 1996 (and as of such date there exists no accrued and unpaid
dividends) and shall be cumulative, whether or not in any fiscal year there
shall be net profits or surplus available for the payment of dividends in
such fiscal year, so that if in any fiscal year or years, dividends in
whole or in part are not paid upon the Convertible Preferred Stock, unpaid
dividends shall accumulate as against the holders of the Junior Stock.
; and further
RESOLVED, that Section A(III)(b)(3) of Article IV of the Restated
Certificate of Incorporation, as amended, of the Company be amended in
its entirety as follows:
(3) Dividends on the Series C Preferred Stock shall accrue from April
16, 1996 (and as of such date there exists no accrued and unpaid dividends)
and shall be cumulative, whether or not in any fiscal year there shall be
net profits or surplus available for the payment of dividends in such
fiscal year, so that if in any fiscal year or years, dividends in whole or
in part are not paid upon the Series C Preferred Stock, unpaid dividends
shall accumulate as against the holders of the Junior Stock.
SECOND: That in lieu of a meeting and vote of the stockholders, the
holders of a majority of the issued and outstanding shares of stock of the
Company entitled to consent with respect to the foregoing amendments have given
their written consent thereto in accordance with the provisions of Sections 228
and 242 of the DGCL, and such written consent has been filed in the minute book
of the Company.
THIRD: That the foregoing amendments were duly adopted in accordance
with the applicable provisions of Section 242 of the DGCL.
-2-
<PAGE>
IN WITNESS WHEREOF, said Company has caused this Certificate of
Amendment to the Restated Certificate of Incorporation, as amended, of the
Company to be signed by the undersigned, this 15th day of April 1996.
XOMED SURGICAL PRODUCTS, INC.
By: /s/ Mark K. Adams
---------------------------
Name: Mark K. Adams
Title: President
-3-
<PAGE>
EXHIBIT 3.2
MEROCEL/XOMED HOLDINGS, INC.
Incorporated Under the Laws of the
State of Delaware
BY-LAWS
-------
ARTICLE I
OFFICES.
Merocel/Xomed Holdings, Inc. (the "Corporation") shall maintain a
registered office in the State of Delaware. The Corporation may also have other
offices at such other places, either within or without the State of Delaware, as
the Board of Directors may from time to time designate or the business of the
Corporation may require.
ARTICLE II
STOCKHOLDERS.
Section 1. Annual Meeting. The annual meeting of Stockholders for
--------------
the election of Directors and the transaction of any other business as may
properly come before such meeting shall be held on the first Monday in June of
each year, or as soon after such date as may be practicable, in such City and
State and at such time and place as may be designated by the Board of Directors,
and set forth in the notice of such meeting. If said day be a legal holiday,
said meeting shall be held on the next succeeding business day. At the annual
meeting any business may be transacted and any corporate action may be taken,
whether stated in the notice of meeting or not, except as otherwise expressly
provided by statute or the Certificate of Incorporation.
Section 2. Special Meetings. Special meetings of the Stockholders
----------------
for any purpose may be called at any time by the Board of Directors, the
Chairman of the Board, or if no Chairman has been elected, by the President and
Chief Executive Officer, and shall be called by the Chairman of the Board or, if
none, by the President and Chief Executive Officer at the request of the holders
of thirty percent (30%) of the outstanding shares of capital stock entitled to
vote. Special meetings shall be held at such place or places within or without
the State of Delaware as shall from time to time be designated by the Board of
Directors and stated in the notice of such meeting. At a special meeting no
business shall be transacted and no corporate action shall be taken other than
that stated in the notice of the meeting.
<PAGE>
Section 3. Notice of Meetings. Written notice of the date, time and
------------------
place of any Stockholders' meeting, whether annual or special, shall be given to
each Stockholder entitled to vote thereat, by mailing the same to him at his
address as the same appears upon the records of the Corporation not less than
ten (10) nor more than sixty (60) days prior to the date of such meeting.
Notice of any adjourned meeting need not be given other than by announcement at
the meeting so adjourned, unless otherwise ordered in connection with such
adjournment. Such further notice, if any, shall be given as may be required by
law.
Section 4. Waiver of Notice. Notice of meeting need not be given to
----------------
any Stockholder who submits a signed waiver of notice, in person or by proxy,
whether before or after the meeting. The attendance of any Stockholder at a
meeting, in person or by proxy, without protesting prior to the conclusion of
the meeting the lack of notice of such meeting, shall constitute a waiver of
notice by him.
Section 5. Quorum. Any number of Stockholders, together holding at
------
least a majority of the capital stock of the Corporation issued and outstanding
and entitled to vote, who shall be present in person or by proxy at any meeting
duly called, shall constitute a quorum for all purposes except as may otherwise
be provided by law.
Section 6. Adjournment of Meetings. If less than a quorum shall
-----------------------
attend at the time for which a meeting shall have been called, the meeting may
be adjourned from time to time by a majority vote of the Stockholders present or
by proxy and entitled to vote thereat, without notice other than by announcement
at the meeting until a quorum shall attend. Any meeting at which a quorum is
present may also be adjourned in like manner and for such time or upon such call
as may be determined by a majority vote of the Stockholders present in person or
by proxy and entitled to vote thereat. At any adjourned meeting at which a
quorum shall be present, any business may be transacted and any corporate action
may be taken which might have been transacted at the meeting as originally
called.
Section 7. Voting. Each Stockholder entitled to vote at any meeting
------
may vote either in person or by proxy, duly appointed by instrument in writing
subscribed by such Stockholder and bearing a date not more than eleven (11)
months prior to said meeting, unless said proxy provides for a longer period.
The holders of Class A Common Stock shall be entitled to one (1) vote in respect
of each share held, and the holders of shares of Series A Convertible Preferred
Stock shall be entitled to the number of votes equal to the number of shares of
Class A Common
-2-
<PAGE>
Stock into which such shares of Series A Convertible Preferred Stock are
Convertible, on all matters submitted to a vote of shareholders. Except as
otherwise provided by law, in the Certificate of Incorporation or in these By-
laws, the holders of shares of Class A Common Stock and the holders of shares of
Series A Preferred Stock shall vote together as a single class. At all meetings
of Stockholders, all matters, except as otherwise provided by law, the
Certificate of Incorporation or these By-laws, shall be determined by a majority
vote of the Stockholders present in person or by proxy and entitled to vote
thereat. Except as otherwise provided by law, the Certificate of Incorporation
or these By-laws, the holders of Class B Common Stock, Series B Convertible
Preferred Stock and Series C Redeemable Preferred Stock shall not be entitled to
notice of, or to vote at, any meeting of the stockholders of the Corporation nor
to vote upon any matter relating to the business or affairs of the Corporation.
Section 8. Action by Stockholders Without a Meeting. Whenever under
----------------------------------------
the General Corporation Law of Delaware Stockholders are required or permitted
to take any action by vote, such action may be taken without a meeting upon
written consent, setting forth the action so taken, signed by the holders of
outstanding shares having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted and shall be delivered to the
Corporation by delivery to its registered office in the State of Delaware, its
principal place of business, or an officer or agent of the Corporation having
custody of the book in which proceedings of meetings of stockholders are
recorded.
ARTICLE III
DIRECTORS.
Section 1. Number and Qualifications. The Board of Directors shall
-------------------------
consist initially of two (2) Directors, and thereafter shall consist of such
number as may be fixed from time to time by resolution of the Board of
Directors. The Directors need not be Stockholders.
Section 2. Responsibilities. The general management of the affairs
----------------
of the Corporation shall be vested in the Board of Directors, which may delegate
to Officers, employees and to committees of three (3) or more Directors such
powers and duties as it may from time to time see fit, subject to the
limitations hereinafter set forth, and except as may otherwise be provided by
law.
-3-
<PAGE>
Section 3. Election and Term of Office. The Directors shall be
---------------------------
elected by the Stockholders at the annual meeting of Stockholders. If the
election of Directors shall not be held on the day designated by the By-laws,
the Directors shall cause the same to be held as soon thereafter as may be
convenient. The Directors chosen at any annual meeting shall hold office except
as hereinafter provided, until the next annual election and until the election
and qualification of their successors.
Section 4. Removal and Resignation of Directors. Any Director may be
------------------------------------
removed from the Board of Directors, with or without cause, by the holders of a
majority of the shares of outstanding stock entitled to vote at any special
meeting of the Stockholders called for that purpose, and the office of such
Director shall forthwith become vacant. Any Director may resign at any time.
Such resignation shall take effect at the time specified therein, and if no time
be specified, at the time of its receipt by the Chairman of the Board or if no
Chairman has been elected, by the President and Chief Executive Officer, or by
the Secretary. The acceptance of a resignation shall not be necessary to make
it effective, unless so specified therein.
Section 5. Filling of Vacancies. Any vacancy among the Directors,
--------------------
occurring from any cause whatsoever, may be filled by a majority of the
remaining Directors, though less than a quorum, provided, however, that the
-------- -------
Stockholders removing any Director may at the same meeting fill the vacancy
caused by such removal, and provided further, that if the Directors fail to fill
-------- -------
any such vacancy, the Stockholders may at any special meeting called for that
purpose fill such vacancy. In case of any increase in the number of Directors,
the additional Directors may be elected by the Directors in office prior to such
increase. Any person elected to fill a vacancy shall hold office, subject to
the right of removal as hereinbefore provided, until the next annual election
and until the election and qualification of his successor.
Section 6. Regular Meetings. The Board of Directors shall hold an
----------------
annual meeting for the purpose of organization and the transaction of any
business immediately after the annual meeting of the Stockholders, provided a
quorum is present. Other regular meetings may be held at such times as may be
determined from time to time by resolution of the Board of Directors.
Section 7. Special Meetings. Special meetings of the Board of
----------------
Directors may be called at any time by the Chairman of the Board of Directors,
if any, or by the President and Chief Executive Officer.
-4-
<PAGE>
Section 8. Notice and Place of Meetings. Regular meetings of the
----------------------------
Board of Directors may be held without notice at such time and place as shall be
designated by resolution of the Board of Directors. Notice shall be required,
however, for special meetings. Notice of any special meeting shall be
sufficiently given if mailed to each Director at his residence or usual place of
business at least five (5) days before the day on which the meeting is to be
held, or if sent to him at such place by telegraph or cable, or delivered
personally or by telephone not later than 24 hours prior to the time at which
the meeting is to be held. No notice of the annual meeting shall be required if
held immediately after the annual meeting of the Stockholders and if a quorum is
present. Notice of a meeting need not be given to any Director who submits a
signed waiver of notice before or after the meeting, nor to any Director who
attends the meeting without protesting the lack of notice prior thereto or at
its commencement.
Section 9. Business Transacted at Meetings. Any business may be
-------------------------------
transacted and any corporate action may be taken at any regular or special
meeting of the Board of Directors at which a quorum shall be present, whether
such business or proposed action be stated in the notice of such meeting or not,
unless special notice of such business or proposed action shall be required by
law.
Section 10. Quorum. A majority of the entire Board of Directors
------
shall be necessary to constitute a quorum for the transaction of business, and
the acts of a majority of the Directors present at a meeting at which a quorum
is present shall be the acts of the Board of Directors, unless otherwise
provided by law, the Certificate of Incorporation or these By-laws. If a quorum
is not present at a meeting of the Board of Directors, a majority of the
Directors present may adjourn the meeting to such time and place as they may
determine without notice other than announcement at the meeting until enough
Directors to constitute a quorum shall attend. When a quorum is once present to
organize a meeting, it is not broken by the subsequent withdrawal of any
Directors.
Section 11. Action Without A Meeting. Any action required or
------------------------
permitted to be taken by the Board of Directors or any committee thereof may be
taken without a meeting if all members of the Board or the committee consent in
writing to the adoption of a resolution authorizing the action. The resolution
and the written consents thereto by the members of the Board or committee shall
be filed with the minutes of the proceedings of the Board or committee.
-5-
<PAGE>
Section 12. Participation By Telephone. Any one or more members of
--------------------------
the Board or any committee thereof may participate in a meeting of the Board or
such committee by means of a conference telephone or similar communications
equipment allowing all persons participating in the meeting to hear each other
at the same time. Participation by such means shall constitute presence in
person at a meeting.
Section 13. Compensation. The Board of Directors may establish by
------------
resolution reasonable compensation of all Directors for services to the
Corporation as Directors, including a fixed fee, if any, incurred in attending
each meeting, Nothing herein contained shall preclude any Director from serving
the Corporation in any other capacity, as an Officer, agent or otherwise, and
receiving compensation therefor.
ARTICLE IV
COMMITTEES.
Section 1. Appointment of Committees. Committees, whose members are
-------------------------
to be Directors, may be appointed by the Board of Directors, which committees
shall hold office for such time and have such powers and perform such duties as
may from time to time be assigned to them by the Board of Directors or the
committee appointing them. Any member of such a committee may be removed at any
time, with or without cause, by the Board of Directors or the committee
appointing such committee. Any vacancy in a committee occurring from any cause
whatsoever may be filled by the Board of Directors or the committee appointing
such committee.
Section 2. Resignation. Any member of a committee may resign at any
-----------
time. Such resignation shall be made in writing and shall take effect at the
time specified therein, or, if no time be specified, at the time of its receipt
by the Chairman of the Board, if any, the President and Chief Executive Officer
or the Secretary. The acceptance of a resignation shall not be necessary to
make it effective unless so specified therein.
Section 3. Quorum. A majority of the members of a committee shall
------
constitute a quorum. The act of a majority of the members of a committee
present at any meeting at which a quorum is present shall be the act of such
committee. The members of a committee shall act only as a committee, and the
individual members thereof shall have no powers as such.
Section 4. Record of Proceedings. Each committee shall keep a record
---------------------
of its acts and proceedings, and shall report
-6-
<PAGE>
the same to the Board of Directors when and as required by the Board of
Directors.
Section 5. Organization, Meetings and Notices. A committee may hold
----------------------------------
its meetings at the principal office of the Corporation, or at any other place
upon which a majority of the committee may at any time agree. Each committee
may make such rules as it may deem expedient for the regulation and carrying on
of its meetings and proceedings.
Section 6. Compensation. The members of any committee shall be
------------
entitled to such compensation as may be established by resolution of the Board
of Directors.
ARTICLE V
OFFICERS.
Section 1. Number. The Officers of the Corporation shall be a
------
President and Chief Executive Officer, a Secretary and a Treasurer, and such
Vice Presidents and other Officers as may be appointed in accordance with the
provisions of Section 3 of this Article V. The Board of Directors, in its
discretion, may also elect a Chairman of the Board of Directors.
Section 2. Election, Term of Office and Qualifications. The
--------------------------------------------
Officers, except as provided in Section 3 of this Article V, shall be chosen
annually by the Board of Directors. Each such Officer shall, except as herein
otherwise provided, hold office until the selection and qualification of his
successor. Any two or more offices may be held by the same person, except the
offices of President and Chief Executive Officer and Secretary.
Section 3. Other Officers. Other Officers, including, without
--------------
limitation, one or more Vice Presidents, Assistant Secretaries and Assistant
Treasurers, may from time to time be appointed by the Board of Directors, which
other Officers shall have such powers and perform such duties as may be assigned
to them by the Board of Directors or the Officer or committee appointing them.
All such Officers shall be corporate officers of the Corporation with the power
to bind the Corporation by acts within the scope of their authority.
Section 4. Removal of Officers. Any Officer of the Corporation may
-------------------
be removed from office, with or without cause, by a vote of a majority of the
Board of Directors.
-7-
<PAGE>
Section 5. Resignation. Any Officer of the Corporation may resign at
-----------
any time. Such resignation shall be in writing and shall take effect at the
time specified therein, and if no time be specified, at the time of its receipt
by the Chairman of the Board, if any, the President and Chief Executive Officer
or the Secretary. The acceptance of a resignation shall not be necessary in
order to make it effective, unless so specified therein.
Section 6. Filling of Vacancies. A vacancy in any office shall be
--------------------
filled by the Board of Directors.
Section 7. Compensation. The compensation of the Officers shall be
------------
fixed by the Board of Directors, or by any committee upon whom such power may be
conferred by the Board of Directors.
Section 8. Chairman of the Board of Directors. The Chairman of the
----------------------------------
Board of Directors, if one is elected, shall be a Director and shall preside at
all meetings of the Board of Directors and of the Stockholders at which he shall
be present. He shall have power to call special meetings of the Stockholders or
of the Board of Directors at any time and shall have such power and perform such
other duties as may from time to time be assigned to him by the Board of
Directors.
Section 9. President and Chief Executive Officer. The President and
-------------------------------------
Chief Executive Officer shall have responsibility for the general direction of
the business affairs and property of the Corporation, and of its several
Officers, and shall have and exercise all such powers and discharge such duties
as usually pertain to the office of President and Chief Executive Officer. He
shall have responsibility for the day-to-day affairs of the Corporation, subject
to the control of the Board of Directors. He shall perform such duties as may be
assigned to him from time to time by the Board of Directors and shall, in the
absence of the Chairman of the Board, perform and carry out the functions of the
Chairman of the Board.
Section 10. Secretary. The Secretary shall attend all meetings of
---------
the Board of Directors and of the Stockholders and record all votes and the
minutes of all proceedings in a book to be kept for that purpose, and shall
perform like duties for any committee appointed by the Board. He shall give or
cause to be given notice of all meetings of Stockholders and special meetings of
the Board of Directors and shall perform such other duties as may be prescribed
by the Board of Directors. He shall keep in safe custody the seal of the
Corporation and affix it to any instrument when so authorized by the Board of
Directors.
-8-
<PAGE>
Section 11. Treasurer. The Treasurer shall have custody of the
---------
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositaries as may be designated by the Board of
Directors. He shall disburse the funds of the Corporation as may be ordered by
the Board, taking proper vouchers for such disbursements, and shall render to
the President and Chief Executive Officer and Directors at the regular meetings
of the Board, or whenever they may require it, an account of all his
transactions as Treasurer and of the financial condition of the Corporation. He
may be required to give bond for the faithful discharge of his duties.
ARTICLE VI
CAPITAL STOCK.
Section 1. Issue of Certificates of Stock. Certificates of capital
------------------------------
stock shall be in such form as shall be approved by the Board of Directors. They
shall be numbered in the order of their issue, and shall be signed by the
Chairman of the Board of Directors, the President and Chief Executive Officer or
any Vice President, and by the Treasurer or any Assistant Treasurer or the
Secretary or any Assistant Secretary, and the seal of the Corporation or a
facsimile thereof shall be impressed, affixed or reproduced thereon. In case any
Officer or Officers who shall have signed any such certificate or certificates
shall cease to be such Officer or Officers of the Corporation, whether because
of death, resignation or otherwise, before such certificate or certificates
shall have been delivered by the Corporation, such certificate or certificates
may nevertheless be adopted by the Corporation and be issued and delivered as
though the person or persons who signed such certificate or certificates have
not ceased to be such Officer or Officers of the Corporation.
Section 2. Registration and Transfer of Shares. The name of each
-----------------------------------
person owning a share of the capital stock of the Corporation shall be entered
on the books of the Corporation together with the number of shares held by him,
the numbers of the certificates covering such shares and the dates of issue of
such certificates. The shares of stock of the Corporation shall be transferable
on the books of the Corporation by the holders thereof in person, or by their
duly authorized attorneys or legal representatives, on surrender and
cancellation of certificates for a like number of shares, accompanied by an
assignment of power of transfer endorsed thereon or attached thereto, duly
-9-
<PAGE>
executed, and with such proof of the authenticity of the signature as the
Corporation or its agents may reasonably require. A record shall be made of
each transfer. The Board of Directors may make other and further rules and
regulations concerning the transfer and registration of certificates for stock.
Section 3. Lost, Destroyed and Mutilated Certificates. The holder of
------------------------------------------
any stock of the Corporation shall immediately notify the Corporation of any
loss, theft, destruction or mutilation of the certificates therefor. The
Corporation may issue a new certificate of stock in the place of any certificate
theretofore issued by it and alleged to have been lost, stolen or destroyed.
The Board of Directors may, in its discretion, require the owner of the lost,
stolen or destroyed certificate, or his legal representatives, to give the
Corporation a bond, in such sum not exceeding double the value of the stock and
with such surety or sureties as they may require, to indemnify it against any
claim that may be made against it by reason of the issue of such new certificate
and against all other liability in the premises, or may remit such owner to such
remedy or remedies as he may have under the laws of the State of Delaware.
ARTICLE VII
DIVIDENDS AND SURPLUS.
The Board of Directors shall have power to fix and vary the amount to
be set aside or reserved as working capital of the Corporation, or as reserves,
or for other proper purposes of the Corporation, and, subject to the
requirements of the Certificate of Incorporation, to determine whether any part
of the surplus or net profits of the Corporation shall be declared in dividends
and paid to the Stockholders, and to fix the date or dates for the payment of
dividends.
-10-
<PAGE>
ARTICLE VIII
MISCELLANEOUS PROVISIONS.
Section 1. Fiscal Year. The fiscal year of the Corporation shall
-----------
commence on the first day of January and end on the last day of December.
Section 2. Corporate Seal. The corporate seal shall be in such form
--------------
as approved by the Board of Directors and may be altered at its pleasure. The
corporate seal may be used by causing it or a facsimile thereof to be impressed,
affixed or reproduced by the Secretary or Assistant Secretary of the
Corporation.
Section 3. Notices. Except as otherwise expressly provided, any
-------
notice required by these By-laws to be given shall be sufficient if given by
depositing the same in a post office or letter box in a sealed wrapper with
first class postage prepaid thereon and addressed to the person entitled thereto
at his address, as the same appears upon the books of the Corporation, or by
telegraphing or cabling the same to such person at such address; and such notice
shall be deemed to be given at the time it is mailed, telegraphed or cabled.
Section 4. Waiver of Notice. Any Stockholder or Director may at any
----------------
time, by writing or by telegraph or by cable, waive any notice required to be
given under these By-laws, and if any Stockholder or Director shall be present
at any meeting his presence shall constitute a waiver of such notice.
Section 5. Contracts, Checks, Drafts. The Board of Directors, except
-------------------------
as may otherwise be required by law, may authorize any Officer or Officers,
agent or agents, in the name of and on behalf of the Corporation to enter into
any contract or execute or deliver any instrument. All checks, drafts or other
orders for the payment of money, notes or other evidences of indebtedness issued
in the name of the Corporation, shall be signed by such Officer or Officers,
agent or agents of the Corporation, and in such manner, as shall be designated
from time to time by resolution of the Board of Directors.
Section 6. Deposits. All funds of the Corporation shall be deposited
--------
from time to time to the credit of the Corporation in such bank or banks, trust
companies or other depositaries as the Board of Directors may select, and, for
the purpose of such deposit, checks, drafts, warrants and other orders for the
payment of money which are payable to the order of the Corporation, may be
endorsed for deposit, assigned and delivered by any Officer of the Corporation,
or by such agents of
-11-
<PAGE>
the Corporation as the Board of Directors, the Chairman of the Board, if any, or
the President and Chief Executive Officer may authorize for that purpose.
Section 7. Voting Stock of Other Corporations. Except as otherwise
----------------------------------
ordered by the Board of Directors, the Chairman of the Board, if any, or the
President and Chief Executive Officer shall have full power and authority on
behalf of the Corporation to attend and to act and to vote at any meeting of the
stockholders of any corporation of which the Corporation is a stockholder and to
execute a proxy to any other person to represent the Corporation at any such
meeting, and at any such meeting the Chairman of the Board, if any, or the
President and Chief Executive Officer or the holder of any such proxy, as the
case may be, shall possess and may exercise any and all rights and powers
incident to ownership of such stock and which, as owner thereof, the Corporation
might have possessed and exercised if present. The Board of Directors may from
time to time confer like powers upon any other person or persons.
Section 8. Indemnification of Officers and Directors. The
-----------------------------------------
Corporation shall indemnify any and all of its Directors or Officers, who shall
serve as an Officer or Director of this Corporation or of any other corporation
at the request of this Corporation, to the fullest extent permitted under and in
accordance with the laws of the State of Delaware.
ARTICLE IX
AMENDMENTS.
These By-laws may be amended or repealed, or new By-laws may be
adopted, at any annual or special meeting of the Stockholders, by vote of the
Stockholders entitled to vote in the election of Directors; provided, however,
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that the notice of such meetings shall have been given as provided in these By-
laws, which notice shall mention that amendment or repeal of these By-laws, or
the adoption of new By-laws, is one of the purposes of such a meeting; and
provided, further, that By-laws adopted by the Stockholders shall not be
rescinded, altered, amended or repealed by the Board of Directors if such By-
laws adopted by the Stockholders so express. These By-laws may also be amended
or repealed, or new By-laws may be adopted, by the Board of Directors at any
meeting thereof; provided, however, that notice of such meeting shall have been
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given as provided in these By-laws, which notice shall mention that amendment or
repeal of the By-laws, or the adoption of new By-laws, is one of the purposes of
such meeting; and provided further, that By-laws
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adopted by the Board of Directors may be amended or repealed by the Stockholders
as hereinabove provided.
Dated: April 12, 1994
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EXHIBIT 10.1
STOCKHOLDERS AGREEMENT
STOCKHOLDERS AGREEMENT, dated as of April 16, 1996, among XOMED
SURGICAL PRODUCTS, INC., a Delaware corporation (the "Company"), WARBURG, PINCUS
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INVESTORS, L.P., a Delaware limited partnership ("Warburg"), ACCEL IV L.P., a
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Delaware limited partnership ("Accel IV"), ACCEL INVESTORS '94 L.P., a Delaware
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limited partnership ("Accel Investors '94"), ACCEL KEIRETSU L.P., a Delaware
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limited partnership ("Accel Keiretsu"), ELMORE C. PATTERSON PARTNERS, a Delaware
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general partnership ("Patterson"), PROSPER PARTNERS, a New York general
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partnership ("Prosper" and together with Accel IV, Accel Investors '94, Accel
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Keiretsu and Patterson, "Accel"), VERTICAL FUND ASSOCIATES, L.P., a Delaware
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limited partnership ("Vertical Fund Associates"), VERTICAL MEDICAL PARTNERS,
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L.P., a Delaware limited partnership ("Vertical Medical Partners"), VERTICAL
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PARTNERS, L.P., a Delaware limited partnership ("Vertical Partners" and together
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with Vertical Fund Associates and Vertical Medical Partners, "Vertical"), MARK
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K. ADAMS ("Adams"), SOLOMON ROSENBLATT ("Rosenblatt"), RONALD J. CERCONE
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("Cercone"), WILLIAM R. MILLER ("Miller") and ROBERT A. REEVES ("Reeves")
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(Warburg, Accel, Vertical, Adams, Rosenblatt, Cercone, Miller and Reeves are
hereinafter referred to collectively as the "Existing Investors"), First Union
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Capital Partners, Inc., a Virginia corporation ("First Union"), and the
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individuals listed on Schedule I hereto (together with First Union, the "New
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Investors" and, together with First Union and the Existing Investors, the
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"Investors").
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R E C I T A L S:
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WHEREAS, the New Investors have, pursuant to the terms of a stock
purchase agreement, dated as of April 15, 1996, with the Company (the "Purchase
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Agreement"), agreed to acquire (i) shares of Series A Convertible Preferred
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Stock, par value $1.00 per share ("Series A Convertible Preferred Stock"), of
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the Company, which shares are convertible into shares of Class A common stock,
par value $.01 per share, of the Company ("Class A Common Stock"); (ii) shares
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of Series C Redeemable Preferred Stock, par value $1.00 per share ("Series C
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Redeemable Preferred Stock" and together with the Series A Convertible Preferred
- --------------------------
Stock and the Series B Convertible Preferred Stock, par value $1.00 per share
("Series B Convertible Preferred Stock"), are hereinafter referred to as
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"Preferred Stock"), of the Company; and (iii) options to acquire shares of Class
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A Common Stock;
WHEREAS, the Existing Investors and the Company desire to amend and
restate Sections 6.3 through 6.6, Section 6.8, Section 9 and Section 10 of the
Exchange and Purchase of Stock Agreement, dated as of April 15, 1994 (the
"Exchange Agreement"), among the Existing Investors and the Company; and
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<PAGE>
WHEREAS, the Investors and the Company desire to promote their mutual
interests by agreeing to certain matters relating to the operations of the
Company and the disposition of shares of capital stock in the Company.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties hereto hereby agree as follows:
SECTION 1. CERTAIN COVENANTS OF THE PARTIES
--------------------------------
(a) Legends. The certificates evidencing the shares of Class A
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Common Stock or Preferred Stock, as applicable, acquired by the New Investors in
connection with the Purchase Agreement will bear the following legend reflecting
the restrictions on the transfer of such securities contained in this Agreement:
"The securities evidenced hereby are subject to the terms of that
certain Stockholders Agreement, dated as of April 16, 1996, by and
among the Company and certain investors identified therein, including
certain restrictions on transfer and rights of first refusal. A copy
of this Agreement has been filed with the Secretary of the Company and
is available upon request."
(b) Election of Directors. The Investors and the Company shall take
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all action within their respective power, including but not limited to, the
voting of capital stock of the Company, required to cause the Board of Directors
of the Company to consist of seven (7) members. So long as Warburg owns forty
percent (40%) or more of the total number of outstanding shares of Class A
Common Stock, Warburg shall have the right to designate three (3) persons of
Warburg's choice to be appointed or nominated for election to the Company's
Board of Directors. If at any time Warburg owns less than forty percent (40%),
but twenty percent (20%) or more, of the total number of outstanding shares of
Class A Common Stock, Warburg shall have the right to designate two (2) persons
of Warburg's choice to be appointed or nominated for election to the Company's
Board of Directors. If at any time Warburg owns less than twenty percent (20%),
but ten percent (10%) or more, of the total number of outstanding shares of
Class A Common Stock, Warburg shall have the right to designate one (1) person
of Warburg's choice to be appointed or nominated for election to the Company's
Board of Directors. If at any time Warburg owns less than ten percent (10%) of
the total number of outstanding shares of Class A Common Stock, Warburg's right
to designate persons for appointment or nomination as directors under this
Agreement shall terminate. In no event shall persons designated by Warburg for
appointment or nomination to the Company's Board of Directors constitute a
majority of the members of the Board of Directors.
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(c) Attendance at Board Meetings. From and after the date hereof and
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at all times throughout the term of this Agreement prior to the date on which
the Company completes a firm commitment underwritten public offering (the
"Initial Public Offering") for shares of Class A Common Stock or Class B common
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stock, par value $.01 per share ("Class B Common Stock" and together with Class
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A Common Stock, "Common Stock") of the Company pursuant to a registration under
------------
the Securities Act of 1933, as amended (the "Act"), the Company shall give First
---
Union notice of each meeting of its board of directors and each committee
thereof at least at the same time and in the same manner as notice is given to
the directors, and the Company shall permit a representative of First Union to
attend as an observer all meetings (including telephonic) of its board of
directors. First Union's representative shall be entitled to receive all
written materials and other information (including without limitation copies of
meeting minutes) given to directors in connection with such meetings at the same
time such materials and information are given to the directors. If the Company
proposes to take any action by written consent in lieu of a meeting of its board
of directors, the Company shall give notice thereof prior to the effective date
of such consent describing in reasonable detail the nature and substance of such
action. If members of the Board of Directors are compensated for out-of-pocket
expenses in connection with attending a board meeting, the Company shall pay the
reasonable out-of-pocket expenses of each First Union representative incurred in
connection with attending such board meetings. The Company shall cause each of
its subsidiaries to provide to First Union the same rights with respect to such
subsidiary (including without limitation relating to notice of and attendance at
meetings of the board of directors of such subsidiary) as provided by the
Company to First Union hereunder.
SECTION 2. TRANSFER OF STOCK
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(a) Resale of Securities. No Investor shall Transfer any shares of
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capital stock of the Company other than in accordance with the provisions of
this Section 2. Any Transfer or purported Transfer made in violation of this
Section 2 shall be null and void and of no effect.
(b) Rights of First Refusal. None of Accel, Vertical, Adams,
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Rosenblatt, Cercone, Miller, Reeves or the New Investors shall transfer any of
the shares of capital stock of the Company owned by such Investor (other than a
transfer to one or more of its Affiliates, so long as such Affiliate agrees, in
writing, to be bound to the provisions of this Section 2(b) as to any subsequent
transfer), unless such Investor (the "Transferor") shall have first offered to
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sell, first to the Company and then to Warburg, Accel (if Accel is not the
Transferor), Vertical (if Vertical is not the Transferor) and First Union (if
First Union is not the Transferor) (collectively, the "Institutional
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Investors"), the securities sought to be transferred (the
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"Subject Securities") in the manner contemplated by this Section 2(b).
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(i) When a Transferor seeks to transfer Subject Securities
(other than a transfer to one or more of its Affiliates, so long as such
Affiliate agrees, in writing, to be bound to the provisions of this Section 2(b)
as to any subsequent transfer), it shall give notice of the proposed transfer to
the Company and the Institutional Investors, which notice shall set forth: (i)
the Transferor's intention to sell the Subject Securities to a third party
pursuant to a bona fide offer from such party, (ii) the nature and amount of
securities to be transferred, (iii) the name, address and identity of such third
party, and (iv) the price and terms upon which such third party intends to
purchase the Subject Securities, and to which notice shall be attached a copy of
such bona fide third party offer. Such notice shall constitute an offer by the
Transferor to sell to the Company, or if the Company shall not elect to
purchase, an offer by the Transferor to sell to the Institutional Investors, all
of the Subject Securities at the same price and upon the same terms and
conditions.
(ii) Within ten (10) days after the receipt of the notice
described in paragraph (a) above, the Company may, at its option, exercisable by
notice to the Transferor, elect to purchase all, but not less than all, of the
Subject Securities at the price and upon the terms and conditions set forth in
the Transferor's notice. In the event that the Company does not exercise its
option to purchase the Subject Securities, within ten (10) days after the
expiration of the prior ten (10) day period, the Institutional Investors may, at
their option, exercisable by notice to the Transferor, elect to purchase, in the
same proportion as each Institutional Investor's shares of Common Equity (as
defined below) bears to the total shares of Common Equity then owned by all of
the Institutional Investors (other than the Transferor), all, but not less than
all, of the Subject Securities at the price and upon the terms and conditions
set forth in the Transferor's notice. If any Institutional Investor shall reject
in whole or in part the Subject Securities offered to it, then the other
Institutional Investors shall be entitled to purchase, all, but not less than
all, of the rejected Subject Securities offered, in the same proportion as each
other Institutional Investor's then owned shares of Common Equity bears to the
total shares of Common Equity owned by the other Institutional Investors who
have not so rejected the Subject Securities offered.
(iii) The closing of the purchase of the Subject Securities shall
take place at the offices of the Company (if the Company is the purchaser) or
Warburg (if Warburg is a purchaser) or at such other location as may be agreed
upon by the purchasers on a date agreed to by the purchasers, which shall not be
more than ten (10) days after the date of the election to purchase the Subject
Securities. At the closing, the Transferor shall deliver
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to the purchaser or purchasers the appropriate stock certificates, duly endorsed
and in negotiable form.
(iv) If neither the Company nor any of the Institutional
Investors elects to exercise its option within the periods provided in paragraph
(ii) above, the Transferor may make the transfer of the Subject Securities to
the prospective transferee named in the Transferor's notice, provided that (i)
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such transfer shall be made only on terms no more favorable to the purchasers
thereof than the terms specified in the Transferor's notice and (ii) the
transferee agrees, in writing, to be bound by the provisions of this Section
2(b) as to any subsequent transfer of the Subject Securities. If, however, the
Transferor shall fail to make such transfer within thirty (30) days following
the expiration of the periods provided in paragraph (ii) above, the Subject
Securities shall again become subject to all of the restrictions and procedures
set forth in this Section 2(b).
(v) It shall be a condition to the issuance by the Company of
any additional securities that any purchaser of such securities agree, in
writing, to be bound by the provisions of this Section 2(b) as to any transfer
of such securities. All certificates evidencing securities of the Company held
by any shareholder other than Warburg shall be legended with a legend reflecting
the fact that the securities are subject to a right of first refusal as provided
in this Section 2(b).
(vi) The Company shall not record any transfer of Subject
Securities in violation of the provisions of this Section 2(b).
(vii) The Company and the Investors hereby declare that it is
impossible to measure in money the damages which will accrue to the Company or
the Institutional Investors by reason of their failure to perform any of the
obligations set forth in this Section 2(b). Therefore, the Company and the
Institutional Investors shall have the right to specific performance of such
obligations, and if the Company or the Institutional Investors shall institute
any action or proceeding to enforce the provisions hereof, each of the Company
and the Investors hereby waives the claim or defense that the Company or the
Institutional Investors has an adequate remedy at law.
(c) Subscription Right. If, at any time after the date hereof, the
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Company proposes to issue equity securities of any kind (the term "equity
securities" shall include for these purposes any warrants, options or other
rights to acquire equity securities and debt securities convertible into or
exchangeable for equity securities or rights to acquire equity securities) of
the Company (other than the issuance of securities (w) upon conversion of the
Class B Common Stock, the Series A Convertible Preferred Stock or the Series B
Convertible Preferred Stock, (x) to the public in a firm commitment underwriting
pursuant to a
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registration statement filed under the Act, (y) pursuant to the acquisition of
another corporation by the Company by merger, purchase of substantially all of
the assets or other form of reorganization or (z) to employees of the Company
pursuant to an employee stock option plan, stock bonus plan, stock purchase plan
or other management equity program), then, as to each Investor who then holds in
excess of one percent (1%) of the shares of Common Equity then outstanding or
issuable, the Company shall:
(i) give written notice setting forth in reasonable detail (i)
the designation and all of the terms and provisions of the securities proposed
to be issued (the "Proposed Securities"), including, where applicable, the
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voting powers, preferences and relative participating, optional or other special
rights, and the qualification, limitations or restrictions thereof and interest
rate and maturity; (ii) the price and other terms of the proposed sale of such
securities; (iii) the amount of such securities proposed to be issued; and (iv)
such other information as the Investors may reasonably request in order to
evaluate the proposed issuance; and
(ii) offer to issue to each such Investor a portion of the
Proposed Securities equal to a percentage determined by dividing (x) the number
of shares of Common Equity held by or issuable to such Investor, by (y) the
total number of shares of Common Equity then outstanding or issuable; provided,
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however, that if the Company proposes to issue Proposed Securities consisting of
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Class A Common Stock, Series A Preferred Stock or any other equity securities
with voting rights, the Company shall offer to sell to Warburg, and Warburg may
purchase, at its option, Warburg's pro rata share of such Proposed Securities in
shares of Class B Common Stock in lieu of Class A Common Stock, Series B
Preferred Stock in lieu of Series A Preferred Stock or other equity securities
substantially similar to those offered to the other Investors except that such
equity securities shall have effective voting rights only in the hands of (i) a
holder other than Warburg or any affiliate (as defined in Rule 12b-2 promulgated
under the Exchange Act and any successor rule) of Warburg or (ii) a holder who,
together with all affiliates of such holder, does not own beneficially and of
record more than fifty percent (50%) of the then outstanding shares of Voting
Stock of the Company.
Each such Investor must exercise its purchase rights hereunder within
ten (10) days after receipt of such notice from the Company. If all of the
Proposed Securities offered to such Investors are not fully subscribed by such
Investors, the remaining Proposed Securities will be reoffered to the Investors
purchasing their full allotment upon the terms set forth in this Section, until
all such Proposed Securities are fully subscribed for or until all such
Investors have subscribed for all such Proposed Securities which they desire to
purchase, except that such Investors must exercise their purchase rights within
five (5) days after receipt of all such reoffers. To the extent that
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the Company offers two or more securities in units, Investors must purchase such
units as a whole and will not be given the opportunity to purchase only one of
the securities making up such unit.
Upon the expiration of the offering periods described above, the
Company will be free to sell such Proposed Securities which the Investors have
not elected to purchase during the ninety (90) days following such expiration on
terms and conditions no more favorable to the purchasers thereof than those
offered to such holders. Any Proposed Securities offered or sold by the Company
after such ninety (90) day period must be reoffered to the Investors pursuant to
this Section.
The election by an Investor not to exercise its subscription rights
under this Section in any one instance shall not affect its right (other than in
respect of a reduction in its percentage holdings) as to any subsequent proposed
issuance. Any sale of such securities by the Company without first giving the
Investors the rights described in this Section shall be void and of no force and
effect.
(d) Tag Along Right. If Warburg shall elect to cause the transfer of
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more than five percent (5%) of its shares of Common Equity in a transaction or
series of related transactions (other than a transfer to one or more of its
Affiliates, so long as such Affiliate agrees, in writing, to be bound to the
provisions of this Section 2(d)) pursuant to a bona fide offer to or from a
third party (the "Buyer"), whether pursuant to one transaction or a series of
-----
related transactions, Warburg shall notify the other Investors, in writing, of
such offer and its terms and conditions. Each other Investor shall have the
right, exercisable by notice to Warburg given within ten (10) days of receipt of
the terms and conditions of the offer, to sell to the Buyer, at the same price
and on the same terms as Warburg, an amount of shares equal to the shares of
Common Equity the Buyer actually proposes to purchase multiplied by a fraction,
the numerator of which shall be the number of shares of Common Equity issued and
owned by such Investor and the denominator of which shall be the aggregate
number of shares of Common Equity issued and owned by Warburg and each Investor
exercising its rights under this Section 2(d).
The election by an Investor not to exercise its rights under this
Section in any one instance shall not affect its right as to any subsequent
proposed sale.
(e) Injunctive Relief. The Company and the Investors hereby declare
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that it is impossible to measure in money the damages which will accrue to the
parties hereto by reason of the failure of any Investor to perform any of its
obligations set forth in this Section 2. Therefore, the Company and the
Investors shall have the right to specific performance of such obligations, and
if any party hereto shall institute any action
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or proceeding to enforce the provisions hereof, each of the Company and the
Investors hereby waives the claim or defense that the party instituting such
action or proceeding has an adequate remedy at law.
(f) Termination. The provisions of Section 2(a) through 2(e) shall
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expire upon the closing of the Initial Public Offering.
(g) Certain Transfer Restrictions. Without the prior written consent
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of the Company, none of the New Investors shall Transfer any shares of Xomed
Preferred (as defined in the Purchase Agreement) acquired by such New Investor
pursuant to the Purchase Agreement, unless prior thereto the transferee
acknowledges and agrees in writing (reasonably satisfactory to the Company) that
such shares to be transferred are subject to the provisions of the Purchase
Agreement.
SECTION 3. REGISTRATION RIGHTS.
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3.1 Definitions. As used in this Section 3:
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(a) the terms "register," "registered" and "registration" refer to a
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registration effected by preparing and filing a registration statement in
compliance with the Act (and any post-effective amendments filed or required to
be filed) and the declaration or ordering of effectiveness of such registration
statement;
(b) "Registrable Securities" shall mean (A) shares of Class A Common
----------------------
Stock issued or issuable to the Investors pursuant to the Exchange Agreement or
the Purchase Agreement (including (i) shares of Class A Common Stock issuable
upon any conversion of the Series A Preferred Stock issued to the Investors;
(ii) shares of Class A Common Stock issuable upon any conversion of the Class B
Common Stock issued to the Investors; or (iii) shares of Class A Common
Stock issuable upon any conversion of the Series B Convertible Preferred Stock
issued hereunder into Class B Common Stock and the subsequent conversion of such
Class B Common Stock into Class A Common Stock) or any other right to acquire
Class A Common Stock; (B) any capital stock of the Company issued as a dividend
or other distribution with respect to, or in exchange for or in replacement of,
the shares of Class A Common Stock referred to in clause (A) above; and (C) any
additional shares of Class A Common Stock which any of the Investors may
hereafter acquire;
(c) "Holder" shall mean any holder of Registrable Securities;
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(d) "Initiating Holder" shall mean (i) prior to the Initial Public
-----------------
Offering, any Holder or Holders who in the aggregate are Holders of more than
50% of the then outstanding Registrable Securities, or (ii) following the
Initial Public
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Offering, any Holder or Holders who in the aggregate are Holders of more than
20% of the then outstanding Registrable Securities;
(e) "Commission" shall mean the Securities and Exchange Commission or
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any other federal agency at the time administering the Act;
(f) "Registration Expenses" shall mean all expenses incurred by the
---------------------
Company in compliance with Sections 3.2 and 3.3 hereof, including, without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel for the Company, blue sky fees and expenses and the
expense of any special audits incident to or required by any such registration
(but excluding the compensation of regular employees of the Company, which shall
be paid in any event by the Company); and
(g) "Selling Expenses" shall mean all underwriting discounts and
----------------
selling commissions applicable to the sale of Registrable Securities and all
fees and disbursements of counsel for each of the Holders.
3.2 Requested Registration.
----------------------
(a) Request for Registration. If the Company shall receive from
------------------------
an Initiating Holder, at any time, a written request that the Company effect any
registration with respect to all or a part of the Registrable Securities, the
Company will:
(i) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders of Registrable Securities;
and
(ii) as soon as practicable, use its diligent best efforts to
effect such registration (including, without limitation, the execution of
an undertaking to file post-effective amendments, appropriate qualification
under applicable blue sky or other state securities laws and appropriate
compliance with applicable regulations issued under the Act) as may be so
requested and as would permit or facilitate the sale and distribution of
all or such portion of such Registrable Securities as are specified in such
request, together with all or such portion of the Registrable Securities of
any Holder or Holders joining in such request as are specified in a written
request received by the Company within ten (10) business days after written
notice from the Company is given under Section 3.2(a)(i) above; provided
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that the Company shall not be obligated to effect, or take any action to
effect, any such registration pursuant to this Section 3.2:
(A) In any particular jurisdiction in which the
Company would be required to execute a general consent to service
of process in effecting
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such registration, qualification or compliance, unless the
Company is already subject to service in such jurisdiction and
except as may be required by the Act or applicable rules or
regulations thereunder; or
(B) After the Company has effected two (2) such
registrations pursuant to this Section 3.2(a) at the request of
any Initiating Holder, and such registrations have been declared
or ordered effective and the sales of such Registrable Securities
shall have closed; provided, however, that if the prior two (2)
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registrations effected pursuant to this Section 3.2(a) did not
include Warburg as an Initiating Holder, then only after the
Company has effected three (3) such registrations pursuant to
this Section 3.2(a), the third of which must include Warburg as
an Initiating Holder; or
(C) If the Registrable Securities requested by all
Holders to be registered pursuant to such request do not have an
anticipated aggregate public offering price (before any
underwriting discounts and commissions) of not less than
$5,000,000.
The registration statement filed pursuant to the request of the
Initiating Holders may, subject to the provisions of Section 3.2(b) below,
include other securities of the Company which are held by officers or directors
of the Company, or which are held by persons who, by virtue of agreements with
the Company, are entitled to include their securities in any such registration,
but the Company shall have no absolute right to include any of its securities in
any such registration.
The registration rights set forth in this Section 3.2 shall be
assignable, in whole or in part, to any transferee of Registrable Securities
(who shall be bound by all obligations of this Section 3).
(b) Underwriting. If the Initiating Holders intend to distribute the
------------
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
Section 3.2.
If officers or directors of the Company holding other securities of
the Company shall request inclusion in any registration pursuant to Section 3.2,
or if holders of securities of the Company other than Registrable Securities who
are entitled, by contract with the Company or otherwise, to have securities
included in such a registration (the "Other Shareholders") request such
------------------
inclusion, the Holders shall offer to include the securities of such officers,
directors and Other
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Shareholders in the underwriting and may condition such offer on their
acceptance of the further applicable provisions of this Section 3. The Company
shall (together with all officers, directors and Other Shareholders proposing to
distribute their securities through such underwriting) enter into an
underwriting agreement in customary form with the representative of the
underwriter or underwriters selected for such underwriting by the Initiating
Holders and reasonably acceptable to the Company. Notwithstanding any other
provision of this Section 3.2, if the representative advises the Holders in
writing that marketing factors require a limitation on the number of shares to
be underwritten, the securities of the Company held by officers or directors
(other than Registrable Securities) of the Company and the securities held by
Other Shareholders shall be excluded from such registration to the extent so
required by such limitation. If, after the exclusion of shares of the Company
and Other Shareholders, further reductions are still required, the number of
shares included in the registration by each Holder shall be reduced on a pro
rata basis based on the number of shares held by each shareholder, by such
minimum number of shares as is necessary to comply with such request. No
Registrable Securities or any other securities excluded from the underwriting by
reason of the underwriter's marketing limitation shall be included in such
registration. If any officer, director or Other Shareholder who has requested
inclusion in such registration as provided above disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the underwriter and the Initiating Holders. The securities so
withdrawn shall also be withdrawn from registration. If the underwriter has not
limited the number of Registrable Securities or other securities to be
underwritten, the Company may include its securities for its own account in such
registration if the underwriter so agrees and if the number of Registrable
Securities and other securities which would otherwise have been included in such
registration and underwriting will not thereby be limited.
(c) Conversion of Class B Common Stock into Class A Common Stock. In
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the event that Warburg intends to sell its shares of Class B Common Stock by
means of an underwriting pursuant to paragraph (b) above, the Company shall,
immediately upon the sale of such shares of Class B Common Stock to the
underwriters of the offering, take all necessary steps and action to convert
such shares into shares of Class A Common Stock for distribution by the
underwriters to the public.
3.3 Company Registration.
--------------------
(a) Company Determination. If the Company shall determine to
---------------------
register any of its securities either for its own account or for the account of
a security holder or holders exercising their respective demand registration
rights, other than a registration relating solely to employee benefit plans, or
a registration relating solely to a Commission Rule 145 transaction, or a
registration on any registration form which
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does not permit secondary sales or does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of Registrable Securities, the Company will:
(i) promptly give to each of the Holders a written notice
thereof (which shall include a list of the jurisdictions in which the
Company intends to attempt to qualify such securities under the applicable
blue sky or other state securities laws); and
(ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made by the Holders within fifteen (15) days after receipt of the
written notice from the Company described in clause (i) above, except as
set forth in Section 9.3(b) below. Such written request may specify all or
a part of the Holders' Registrable Securities.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise each of the Holders as a part of the written notice
given pursuant to Section 3.3(a)(i). In such event, the right of each of the
Holders to registration pursuant to this Section 3.3 shall be conditioned upon
such Holders' participation in such underwriting and the inclusion of such
Holders' Registrable Securities in the underwriting to the extent provided
herein. The Holders shall (together with the Company and the Other Shareholders
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for underwriting by the Company. Notwithstanding any other provision of
this Section 3.3, if the underwriter determines that marketing factors require a
limitation on the number of shares to be underwritten, and (x) if such
registration is the first registered offering of the Company's securities to the
public, the underwriter may (subject to the allocation priority set forth below)
exclude from such registration and underwriting some or all of the Registrable
Securities which would otherwise be underwritten pursuant hereto, and (y) if
such registration is other than the first registered offering of the Company's
securities to the public, the underwriter may (subject to the allocation
priority set forth below) limit the number of Registrable Securities to be
included in the registration and underwriting to not less than twenty five
percent (25%) of the securities included therein (based on aggregate market
values). The Company shall so advise all holders of securities requesting
registration, and the number of shares of securities that are entitled to be
included in the registration and underwriting shall be allocated in the
following manner: The securities of the Company held by officers, directors and
Other Shareholders of the Company (other than
-12-
<PAGE>
Registrable Securities and other than securities held by holders who by
contractual right demanded such registration ("Demanding Holders")) shall be
-----------------
excluded from such registration and underwriting to the extent required by such
limitation, and, if a limitation on the number of shares is still required, the
number of shares that may be included in the registration and underwriting by
each of the Holders and Demanding Holders shall be reduced, on a pro rata basis,
by such minimum number of shares as is necessary to comply with such limitation.
If any of the Holders or any officer, director or Other Shareholder disapproves
of the terms of any such underwriting, he may elect to withdraw therefrom by
written notice to the Company and the underwriter. Any Registrable Securities or
other securities excluded or withdrawn from such underwriting shall be withdrawn
from such registration.
(c) Number and Transferability. Each of the Holders shall be
--------------------------
entitled to have its shares included in an unlimited number of registrations
pursuant to this Section 3.3. The registration rights granted pursuant to this
Section shall be assignable, in whole or in part, to any transferee of
Registrable Securities (who shall be bound by all obligations of this Section
3).
3.4 Expenses And Registration.
-------------------------
All Registration Expenses incurred in connection with any
registration, qualification or compliance pursuant to this Section 3 shall be
borne by the Company, and all Selling Expenses shall be borne by the Holders of
the securities so registered pro rata on the basis of the number of their shares
so registered; provided, however, that the Company shall not be required to pay
-------- -------
any Registration Expenses with respect to a registration requested under Section
3.2 hereof if, as a result of the withdrawal of a request for registration by
any of the Holders, as applicable (other than a withdrawal of a request for
registration because of material adverse developments with respect to the
Company since the time such Holder made its request), the registration statement
does not become effective, in which case each of the Holders and Other
Shareholders requesting registration shall bear such Registration Expenses pro
rata on the basis of the number of their shares so included in the registration
request, and provided, further, that, in each such case, such registration shall
-------- -------
not be counted as a registration pursuant to Section 3.2(a)(ii)(B).
3.5 Registration Procedures.
------------------------
In the case of each registration effected by the Company pursuant to
Section 3, the Company will keep the Holders, as applicable, advised in writing
as to the initiation of each registration and as to the completion thereof. At
its expense, the Company will:
-13-
<PAGE>
(a) Keep such registration effective for a period of one hundred
twenty (120) days or until the Holders, as applicable, have completed the
distribution described in the registration statement relating thereto, whichever
first occurs; provided, however, that (i) such one hundred twenty (120) day
-------- -------
period shall be extended for a period of time equal to the period during which
the Holders, as applicable, refrain from selling any securities included in such
registration in accordance with provisions in paragraph 3.9 hereof; and (ii) in
the case of any registration of Registrable Securities on Form S-3 which are
intended to be offered on a continuous or delayed basis, such one hundred twenty
(120) day period shall be extended until all such Registrable Securities are
sold, provided that Rule 415, or any successor rule under the Act, permits an
offering on a continuous or delayed basis, and provided further that applicable
-------- -------
rules under the Act governing the obligation to file a post-effective amendment
permit, in lieu of filing a post-effective amendment which (y) includes any
prospectus required by Section 10(a)(3) of the Act or (z) reflects facts or
events representing a material or fundamental change in the information set
forth in the registration statement, the incorporation by reference of
information required to be included in (y) and (z) above to be contained in
periodic reports filed pursuant to Section 13 or 15(d) of the Exchange Act in
the registration statement;
(c) Furnish such number of prospectuses and other documents incident
thereto as each of the Holders, as applicable, from time to time may reasonably
request; and
(d) In connection with any underwritten offering pursuant to a
registration statement filed pursuant to Section 3.2 hereof, the Company will
enter into any underwriting agreement reasonably necessary to effect the offer
and sale of Registrable Securities, provided such underwriting agreement is with
--------
an underwriter reasonably acceptable to the Company and contains customary
underwriting provisions and provided, further, that if the underwriter so
-------- -------
requests the underwriting agreement will contain customary contribution
provisions.
3.6 Indemnification.
---------------
(a) The Company will indemnify each of the Holders, as applicable,
each of its officers, directors and partners, and each person controlling each
of the Holders, with respect to each registration which has been effected
pursuant to this Section 3, and each underwriter, if any, and each person who
controls any underwriter, against all claims, losses, damages and liabilities
(or actions in respect thereof) arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any prospectus,
offering circular or other document (including any related registration
statement, notification or the like) incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or
-14-
<PAGE>
necessary to make the statements therein not misleading, or any violation by the
Company of the Act or any rule or regulation thereunder applicable to the
Company and relating to action or inaction required of the Company in connection
with any such registration, qualification or compliance, and will reimburse each
of the Holders, each of its officers, directors and partners, and each person
controlling each of the Holders, each such underwriter and each person who
controls any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating and defending any such claim, loss,
damage, liability or action, provided that the Company will not be liable in any
--------
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission based upon written
information furnished to the Company by the Holders or underwriter and stated to
be specifically for use therein.
(b) Each of the Holders will, if Registrable Securities held by it
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers and each underwriter, if any, of the Company's securities covered by
such a registration statement, each person who controls the Company or such
underwriter within the meaning of the Act and the rules and regulations
thereunder, each Other Shareholder and each of their officers, directors, and
partners, and each person controlling such Other Shareholder against all claims,
losses, damages and liabilities (or actions in respect thereof) arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus, offering circular
or other document made by such Holder, or any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading by such Holder, and will reimburse the
Company and such Other Shareholders, directors, officers, partners, persons,
underwriters or control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by such Holder and stated to be specifically for use
therein; provided, however, that the obligations of each of the Holders
-------- -------
hereunder shall be limited to an amount equal to the proceeds to such Holder of
securities sold as contemplated herein.
(c) Each party entitled to indemnification under this Section 3.6
(the "Indemnified Party") shall give notice to the party required to provide
-----------------
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
------------------
has actual knowledge of any claim as to which indemnity may be sought, and
-15-
<PAGE>
shall permit the Indemnifying Party to assume the defense of any such claim or
any litigation resulting therefrom, provided that counsel for the Indemnifying
--------
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld) and the Indemnified Party may participate in such
defense at such party's expense (unless (i) the employment of counsel by such
Indemnified Party has been authorized by the Indemnifying Party, (ii) the
Indemnified Party shall have reasonably concluded that there may be a conflict
of interest between the Indemnifying Party of such action, in each of which
cases the fees and expenses of counsel shall be at the expense of the
Indemnifying Party), and provided, further, that the failure of any Indemnified
-------- -------
Party to give notice as provided herein shall not relieve the Indemnifying Party
of its obligations under this Section 3. No Indemnifying Party, in the defense
of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation. Each Indemnified Party shall furnish
such information regarding itself or the claim in question as an Indemnifying
Party may reasonably request in writing and as shall be reasonably required in
connection with the defense of such claim and litigation resulting therefrom.
3.7 Information by the Holders.
--------------------------
Each of the Holders and each Other Shareholder holding securities
included in any registration shall furnish to the Company such information
regarding such Holder or Other Shareholder and the distribution proposed by such
Holder or Other Shareholder as the Company may reasonably request in writing and
as shall be reasonably required in connection with any registration,
qualification or compliance referred to in this Section 3.
3.8 Condition to Registration.
-------------------------
The Company shall not be obligated to file a registration statement or
to include Registrable Securities in a registration statement hereunder, (i) if
the Company shall have received opinions of counsel reasonably satisfactory to
each Holder and the Company to the effect that the proposed disposition of such
Registrable Securities may be effected without registration under the Act or
(ii) to the extent all such Registrable Securities can then be sold during a
single three-month period pursuant to Rule 144 under the Act (without giving
effect to the provisions of Rule 144(k)).
-16-
<PAGE>
3.9 Rule 144 Reporting.
------------------
With a view to making available the benefits of certain rules and
regulations of the Commission which may permit the sale of the restricted
securities to the public without registration, the Company agrees to:
(a) Make and keep public information available as those terms are
understood and defined in Rule 144 under the Act, at all times from and after
ninety (90) days following the effective date of the first registration under
the Act filed by the Company for an offering of its securities to the general
public;
(b) Use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the Act and
the Exchange Act at any time after it has become subject to such reporting
requirements; and
(c) So long as the Investors own any Registrable Securities, furnish
to each Investor upon request, a written statement by the Company as to its
compliance with the reporting requirements of Rule 144 (at any time from and
after ninety (90) days following the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Act and the Exchange Act (at any time after it has become
subject to such reporting requirements), a copy of the most recent annual or
quarterly report of the company, and such other reports and documents so filed
as each Investor may reasonably request in availing itself of any rule or
regulation of the Commission allowing each Investor to sell any such securities
without registration.
3.10 Market Stand-Off Agreement.
--------------------------
Each of the Holders shall agree, if requested by the Company and
an underwriter of Class A Common Stock (or other securities) of the Company, not
to sell or otherwise transfer or dispose of any Common Stock (or other
securities) of the Company held by such Holder during the one hundred eighty
(180) day period following the effective date of a registration statement of the
Company filed under the Act, provided that:
--------
(a) such agreement only applies to the first such registration
statement of the Company which includes securities to be sold on the Company's
behalf to the public in an underwritten offering; and
(b) all Other Shareholders and officers and directors of the Company
enter into similar agreements.
Such agreement shall be in writing in a form satisfactory to the
Company and such underwriter. The Company may impose stop-transfer instructions
with respect to the shares
-17-
<PAGE>
(or securities) subject to the foregoing restriction until the end of said one
hundred eighty (180) day period.
SECTION 4. INFORMATION AS TO THE COMPANY AND RELATED COVENANTS
---------------------------------------------------
4.1 Financial and Business Information Information. From and after
----------------------------------------------
the date hereof until the Initial Public Offering, the Company shall deliver to
each Investor so long as such Investor continues to hold at least 50% of the
shares of Common Equity acquired by such Investor in connection with this
Agreement or the Exchange Agreement:
(a) Monthly and Quarterly Statements. As soon as practicable, and in
--------------------------------
any event within thirty (30) days of the close of each month of each fiscal year
of the Company in the case of Monthly Statements and forty-five (45) days after
the close of each of the first three fiscal quarters of each fiscal year of the
Company in the case of Quarterly Statements, a consolidated balance sheet,
statement of income and statement of changes in cash flow of the Company and its
Subsidiaries, if any, as of the close of such month or quarter, as the case may
be, and covering operations for such month or quarter and the portion of the
Company's fiscal year ending on the last day of such month or quarter, all in
reasonable detail and prepared in accordance with generally accepted accounting
principles, consistently applied, subject to audit and year end adjustments,
setting forth in each case in comparative form the figures for the comparable
period of the previous fiscal year;
(b) Annual Statements. As soon as practicable after the end of each
-----------------
fiscal year of the Company, and in any event within one hundred twenty (120)
days thereafter, a copy of:
(i) consolidated and consolidating balance sheets of the Company
and its Subsidiaries, if any, at the end of such year, and
(ii) consolidated and consolidating statements of income,
stockholders' equity and changes in cash flow of the Company and its
Subsidiaries, if any, for such year, setting forth in each case in
comparative form the figures for the previous fiscal year, all in
reasonable detail and accompanied by an opinion thereon of independent
certified public accountants of recognized national standing selected by
the Company and reasonably acceptable to the Investor, which opinion shall
state that such financial statements fairly present the financial position
of the Company and its Subsidiaries, if any, on a consolidated basis and
have been prepared in accordance with generally accepted accounting
principles consistently applied (except for changes in application in which
such accountants concur) and that the examination of such accountants has
been made in accordance
-18-
<PAGE>
with generally accepted auditing standards, and accordingly included such
tests of the accounting records and such other auditing procedures as were
considered necessary in the circumstances;
(c) Business Plan; Projections. Prior to the commencement of each
--------------------------
fiscal year of the Company, an annual business plan of the Company and
projections of operating results, prepared on a monthly basis, and a two (2)
year business plan of the Company and projections of operating results. Within
forty-five (45) days of the close of each fiscal quarter of the Company, if so
requested by the Investor, the Company shall provide the Investor with a
comparison of actual year-to-date results with the corresponding budgeted
figures;
(d) Audit Reports. Promptly upon receipt thereof, one (1) copy of
-------------
each other financial report and internal control letter submitted to the Company
by independent accountants in connection with any annual, interim or special
audit made by them of the books of the Company and its Subsidiaries, if any;
(e) Other Reports. Promptly upon their becoming available, one (1)
-------------
copy of each financial statement, report, notice or proxy statement sent by the
Company to its shareholders generally, of each financial statement, report,
notice or proxy statement sent by the Company or any of its Subsidiaries to the
Commission or any successor agency, if applicable, of each regular or periodic
report and any registration statement, prospectus or written communication
(other than transmittal letters) in respect thereof filed by the Company or any
of its Subsidiaries with, or received by such Person in connection therewith
from, any securities exchange or the Commission or any successor agency, of any
press release issued by the Company or any of its Subsidiaries, and of any
material of any nature whatsoever prepared by the Commission, or any successor
agency thereto or any state blue sky or securities law commission which relates
to or affects in any way the Company or any of its Subsidiaries; and
(f) Requested Information. With reasonable promptness, the Company
---------------------
shall furnish each Investor with such other data and information as from time to
time may be reasonably requested.
4.2 Inspection.
----------
As long as any Investor holds at least two percent (2%) of the
outstanding Common Stock or holds other securities convertible into a number of
shares of Common Stock which upon such conversion will, together with shares of
Common Stock held directly, equal at least two percent (2%) of the outstanding
Common Stock after such conversion, the Company shall permit such Investor, its
nominee, assignee, and its representative to visit and inspect any of the
properties of the Company, to examine all
-19-
<PAGE>
its books of account, records, reports and other papers not contractually
required of the Company to be confidential or secret, to make copies and
extracts therefrom, and to discuss its affairs, finances and accounts with its
officers, directors, key employees and independent public accountants or any of
them (and by this provision the Company authorizes said accountants to discuss
with said Investor, its nominee, assign and representatives the finances and
affairs of the Company and its Subsidiaries, if any), all at such reasonable
times and as often as may be reasonably requested.
4.3 Confidentiality.
---------------
As to so much of the information and other material furnished
under or in connection with this Agreement or the Exchange Agreement (whether
furnished before, on or after the date hereof) as constitutes or contains
confidential business, financial or other information of the Company or its
Subsidiaries, if any, each Investor covenants for itself and its directors,
officers and partners that it will use due care to prevent its respective
officers, directors, employees, counsel, accountants and other representatives
from disclosing such information to persons other than their respective
authorized employees, counsel, accountants, shareholders, partners, limited
partners and other authorized representatives; provided, however, that the
-------- -------
Investor may disclose or deliver any information or other material disclosed to
or received by the Investor should such disclosure or delivery be required by
law.
SECTION 5. INTERPRETATION OF THIS AGREEMENT
--------------------------------
(a) Terms Defined. As used in this Agreement, the following
-------------
terms have the respective meaning set forth below:
Affiliate: means any person or entity, directly or indirectly,
---------
controlling, controlled by or under common control with such person or entity.
Common Equity: means the Common Stock issued by the Company and the
-------------
Common Stock issuable upon conversion of the Series A Preferred Stock and the
Series B Preferred Stock (assuming full conversion of all outstanding shares of
Series A Preferred Stock and Series B Preferred Stock).
Exchange Act: the Securities Exchange Act of 1934, as amended.
------------
Person: an individual, partnership, joint-stock company, corporation,
------
trust or unincorporated organization, and a government or agency or political
subdivision thereof.
Subsidiary: a corporation of which the Company owns, directly or
----------
indirectly, more than 50% of the Voting Stock.
-20-
<PAGE>
Transfer: any sale, assignment, pledge, hypothecation, or other
--------
disposition or encumbrance.
Voting Stock: securities of any class or classes of a corporation the
------------
holders of which are ordinarily, in the absence of contingencies, entitled to
elect a majority of the corporate directors (or Persons performing similar
functions).
(b) Accounting Principles. Where the character or amount of any
---------------------
asset or amount of any asset or liability or item of income or expense is
required to be determined or any consolidation or other accounting computation
is required to be made for the purposes of this Agreement, this shall be done in
accordance with U.S. generally accepted accounting principles at the time in
effect, to the extent applicable, except where such principles are inconsistent
with the requirements of this Agreement.
(c) Directly or Indirectly. Where any provision in this Agreement
----------------------
refers to action to be taken by any Person, or which such Person is prohibited
from taking, such provision shall be applicable whether such action is taken
directly or indirectly by such Person.
(d) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of Delaware applicable to contracts
made and to be performed entirely within such State.
(e) Section Headings. The headings of the sections and
----------------
subsections of this Agreement are inserted for convenience only and shall not be
deemed to constitute a part thereof.
SECTION 6. MISCELLANEOUS
-------------
(a) Termination. This Agreement shall terminate on the earlier to
-----------
occur of (i) the date on which each of the Institutional Investors shall have
agreed or (ii) the tenth anniversary of the date hereof.
(b) Amendment of Exchange Agreement; Binding Agreement. Each of the
--------------------------------------------------
Existing Investors a signatory hereto and the Company hereby acknowledge and
agree that this Agreement supersedes and amends and restates Sections 6.3
through 6.6, Section 6.8, Section 9 and Section 10 of the Exchange Agreement.
Each of the Investors and the Company hereby acknowledge and agree that,
notwithstanding the fact that this Agreement may not be executed by all of the
Existing Investors, this Agreement constitutes a valid and binding obligation of
such signatory and the Company, enforceable against the signatory and the
Company in accordance with its terms. The Company hereby agrees to indemnify
and hold harmless each of the New Investors from and against any and all damages
and losses resulting from any failure of any Existing Investor to execute this
Agreement, it being
-21-
<PAGE>
understood that (i) the Company agreed to provide to each of the New Investors
all rights that each such New Investor would obtain hereunder upon execution and
delivery of this Agreement by all of the Existing Investors and the Company
("Full Stockholder Rights"), and (ii) the Full Stockholder Rights are a material
-----------------------
inducement to each such New Investor to enter into and consummate the
transactions contemplated by the Stock Purchase Agreement.
(c) Notices.
-------
(i) All communications under this Agreement shall be in writing
and shall be delivered by hand or mailed by overnight courier or by registered
or certified mail, postage prepaid:
(1) if to the Investors, at the addresses shown below,
marked for attention as there indicated, or at such other address as the
Investor may have furnished the Company in writing.
if to Warburg, at:
Warburg, Pincus Investors, L.P.
466 Lexington Avenue
New York, New York 10017
Attention: Elizabeth H. Weatherman
with a copy to:
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: Steven J. Gartner, Esq.
if to Accel, at:
c/o Accel Partners
One Embarcadero Center
Suite 3820
San Francisco, California 94111
Attention: Paul Klingenstein
if to Vertical, at:
c/o The Vertical Group
18 Bank Street
Summit, New Jersey 07901
Attention: Richard B. Emmitt
-22-
<PAGE>
if to Adams, at:
Mark K. Adams
135 Montauk Avenue
Stonington, Connecticut 06378
if to Rosenblatt, at:
Solomon Rosenblatt
P.O. Box 225
Sugar Loaf Shores, Florida 33044
if to Cercone, at:
Ronald J. Cercone
8 Pepperidge Lane
East Lyme, Connecticut 06333
if to Miller, at:
William R. Miller
150 East 52nd Street
New York, New York 10022
if to Reeves, at:
Robert A. Reeves
c/o Underwriters Safety and Claims
of Tennessee
Suite 301
2019 Richard Jones Road
Nashville, Tennessee 37215
if to First Union, at:
Scott Perper
First Union Capital Partners
One First Union Center
Charlotte, North Carolina 28288
if to James T. Treace, at:
James T. Treace
4911 Creekside Drive
Clearwater, Florida
if to John R. Treace, at:
John R. Treace
4911 Creekside Drive
Clearwater, Florida
if to Daniel H. Treace, at:
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<PAGE>
Daniel H. Treace
4911 Creekside Drive
Clearwater, Florida
if to F. Barry Bays, at:
F. Barry Bays
4911 Creekside Drive
Clearwater, Florida
with a copy to, with respect to the New Investors:
Kirkland & Ellis
200 East Randolph Street
Chicago, Illinois 60601
Attention: Emile Karafiol, Esq.
(2) if to the Company, at its address shown below, marked
for the attention of the President of the Company, or at such other address as
it may have furnished in writing to each of the Investors.
Xomed Surgical Products, Inc.
6743 Southpoint Drive North
Jacksonville, Florida 32216
Attention: President
(ii) Any notice so addressed shall be deemed to be given: if
delivered by hand, on the date of such delivery; if mailed by courier, on the
first business day following the date of such mailing; and if mailed by
registered or certified mail, on the third business day after the date of such
mailing.
(d) Reproduction of Documents. This Agreement and all documents
-------------------------
relating thereto, including, without limitation, (i) consents, waivers and
modifications which may hereafter be executed, (ii) documents received by each
Investor pursuant hereto and (iii) financial statements, certificates and other
information previously or hereafter furnished to each Investor, may be
reproduced by each Investor by an photographic, photostatic, microfilm,
microcard, miniature photographic or other similar process and each Investor may
destroy any original document so reproduced. All parties hereto agree and
stipulate that any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding (whether or not the
original is in existence and whether or not such reproduction was made by each
Investor in the regular course of business) and that any enlargement, facsimile
or further reproduction of such reproduction shall likewise be admissible in
evidence.
(e) Successors and Assigns. This Agreement shall inure to the
----------------------
benefit of and be binding upon the successors and assigns (including without
limitation any transferee of Common
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<PAGE>
Equity as permitted pursuant to the terms of this Agreement) of each of the
parties.
(f) Entire Agreement; Amendment and Waiver. This Agreement
--------------------------------------
constitutes the entire understanding of the parties hereto relating to the
subject matter hereof and supersede all prior agreements or understandings with
respect to the subject matter hereof among such parties. This Agreement may be
amended, and the observance of any term of this Agreement may be waived, with
(and only with) the written consent of each of the Institutional Investors and
Management Investors holding more than 50% of the shares of Common Stock then
held by all Management Investors.
(g) Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
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<PAGE>
IN WITNESS WHEREOF, certain of the parties hereto have executed this
Stockholders Agreement as of the date first above written.
XOMED SURGICAL PRODUCTS, INC.
By: /s/ Mark K. Adams
------------------------------
Name: Mark K. Adams
Title: President and CEO
WARBURG, PINCUS INVESTORS, L.P.
By: Warburg, Pincus & Co.,
General Partner
By: /s/ Elizabeth H. Weatherman
------------------------------
Name: Elizabeth H. Weatherman
Title: Partner
ACCEL IV L.P.
By: Accel IV Associates L.P.
Its General Partner
By: /s/ G. Carter Sednaoui
------------------------------
General Partner
ACCEL INVESTORS '94 L.P.
By: /s/ G. Carter Sednaoui
------------------------------
General Partner
ACCEL KEIRETSU L.P.
By: Accel Partners & Co., Inc.
Its General Partner
By: /s/ G. Carter Sednaoui
------------------------------
General Partner
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<PAGE>
ELLMORE C. PATTERSON PARTNERS
By: /s/ Authorized Signatory
-------------------------------
General Partner
PROSPER PARTNERS
By: /s/ G. Carter Sednaoui
-------------------------------
Attorney-In-Fact
VERTICAL FUND ASSOCIATES, L.P.
By: Vertical Group, L.P., General Parnter
By: /s/ John E. Runnells
--------------------------------
General Partner
VERTICAL MEDICAL PARTNERS, L.P.
By: The Vertical Group, Inc.
Its General Partner
By: /s/ John E. Runnells
--------------------------------
VERTICAL PARTNERS
By: The Vertical Group, Inc.
Its General Partner
By: /s/ John E. Runnells
--------------------------------
MARK K. ADAMS
/s/ Mark K. Adams
-------------------------------------
Mark K. Adams
SOLOMON ROSENBLATT
/s/ Solomon Rosenblatt
-------------------------------------
Solomon Rosenblatt
-27-
<PAGE>
RONALD J. CERCONE
/s/ Ronald J. Cercone
----------------------------------
Ronald J. Cercone
WILLIAM R. MILLER
/s/ William R. Miller
----------------------------------
William R. Miller
ROBERT A. REEVES
/s/ Robert A. Reeves
----------------------------------
Robert A. Reeves
FIRST UNION CAPITAL PARTNERS
/s/ Scott B. Perper
----------------------------------
First Union Capital Partners
JAMES T. TREACE
/s/ James T. Treace
----------------------------------
James T. Treace
JOHN R. TREACE
/s/ John R. Treace
----------------------------------
John R. Treace
DANIEL H. TREACE
/s/ Daniel H. Treace
----------------------------------
Daniel H. Treace
-28-
<PAGE>
F. BARRY BAYS
/s/ F. Barry Bays
------------------------
F. Barry Bays
THOMAS E. TIMBIE
/s/ Thomas E. Timbie
------------------------
Thomas E. Timbie
-29-
<PAGE>
SCHEDULE I
James T. Treace
John R. Treace
Daniel H. Treace
F. Barry Bays
Thomas E. Timbie
<PAGE>
EXHIBIT 10.2
CREDIT AGREEMENT
----------------
BY AND AMONG
MEROCEL/XOMED HOLDINGS, INC.,
MEROCEL CORPORATION,
XOMED-TREACE, INC.,
XOMED-TREACE, P.R. INC.,
BANK OF BOSTON CONNECTICUT,
THE OTHER LENDERS WHICH ARE OR MAY BECOME PARTIES HERETO
AND
BANK OF BOSTON CONNECTICUT, AS AGENT
DATED: APRIL 15, 1994
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Section Page
- ------- -----
<S> <C> <C>
(S)1 DEFINITIONS AND RULES OF INTERPRETATION
--------------------------------------- -1-
(S)1.1 Definitions -1-
-----------
(S)1.2 Rules of Interpretation -1-
-----------------------
(S)2 THE REVOLVING CREDIT FACILITY -1-
-----------------------------
(S)2.1 Commitment to Lend -1-
------------------
(S)2.2 Commitment Fee -2-
--------------
(S)2.3 Reduction of Total Commitment -2-
-----------------------------
(S)2.4 The Revolving Credit Notes -2-
--------------------------
(S)2.5 Interest on Revolving Credit Loans -3-
----------------------------------
(S)2.6 Requests for Revolving Credit Loans -3-
-----------------------------------
(S)2.7 Conversion Options -3-
------------------
(S)2.8 Funds for Revolving Credit Loans -4-
--------------------------------
(S)2.9 Settlement: Application of Repayments of Revolving Credit
---------------------------------------------------------
Loans -5-
-----
(S)2.10 Change in Borrowing Base -7-
------------------------
(S)3 REPAYMENT OF THE REVOLVING CREDIT LOANS -7-
---------------------------------------
(S)3.1 Maturity -7-
--------
(S)3.2 Mandatory Repayments of Revolving Credit Loans -7-
----------------------------------------------
(S)3.3 Optional Repayments of Revolving Credit Loans -7-
---------------------------------------------
(S)4 THE TERM LOAN -8-
-------------
(S)4.1 Commitment to Lend -8-
------------------
(S)4.2 The Term Notes -8-
--------------
(S)4.3 Mandatory Payments of Principal of Term Loan -8-
--------------------------------------------
(S)4.4 Optional Prepayment of Term Loan -10-
--------------------------------
(S)4.5 Interest on Term Loan -11-
---------------------
(S)5 CERTAIN GENERAL PROVISIONS -12-
--------------------------
(S)5.1 Fees -12-
----
(S)5.2 Funds for Payments -12-
------------------
(S)5.3 Computations -12-
------------
(S)5.4 Inability to Determine Eurodollar Rate -12-
--------------------------------------
(S)5.5 Illegality -13-
----------
(S)5.6 Additional Costs, Etc -13-
-----------------
(S)5.7 Capital Adequacy -14-
----------------
(S)5.8 Certificate -15-
-----------
(S)5.9 Indemnity -15-
---------
(S)5.10 Interest After Default -15-
----------------------
(S)5.11 HLT Classification -16-
------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(S)5.12 Concerning Joint and Several Liability of the Borrowers-16-
-------------------------------------------------------
(S)6 COLLATERAL SECURITY-18-
-------------------
(S)7 REPRESENTATIONS AND WARRANTIES-18-
------------------------------
(S)7.1 Corporate Authority; Ownership-18-
------------------------------
(S)7.2 No Business Activity; Subsidiaries-19-
----------------------------------
(S)7.3 Governmental Approvals-19-
----------------------
(S)7.4 Title to Properties; Leases-20-
---------------------------
(S)7.5 Financial Statements-20-
--------------------
(S)7.6 Financial Statements-21-
--------------------
(S)7.7 No Material Changes, Etc.-22-
-------------------------
(S)7.8 Franchises, Patents, Copyrights, Etc.-2-
-------------------------------------
(S)7.9 Litigation-22-
----------
(S)7.10 No Materially Adverse Contracts, Etc.-22-
-------------------------------------
(S)7.11 Compliance with Other Instruments, Laws, Etc.-23-
---------------------------------------------
(S)7.12 Tax Status-23-
----------
(S)7.13 No Event of Default-23-
-------------------
(S)7.14 Holding Company and Investment Company Acts-23-
-------------------------------------------
(S)7.15 Absence of Financing Statements, Etc-23-
------------------------------------
(S)7.16 Perfection of Security Interest-23-
-------------------------------
(S)7.17 Certain Transactions-24-
--------------------
(S)7.18 Employee Benefit Plans-24-
----------------------
(S)7.19 Regulations U and X-25-
-------------------
(S)7.20 Environmental Compliance-25-
------------------------
(S)7.21 Fiscal Year-27-
-----------
(S)7.22 Loans as Senior Indebtedness-27-
----------------------------
(S)7.23 Proceeds of Capital Contribution.-27-
---------------------------------
(S)7.24 Other Representations-27-
---------------------
(S)7.25 Bank Accounts-27-
-------------
(S)7.26 Puerto Rico Collateral-27
----------------------
(S)8 AFFIRMATIVE COVENANTS OF THE BORROWERS-28-
--------------------------------------
(S)8.1 Punctual Payment-28-
----------------
(S)8.2 Maintenance of Office-28-
---------------------
(S)8.3 Records and Account-28-
-------------------
(S)8.4 Financial Statements, Certificates and Information-28-
--------------------------------------------------
(S)8.5 Notices-30-
-------
(S)8.6 Corporate Existence; Maintenance of Properties-31-
----------------------------------------------
(S)8.7 Insurance-31-
---------
(S)8.8 Taxes-32-
-----
(S)8.9 Inspection of Properties and Books, Etc.-32-
---------------------------------------
(S)8.10 Compliance with Laws, Contracts, Licenses, and Permits-33-
------------------------------------------------------
(S)8.11 Employee Benefit Plans-33-
----------------------
(S)8.12 Use of Proceeds-34-
---------------
(S)8.13 Additional Mortgaged Property-34-
-----------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(S)8.14 Further Assurances-34-
------------------
(S)8.15 Bank Accounts-34-
-------------
(S)8.16 Interest Rate Protection Arrangements-34-
-------------------------------------
(S)8.17 Puerto Rican Collateral; Dissolution of Xomed-Treace, P.R.
----------------------------------------------------------
Inc.-35-
----
(S)9 CERTAIN NEGATIVE COVENANTS OF THE BORROWERS-35-
-------------------------------------------
(S)9.1 Restrictions on Indebtedness-35-
----------------------------
(S)9.2 Restrictions on Liens-36-
---------------------
(S)9.3 Restrictions on Investments-37-
---------------------------
(S)9.4 Distributions-38-
-------------
(S)9.5 Merger, Consolidation and Disposition of Assets-38-
-----------------------------------------------
(S)9.6 Sale and Leaseback-39-
------------------
(S)9.7 Compliance with Environmental Laws-39-
----------------------------------
(S)9.8 Employee Benefit Plans-39-
----------------------
(S)9.9 Additional Shares-40-
-----------------
(S)9.10 Changes in Terms of Subordinated Debt.-40-
-------------------------------------
(S)9.11 Acquisition Documents-40-
---------------------
(S)9.13 Amendment or Modification of Capitalization Documents-42-
-----------------------------------------------------
(S)9.14 Change of Fiscal Year-42-
---------------------
(S)9.15 Total Commitment Amount-42-
-----------------------
(S)10 FINANCIAL COVENANTS OF THE BORROWERS-42-
------------------------------------
(S)10.1 Operating Cash Flow to Financial Obligations-42-
--------------------------------------------
(S)10.2 Interest Coverage-43-
-----------------
(S)10.3 Consolidated Shareholders Equity-43-
--------------------------------
(S)10.4 Liabilities to Equity-43-
---------------------
(S)10.5 Capital Expenditures; Capitalized Leases-43-
----------------------------------------
(S)11 INITIAL CLOSING CONDITIONS-43-
--------------------------
(S)11.1 Loan Documents-44-
--------------
(S)11.2 Certified Copies of Charter Documents-44-
-------------------------------------
(S)11.3 Corporate Action-44-
----------------
(S)11.4 Incumbency Certificate-44-
----------------------
(S)11.5 Legality of Transactions-44-
------------------------
(S)11.6 Validity of Liens-44-
-----------------
(S)11.7 UCC Search Results-45-
------------------
(S)11.8 Survey and Taxes-45-
----------------
(S)11.9 Title Insurance-45-
---------------
(S)11.10 Landlord Consents-45-
-----------------
(S)11.11 Certificates of Insurance-45-
-------------------------
(S)11.12 Borrowing Base Report-45-
---------------------
(S)11.13 Proceedings and Documents-45-
-------------------------
(S)11.14 Accounts Receivable Aging Report-45-
--------------------------------
(S)11.15 Appraisals; Hazardous Waste Assessments-45-
---------------------------------------
(S)11.16 Financial Condition-46-
-------------------
(S)11.17 Opinion of Counsel-46-
------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(S)11.18 Payment of Fees-46-
---------------
(S)11.19 Payoff Letter-46-
-------------
(S)11.20 Disbursement Instructions-47-
-------------------------
(S)11.21 Solvency Certificate-47-
--------------------
(S)11.22 Bank Agency Agreements-47-
----------------------
(S)11.23 Equity Contribution-47-
-------------------
(S)11.24 Closing of Acquisition-47-
----------------------
(S)11.25 Acquisition Documents-47-
---------------------
(S)11.26 H-S-R-48-
-----
(S)11.27 Collateral Note-48-
---------------
(S)12 CONDITIONS TO ALL BORROWINGS-48-
----------------------------
(S)12.1 Representations True; No Event of Default-48-
-----------------------------------------
(S)12.2 No Legal Impediment-48-
-------------------
(S)12.3 Governmental Regulation-48-
-----------------------
(S)12.4 Proceedings and Documents-49-
-------------------------
(S)12.5 Borrowing Base Report-49-
---------------------
(S)12.6 Future Advances Tax Payment-49-
---------------------------
(S)13 EVENTS OF DEFAULT; ACCELERATION; ETC.-49-
-------------------------------------
(S)13.1 Events of Default Acceleration-49-
------------------------------
(S)13.2 Termination of Commitments-53-
--------------------------
(S)13.3 Remedies-53-
--------
(S)13.4 Distribution of Collateral Proceeds-53-
-----------------------------------
(S)14 SETOFF-54-
------
(S)15 THE AGENT-55-
---------
(S)15.1 Authorization-55-
-------------
(S)15.2 Employees and Agents-55-
--------------------
(S)15.3 No Liability-55-
------------
(S)15.4 No Representations-55-
------------------
(S)15.5 Payments-56-
--------
(S)15.6 Holders of Notes-57-
----------------
(S)15.7 Indemnity-57-
---------
(S)15.8 Agent as Bank-57-
-------------
(S)15.9 Resignation-57-
-----------
(S)15.10 Notification of Defaults and Events of Default-58-
----------------------------------------------
(S)15.11 Duties in the Case of Enforcement-58-
---------------------------------
(S)16 EXPENSES-58-
--------
(S)17 INDEMNIFICATION-59-
---------------
(S)18 SURVIVAL OF COVENANTS, ETC.-60-
---------------------------
(S)19 ASSIGNMENT AND PARTICIPATION-60-
----------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(S)19.1 Conditions to Assignment by Banks-60-
---------------------------------
(S)19.2 Certain Representations and Warranties; Limitations;
----------------------------------------------------
Covenants-61-
--------
(S)19.3 Register-62-
--------
(S)19.4 New Notes-62-
---------
(S)19.5 Participations-62-
--------------
(S)19.6 Disclosure-63-
----------
(S)19.7 Assignee or Participant Affiliated with the Borrowers-63-
-----------------------------------------------------
(S)19.8 Miscellaneous Assignment Provisions-63-
-----------------------------------
(S)19.9 Assignment by Borrowers-64-
-----------------------
(S)20 NOTICES, ETC-64-
------------
(S)21 GOVERNING LAW-64-
-------------
(S)22 HEADINGS-65-
--------
(S)23 COUNTERPARTS-65-
------------
(S)24 ENTIRE AGREEMENT, ETC-65-
----------------
(S)25 WAIVER OF JURY TRIAL-65-
--------------------
(S)26 CONSENTS, AMENDMENTS, WAIVERS, ETC.-65-
----------------------------------
(S)27 SEVERABILITY-66-
------------
(S)28 COMMERCIAL TRANSACTION; PREJUDGEMENT REMEDY
-------------------------------------------
WAIVER-66-
------
EXHIBITS
--------
Exhibit A -Form of Revolving Credit Note
Exhibit B -Form of Term Note
Exhibit C -Form of Compliance Certificate
Exhibit D -Form of Assignment and Acceptance
Exhibit E -Borrowing Base Report
SCHEDULES
---------
Schedule 1 -Lending Institutions
Schedule 2 -Definitions and Rules of Interpretation
Schedule 7.1(d)-Ownership
Schedule 7.2 -Ownership Interests
Schedule 7.4 -Owned Assets not listed on Balance Sheet
Schedule 7.8 -Patents
</TABLE>
<PAGE>
Schedule 7.9 - Litigation
Schedule 7.17 - Permitted Transactions
Schedule 7.20 - Environmental Issues
Schedule 7.25 - Bank Accounts
Schedule 8.2 - Use of Proceeds
Schedule 9.1 - Permitted Indebtedness
Schedule 9.2 - Permitted Liens
Schedule 9.3 - Permitted Investments
<PAGE>
CREDIT AGREEMENT
----------------
This CREDIT AGREEMENT is made as of the 15th day of April, 1994, by and
among MEROCEL CORPORATION ("Merocel"), XOMED-TREACE, INC. ("Xomed"), XOMED-
TREACE, P.R. INC. ("Xomed P.R.") and MEROCEL/XOMED HOLDINGS, INC. ("Holdings"
and, together with Merocel, Xomed and Xomed P.R., the "Borrowers" and each,
singularly, a "Borrower"), each a Delaware corporation having its principal
place of business at 950 Flanders Road, Mystic, Connecticut 06355, and BANK OF
BOSTON CONNECTICUT and the other lending institutions listed on Schedule 1
----------
attached hereto (collectively, the "Banks") and BANK OF BOSTON CONNECTICUT as
agent for itself and the other Banks (in such capacity, the "Agent").
(S)1 DEFINITIONS AND RULES OF INTERPRETATION.
---------------------------------------
(S)1.1 Definitions. Except as otherwise expressly provided herein, all
-----------
capitalized terms used in this Credit Agreement, the exhibits hereto and any
notes, certificates, reports or other documents or instruments made or delivered
pursuant to or in connection with this Credit Agreement shall have the meanings
set forth for such terms in Schedule 2 hereto.
----------
(S)1.2 Rules of Interpretation. Except as otherwise expressly provided
-----------------------
herein, the rules of interpretation set forth in Schedule 2 hereto shall apply
----------
to this Credit Agreement, the exhibits hereto and any notes, certificates,
reports or other documents or instruments made or delivered pursuant to or in
connection with this Credit Agreement.
(S)2 THE REVOLVING CREDIT FACILITY.
-----------------------------
(S)2.1 Commitment to Lend. Subject to the terms and conditions set
------------------
forth in this Credit Agreement, each of the Banks severally agrees to lend to
the Borrowers and the Borrowers may borrow, repay, and reborrow from time to
time between the Closing Date and the Revolving Credit Loan Maturity Date upon
notice by the Borrowers to the Agent given in accordance with (S)2.6, such sums
as are requested by the Borrowers up to a maximum aggregate amount outstanding
(after giving effect to all amounts requested) at any one time equal to such
Bank's Commitment or, if Bank of Boston Connecticut elects, in its sole
discretion, to fund any Revolving Credit Loan pursuant to the terms of (S)2.9
hereof, no later than 12:00 noon (Hartford, Connecticut time) on the proposed
Drawdown Date of such Revolving Credit Rate Loan; provided that the outstanding
--------
aggregate amount of all Revolving Credit Loans shall not at any time exceed at
the lesser of (i) the Total Commitment and (ii) the Borrowing Base. The
Revolving Credit Loans shall be made pro rata in accordance with each Bank's
--- ----
Commitment Percentage. Each request for a Revolving Credit Loan hereunder shall
constitute a representation and warranty by the Borrowers that the conditions
set forth in (S)11 and (S)12, in the case
<PAGE>
of the initial Revolving Credit Loans to be made on the Closing Date, and (S)12,
in the case of all other Revolving Credit Loans, have been satisfied on the date
of such request.
(S)2.2 Commitment Fee. The Borrowers agree to pay to the Agent for
--------------
the respective accounts of the Banks in accordance with their respective
Commitment Percentages a commitment fee calculated at the rate of one-half of
one percent (1/2%) per annum on the average daily amount during each calendar
quarter (or portion thereof) from the Closing Date to the Revolving Credit Loan
Maturity Date by which the Total Commitment exceeds the outstanding amount of
Revolving Credit Loans during such period. The commitment fee shall be payable
quarterly in arrears on the first day of each calendar quarter for the
immediately preceding calendar quarter (or portion thereof) commencing on the
first such date following the date hereof, with a final payment on the Revolving
Credit Maturity Date or any earlier date on which the Commitments shall
terminate.
(S)2.3 Reduction of Total Commitment. The Borrowers shall have the
-----------------------------
right at any time and from time to time upon three (3) Business Days' prior
written notice to the Agent to reduce by $500,000 or any greater integral
multiple thereof or terminate entirely the Total Commitment, whereupon the
Commitments of the Banks shall be reduced pro rata in accordance with their
--- ----
respective Commitment Percentages of the amount specified in such notice or, as
the case may be, terminated. Promptly after receiving any notice from the
Borrowers delivered pursuant to this (S)2.3, the Agent will notify the Banks of
the substance thereof. Upon the effective date of any such reduction or
termination, the Borrowers shall pay to the Agent for the respective accounts of
the Banks the full amount of any commitment fee then accrued on the amount of
the reduction. No reduction or termination of the Commitments may be reinstated.
(S)2.4 The Revolving Credit Notes. The Revolving Credit Loans shall
--------------------------
be evidenced by separate promissory notes of the Borrowers in substantially the
form of Exhibit A hereto (each a "Revolving Credit Note"), dated as of the
---------
Closing Date and completed with appropriate insertions. One Revolving Credit
Note shall be payable to the order of each Bank in a principal amount equal to
such Bank's Commitment or, if less, the outstanding amount of all Revolving
Credit Loans made by such Bank, plus interest accrued thereon, as set forth
below. Each Borrower irrevocably authorizes each Bank to make or cause to be
made, at or about the time of the Drawdown Date of any Revolving Credit Loan or
at the time of receipt of any payment of principal on such Bank's Revolving
Credit Note, an appropriate notation on such Bank's Revolving Credit Note Record
reflecting the making of such Revolving Credit Loan or (as the case may be) the
receipt of such payment. The outstanding amount of the Revolving Credit Loans
set forth on such Bank's Revolving Credit Note Record shall be prima facie
----- -----
evidence of the principal amount thereof owing and unpaid to such Bank, but the
failure to record, or any error in so recording, any such amount on such Bank's
Revolving Credit Note Record shall not limit or otherwise affect the obligations
of the Borrowers hereunder or under any Revolving Credit Note to make payments
of principal of or interest on any Revolving Credit Note when due.
<PAGE>
(S)2.5 Interest on Revolving Credit Loans. Except as otherwise
----------------------------------
provided in (S)5.11,
(a) Each Base Rate Loan shall bear interest for the period
commencing with the Drawdown Date thereof and ending on the last day of the
Interest Period with respect thereto at the rate of one percent (1%) per annum
above the Base Rate.
(b) Each Eurodollar Rate Loan shall bear interest for the period
commencing with the Drawdown Date thereof and ending on the last day of the
Interest Period with respect thereto at the rate of two and one-quarter of one
percent (2.25%) per annum above the Eurodollar Rate determined for such Interest
Period.
(c) The Borrowers promise to pay interest on each Revolving
Credit Loan in arrears on each Interest Payment Date with respect thereto.
(S)2.6 Requests for Revolving Credit Loans. The Borrowers shall give
-----------------------------------
to the Agent written notice in form and substance satisfactory to Agent of each
Revolving Credit Loan requested hereunder (a "Loan Request") no less than (i)
two (2) Business Days prior to the proposed Drawdown Date of any Base Rate Loan
and (ii) four (4) Eurodollar Business Days prior to the proposed Drawdown Date
of any Eurodollar Rate Loan. Each such notice shall specify (1) the principal
amount of the Revolving Credit Loan requested, (2) the proposed Drawdown Date of
such Revolving Credit Loan, (3) the Interest Period for such Revolving Credit
Loan and (4) the Type of such Revolving Credit Loan. Promptly upon receipt of
any such notice, the Agent shall notify each of the Banks thereof. Each Loan
Request shall be irrevocable and binding on each Borrower and shall obligate the
Borrowers to accept the Revolving Credit Loan requested from the Banks on the
proposed Drawdown Date. Each Loan Request shall be in a minimum aggregate amount
of $500,000 or an integral multiple thereof.
(S)2.7 Conversion Options.
------------------
(a) The Borrowers may elect from time to time to convert any
outstanding Revolving Credit Loan to a Revolving Credit Loan of another Type,
provided that (i) with respect to any such conversion of a Revolving Credit Loan
- --------
to a Base Rate Loan, the Borrowers shall give the Agent at least two (2)
Business Days' prior written notice of such election; (ii) with respect to any
such conversion of a Base Rate Loan to a Eurodollar Rate Loan, the Borrowers
shall give the Agent at least four (4) Eurodollar Business Days' prior written
notice of such election; (iii) with respect to any such conversion of a
Eurodollar Rate Loan into a Revolving Credit Loan of another Type, such
conversion shall only be made on the last day of the Interest Period with
respect thereto and (iv) no Loan may be converted into a Eurodollar Rate Loan
when any Default or Event of Default has occurred and is continuing. On the
date on which such conversion is being made each Bank shall take such action as
is necessary to transfer its Commitment Percentage of such Revolving Credit
Loans to its Domestic Lending Office or its Eurodollar
<PAGE>
Lending Office, as the case may be. All or any part of outstanding Revolving
Credit Loans of any Type may be converted into a Revolving Credit Loan of
another Type as provided herein, provided that any partial conversion shall be
--------
in an aggregate principal amount of $500,000 or a whole multiple thereof. Each
Conversion Request relating to the conversion of a Revolving Credit Loan to a
Eurodollar Rate Loan shall be irrevocable by the Borrowers.
(b) Any Revolving Credit Loan of any Type may be continued as a
Revolving Credit Loan of the same Type upon the expiration of an Interest Period
with respect thereto by compliance by the Borrowers with the notice provisions
contained in (S)2.7(a); provided that no Eurodollar Rate Loan may be continued
--------
as such when any Default or Event of Default has occurred and is continuing, but
shall be automatically converted to a Base Rate Loan on the last day of the
first Interest Period relating thereto ending during the continuance of any
Default or Event of Default of which officers of the Agent active upon the
Borrowers' account have actual knowledge. The Agent shall notify the Banks
promptly when any such automatic conversion contemplated by this (S)2.7 is
scheduled to occur.
(c) Any conversion to or from Eurodollar Rate Loans shall be in
such amounts and be made pursuant to such elections so that, after giving effect
thereto, the aggregate principal amount of all Eurodollar Rate Loans having the
same Interest Period shall not be less than $500,000 or a whole multiple of
$100,000 in excess thereof.
(S)2.8 Funds for Revolving Credit Loans.
--------------------------------
(a) Not later than 12:00 noon (Hartford, Connecticut time) on the
proposed Drawdown Date of any Revolving Credit Loan, each of the Banks will make
available to the Agent, at the Agent's Head Office, in immediately available
funds, the amount of such Bank's Commitment Percentage of the amount of the
requested Revolving Credit Loans. Upon receipt from each Bank of such amount,
and upon receipt of the documents required by (i) (S)(S)11 and 12 in the case of
initial Loans, and (ii) (S)12 for all other Revolving Credit Loans, and the
satisfaction of the other conditions set forth therein, to the extent
applicable, the Agent will make available to the Borrowers the aggregate amount
of such Revolving Credit Loans made available to the Agent by the Banks. The
failure or refusal of any Bank to make available to the Agent at the aforesaid
time and place on any Drawdown Date the amount of such Bank's Commitment
Percentage of the requested Revolving Credit Loans shall not relieve any other
Bank from its several obligation hereunder to make available to the Agent the
amount of such other Bank's Commitment Percentage of any requested Revolving
Credit Loans.
(b) The Agent may, unless notified to the contrary by any Bank
prior to a Drawdown Date, assume that such Bank has made available to the Agent
on such Drawdown Date the amount of such Bank's Commitment Percentage of the
Revolving Credit Loans to be made on such Drawdown Date, and the Agent may (but
it shall not be
<PAGE>
required to), in reliance upon such assumption, make available to the Borrowers
a corresponding amount. If any Bank makes available to the Agent such amount on
a date after such Drawdown Date, such Bank shall pay to the Agent on demand an
amount equal to the product of (i) the average, computed for the period referred
to in clause (iii) below, of the weighted average interest rate paid by the
Agent for federal funds acquired by the Agent during each day included in such
period, times (ii) the amount of such Bank's Commitment Percentage of such
-----
Revolving Credit Loans, times (iii) a fraction, the numerator of which is the
-----
number of days that elapse from and including such Drawdown Date to the date on
which the amount of such Bank's Commitment Percentage of such Revolving Credit
Loans shall become immediately available to the Agent, and the denominator of
which is 365. A statement of the Agent submitted to such Bank with respect to
any amounts owing under this paragraph shall be prima facie evidence of the
----- -----
amount due and owing to the Agent by such Bank. If the amount of such Bank's
Commitment Percentage of such Revolving Credit Loans is not made available to
the Agent by such Bank within three (3) Business Days following such Drawdown
Date, the Agent shall be entitled to recover such amount from the Borrowers on
demand, with interest thereon at the rate per annum applicable to the Revolving
Credit Loans made on such Drawdown Date.
(S)2.9 Settlement; Application of Repayments of Revolving Credit Loans.
---------------------------------------------------------------
(a) Bank of Boston Connecticut may, but is not required to, fund all Revolving
Credit Loans made in accordance with the provisions of this Agreement. Prior to
each Settlement, (i) all payments of the principal of the Revolving Credit Loans
shall be credited to the account of Bank of Boston Connecticut, and (ii) the
outstanding amount of Revolving Credit Loans made by Bank of Boston Connecticut
may exceed Bank of Boston Connecticut's Commitment Percentage of the outstanding
amount of Revolving Credit Loans.
(b) The Banks shall effect Settlements (i) on the last Business Day of
each week, (ii) within one Business Day after each other date on which
borrowings of Revolving Credit Loans (net of payments of principal of Revolving
Credit Loans by the Borrowers) or payments of principal of Revolving Credit
Loans (net of borrowings of Revolving Credit Loans by the Borrowers) exceed
$5,000,000 and (iii) on the Revolving Credit Loan Maturity Date (each such date,
a "Settlement Date"). On the Business Day prior to each such Settlement Date,
---------- ----
the Agent shall give telephonic notice to the Banks of (A) the respective
outstanding amount of Revolving Credit Loans made by each Bank as at the close
of business on the prior day, (B) the amount that any Bank, as applicable (the
"Settling Bank"), shall pay to effect a Settlement (the "Settlement Amount")
-------- ---- ---------- ------
and (C) the portion (if any) of the aggregate Settlement Amount to be paid to
each Bank. A statement of the Agent submitted to the Banks with respect to any
amounts owing hereunder shall be prima facie evidence of the amount due and
----- -----
owing. Each Settling Bank shall, not later than 11:00 a.m. (Hartford,
Connecticut time) on each Settlement Date, effect a wire transfer of immediately
available funds to the Agent at its head
<PAGE>
office in the amount of such Bank's Settlement Amount. The Agent shall, as
promptly as practicable during normal business hours on each Settlement Date,
effect a wire transfer of immediately available funds to each Bank of the
Settlement Amount to be paid to such Bank. All funds advanced by any Bank as a
Settling Bank pursuant to this (S)2.9(b) shall for all purposes be treated as a
Revolving Credit Loan made by such Settling Bank to the Borrowers and all funds
received by any Bank pursuant to this (S)2.9(b) shall for all purposes be
treated as repayment of amounts owed by the Borrowers with respect to Revolving
Credit Loans made by such Bank.
(c) The Agent may (unless notified to the contrary by a Settling Bank by
2:00 p.m. (Hartford, Connecticut time) on the Settlement Date) assume that each
Settling Bank has made available to the Agent on such Settlement Date the
Settlement Amount, and the Agent may (but shall not be required to), in reliance
upon such assumption, make available to each applicable Bank its share (if any)
of the aggregate Settlement Amount. If the Settlement Amount of such Settling
Bank is made available to the Agent by such Settling Bank (or, conversely, if
the Agent makes the Settlement Amount available to a Bank entitled thereto) on a
date after such Settlement Date, such Settling Bank shall pay the Agent (or,
conversely, the Agent shall pay such Bank entitled to such Settlement Amount) on
demand an amount equal to the product of (i) the average computed for the period
referred to in clause (iii) below, of the weighted average annual interest rate
paid by the Agent or such Bank, as applicable, for federal funds acquired by the
Agent or such Bank, as applicable during each day included in such period times
-----
(ii) the Settlement Amount, times (iii) a fraction, the numerator of which is
-----
the number of days that elapse from and including such Settlement Date to but
not including the date on which the Settlement Amount shall become immediately
available to the Agent or such Bank, as applicable, and the denominator of which
is 365. Upon payment of such amount the Settling Bank shall be deemed to have
delivered the Settlement Amount of such Settling Bank on the Settlement Date and
shall become entitled to interest payable by the Borrowers with respect to such
Bank's Settlement Amount as if such share were delivered on the Settlement Date.
If the Settlement Amount is not in fact made available to the Agent by the
Settling Bank within three (3) Business Days of such Settlement Date, the Agent
shall be entitled to debit the Borrowers' account with the Agent to recover such
amount from the Borrowers and if the Borrowers' account with the Agent does not
contain sufficient funds the Borrowers agree to deposit into the account such
amount, with interest thereon at the rate per annum applicable to any Revolving
Credit Loans made on such Settlement Date. The failure or refusal of any of the
Banks to make available to the Agent at the aforesaid time on any Settlement
Date the amount of the Settlement Amount representing Revolving Credit Loans to
be made by such Bank on such date shall not relieve any other Bank from its
obligations hereunder to make Settlements and Revolving Credit Loans on such
Settlement Date or on any subsequent Settlement Date but in no event shall any
Bank or the Agent be responsible or liable for the failure of any other
<PAGE>
Bank to make the Revolving Credit Loans to be made by such other Bank.
(d) Each payment by the Borrowers of Revolving Credit Loans hereunder
shall be allocated among the Banks on the first Settlement Date after such
payment, in amounts determined to provide that after such application the
outstanding amount of Revolving Credit Loans of each Bank equals, as nearly as
practicable, such Bank's Commitment Percentage of all outstanding Revolving
Credit Loans.
(S)2.10 Change in Borrowing Base. The Borrowing Base shall be
------------------------
determined bi-weekly (or at such other interval as may be specified pursuant to
(S)8.4(g)) by the Agent by reference to the Borrowing Base Report delivered to
the Agent pursuant to (S)8.4(g).
(S)3 REPAYMENT OF THE REVOLVING CREDIT LOANS.
---------------------------------------
(S)3.1 Maturity. The Borrowers absolutely and unconditionally
--------
promise to pay on the Revolving Credit Loan Maturity Date, and there shall
become absolutely due and payable on the Revolving Credit Loan Maturity Date,
all of the Revolving Credit Loans outstanding on such date, together with any
and all accrued and unpaid interest thereon and all fees and reasonable expenses
incurred by the Banks and Agent in connection therewith and payable by the
Borrowers hereunder.
(S)3.2 Mandatory Repayments of Revolving Credit Loans. If at any
----------------------------------------------
time the outstanding amount of the Revolving Credit Loans exceeds an amount
equal to the lesser of (i) the Total Commitment and (ii) the Borrowing Base,
then the Borrowers shall immediately pay the amount of such excess to the Agent
for the respective accounts of the Banks for application to the Revolving Credit
Loans. Each prepayment of Revolving Credit Loans shall be allocated among the
Banks, in proportion, as nearly as practicable, to the respective unpaid
principal amount of each Bank's Revolving Credit Note, with adjustments to the
extent practicable to equalize any prior payments or repayments not exactly in
proportion.
(S)3.3 Optional Repayments of Revolving Credit Loans. The Borrowers
---------------------------------------------
shall have the right, at their election, to repay the outstanding amount of the
Revolving Credit Loans, as a whole or in part, at any time without penalty or
premium, provided that any full or partial prepayment of the outstanding amount
--------
of any Eurodollar Rate Loans pursuant to this (S)3.3 may be made only on the
last day of the Interest Period relating thereto. The Borrowers shall give the
Agent, no later than 10:00 a.m., Hartford time, at least three (3) Business
Days' prior written notice of any proposed prepayment pursuant to this (S)3.3 of
Base Rate Loans, and four (4) Eurodollar Business Days' notice of any proposed
prepayment pursuant to this (S)3.3 of Eurodollar Rate Loans, in each case
specifying the proposed date of prepayment of Revolving Credit Loans and the
principal amount to be prepaid. Each such partial prepayment of the Revolving
Credit Loans shall be in an integral multiple of $500,000, shall be accompanied
by the payment of
<PAGE>
accrued interest on the principal prepaid to the date of prepayment and shall be
applied, in the absence of instruction by the Borrowers, first to the principal
of Base Rate Loans and then to the principal of Eurodollar Rate Loans. Each
partial prepayment shall be allocated among the Banks, in proportion, as nearly
as practicable, to the respective unpaid principal amount of each Bank's
Revolving Credit Note, with adjustments to the extent practicable to equalize
any prior repayments not exactly in proportion.
(S)4 THE TERM LOAN.
-------------
(S)4.1 Commitment to Lend. Subject to the terms and conditions set
------------------
forth in this Credit Agreement, each Bank agrees to lend to the Borrowers on the
Closing Date an amount equal to its Commitment Percentage of a term loan in the
aggregate principal amount of $33,000,000 (the "Term Loan").
(S)4.2 The Term Notes. The Term Loan shall be evidenced by separate
--------------
promissory notes of the Borrowers in substantially the form of Exhibit B hereto
---------
(each a "Term Note"), dated the Closing Date and completed with appropriate
insertions. One Term Note shall be payable to the order of each Bank in a
principal amount equal to such Bank's Commitment Percentage of the Term Loan and
representing the obligation of the Borrowers to pay to such Bank such principal
amount or, if less, the outstanding amount of such Bank's Commitment Percentage
of the Term Loan, plus interest accrued thereon, as set forth below. Each
Borrower irrevocably authorizes each Bank to make or cause to be made a notation
on such Bank's Term Note Record reflecting the original principal amount of such
Bank's Commitment Percentage of the Term Loan and, at or about the time of such
Bank's receipt of any principal payment on such Bank's Term Note, an appropriate
notation on such Bank's Term Note Record reflecting such payment. The aggregate
unpaid amount set forth on such Bank's Term Note Record shall be prima facie
----- -----
evidence of the principal amount thereof owing and unpaid to such Bank, but the
failure to record, or any error in so recording, any such amount on such Bank's
Term Note Record shall not affect the obligations of the Borrowers hereunder or
under any Term Note to make payments of principal of and interest on any Term
Note when due.
(S)4.3 Mandatory Payments of Principal of Term Loan. (a) The
--------------------------------------------
Borrowers promise to pay to the Agent for the accounts of the Banks the
principal amount of the Term Loan in twenty (20) consecutive quarterly
installments in the amounts and during the periods set forth in the table below,
such installments to be due and payable on the first day of each calendar
quarter ending during such periods, commencing on July 1, 1994, with a final
payment on the Term Loan Maturity Date in an amount equal to the unpaid
principal balance of the Term Loan on such date:
<PAGE>
<TABLE>
<CAPTION>
Quarterly Annual
One-Year Period Payment Amount Payment
- --------------- -------------- -------
Amount
- ------
<S> <C> <C>
One year period
commencing on Closing
Date $625,000 $2,500,000
One year period
commencing on first
anniversary of
Closing Date $975,000 $3,900,000
One year period
commencing on second
anniversary of
Closing Date $1,275,000 $5,100,000
One year period
commencing on third
anniversary of
Closing Date $1,775,000 $7,100,000
One year period
commencing on fourth
anniversary of
Closing Date $1,775,000 $7,100,000
Term Loan Maturity Date The outstanding principal amount of the
Term Loan, together with all interest
accrued thereon.
</TABLE>
(b) Excess Cash Flow Recapture. In addition to any and all scheduled
--------------------------
amortization repayments of the Term Loan as set forth in (S)4.3(a) above, the
Borrowers shall, on March 31 of each calendar year, commencing on March 31,
1995, pay to the Agent for the accounts of the Banks an amount equal to fifty
percent (50%) of Consolidated Excess Cash Flow of Holdings and its Subsidiaries
for the immediately preceding fiscal year. Such prepayments of Consolidated
Excess Cash Flow shall be applied to the payment of installments of the
outstanding principal amount of the Term Loan (including, without limitation,
the installment due and payable on the Term Loan Maturity Date) due and payable
hereunder in inverse order of maturity.
(c) Offering Proceeds. In addition to the payments referred to above, the
-----------------
Borrowers shall pay to the Agent on behalf of the Banks an amount equal to fifty
percent (50%) of the aggregate cash proceeds from any sale of the capital stock
or other securities of Holdings for cash which is required to be registered
under the Securities Act of 1933, as amended, or any sale of such capital stock
or securities of Holdings for cash to qualified institutional buyers pursuant to
Rule 144A established thereunder, in each case, after deduction of reasonable
costs and expenses and normal and
<PAGE>
customary underwriting discounts and commissions incurred by Holdings in
connection with such offering; provided, that nothing set forth herein shall be
--------
deemed to be or construed as the consent of the Agent or the Banks to any sale
of capital stock or other securities of Holdings not expressly permitted by the
terms hereof. Each payment required by this (S)4.3(c) shall be due and payable
contemporaneously with the receipt by Holdings of all or any portion of any
proceeds from the applicable offering. Such prepayments of such offering
proceeds shall be applied to the payment of installments of the outstanding
principal amount of the Term Loan (including, without limitation, the
installment due and payable on the Term Loan Maturity Date) due and payable
hereunder in inverse order of maturity.
(d) Asset Dispositions. The Borrowers shall pay to the Agent on behalf of
------------------
the Banks one hundred percent (100%) of the net proceeds (after reasonable costs
of sale and the provision for the payment by the Borrowers of any taxes incurred
by Borrowers solely as the result of such sale) from the sale or other
disposition of properties and assets of the Borrowers (other than capital stock,
other securities issued by the Borrowers or sales of inventory in the ordinary
course of business and as otherwise provided in (S)9.5) expressly permitted by
the terms hereof. Each payment required by this (S)4.3(d) shall be due and
payable contemporaneously with any Borrower's receipt of all or any portion of
any proceeds from any such sale. Such net proceeds shall be applied first to
the payment of the outstanding principal amount of the Term Loan that will be
due and payable on the Term Loan Maturity Date (as determined by the Agent on
the date of such prepayment without reference to future prepayments of any kind
whatsoever), with fifty percent (50%) of the balance (hereinafter referred to as
the "REMAINING PAYMENT AMOUNT") used to reduce each regularly scheduled
quarterly payment due with respect to the Term Loan pursuant to (S)4.3(a) above
by an amount determined by multiplying (1) the Remaining Payment Amount by (2) a
fraction, the numerator of which is the amount of such quarterly payment and the
denominator of which is the outstanding balance of the Term Loan on the date of
such prepayment (after taking into account the prepayment of the final
installment due and payable on the Term Loan Maturity Date). Any remaining
balance of such net sale proceeds shall be deposited in the Borrower's operating
accounts maintained with the Agent.
(S)4.4 Optional Prepayment of Term Loan. The Borrowers shall have
--------------------------------
the right at any time to prepay the Term Notes on or before the Term Loan
Maturity Date, as a whole, or in part, upon not less than five (5) Business
Days' prior written notice to the Agent, without premium or penalty, provided
--------
that (i) each partial prepayment shall be in the principal amount of $500,000 or
an integral multiple thereof, (ii) no portion of the Term Loan bearing interest
at the Eurodollar Rate may be prepaid pursuant to this (S)4.4 except on the last
day of the Interest Period relating thereto, and (iii) each partial prepayment
shall be allocated among the Banks, in proportion, as nearly as practicable, to
the respective outstanding amount of each Bank's Term Note, with adjustments to
the extent practicable to equalize any prior prepayments not exactly in
proportion. Any prepayment of principal of the Term Loan shall include all
interest accrued to the date of prepayment and shall be applied against the
scheduled installments of principal due on the Term Loan (including the final
installment due and payable on the Term Loan Maturity Date) in the inverse order
of maturity. No amount repaid with respect to the Term Loan may be reborrowed.
(S)4.5 Interest on Term Loan.
---------------------
<PAGE>
(a) Except as otherwise provided in (S)5.11, the Term Loan shall bear
interest during each Interest Period relating to all or any portion of the Term
Loan at the following rates:
(i) To the extent that all or any portion of the Term Loan bears
interest during such Interest Period at the Base Rate, the Term Loan
or such portion thereof shall bear interest during such Interest
Period at the rate of one percent (1.0%) per annum above the Base
Rate.
(ii) To the extent that all or any portion of the Term Loan
bears interest during such Interest Period at the Eurodollar Rate, the
Term Loan or such portion thereof shall bear interest during such
Interest Period at the rate of two and one-quarter of one percent
(2.25%) per annum above the Eurodollar Rate.
The Borrowers promise to pay interest on the Term Loan or any portion
thereof outstanding during each Interest Period in arrears on each Interest
Payment Date applicable to such Interest Period.
(b) The Borrowers shall notify the Agent, such notice to be
irrevocable, at least two (2) Business Days prior to the Drawdown Date of the
Term Loan if all or any portion of the Term Loan is to bear interest at the Base
Rate and at least four (4) Eurodollar Business Days prior to the Drawdown Date
of the Term Loan if all or any portion of the Term Loan is to bear interest at
the Eurodollar Rate. After the Term Loan has been made, the provisions of
(S)2.7 hereof shall apply mutatis mutandis with respect to all or any portion of
------- --------
the Term Loan so that the Borrowers may have the same interest rate options with
respect to all or any portion of the Term Loan as it would be entitled to with
respect to the Revolving Credit Loans.
(c) Any portion of the Term Loan bearing interest at the Eurodollar
Rate relating to any Interest Period shall be in the amount of $500,000 or an
integral multiple thereof. No Interest Period relating to the Term Loan or any
portion thereof bearing interest at the Eurodollar Rate shall extend beyond the
date on which a regularly scheduled installment payment of the principal of the
Term Loan is to be made unless a portion of the Term Loan at least equal to such
installment payment has an Interest Period ending on such date or is then
bearing interest at the Base Rate.
<PAGE>
(S)5 CERTAIN GENERAL PROVISIONS.
--------------------------
(S)5.1 Fees. The Borrowers agree to pay all fees set forth in the
----
Fee Letter Agreements in accordance with the terms thereof.
(S)5.2 Funds for Payments.
------------------
(a) All payments of principal, interest, commitment fees and any
other amounts due hereunder or under any of the other Loan Documents shall be
made to the Agent, for the respective accounts of the Banks and the Agent, at
the Agent's Head Office or at such other location in the Hartford, Connecticut
area that the Agent may from time to time designate, in each case in immediately
available funds.
(b) All payments by the Borrowers hereunder and under any of the
other Loan Documents shall be made without setoff or counterclaim and free and
clear of and without deduction for any taxes, levies, imposts, duties, charges,
fees, deductions, withholdings, compulsory loans, restrictions or conditions of
any nature now or hereafter imposed or levied by any jurisdiction or any
political subdivision thereof or taxing or other authority therein unless the
Borrowers are compelled by law to make such deduction or withholding. If any
such obligation is imposed upon the Borrowers with respect to any amount payable
by it hereunder or under any of the other Loan Documents, the Borrowers will pay
to the Agent, for the account of the Banks or (as the case may be) the Agent, on
the date on which such amount is due and payable hereunder or under such other
Loan Document, such additional amount in Dollars as shall be necessary to enable
the Banks or the Agent to receive the same net amount which the Banks or the
Agent would have received on such due date had no such obligation been imposed
upon the Borrowers. The Borrowers will deliver promptly to the Agent
certificates or other valid vouchers for all taxes or other charges deducted
from or paid with respect to payments made by the Borrowers hereunder or under
such other Loan Document.
(S)5.3 Computations. All computations of interest on the Loans and
------------
of commitment fees, or other fees shall, unless otherwise expressly provided
herein, be based on a 360-day year and paid for the actual number of days
elapsed. Except as otherwise provided in the definition of the term "Interest
Period" with respect to Eurodollar Rate Loans, whenever a payment hereunder or
under any of the other Loan Documents becomes due on a day that is not a
Business Day, the due date for such payment shall be extended to the next
succeeding Business Day, and interest shall accrue during such extension. The
outstanding amount of the Loans as reflected on the Revolving Credit Note
Records and the Term Note Records from time to time shall be considered correct
and binding on each Borrower unless within five (5) Business Days after receipt
of any notice by the Agent or any of the Banks of such outstanding amount, the
Agent or such Bank shall notify the Borrowers to the contrary.
(S)5.4 Inability to Determine Eurodollar Rate. In the event, prior
--------------------------------------
to the commencement of any Interest Period relating to any
<PAGE>
Eurodollar Rate Loan, the Agent shall determine or be notified by any Bank that
adequate and reasonable methods do not exist for ascertaining the Eurodollar
Rate that would otherwise determine the rate of interest to be applicable to any
Eurodollar Rate Loan during any Interest Period, the Agent shall forthwith give
notice of such determination (which shall be conclusive and binding on the
Borrowers and the Banks) to the Borrowers and the Banks. In such event (a) any
Loan Request or Conversion Request with respect to Eurodollar Rate Loans shall
be automatically withdrawn and shall be deemed a request for Base Rate Loans,
(b) each Eurodollar Rate Loan will automatically, on the last day of the then
current Interest Period relating thereto, become a Base Rate Loan, and (c) the
obligations of the Banks to make Eurodollar Rate Loans shall be suspended until
the Agent or the Majority Banks determines that the circumstances giving rise to
such suspension no longer exist, whereupon the Agent or, as the case may be, the
Agent upon the instruction of the Majority Banks, shall so notify the Borrowers
and the Banks.
(S)5.5 Illegality. Notwithstanding any other provisions herein, if
----------
any present or future law, regulation, treaty or directive or in the
interpretation or application thereof shall make it unlawful for any Bank to
make or maintain Eurodollar Rate Loans, such Bank shall forthwith give notice of
such circumstances to the Borrowers and the other Banks and thereupon (a) the
commitment of such Bank to make Eurodollar Rate Loans or convert Loans of
another Type to Eurodollar Rate Loans shall forthwith be suspended and (b) such
Bank's Revolving Credit Loans then outstanding as Eurodollar Rate Loans, if any,
shall be converted automatically to Base Rate Loans on the last day of each
Interest Period applicable to such Eurodollar Rate Loans or within such earlier
period as may be required by law. The Borrowers hereby agree promptly to pay
the Agent for the account of such Bank, upon demand by such Bank, any additional
amounts necessary to compensate such Bank for any costs incurred by such Bank in
making any conversion in accordance with this (S)5.6, including any interest or
fees payable by such Bank to lenders of funds obtained by it in order to make or
maintain its Eurodollar Loans hereunder.
(S)5.6 Additional Costs, Etc. If any future applicable law or any
---------------------
change in any present law, which expression, as used herein, includes statutes,
rules and regulations thereunder and interpretations thereof by any competent
court or by any governmental or other regulatory body or official charged with
the administration or the interpretation thereof and requests, directives,
instructions and notices at any time or from time to time hereafter made upon or
otherwise issued to any Bank or the Agent by any central bank or other fiscal,
monetary or other authority (whether or not having the force of law), shall:
(a) subject any Bank or the Agent to any tax, levy, impost, duty,
charge, fee, deduction or withholding of any nature with respect to this Credit
Agreement, the other Loan Documents, such Bank's Commitment or the Loans (other
than taxes based upon or measured by the income or profits of such Bank or the
Agent), or
<PAGE>
(b) materially change the basis of taxation (except for changes in
taxes on income or profits) of payments to any Bank of the principal of or the
interest on any Loans or any other amounts payable to any Bank or the Agent
under this Credit Agreement or any of the other Loan Documents, or
(c) impose or increase or render applicable (other than to the
extent specifically provided for elsewhere in this Credit Agreement) any special
deposit, reserve, assessment, liquidity, capital adequacy or other similar
requirements (whether or not having the force of law) against assets held by, or
deposits in or for the account of, or loans by, or letters of credit issued by,
or commitments of an office of any Bank, or
(d) impose on any Bank or the Agent any other conditions or
requirements with respect to this Credit Agreement, the other Loan Documents,
the Loans, such Bank's Commitment, or any class of loans, letters of credit or
commitments of which any of the Loans or such Bank's Commitment forms a part,
and the result of any of the foregoing is
(i) to increase the cost to any Bank of making, funding, issuing,
renewing, extending or maintaining any of the Loans or such Bank's
Commitment, or
(ii) to reduce the amount of principal, interest, or other amount payable
to such Bank or the Agent hereunder on account of such Bank's Commitment,
or any of the Loans, or
(iii) to require such Bank or the Agent to make any payment or to forego
any interest or other sum payable hereunder, the amount of which payment or
foregone interest or other sum is calculated by reference to the gross
amount of any sum receivable or deemed received by such Bank or the Agent
from the Borrowers hereunder,
then, and in each such case, the Borrowers will, upon demand made by such Bank
or (as the case may be) the Agent at any time and from time to time and as often
as the occasion therefor may arise, pay to such Bank or the Agent such
additional amounts as will be sufficient to compensate such Bank or the Agent
for such additional cost, reduction, payment or foregone interest or
Reimbursement Obligation or other sum.
(S)5.7 Capital Adequacy. If after the date hereof any Bank (other
----------------
than a Foreign Bank) or the Agent determines that (a) the adoption of or change
in any law, governmental rule, regulation, policy, guideline or directive
(whether or not having the force of law) regarding capital requirements for
banks or bank holding companies or any change in the interpretation or
application thereof by a court or governmental authority with appropriate
jurisdiction, or (b) compliance by such Bank or the Agent or any corporation
controlling such Bank or the Agent with any law, governmental rule, regulation,
policy, guideline or directive (whether or not having the force of law) of any
such entity
<PAGE>
regarding capital adequacy, has the effect of reducing the return on such Bank's
or the Agent's commitment with respect to any Loans to a level below that which
such Bank or the Agent could have achieved but for such adoption, change or
compliance (taking into consideration such Bank's or the Agent's then existing
policies with respect to capital adequacy and assuming full utilization of such
entity's capital) by any amount deemed by such Bank or (as the case may be) the
Agent to be material, then such Bank or the Agent may notify the Borrowers of
such fact. To the extent that the amount of such reduction in the return on
capital is not reflected in the Base Rate, the Borrowers agree to pay such Bank
or (as the case may be) the Agent for the amount of such reduction in the return
on capital as and when such reduction is determined upon presentation by such
Bank or (as the case may be) the Agent of a certificate in accordance with
(S)5.8 hereof. Each such Bank shall allocate such cost increases among its
customers in good faith and on an equitable basis.
(S)5.8 Certificate. A certificate setting forth any additional
-----------
amounts payable pursuant to (S)(S)5.6 or 5.7 and a brief explanation of such
amounts which are due, submitted by any Bank or the Agent to the Borrowers,
shall be conclusive, absent manifest error, that such amounts are due and owing.
(S)5.9 Indemnity. Each Borrower agrees to indemnify each Bank and to
---------
hold each Bank harmless from and against any loss, cost or expense (including
loss of anticipated profits) that such Bank may sustain or incur as a
consequence of (a) default by the Borrowers in payment of the principal amount
of or any interest on any Eurodollar Rate Loans as and when due and payable,
including any such loss or expense arising from interest or fees payable by such
Bank to lenders of funds obtained by it in order to maintain its Eurodollar Rate
Loans, (b) default by the Borrowers in making a borrowing or conversion after
the Borrower has given (or is deemed to have given) a Loan Request, notice (in
the case of all or any portion of the Term Loans pursuant to (S)4.5(b)) or a
Conversion Request relating thereto in accordance with (S)2.6 or (S)2.7 or
(S)4.5 or (c) the making of any payment of a Eurodollar Rate Loan or the making
of any conversion of any such Loan to a Base Rate Loan on a day that is not the
last day of the applicable Interest Period with respect thereto, including
interest or fees payable by such Bank to lenders of funds obtained by it in
order to maintain any such Loans.
(S)5.10 Interest After Default.
----------------------
(a) Overdue principal and (to the extent permitted by applicable
law) interest on the Loans and all other overdue amounts payable hereunder or
under any of the other Loan Documents shall bear interest compounded monthly and
payable on demand at a rate per annum equal to two percent (2%) above the
Base Rate until such amount shall be paid in full (after as well as before
judgment).
(b) During the continuance of any Event of Default arising as a
result of the failure of the Borrowers to pay any
<PAGE>
principal or interest due and payable hereunder or under any of the other Loan
Documents, the principal of the Revolving Credit Loans and the Term Loan not
overdue shall, until such Event of Default has been cured or remedied or such
Event of Default has been waived by the Majority Banks pursuant to (S)26, bear
interest at a rate per annum equal to the rate of interest applicable to overdue
principal pursuant to (S)5.10(a) hereof.
(S)5.11 HLT Classification. If, after the date hereof, the Agent
------------------
determines or is advised by any Bank that such Bank has determined, or the Agent
receives notice from or is advised by any Bank that such Bank has received
notice from any governmental authority, central bank or comparable agency having
jurisdiction over such Bank, that any of the Commitments or Loans are classified
as a "highly leveraged transaction" (an "HLT Classification") pursuant to any
existing regulations regarding "highly leveraged transactions" or any
modification, amendment or interpretation thereof, or the adoption of new
regulations regarding "highly leveraged transactions" after the date hereof by
any governmental authority, central bank or comparable agency, the Agent shall
promptly give notice of such HLT Classification to the Borrowers and the Banks.
The Agent, the Banks and the Borrowers shall thereupon commence negotiations in
good faith to agree on the extent to which fees, interest rates and/or margins
hereunder should be increased so as to reflect such HLT Classification. If the
Borrowers and the Majority Banks agree on the amount of such increase or
increases, this Credit Agreement shall be promptly amended to give effect to
such increase or increases. If the Borrowers and the Majority Banks fail to so
agree and the Borrowers have failed to refinance the Obligations within ninety
(90) days after notice is given by the Agent as provided above, then the Agent
shall, if so requested by the Majority Banks, by notice to the Borrowers
terminate the Commitments, and the Commitments shall thereupon terminate, with
the provisions of (S)3.2 then becoming applicable; and the Loans shall also then
become due and payable in full. The Agent and the Banks acknowledge that an HLT
Classification is not a Default or an Event of Default.
(S)5.12 Concerning Joint and Several Liability of the Borrowers.
-------------------------------------------------------
(a) Each of the Borrowers is accepting joint and several liability
hereunder in consideration of the financial accommodations to be provided by the
Agent and the Banks under this Agreement, for the mutual benefit, directly and
indirectly, of each of the Borrowers and in consideration of the undertakings of
each of the Borrowers to accept joint and several liability for the obligations
of each of them.
(b) Each of the Borrowers, jointly and severally, hereby
irrevocably and unconditionally accepts, not merely as a surety but also as a
co-debtor, joint and several liability with each other Borrower, with respect to
the payment and performance of all of the Obligations, it being the intention of
the parties hereto that all
<PAGE>
the Obligations shall be the joint and several obligations of all of the
Borrowers without preferences or distinction among them.
(c) If and to the extent that any of the Borrowers shall fail to
make any payment with respect to any of the Obligations as and when due or to
perform any of such Obligations in accordance with the terms thereof, then in
each such event each other Borrower will make such payment with respect to, or
perform, such Obligation.
(d) The obligations of each Borrower under the provisions of this
(S)5.12 constitute the absolute and unconditional obligations of such Borrower
enforceable against it to the full extent permitted under the terms hereof,
irrespective of the validity, regularity or enforceability of this Agreement or
any other circumstance whatsoever.
(e) Each Borrower hereby waives notice of acceptance of its joint
and several liability, notice of the Loans made under this Agreement, notice of
the occurrence of any Default or Event of Default, or of any demand for any
payment under this Agreement, notice of any action at any time taken or omitted
by the Agent or the Banks under or in respect of any of the Obligations, any
requirement of diligence or to mitigate damages and, generally, all demands,
notices and other formalities of every kind in connection with this Agreement.
Each Borrower hereby assents to, and waives notice of, any extension or
postponement of the time for the payment of any of the Obligations, the
acceptance of any partial payment thereon, any waiver, consent or other action
or acquiescence by the Agent or the Banks at any time or times in respect of any
default by any Borrower in the performance or satisfaction of any term,
covenant, condition or provision of this Agreement, any and all other
indulgences whatsoever by the Agent or the Banks in respect of any of the
obligations hereunder, and the taking, addition, substitution or release, in
whole or in part, at any time or times, of any security for any of such
obligations or the addition, substitution or release, in whole or in part, of
any Borrower. Without limiting the generality of the foregoing, each Borrower
assents to any other action or delay in acting or failure to act on the part of
the Agent or the Banks including, without limitation, any failure strictly or
diligently to assert any right or to pursue any remedy or to comply fully with
applicable laws or regulations thereunder, which might, but for the provisions
of this (S)5.12, afford grounds for terminating, discharging or relieving such
Borrower, in whole or in part, from any of its Obligations under this (S)5.12,
it being the intention of each Borrower that, so long as any of the Obligations
remain unsatisfied, the Obligations of such Borrower under this (S)5.12 shall
not be discharged except by performance and then only to the extent of such
performance. The joint and several liability of the Borrowers hereunder shall
continue in full force and effect notwithstanding any absorption, merger,
amalgamation or any other change whatsoever in the name, membership,
constitution or place of formation of any Borrower or the Agent or the Banks. If
at any time, any payment, or any part thereof, made in respect of any of the
Obligations, is rescinded or
<PAGE>
must otherwise be restored or returned by the Agent or the Banks upon the
insolvency, bankruptcy or reorganization of any of the Borrowers, or otherwise,
the provisions of this (S)5.12 will forthwith be reinstated in effect, as though
such payment had not been made.
(S)6 COLLATERAL SECURITY. The Obligations shall be secured by a
-------------------
perfected first priority security interest (subject only to Permitted Liens
entitled to priority under applicable law) in all of the issued and outstanding
capital stock of each Borrower and in all of the assets of the Borrowers,
whether now owned or hereafter acquired, including, without limitation, accounts
receivable, inventory, real property, plant, equipment, joint venture and
limited partnership interests, intangibles and shares of stock of any subsidiary
of the Borrowers pursuant to the terms of the Security Documents.
(S)7 REPRESENTATIONS AND WARRANTIES. Each Borrower represents and
------------------------------
warrants to the Banks and the Agent as follows:
(S)7.1 Corporate Authority; Ownership.
------------------------------
(a) Incorporation; Good Standing. Each Borrower and its
----------------------------
Subsidiaries (i) is a corporation duly organized, validly existing and in good
standing under the laws of its state of incorporation, (ii) has all requisite
corporate power to own its property and conduct its business as now conducted
and as presently contemplated, and (iii) is in good standing as a foreign
corporation and is duly authorized to do business in each jurisdiction where a
failure to be so qualified would have a materially adverse effect on the
business, assets or financial condition of such Borrower or its Subsidiary.
(b) Authorization. The execution, delivery and performance of
-------------
this Credit Agreement, the other Loan Documents, the Capitalization Documents
and the Acquisition Documents to which any Borrower, any of its Subsidiaries, or
the Seller, as applicable, is or is to become a party, and the performance by
each such Person of all of its agreements and obligations under each of such
documents, including, without limitation, the Acquisition, and the transactions
contemplated hereby and thereby (i) are within the corporate or trust, as
applicable, authority of each such Person, (ii) have been duly authorized by all
necessary corporate or trust, as applicable, proceedings, (iii) do not conflict
with or result in any breach or contravention of any provision of law, statute,
rule or regulation to which such Borrower or any of its Subsidiaries is subject
or any judgment, order, writ, injunction, license or permit applicable to such
Person, (iv) do not conflict with any provision of the corporate charter or
bylaws of, any agreement or other instrument binding upon, or trust agreement
of, such Person and (v) do not require any approval, consent, order,
authorization or license by, or giving notice to, or taking any other action
with respect to, any governmental or regulatory authority or agency under any
provision of any applicable law.
<PAGE>
(c) Enforceability.
--------------
(i) The execution and delivery of this Credit Agreement, the
other Loan Documents, the Capitalization Documents and the Acquisition
Documents to which any Borrower, any of its Subsidiaries or the Seller is
or is to become a party will result in valid and legally binding
obligations of such Person enforceable against such Person in accordance
with the respective terms and provisions hereof and thereof, except as
enforceability is limited by bankruptcy, insolvency, reorganization,
moratorium or other laws relating to or affecting generally the enforcement
of creditors' rights and except to the extent that availability of the
remedy of specific performance or injunctive relief is subject to the
discretion of the court before which any proceeding therefor may be
brought.
(ii) The Seller has duly executed and delivered each of the
Acquisition Documents to which it is a party and each of such documents is
in full force and effect. The agreements and obligations of the Seller
contained in each of the Acquisition Documents to which it is a party
constitute the legal, valid and binding obligations of the Seller,
enforceable against it in accordance with their respective terms, except as
enforceability is limited by bankruptcy, insolvency, reorganization,
moratorium or other laws relating to or affecting generally the enforcement
of creditors' rights and except to the extent the availability of the
remedy of specific performance and injunctive or other forms of equitable
relief may be subject to equitable defenses and to the discretion of the
court before which any proceeding therefor may be brought.
(d) Ownership. After giving effect to the Acquisition Documents and
---------
the Capitalization Documents, the ownership of all of the issued and outstanding
capital stock of Holdings on the date hereof is set forth on Schedule 7.1(d)
-------- ------
hereto.
(S)7.2 No Business Activity; Subsidiaries. Except as set forth on
----------------------------------
Schedule 7.2, no Borrower owns or holds of record and/or beneficially (whether
- -------- ---
directly or indirectly) any shares of any class in the capital of any other
corporations or any legal and/or beneficial interests in any corporation,
partnership, business trust or joint venture or in any other unincorporated
trade or business enterprise.
(S)7.3 Governmental Approvals. The execution, delivery and performance
----------------------
by each Borrower and its Subsidiaries of any of the Loan Documents, Acquisition
Documents or the Capitalization Documents to which such Borrower or any of its
Subsidiaries is or is to become a party and the transactions contemplated hereby
and thereby do not require the approval or consent of, or filing with, any
governmental agency or authority other than those already obtained.
<PAGE>
(S)7.4 Title to Properties; Leases. Except as indicated on Schedule 7.4
--------------------------- ------------
hereto, Merocel and its Subsidiaries and Xomed and its Subsidiaries own all of
the assets reflected in the respective consolidated balance sheets of Merocel
and Xomed and their Subsidiaries as at the Balance Sheet Date or acquired since
that date (except property and assets sold or otherwise disposed of in the
ordinary course of business since that date), subject to no rights of others,
including any mortgages, leases, conditional sales agreements, title retention
agreements, liens or other encumbrances except Permitted Liens.
(S)7.5 Financial Statements.
--------------------
(a) There has been furnished to each of the Banks a consolidated
balance sheet of Merocel and its Subsidiaries as at December 31, 1993, and a
consolidated statement of income and a consolidated statement of cash flow of
Merocel and its Subsidiaries for the fiscal year then ended, each setting forth
in comparative form the figures for the previous fiscal year and in each case
together with the notes related thereto and audited and certified by Ernst &
Young. Such balance sheet and statements of income and cash flow of Merocel and
its Subsidiaries shall have been prepared in accordance with generally accepted
accounting principles and fairly present the financial condition of Merocel and
its Subsidiaries as at the close of business on the date thereof and the results
of operations for the fiscal year then ended. There are no contingent
liabilities of Merocel or any of its Subsidiaries as of such date involving
material amounts, known to the officers of Merocel, which were not disclosed in
such balance sheet and the notes related thereto.
(b) There has been furnished to each of the Banks a consolidated
balance sheet of Xomed and its Subsidiaries as at June 30, 1993, and a
consolidated statement of income and a consolidated statement of cash flow of
Xomed and its Subsidiaries for the six (6) month period then ended, each setting
forth in comparative form the figures for the same six-month period of the prior
fiscal year and in each case together with the notes related thereto and audited
and certified by Price & Waterhouse. Such balance sheet and statements of
income and cash flow of Xomed and its Subsidiaries shall have been prepared in
accordance with generally accepted accounting principles and fairly present the
financial condition of Xomed and its Subsidiaries as at the close of business on
the date thereof and the results of operations for the six (6) month period then
ended. There are no contingent liabilities of Xomed or any of its Subsidiaries
as of such date involving material amounts, known to the officers of Xomed,
which were not disclosed in such balance sheet and the notes related thereto.
(c) There has been furnished to each of the Banks an unaudited
consolidated balance sheet and a consolidated statement of income of Merocel and
its Subsidiaries as at the Balance Sheet Date. Such balance sheet and statement
of income of Merocel and its Subsidiaries has been prepared in accordance with
generally accepted accounting principles and fairly presents the financial
<PAGE>
condition of Merocel and its Subsidiaries as at the close of business on the
date thereof (subject to normal year-end audit adjustments). There are no
contingent liabilities of Merocel, Xomed or Xomed P.R. as of such date involving
material amounts which were not disclosed in such consolidated balance sheet of
Merocel and Xomed and the notes related thereto.
(d) There has been furnished to each of the Banks an unaudited
consolidated balance sheet and a consolidated statement of income of Xomed and
its Subsidiaries as at the Balance Sheet Date. Such balance sheet and statement
of income of Xomed and its Subsidiaries has been prepared in accordance with
generally accepted accounting principles and fairly presents the financial
condition of Xomed and its Subsidiaries as at the close of business on the date
thereof (subject to normal year-end audit adjustments). There are no contingent
liabilities of Xomed or any of its Subsidiaries as of such date involving
material amounts which were not disclosed in such consolidated balance sheet of
Xomed and the notes related thereto.
(e) There has been furnished to each of the Banks unaudited
consolidated financial statements of Xomed and its Subsidiaries as at December
31, 1993, which outline in the notes attached thereto the sales and gross
profits associated with the assets (the "International Assets") being sold to
the Borrower relating to Seller's International Business (as defined in the
Stock Purchase Agreement). Such financial statements have been prepared in
accordance with generally accepted accounting principles and fairly presents the
status of the International Assets as of such date.
(f) Both before and immediately after giving effect to the
transactions contemplated hereby and by the Acquisition Documents, each Borrower
and its Subsidiaries is and shall be solvent on a going concern basis, has
assets having a fair value in excess of the amount required to pay its probable
liabilities on its existing debts as they become absolute and matured, and has,
and will have as of the Closing Date, access to adequate capital for the conduct
of its business and the ability to pay its debts from time to time incurred in
connection therewith as such debts mature.
(S)7.6 Financial Statements. Holdings has furnished to each of the
--------------------
Banks the pro forma consolidated and consolidating balance sheet of Holdings and
--- -----
its Subsidiaries as of the Balance Sheet Date, adjusted to give effect to the
making of the Loans. Each of such balance sheets presents fairly the financial
condition of Holdings and its Subsidiaries as of the date thereof after giving
effect to the Acquisition and the making of the Loans, has been prepared on the
basis of the assumptions set forth therein, and is accurate and complete in all
material respects (subject to normal year-end audit adjustments). Neither
Holdings nor any of its Subsidiaries will have, as of the Balance Sheet Date,
any material obligations, secured or unsecured (whether accrued, absolute or
<PAGE>
actual, contingent, or otherwise), which are not reflected in such balance
sheets.
(S)7.7 No Material Changes, Etc. Since the Balance Sheet Date there has
------------------------
occurred no materially adverse change in the financial condition or business of
any Borrower or its Subsidiaries or the International Assets as shown on or
reflected in the pro forma balance sheets of Holdings and its Subsidiaries as at
--- -----
the Balance Sheet Date, the consolidated balance sheets of Merocel and its
Subsidiaries and Xomed and its Subsidiaries as at the Balance Sheet Date, or the
consolidated statements of income and cash flow of Xomed and Merocel for the
fiscal periods then ended, other than changes in the ordinary course of business
that have not had any materially adverse effect either individually or in the
aggregate on the business or financial condition of the Borrowers or any of
their respective Subsidiaries. Since the Balance Sheet Date, no Borrower has
made any Distributions.
(S)7.8 Franchises, Patents, Copyrights, Etc. Except as set forth on
------------------------------------
Schedule 7.8, each Borrower and its Subsidiaries possesses all franchises,
- -------- ---
patents, copyrights, trademarks, trade names, licenses and permits, and rights
in respect of the foregoing, adequate for the conduct of its business
substantially as now conducted without known conflict with any rights of others.
(S)7.9 Litigation. Except as set forth on Schedule 7.9, there are no
---------- -------- ---
actions, suits, proceedings or investigations of any kind pending (except for
any actions or suits which have been commenced by the filing of a complaint or
other pleading with the appropriate judicial or administrative authorities,
which have not yet been served upon any Borrower or any of its Subsidiaries, as
to which such Borrower has no knowledge) or, to the best knowledge of the
Borrowers after due inquiry, threatened against any Borrower or any of its
Subsidiaries or, to the best of the Borrowers' knowledge after due inquiry,
against the Seller, before any court, tribunal or administrative agency or board
that, if adversely determined, might, either in any case or in the aggregate,
materially adversely affect the properties, assets, financial condition or
business of any Borrower or its Subsidiaries or materially impair the right of
such Borrower and its Subsidiaries, considered as a whole, to carry on business
substantially as now conducted by them, or result in any substantial liability
not adequately covered by insurance, or for which adequate reserves are not
maintained on the consolidated balance sheet of such Borrower and its
Subsidiaries, or which question the validity of any of the Capitalization
Documents or of this Credit Agreement or any of the other Loan Documents or the
Acquisition Documents or any action taken or to be taken pursuant hereto or
thereto.
(S)7.10 No Materially Adverse Contracts, Etc. No Borrower, or any
------------------------------------
Subsidiary of such Borrower, or the Seller is subject to any charter, corporate
or other legal restriction, or any judgment, decree, order, rule or regulation
that has or is expected in the future to have a materially adverse effect on the
business, assets or financial condition of any of such Persons. No Borrower or
any
<PAGE>
Subsidiary of such Borrower, or the Seller is a party to any contract or
agreement that has or is expected, in the judgment of such Borrowers's officers,
to have any materially adverse effect on the business any of such Persons.
(S)7.11 Compliance with Other Instruments, Laws, Etc. No Borrower or any
--------------------------------------------
Subsidiary of such Borrower, or the Seller, is in violation of any provision of
their respective charter documents, bylaws, or any agreement or instrument to
which any of them may be subject or by which any of them or any of their
properties may be bound or any decree, order, judgment, statute, license, rule
or regulation, in any of the foregoing cases in a manner that could result in
the imposition of substantial penalties or materially and adversely affect the
financial condition, properties or business of any of such Persons.
(S)7.12 Tax Status. Each Borrower and its Subsidiaries (a) have made or
----------
filed all federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which any of them is subject, (b)
have paid all taxes and other governmental assessments and charges shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and by appropriate proceedings and (c) have set
aside on their books provisions reasonably adequate for the payment of all taxes
for periods subsequent to the periods to which such returns, reports or
declarations apply. There are no unpaid taxes in any material amount claimed to
be due by the taxing authority of any jurisdiction, and to the best knowledge of
such Borrower after due and diligent inquiry, there is no basis for any such
claim. No Borrower is liable with respect to any taxes incurred by the Seller.
(S)7.13 No Event of Default. No Default or Event of Default has occurred
-------------------
and is continuing.
(S)7.14 Holding Company and Investment Company Acts. No Borrower or any
-------------------------------------------
Subsidiary of such Borrower is a "holding company", or a "subsidiary company" of
a "holding company", or an affiliate" of a "holding company", as such terms are
defined in the Public Utility Holding Company Act of 1935; nor is it an
"investment company", or an "affiliated company" or a "principal underwriter" of
an "investment company", as such terms are defined in the Investment Company Act
of 1940.
(S)7.15 Absence of Financing Statements, Etc. Except with respect to
------------------------------------
Permitted Liens, there is no financing statement, security agreement, chattel
mortgage, real estate mortgage or other document filed or recorded with any
filing records, registry or other public office, that purports to cover, affect
or give notice of any present or possible future lien on, or security interest
in, any assets or property of the Borrowers or any of their respective
Subsidiaries or any rights relating thereto.
(S)7.16 Perfection of Security Interest. All filings, assignments,
-------------------------------
pledges and deposits of documents or instruments have
<PAGE>
been made and all other actions have been taken that are necessary or advisable,
under applicable law, to establish and perfect the Agent's security interest in
the Collateral. The Collateral and the Agent's rights with respect to the
Collateral are not subject to any setoff, claims, withholdings or other
defenses. The Borrowers are the owners of the Collateral free from any lien,
security interest, encumbrance and any other claim or demand, except for
Permitted Liens.
(S)7.17 Certain Transactions. Except as set forth on Schedule 7.17, none
-------------------- -------- ----
of the officers, directors, or employees of the Borrowers or any of their
respective Subsidiaries is presently a party to any transaction with any
Borrower or any of its Subsidiaries (other than for services as employees,
officers and directors or for management services), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Borrowers, any corporation, partnership, trust or other entity
in which any officer, director, or any such employee has a substantial interest
or is an officer, director, trustee or partner.
(S)7.18 Employee Benefit Plans.
----------------------
(a) In General. Each Employee Benefit Plan has been maintained
----------
and operated in compliance in all material respects with the provisions of ERISA
and, to the extent applicable, the Code, including but not limited to the
provisions thereunder respecting prohibited transactions. Each Borrower has
heretofore delivered to the Agent the most recently completed annual report,
Form 5500, with all required attachments, and actuarial statement required to be
submitted under (S)103(d) of ERISA, with respect to each Guaranteed Pension
Plan.
(b) Terminability of Welfare Plans. Under each Employee Benefit
------------------------------
Plan which is an employee welfare benefit plan within the meaning of (S)3(1) or
(S)3(2)(B) of ERISA, no benefits are due unless the event giving rise to the
benefit entitlement occurs prior to plan termination (except as required by
Title I, Part 6 of ERISA). The Borrowers or an ERISA Affiliate, as appropriate,
may terminate each such Plan at any time (or at any time subsequent to the
expiration of any applicable bargaining agreement) in the discretion of the
Borrowers or such ERISA Affiliate without liability to any Person if the cost of
providing such benefits should increase in any material respect, or any time
after December 31, 1995.
(c) Guaranteed Pension Plans. Each contribution required to be
------------------------
made to a Guaranteed Pension Plan, whether required to be made to avoid the
incurrence of an accumulated funding deficiency, the notice or lien provisions
of (S)302(f) of ERISA, or otherwise, has been timely made. No waiver of an
accumulated funding deficiency or extension of amortization periods has been
received with respect to any Guaranteed Pension Plan. No liability
<PAGE>
to the PBGC (other than required insurance premiums, all of which have been
paid) has been incurred by any Borrower, or any ERISA Affiliate with respect to
any Guaranteed Pension Plan and there has not been any ERISA Reportable Event,
or any other event or condition which presents a material risk of termination of
any Guaranteed Pension Plan by the PBGC. Based on the latest valuation of each
Guaranteed Pension Plan (which in each case occurred within twelve months of the
date of this representation), and on the actuarial methods and assumptions
employed for that valuation, the aggregate benefit liabilities of all such
Guaranteed Pension Plans within the meaning of (S)4001 of ERISA did not exceed
the aggregate value of the assets of all such Guaranteed Pension Plans,
disregarding for this purpose the benefit liabilities and assets of any
Guaranteed Pension Plan with assets in excess of benefit liabilities.
(d) Multiemployer Plans. No Borrower or any ERISA Affiliate has
-------------------
incurred any material liability (including secondary liability) to any
Multiemployer Plan as a result of a complete or partial withdrawal from such
Multiemployer Plan under (S)4201 of ERISA or as a result of a sale of assets
described in (S)4204 of ERISA. No Borrower or any ERISA Affiliate has been
notified that any Multiemployer Plan is in reorganization or insolvent under and
within the meaning of (S)4241 or (S)4245 of ERISA or that any Multiemployer Plan
intends to terminate or has been terminated under (S)4041A of ERISA.
(S)7.19 Regulations U and X. The proceeds of the Loans shall be used (i)
-------------------
to refinance on the Closing Date certain existing indebtedness of the Borrowers
to Bank of Boston Connecticut and certain other Indebtedness previously
described in writing to the Agent, (ii) to consummate the Acquisition in
accordance with the terms of the Acquisition Documents, and (iii) for working
capital and general corporate purposes. No portion of any Loan is to be used for
the purpose of purchasing or carrying any "margin security" or "margin stock" as
such terms are used in Regulations U and X of the Board of Governors of the
Federal Reserve System, 12 C.F.R. Parts 221 and 224.
(S)7.20 Environmental Compliance. As set forth on Schedule 7.20, each
------------------------ -------- ----
Borrower has taken all reasonable steps to investigate the past and present
condition and usage of the Real Estate and the operations conducted thereon and,
based upon such diligent investigation, has determined that:
(a) To the best knowledge of the Borrowers after the
investigation referred to above, no Borrower or any Subsidiary of such Borrower,
or any operator of the Real Estate or any operations thereon, is in violation,
or alleged violation, of any judgment, decree, order, law, license, rule or
regulation pertaining to environmental matters, including without limitation,
those arising under the Resource Conservation and Recovery Act ("RCRA"), the
Comprehensive Environmental Response, Compensation and Liability Act of 1980 as
amended ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986
("SARA"), the Federal Clean Water Act,
<PAGE>
the Federal Clean Air Act, the Toxic Substances Control Act, or any applicable
state or local statute, regulation, ordinance, order or decree relating to
health, safety or the environment (hereinafter "Environmental Laws"), which
violation would have a material adverse effect on the environment or the
business, assets or financial condition of such Borrower and any of its
Subsidiaries;
(b) No Borrower or any Subsidiary of such Borrower, has received
notice from any third party including, without limitation: any federal, state or
local governmental authority, (i) that any one of them has been identified by
the United States Environmental Protection Agency ("EPA") as a potentially
responsible party under CERCLA with respect to a site listed on the National
Priorities List, 40 C.F.R. Part 300 Appendix B (1986); (ii) that any hazardous
waste, as defined by 42 U.S.C. (S) 9601(5), any hazardous substances as defined
by 42 U.S.C. (S) 9601(14), any pollutant or contaminant as defined by 42 U.S.C.
(S)9601(33) and any toxic substances, oil or hazardous materials or other
chemicals or substances regulated by any Environmental Laws ("Hazardous
Substances") which any one of them has generated, transported or disposed of has
been found at any site at which a federal, state or local agency or other third
party has conducted or has ordered that such Borrower or any of its Subsidiaries
conduct a remedial investigation, removal or other response action pursuant to
any Environmental Law; or (iii) that it is or shall be a named party to any
claim, action, cause of action, complaint, or legal or administrative proceeding
(in each case, contingent or otherwise) arising out of any third party's
incurrence of costs, expenses, losses or damages of any kind whatsoever in
connection with the release of Hazardous Substances;
(c) (i) no portion of the Real Estate has been used for the
handling, processing, storage or disposal of Hazardous Substances except in
accordance with applicable Environmental Laws; and no underground tank or other
underground storage receptacle for Hazardous Substances is located on any
portion of the Real Estate; (ii) in the course of any activities conducted by
the Borrowers, their Subsidiaries or operators of their respective properties,
no Hazardous Substances have been generated or are being used on the Real Estate
except in accordance with applicable Environmental Laws; (iii) there have been
no releases (i.e. any past or present releasing, spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, disposing or
dumping) of Hazardous Substances on, upon, into or from the properties of the
Borrowers or their Subsidiaries, which releases would have a material adverse
effect on the value of any of the Real Estate or adjacent properties or the
environment; (iv) to the best of the Borrowers' knowledge, there have been no
releases on, upon, from or into any real property in the vicinity of any of the
Real Estate which, through soil or groundwater contamination, may have come to
be located on, and which would have a material adverse effect on the value of,
the Real Estate and to the best of the Borrowers' knowledge, there is no
asbestos contamination on any of the Real Estate which would result in a
violation of applicable Environmental Laws or which would require removal under
such Environmental Laws; and (v) in addition, to the best of the
<PAGE>
Borrowers' knowledge, any Hazardous Substances that have been generated on any
of the Real Estate have been transported offsite only by carriers having an
identification number issued by the EPA, treated or disposed of only by
treatment or disposal facilities maintaining valid permits as required under
applicable Environmental Laws, which transporters and facilities have been and
are, to the best of the Borrowers' knowledge, operating in compliance with such
permits and applicable Environmental Laws; and
(d) No Borrower or any Subsidiary of such Borrower, any Mortgaged
Property or any of the other Real Estate is subject to any applicable
environmental law requiring the performance of Hazardous Substances site
assessments, or the removal or remediation of Hazardous Substances, or the
giving of notice to any governmental agency or the recording or delivery to
other Persons of an environmental disclosure document or statement by virtue of
the transactions set forth herein and contemplated hereby, or as a condition to
the recording of any Mortgage or to the effectiveness of any other transactions
contemplated hereby.
(S)7.21 Fiscal Year. Each fiscal year of each Borrower and each of its
-----------
Subsidiaries begins on January 1 of each calendar year and ends on December 31
of each calendar year.
(S)7.22 Loans as Senior Indebtedness. All Indebtedness of the Borrowers
----------------------------
to the Banks in respect of the principal of and interest on the Loans will
constitute "Senior Indebtedness" under the terms of each of the Subordinated
Agreements and any other instrument evidencing, or pursuant to which there is
issued indebtedness which purports to be Subordinated Debt.
(S)7.23 Proceeds of Capital Contribution. All of the transactions
--------------------------------
contemplated by the Capitalization Documents have been consummated in accordance
with the terms thereof, including, without limitation, the required capital
contribution by the Holdings Shareholders of $43,502,337.36 in cash to Holdings.
(S)7.24 Other Representations. Each of the representations and warranties
---------------------
made by each of the Borrowers or any other Person in any of the Loan Documents
to which any such Person is a party, was true and correct in all material
respects when made and continues to be true and correct in all material respects
on the Closing Date, except to the extent that any of such representations and
warranties may have been affected by the consummation of the transactions
contemplated and permitted or required by the Loan Documents and Acquisition
Documents.
(S)7.25 Bank Accounts. Schedule 7.25 sets forth the account numbers and
------------- -------------
locations of all bank and deposit accounts of the Borrowers or any of their
Subsidiaries.
(S)7.26 Puerto Rico Collateral. Except as described on Schedule (S)9.3
---------------------- ---------------
hereto, the fair market value of all Collateral and other properties and assets
of any of the Borrowers and their
<PAGE>
respective Subsidiaries located in the Commonwealth of Puerto Rico does not
exceed $1,000,000 in the aggregate.
(S)8 AFFIRMATIVE COVENANTS OF THE BORROWERS. Each Borrower covenants and
--------------------------------------
agrees that, so long as any Loan or Note is outstanding or any Bank has any
obligation to make any Loans:
(S)8.1 Punctual Payment. The Borrowers will duly and punctually pay or
----------------
cause to be paid the principal and interest on the Loans, the commitment fees,
the Agent's fee and all other amounts provided for in this Credit Agreement and
the other Loan Documents to which any Borrower or any of its Subsidiaries is a
party, all in accordance with the terms of this Credit Agreement and such other
Loan Documents.
(S)8.2 Maintenance of Office. Each Borrower will maintain its chief
---------------------
executive office at 950 Flanders Road, Mystic, Connecticut 06355, or at such
other place in the United States of America as such Borrower shall designate
upon written notice to the Agent, where notices, presentations and demands to or
upon such Borrower in respect of the Loan Documents to which such Borrower is a
party may be given or made.
(S)8.3 Records and Accounts. Each Borrower will (a) keep, and cause each
--------------------
of its Subsidiaries to keep, true and accurate records and books of account in
which full, true and correct entries will be made in accordance with generally
accepted accounting principles and (b) maintain adequate accounts and reserves
for all taxes (including income taxes), depreciation, depletion, obsolescence
and amortization of its properties and the properties of its Subsidiaries,
contingencies, and other reserves.
(S)8.4 Financial Statements, Certificates and Information. Holdings
--------------------------------------------------
will deliver to each of the Banks:
(a) as soon as practicable, but in any event not later than ninety
(90) days after the end of each fiscal year of Holdings, the consolidated and
consolidating balance sheet of Holdings and its Subsidiaries as at the end of
such year, and the related consolidated and consolidating statement of income
and consolidated and consolidating statement of cash flow for such year, each
setting forth in comparative form the figures for the previous fiscal year and
all such consolidated and consolidating statements to be in reasonable detail,
prepared in accordance with generally accepted accounting principles, and
certified without qualification by (i) with respect to consolidating statements,
the principal financial officer of Holdings and (ii) with respect to
consolidated statements, Ernst & Young or by other independent certified public
accountants satisfactory to the Agent, together with a written statement from
such accountants to the effect that they have read a copy of this Credit
Agreement, and that, in making the examination necessary to said certification,
they have obtained no knowledge of any Default or Event of Default (other than
an Event of Default described in (S)13.1(o) hereof), or, if such accountants
shall have obtained knowledge of any then existing
<PAGE>
Default or Event of Default they shall disclose in such statement any such
Default or Event of Default; provided that such accountants shall not be liable
--------
to the Banks for failure to obtain knowledge of any Default or Event of Default;
(b) as soon as practicable, but in any event not later than forty-
five (45) days after the end of each of the fiscal quarters of Holdings, copies
of the unaudited consolidated and consolidating balance sheet of Holdings and
its Subsidiaries as at the end of such quarter, and the related consolidated and
consolidating statement of income and consolidated and consolidating statement
of cash flow for the portion of Holdings' fiscal year then elapsed, all in
reasonable detail and prepared in accordance with generally accepted accounting
principles to the extent customarily applied to interim financial statements of
the Borrowers and consistent with past practices of the Borrowers, together with
a certification by the principal financial or accounting officer of Holdings
that the information contained in such financial statements fairly presents the
financial position of Holdings and its Subsidiaries on the date thereof (subject
to year-end adjustments);
(c) as soon as practicable, but in any event within thirty (30) days
after the end of each month in each fiscal year of Holdings, unaudited monthly
consolidated and consolidating financial statements of Holdings and its
Subsidiaries for such month prepared in accordance with generally accepted
accounting principles, to the extent customarily applied to interim financial
statements of the Borrowers and consistent with past practices of the Borrowers,
together with a certification by the principal financial or accounting officer
of Holdings that the information contained in such financial statements fairly
presents the financial condition of Holdings and its Subsidiaries on the date
thereof (subject to year-end adjustments);
(d) as soon as practicable, but in any event on or before June 30,
1994, the consolidated and consolidating balance sheet of Holdings and its
Subsidiaries as of the close of business on the Closing Date hereof, prepared in
accordance with generally accepted accounting principals, and certified without
qualification by (i) with respect to the consolidating balance sheet, the
principal financial officer of Holdings and (ii) with respect to the
consolidated balance sheet, Ernst & Young;
(e) simultaneously with the delivery of the financial statements
referred to in subsections (a) and (b) above, a statement certified by the
principal financial or accounting officer of Holdings in substantially the form
of Exhibit C hereto and setting forth in reasonable detail computations
---------
evidencing compliance with the covenants contained in (S)10 and (if applicable)
reconciliations to reflect changes in generally accepted accounting principles
since the Balance Sheet Date;
<PAGE>
(f) contemporaneously with the filing or mailing thereof, copies of
all material of a financial nature filed with the Securities and Exchange
Commission;
(g) within seven (7) days after each of the fifteenth and the last
day of each calendar month, or at such other times as the Agent may reasonably
request during the continuance of a Default or an Event of Default, a Borrowing
Base Report setting forth the Borrowing Base as at the end of such calendar
month or other date so requested by the Agent;
(h) within thirty (30) days after the end of each calendar month, an
Accounts Receivable aging report; and
(i) from time to time such other financial data and information
(including accountants management letters) as the Agent or any Bank may
reasonably request.
(S)8.5 Notices
-------
(a) Defaults. Each Borrower will promptly notify the Agent and each
--------
of the Banks in writing of the occurrence of any Default or Event of Default.
If any Person shall give any notice or take any other action in respect of a
claimed default (whether or not constituting an Event of Default) under this
Credit Agreement or any other note, evidence of indebtedness, indenture or
other obligation to which or with respect to which such Borrower or any of its
Subsidiaries is a party or obligor, whether as principal, guarantor, surety or
otherwise, such Borrower shall forthwith give written notice thereof to the
Agent and each of the Banks, describing the notice or action and the nature of
the claimed default.
(b) Environmental Events. Each Borrower will promptly give notice to
--------------------
the Agent and each of the Banks (i) of any violation of any Environmental Law
that such Borrower or any of its Subsidiaries reports in writing or is
reportable by such Person in writing (or for which any written report
supplemental to any oral report is made) to any federal, state or local
environmental agency and (ii) upon becoming aware thereof, of any inquiry,
proceeding, investigation, or other action, including a notice from any agency
of potential environmental liability, or any federal, state or local
environmental agency or board, that has the potential to materially affect the
assets, liabilities, financial conditions or operations of such Borrower or any
of its Subsidiaries, or the Agent's mortgages, deeds of trust or security
interests pursuant to the Security Documents.
(c) Notification of Claims against Collateral. Each Borrower will,
-----------------------------------------
immediately upon becoming aware thereof, notify the Agent and each of the Banks
in writing of any setoff, claims (including, with respect to the Real Estate,
environmental claims), withholdings or other defenses to which any Collateral
having a fair value, either, singularly or in the aggregate in excess of
<PAGE>
$100,000 is subject, or the Agent's rights with respect to any such Collateral,
is subject.
(d) Notice of Litigation and Judgments. Each Borrower will, and will
----------------------------------
cause each of its Subsidiaries to, give notice to the Agent and each of the
Banks in writing within fifteen (15) days of becoming aware of any litigation or
proceedings threatened in writing or any pending litigation and proceedings
affecting such Borrower or any of its Subsidiaries or to which such Borrower or
any of its Subsidiaries is or becomes a party involving an uninsured claim
against such Borrower or any of its Subsidiaries that could reasonably be
expected to have a materially adverse effect on such Borrower or any of its
Subsidiaries and stating the nature and status of such litigation or
proceedings. Each Borrower will, and will cause each of its Subsidiaries to,
give notice to the Agent and each of the Banks, in writing, in form and detail
satisfactory to the Agent, within ten (10) days of any judgment not covered by
insurance, final or otherwise, against such Borrower or any of its Subsidiaries
in an amount in excess of $100,000.
(S)8.6 Corporate Existence; Maintenance of Properties. Except for
----------------------------------------------
mergers expressly permitted by the terms of (S)9.5(a) and the possible
dissolution of Xomed Puerto Rico, each Borrower will do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, rights and franchises and those of its Subsidiaries. It (a) will
cause all of its properties and those of its Subsidiaries used or useful in the
conduct of its business or the business of its Subsidiaries to be maintained and
kept in good condition, repair and working order and supplied with all necessary
equipment, (b) will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
such Borrower may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times, and (c)
will, and will cause each of its Subsidiaries to, continue to engage primarily
in the businesses now conducted by them and in related businesses and will not,
and will not permit its Subsidiaries to, alter the nature of its business as
operated on the date hereof in any material respect. In addition, without
limiting the foregoing, (y) Holdings' assets will consist solely of cash and
shares of stock of its Subsidiaries and Holdings will not legally own or hold
any assets or properties other than cash and such shares of stock and (z)
Merocel FSC's assets will consist solely of certain contract rights arising in
connection with foreign sales transactions conducted for the benefit of Merocel
and Merocel FSC will not legally or beneficially own or hold any properties or
assets other than such contract rights.
(S)8.7 Insurance. Each Borrower will, and will cause each of its
---------
Subsidiaries to, maintain with financially sound and reputable insurers
insurance with respect to its properties and business against such casualties
and contingencies as shall be in accordance with the general practices of
businesses engaged in similar activities in similar geographic areas and in
amounts, containing such terms, in such forms and for such periods as may be
reasonable
<PAGE>
and prudent and in accordance with the terms of the Security Agreements. Each
Borrower will, and will cause each of its Subsidiaries to, maintain insurance on
the Mortgaged Properties in accordance with the terms of the Mortgages. All such
insurance shall be payable to the Agent on behalf of the Banks as loss payee in
accordance with the terms of the Security Documents.
(S)8.8 Taxes. Each Borrower will, and will cause each of its
-----
Subsidiaries to, duly pay and discharge, or cause to be paid and discharged,
before the same shall become overdue, all taxes, assessments and other
governmental charges imposed upon it and its real properties, sales and
activities, or any part thereof, or upon the income or profits therefrom, as
well as all claims for labor, materials, or supplies that if unpaid might by law
become a lien or charge upon any of its property; provided that any such tax,
--------
assessment, charge, levy or claim need not be paid if the validity or amount
thereof shall currently be contested in good faith by appropriate proceedings
and if such Borrower or such Subsidiary shall have set aside on its books
adequate reserves with respect thereto; and provided further that such Borrower
-------- -------
and each Subsidiary of such Borrower will pay all such taxes, assessments,
charges, levies or claims forthwith upon the commencement of proceedings to
foreclose any lien that may have attached as security therefor.
<PAGE>
(S)8.9 Inspection of Properties and Books, Etc.
---------------------------------------
(a) General. Upon two (2) Business Days' prior notice by the Agent
-------
or any of the Banks to the Borrowers, each Borrower shall permit the Banks,
through the Agent or any of the Banks' other designated representatives, to
visit and inspect any of the properties of such Borrower or any of its
Subsidiaries, to examine the books of account of such Borrower and its
Subsidiaries (and to make copies thereof and extracts therefrom), and to discuss
the affairs, finances and accounts of such Borrower and its Subsidiaries with,
and to be advised as to the same by, its and their officers, all during normal
business hours and at such reasonable intervals as the Agent or any Bank may
reasonably request.
(b) Environmental Assessments. At any time an Event of Default shall
-------------------------
have occurred and be continuing and, whether or not an Event of Default shall
have occurred and be continuing, at any time after Agent shall receive notice of
a spill or release of any Hazardous Substances on any of the Real Estate from
any Borrower, or shall have received notice from any source deemed reliable by
Agent that a spill or release may have occurred with respect to any Real Estate,
the Agent may in its reasonable discretion for the purpose of assessing and
ensuring the value of any Mortgaged Property, obtain one or more environmental
assessments or audits of such Mortgaged Property prepared by a hydrogeologist,
an independent engineer or other qualified consultant or expert approved by the
Agent (and, unless a Default or an Event of Default shall have occurred and be
continuing, the Borrowers) to evaluate or confirm (i) whether any Hazardous
Substances are present in the soil or water at such Mortgaged Property in excess
of applicable Environmental Law clean-up limits and (ii) whether the use and
operation of such Mortgaged Property complies with all Environmental Laws.
Environmental assessments may include without limitation detailed visual
inspections of such Mortgaged Property including any and all storage areas,
storage tanks, drains, dry wells and leaching areas, and the taking of soil
samples, surface water samples and ground water samples, as well as such other
investigations or analyses as the Agent reasonably deems appropriate. All such
environmental assessments shall be conducted by the Borrowers (unless a Default
or an Event of Default has occurred and is continuing) and shall be made at the
expense of the Borrowers.
(c) Communications with Accountants. Each Borrower authorizes the
-------------------------------
Agent and, if accompanied by the Agent, the Banks to communicate directly with
such Borrower's independent certified public accountants and authorizes such
accountants to disclose to the Agent and the Banks any and all financial
statements and other supporting financial documents and schedules including
copies of any management letter with respect to the business, financial
condition and other affairs of such Borrower or any of its Subsidiaries. At the
request of the Agent, such Borrower shall deliver
<PAGE>
a letter addressed to such accountants instructing them to comply with the
provisions of this (S)8.9(c).
(S)8.10 Compliance with Laws, Contracts, Licenses, and Permits. Each
------------------------------------------------------
Borrower will, and will cause each of its Subsidiaries to, (a) comply in all
material respects with the applicable laws and regulations wherever its business
is conducted, including all Environmental Laws, (b) comply with the provisions
of its charter documents and by-laws, (c) comply in all material respects with
all agreements and instruments by which it or any of its properties may be bound
and (d) comply in all material respects with all applicable decrees, orders, and
judgments. If any authorization, consent, approval, permit or license from any
officer, agency or instrumentality of any government shall become necessary or
required in order that such Borrower or any of its Subsidiaries may fulfill any
of its obligations hereunder or any of the other Loan Documents to which such
Borrower or such Subsidiary is a party, such Borrower will, or (as the case may
be) will cause such Subsidiary to, immediately take or cause to be taken all
reasonable steps within the power of such Borrower or such Subsidiary to obtain
such authorization, consent, approval, permit or license and furnish the Agent
and the Banks with evidence thereof.
(S)8.11 Employee Benefit Plans. Each Borrower will, and will cause
----------------------
each of its Subsidiaries to, (i) promptly upon filing the same with the
Department of Labor or Internal Revenue Service, furnish to the Agent a copy of
the most recent actuarial statement required to be submitted under (S)103(d) of
ERISA and Annual Report, Form 5500, with all required attachments, in respect of
each Guaranteed Pension Plan and (ii) promptly upon receipt or dispatch, furnish
to the Agent any notice, report or demand sent or received in respect of a
Guaranteed Pension Plan under (S)(S)302, 4041, 4042,
<PAGE>
4043, 4063, 4065, 4066 and 4068 of ERISA, or in respect of a Multiemployer Plan,
under (S)(S)4041A, 4202, 4219, 4242, or 4245 of ERISA.
(S)8.12 Use of Proceeds. Each Borrower will use the proceeds of the
---------------
Loans solely (i) to refinance on the Closing Date certain existing indebtedness
of the Borrowers to Bank of Boston Connecticut and certain other Indebtedness of
the Borrowers as set forth on Schedule 8.12 hereto, (ii) to consummate the
-------------
Acquisition in accordance with the terms of the Acquisition Documents, and (iii)
for working capital and general corporate purposes.
(S)8.13 Additional Mortgaged Property. If, after the Closing Date,
-----------------------------
any Borrower or any of its Subsidiaries acquires fee simple title to any real
estate having a fair value or cost in excess of $500,000, or leases any real
estate (and the annual lease payments with respect to such real estate exceeds
$250,000), such Borrower shall, or shall cause such Subsidiary to, forthwith
deliver to the Agent a fully executed mortgage over its fee or leasehold
interest in such real estate, in form and substance satisfactory to the Agent,
together with title insurance policies, surveys, evidences of insurance with the
Agent named as loss payee and additional insured, legal opinions and other
documents and certificates with respect to such real estate as was required for
Real Estate of such Borrower or such Subsidiary as of the Closing Date. Each
Borrower further agrees that, following the taking of such actions with respect
to such real estate, the Agent shall have, for the benefit of the Banks and the
Agent, a valid and enforceable first priority mortgage over such real estate,
free and clear of all defects and encumbrances except for Permitted Liens.
(S)8.14 Further Assurances. Each Borrower will, and will cause each
------------------
of its Subsidiaries to, cooperate with the Banks and the Agent and execute such
further instruments and documents as the Banks or the Agent shall reasonably
request to carry out to their satisfaction the transactions contemplated by this
Credit Agreement and the other Loan Documents.
(S)8.15 Bank Accounts. Each Borrower will, and will cause each of its
-------------
Subsidiaries to, together with the employees, agents and other Persons acting on
behalf of such Borrower or such Subsidiary, receive and hold in trust for the
Bank all payments constituting proceeds of Accounts Receivable or other
Collateral which come into their possession or under their control and,
immediately upon receipt thereof, deposit such payments in the form received,
with any appropriate endorsements, in one of the accounts designated as a
central depositary account on Schedule 7.25.
-------------
(S)8.16 Interest Rate Protection Arrangements. The Borrowers agree to
-------------------------------------
effect, on or before ninety (90) days following the Closing Date, and maintain,
interest rate protection arrangements, in form and substance satisfactory to the
Majority Banks, to insure that the Base Rate used in determining the maximum
annual interest rate applicable to sixty (60%) percent of the outstanding
principal amount of the Revolving Credit Loans and the Term Loan shall not
exceed ten percent (10%).
(S)8.17 Puerto Rican Collateral; Dissolution of Xomed-Treace, P.R. Inc.
---------------------------------------------------------------
On or before April 15, 1995, Xomed Puerto Rico shall grant to the Agent on
behalf of the Banks a valid and perfected security interest in and lien on all
of the assets and properties of Xomed Puerto Rico. Alternatively, the Borrowers
shall provide the Agent and the Banks, on or before April 15, 1995, with
evidence satisfactory to the Banks that Xomed Puerto Rico has been dissolved and
that all of the assets and properties of Xomed Puerto Rico have been transferred
to Xomed and are subject to valid and perfected security interests and liens in
favor of the Agent on behalf of the Banks.
(S)9 CERTAIN NEGATIVE COVENANTS OF THE BORROWERS. Each Borrower
-------------------------------------------
covenants and agrees that, so long as any Loan or Note is outstanding or any
Bank has any obligation to make any Loans:
<PAGE>
(S)9.1 Restrictions on Indebtedness. No Borrower will, and will not
----------------------------
permit any of its Subsidiaries to, create, incur, assume, guarantee or be or
remain liable, contingently or otherwise, with respect to any Indebtedness other
than:
(a) Indebtedness to the Banks and the Agent arising under any of the
Loan Documents;
(b) current liabilities of such Borrower or such Subsidiary incurred
in the ordinary course of business not incurred through (i) the borrowing of
money, or (ii) the obtaining of credit except for credit on an open account
basis customarily extended and in fact extended in connection with normal
purchases of goods and services;
(c) Indebtedness in respect of taxes, assessments, governmental
charges or levies and claims for labor, materials and supplies to the extent
that payment therefor shall not at the time be required to be made in accordance
with the provisions of (S)8.8;
(d) Indebtedness in respect of judgments or awards that have been in
force for less than the applicable period for taking an appeal so long as
execution is not levied thereunder or in respect of which such Borrower or such
Subsidiary shall at the time in good faith be prosecuting an appeal or
proceedings for review and in respect of which a stay of execution shall have
been obtained pending such appeal or review;
(e) endorsements for collection, deposit or negotiation and
warranties of products or services, in each case incurred in the ordinary course
of business;
(f) obligations under Capitalized Leases (other than Capitalized
Leases referred to on Schedule 9.1) not exceeding $500,000 in aggregate amount
-------- ---
for all Borrowers and their respective Subsidiaries at any time outstanding;
<PAGE>
(g) Indebtedness incurred in connection with the acquisition after the
date hereof of any real or personal property by such Borrowers or such
Subsidiary, provided that the aggregate principal amount of all such
--------
Indebtedness of all Borrowers and their respective Subsidiaries shall not exceed
the aggregate amount of $200,000 at any one time; and further, provided that the
------- --------
aggregate amount of indebtedness permitted under this clause (g) and the
immediately preceding clause (f) of this (S)9.1 shall not at any time together
exceed $700,000.
(h) Indebtedness existing on the date hereof and listed and described
on Schedule 9.1 hereto; and
------------
(i) Subordinated Debt.
(S)9.2 Restrictions on Liens. No Borrower will, and will not permit
---------------------
any of its Subsidiaries to, (a) create or incur or suffer to be created or
incurred or to exist any lien, encumbrance, mortgage, pledge, charge,
restriction or other security interest of any kind upon any of its property or
assets of any character whether now owned or hereafter acquired, or upon the
income or profits therefrom; (b) transfer any of such property or assets or the
income or profits therefrom for the purpose of subjecting the same to the
payment of Indebtedness or performance of any other obligation in priority to
payment of its general creditors; (c) acquire, or agree or have an option to
acquire, any property or assets upon conditional sale or other title retention
or purchase money security agreement, device or arrangement; (d) suffer to exist
for a period of more than thirty (30) days after the same shall have been
incurred any Indebtedness or claim or demand against it that if unpaid might by
law or upon bankruptcy or insolvency, or otherwise, be given any priority
whatsoever over its general creditors; or (e) sell, assign, pledge or otherwise
transfer any accounts, contract rights, general intangibles, chattel paper or
instruments, with or without recourse; provided that such Borrower and any
--------
Subsidiary of such Borrower may create or incur or suffer to be created or
incurred or to exist:
(i) liens to secure taxes, assessments and other government
charges in respect of obligations not overdue or liens on properties other
than Mortgaged Properties to secure claims for labor, material or supplies
in respect of obligations not overdue;
(ii) deposits or pledges made in connection with, or to secure
payment of, workmen's compensation, unemployment insurance, old age
pensions or other social security obligations;
(iii) liens on properties other than Mortgaged Properties in
respect of judgments or awards, the Indebtedness with respect to which is
permitted by (S)9.1(d);
(iv) liens of carriers, warehousemen, mechanics and
materialmen, and other like liens on properties other than
<PAGE>
Mortgaged Properties, in existence less than 120 days from the date of
creation thereof in respect of obligations not overdue;
(v) encumbrances on Real Estate consisting of easements,
rights of way, zoning restrictions, restrictions on the use of real
property and defects and irregularities in the title thereto, landlord's or
lessor's liens under leases to which such Borrower or a Subsidiary of such
Borrower is a party, and other minor liens or encumbrances none of which in
the opinion of such Borrower interferes materially with the use of the
property affected in the ordinary conduct of the business of such Borrower
and its Subsidiaries, which defects do not individually or in the aggregate
have a materially adverse effect on the business of such Borrower
individually or of such Borrower and its Subsidiaries on a consolidated
basis;
(vi) liens existing on the date hereof and listed on
Schedule 9.2 hereto;
------------
(vii) purchase money security interests in or purchase money
mortgages on real or personal property other than Mortgaged Properties
acquired after the date hereof to secure purchase money Indebtedness of the
type and amount permitted by (S)9.1(g), incurred in connection with the
acquisition of such property, which security interests or mortgages cover
only the real or personal property so acquired;
(viii) liens and encumbrances on each Mortgaged Property as
and to the extent permitted by the Mortgage applicable thereto; and
(ix) liens in favor of the Agent for the benefit of the
Banks and the Agent under the Loan Documents.
(S)9.3 Restrictions on Investments. No Borrower will, and will not
---------------------------
permit any of its Subsidiaries to, make or permit to exist or to remain
outstanding any Investment except:
(a) Investments in marketable direct or guaranteed obligations of the
United States of America or its agencies that mature within one (1) year from
the date of purchase by such Borrower;
(b) Investments in demand deposits, certificates of deposit, bankers
acceptances and time deposits of United States banks having total assets in
excess of $2,000,000,000;
(c) Investments in securities commonly known as "commercial paper"
issued by a corporation organized and existing under the laws of the United
States of America or any state thereof that at the time of purchase have been
rated and the ratings for which are not less than "P 1" if rated by Moody's
Investors
<PAGE>
Services, Inc., and not less than "A 1" if rated by Standard and
Poor's;
(d) Investments existing on the date hereof and listed on Schedule 9.3
------------
hereto;
(e) The acquisition of the capital stock of Xomed and Xomed Puerto
Rico pursuant to the Acquisition Documents;
(f) extensions of trade credit in the ordinary course of business;
(g) loans and advances to employees of such Borrower or its
Subsidiaries for either (i) travel and relocation expenses in the ordinary
course of business in an outstanding aggregate amount for all such loans not to
exceed $500,000 at any time for all Borrowers or (ii) the purchase of the
capital stock of Holdings in an outstanding aggregate amount for all such loans
not to exceed $1,100,000 at any time for all Borrowers; and
(h) Investments in wholly-owned Subsidiaries of any Borrower;
provided, that each such Subsidiary shall have (i) guaranteed the prompt payment
- --------
and performance of all of the Obligations pursuant to a guaranty in form and
substance satisfactory to the Majority Banks and (ii) granted to the Agent on
behalf of the Banks a valid and perfected security interest in and lien on all
of the assets and properties of such Subsidiary pursuant to a security agreement
in form and substance satisfactory to the Majority Banks; and provided, further,
-------- -------
that the aggregate Dollar amount of all Investments by the Borrowers in all such
Subsidiaries by the Borrowers shall not exceed $3,000,000 in the aggregate.
(S)9.4 Distributions. None of the Borrowers will, and will not
-------------
permit any of its Subsidiaries to, make any Distributions at any time except (a)
so long as no Default or Event of Default shall have occurred and be continuing
or would result from the making thereof, any Subsidiary of any Borrower may make
Distributions to such Borrower, (b) dividends by Holdings payable solely in
shares of Preferred Stock of Holdings and (c) so long as no Event of Default
shall have occurred and be continuing or would result from the making thereof,
Holdings shall be permitted to purchase its capital stock from its employees
issued in accordance with the terms of the Stock Option Plan; provided, that the
aggregate amount of Distributions permitted under this clause (c) shall not
exceed $750,000 in the aggregate during any calendar year.
(S)9.5 Merger, Consolidation and Disposition of Assets.
-----------------------------------------------
(a) None of the Borrowers will, and will not permit any of its
Subsidiaries to, become a party to any merger or consolidation, or agree to or
effect any asset acquisition or stock acquisition except (i) the acquisition of
assets in the ordinary course of business consistent with past practices, (ii)
the Acquisition, (iii) the merger or consolidation of one or more of
<PAGE>
the Subsidiaries of any Borrower (other than Holdings) with and into such
Borrower (other than Holdings), (iv) the merger or consolidation of two or more
Subsidiaries of the Borrowers or (v) the acquisition by Xomed of all of the
assets and properties of Xomed Puerto Rico.
(b) No Borrower will, and will not permit any of its Subsidiaries to,
become a party to or agree to or effect any disposition of assets, other than
the disposition of assets in the ordinary course of business consistent with
past practices and other than the transfer to Xomed of all of the assets and
properties of Xomed Puerto Rico.
(S)9.6 Sale and Leaseback. No Borrower will, and will not permit any
------------------
of its Subsidiaries to, enter into any arrangement, directly or indirectly,
whereby such Borrower or any Subsidiary of such Borrower shall sell or transfer
any property owned by it in order then or thereafter to lease such property or
lease other property that such Borrower or any Subsidiary of such Borrower
intends to use for substantially the same purpose as the property being sold or
transferred.
(S)9.7 Compliance with Environmental Laws. No Borrower will, and
----------------------------------
will not permit any of its Subsidiaries to conduct any activity at any Real
Estate or use any Real Estate in any manner that would violate any Environmental
Law or bring such Real Estate in violation of any Environmental Law, including
(a) using any of the Real Estate or any portion thereof for the handling,
processing, storage or disposal of Hazardous Substances in a manner that would
violate Environmental Laws, (b) causing or permitting to be located on any of
the Real Estate any underground tank or other underground storage receptacle for
Hazardous Substances in a manner that would violate Environmental Laws, (c)
generating of any Hazardous Substances on any of the Real Estate in a manner
that would violate Environmental Laws, or (d) conducting of any activity at any
Real Estate or use any Real Estate in any manner so as to cause a release (i.e.
releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, leaching, disposing or dumping) of Hazardous Substances on,
upon or into the Real Estate in a manner that would violate Environmental Laws.
(S)9.8 Employee Benefit Plans. No Borrower or any ERISA Affiliate
----------------------
will:
(a) engage in any "prohibited transaction" within the meaning of
(S)406 of ERISA or (S)4975 of the Code which could result in a material
liability for such Borrower or any of its Subsidiaries; or
(b) permit any Guaranteed Pension Plan to incur an "accumulated
funding deficiency", as such term is defined in (S)302 of ERISA, whether or not
such deficiency is or may be waived; or
(c) fail to contribute to any Guaranteed Pension Plan to an extent
which, or terminate any Guaranteed Pension Plan in a
<PAGE>
manner which, could result in the imposition of a lien or encumbrance on the
assets of such Borrower or any of its Subsidiaries pursuant to (S)302(f) or
(S)4068 of ERISA; or
(d) permit or take any action which would result in the aggregate
benefit liabilities (with the meaning of (S)4001 of ERISA) of all Guaranteed
Pension Plans exceeding the value of the aggregate assets of such Plans,
disregarding for this purpose the benefit liabilities and assets of any such
Plan with assets in excess of benefit liabilities.
(S)9.9 Additional Shares. No Borrower will at any time, nor will
-----------------
cause or permit any of its Subsidiaries at any time, to sell or offer to sell
any shares of any class of capital stock, or any other securities, of such
Borrower or any Subsidiary without the prior written consent of the Majority
Banks, unless the proceeds of such sale are used to pay in full all Indebtedness
of the Borrowers to the Agent and the Banks hereunder and the Borrowers shall
have irrevocably terminated the Commitments in accordance with the terms hereof,
and, subject to the terms of (S)(S)4.3(c), 13.1(r) and 13.1(s) hereof, except
for (a) the issuance of shares of capital stock of Holdings under the Stock
Option Plan, (b) the sale of shares of the capital stock of Holdings to the
Holdings Stockholders for fair cash consideration, (c) with the prior written
consent of the Majority Banks, the sale of the capital stock or other securities
of Holdings for fair cash consideration which is required to be registered under
the Securities Act of 1933, as amended, or a sale of such capital stock or other
securities of Holdings to qualified institutional buyers pursuant to Rule 144A
thereunder, (d) a sale or sales of capital stock or other securities of Holdings
for fair cash consideration under circumstances not described in (S)9.9(c) above
so long as no Default or Event of Default shall have occurred and be continuing
and so long as the aggregate sales proceeds from such sale or sales (whether in
one transaction or a series of transactions) does not exceed $15,000,000 in the
aggregate, (e) sales of the shares of capital stock of the Existing Subsidiaries
to Holdings for fair cash consideration, and (f) subject to the terms of
(S)9.3(h) hereof, sales of the shares of capital stock of any Subsidiaries of
Holdings (other than an Existing Subsidiary) to Holdings for fair cash
consideration. The Borrowers agree to provide the Agent with reasonable prior
notice of any proposed sale of the shares of Capital Stock of Holdings described
in subsection (b) and (d) above.
(S)9.10 Changes in Terms of Subordinated Debt. Without the prior
-------------------------------------
written consent of the Majority Banks, no Borrower will, and will not permit any
of its Subsidiaries to, make any changes relating to the interest rate,
maturity, scheduled amortization, notice to the Banks and the Agent of defaults,
events of default or intended accelerations, subordination or any other
provision of any promissory note, indenture, agreement or other instrument
evidencing or governing any Subordinated Debt.
(S)9.11 Acquisition Documents. Each Borrower acknowledges and agrees
---------------------
that, pursuant to the Security Agreement, the Borrowers have
<PAGE>
assigned, conveyed
and granted a security interest to the Agent on behalf of the Banks in, among
other things, all of the Borrowers' right, title and interest in and to all
payment and indemnification obligations of the Seller under the Stock Purchase
Agreement and the other Acquisition Documents (referred to herein as the
"Rights"). Without limiting anything set forth in the Security Agreement or the
other Loan Documents, each Borrower agrees and covenants as follows:
(a) No Borrower shall effect or cause any amendment or modification of any
of the Acquisition Documents in any material respect without the prior written
consent of the Majority Banks.
(b) The Borrowers shall promptly (and in any event within three (3)
Business Days) notify the Agent (according to the notification provisions set
forth herein) of the exercise by any Borrower of any rights or remedies relating
to any of the Rights.
(c) Each Borrower hereby constitutes and appoints the Agent and the
Agent's successors and assigns as the Assignor's true and lawful attorney (and
agent-in-fact), with full power of substitution, in such Borrower's name and
stead, but on behalf and for the benefit of the Agent and its successors and
assigns, to, after the occurrence and during the continuance of an Event of
Default, demand, receive, exercise and enforce all of the Rights conveyed to the
Agent and to give receipts and releases for and in respect of the same, and any
part thereof, and from time to time to institute and prosecute in such
Borrower's name, or otherwise, for the benefit of the Agent and its successors
and assigns, all proceedings at law, in equity or otherwise, which the Agent or
its successors or assigns may reasonably deem proper (i) for the collection or
reduction to possession of any of the Rights and to do all acts and things in
relation to the collection or reduction to possession of the Rights conveyed to
the Agent as the Agent or its successors or assigns shall reasonably deem
desirable and (ii) for the obtaining of any benefit and coverage of and under
any and all of the Rights as the Agent or its successors or assigns shall
reasonably deem desirable, each Borrower hereby declaring that the foregoing
powers are coupled with an interest and are and shall be irrevocable by such
Borrower or by its dissolution or in any other manner or for any reason
whatsoever. Each Borrower hereby irrevocably authorizes and empowers the Agent,
in the sole discretion of the Agent, to, after the occurrence and during the
continuance of an Event of Default, (1) exercise and enforce any and all of the
Rights and (2) receive and collect any payments, damages, awards and other
moneys resulting from the exercise of the foregoing rights and to apply the same
on account of any of the Obligations.
(d) The Borrower shall keep the Agent informed of all material
circumstances bearing upon or involving any of the Acquisition Documents or the
transactions contemplated thereby.
(e) None of the Borrowers will assign, pledge or otherwise encumber any of
its right, title or interest under, in or to the
<PAGE>
Stock Purchase Agreement or any of the other Acquisition Documents to anyone
other than the Agent and its respective successors or assigns.
(f) None of the Borrowers will take or omit to take any action, the taking
or omission of which might result in the termination or suspension of any of the
Rights.
(g) After the occurrence of an Event of Default, each Borrower will act at
the direction of the Agent in taking any action or omitting to take any action,
including without limitation, the delivery of demands and releases and the
exercise and enforcement of any and all of the Rights, permitted to be taken by
such Borrower under the Stock Purchase Agreement or any of the other Acquisition
Documents.
(S)9.12 Amendment of Stock Option Plan. No Borrower shall effect or cause
------------------------------
any amendment or modification of the Stock Option Plan in any material respect
without the prior written consent of the Majority Banks.
(S)9.13 Amendment or Modification of Capitalization Documents. Without
-----------------------------------------------------
the prior written consent of the Majority Banks, no Borrower shall cause or
permit or consent to any amendment or modification of any term or condition of
any of the Capitalization Documents that involves, relates to or deals with (a)
the redemption or purchase of any of the capital stock of such Borrower or any
of its Subsidiaries, (b) the ability of such Borrower, the Agent or the Banks to
modify or amend or waive any term or condition of this Agreement or any of the
other Loan Documents (c) the subordination terms set forth therein or in any
document, agreement or instrument executed in connection therewith or (d) the
voting rights of, or consents required to be given by, the holders of Preferred
Stock under the Restated Certificate of Incorporation.
(S)9.14 Change of Fiscal Year. No Borrower or any of its
---------------------
Subsidiaries shall change its fiscal year without the prior written consent of
the Majority Banks, provided that, such consent shall not be unreasonably
withheld.
(S)9.15 Total Commitment Amount. The Borrowers shall not cause or
-----------------------
permit the sum of the outstanding amount of all Revolving Credit Loans to exceed
the Total Commitment or the Borrowing Base.
(S)10 FINANCIAL COVENANTS OF THE BORROWERS. Each Borrower covenants
------------------------------------
and agrees that, so long as any Loan or Note is outstanding or any Bank has any
obligation to make any Loans:
(S)10.1 Operating Cash Flow to Financial Obligations. Holdings will
--------------------------------------------
not permit the ratio of Consolidated Operating Cash Flow to Consolidated
Financial Obligations plus Distributions of Holdings and its Subsidiaries to be
less than (a) 1.20 to 1.0 for (i) the fiscal quarter of Holdings ending June 30,
1994, (ii) the period consisting of two consecutive fiscal quarters of Holdings
ending September 30, 1994, (iii) the period consisting of three
<PAGE>
consecutive fiscal quarters of Holdings ending December 31, 1994, and (iv) the
period consisting of four consecutive fiscal quarters of Holdings ending March
31, 1995 and (b) 1.25 to 1.0 for any period consisting of four consecutive
fiscal quarters of Holdings ending on or after April 1, 1995.
(S)10.2 Interest Coverage. Holdings will not permit the ratio of
-----------------
Earnings Before Interest and Taxes to Consolidated Total Interest Expense of
Holdings and its Subsidiaries to be less than (a) 2.0 to 1.0 for (i) the fiscal
quarter of Holdings ending June 30, 1994, (ii) the period consisting of two
consecutive fiscal quarters of Holdings ending September 30, 1994, (iii) the
period consisting of three consecutive fiscal quarters of Holdings ending
December 31, 1994, and (iv) the period consisting of four consecutive fiscal
quarters of Holdings ending March 31, 1995 and (ii) for any period consisting of
four consecutive fiscal quarters of Holdings ending during any period described
below the ratio set forth opposite such same period in such table:
Period Ratio
------ -----
April 1, 1995 through March 31, 1996 3.00 to 1
April 1, 1996 and thereafter 3.50 to 1
(S)10.3 Consolidated Shareholders Equity. Holdings will not permit the
--------------------------------
Consolidated Shareholders Equity of Holdings and its Subsidiaries for any fiscal
quarter ending after the Closing Date to be less than $47,000,000 plus on a
----
cumulative basis, fifty percent (50%) of positive Consolidated Net Income of
Holdings and its Subsidiaries for each fiscal year of Holdings beginning with
the fiscal year ending December 31, 1994.
(S)10.4 Liabilities to Equity. Holdings will not permit the ratio of
---------------------
Consolidated Total Liabilities to Consolidated Shareholders Equity of Holdings
and its Subsidiaries for any fiscal quarter ending during any period described
below to be greater than the ratio set forth opposite such period in such table:
Period Ratio
------ -----
Closing Date through March 31, 1995 1.30 to 1
April 1, 1995 through March 31, 1996 1.20 to 1
April 1, 1996 and thereafter 1.00 to 1
(S)10.5 Capital Expenditures; Capitalized Leases. The Borrowers will
----------------------------------------
not make, or permit any Subsidiary of the Borrowers to make, Capital
Expenditures plus Capitalized Lease expenditures (including the "face amount" of
Capitalized Leases) during any fiscal year ending after December 31, 1993 that
exceed, in the aggregate for all Borrowers and their Subsidiaries, the sum of
$3,000,000 for such fiscal year.
(S)11 INITIAL CLOSING CONDITIONS. The obligations of the Banks to
--------------------------
make the initial Revolving Credit Loans and the Term Loan, shall
<PAGE>
be subject to the satisfaction of the following conditions precedent on or prior
to April 15, 1994:
(S)11.1 Loan Documents. Each of the Loan Documents, the Acquisition
--------------
Documents and the Capitalization Documents shall have been duly executed and
delivered by the respective parties thereto, shall be in full force and effect
and shall be in form and substance satisfactory to each of the Banks. Each Bank
shall have received a fully executed copy of each such document, certified as
true and correct by the Borrowers.
(S)11.2 Certified Copies of Charter Documents. Each of the Banks
-------------------------------------
shall have received from each Borrower and each of its Subsidiaries a copy,
certified by a duly authorized officer of such Person to be true and complete on
the Closing Date, of each of (a) its charter or other incorporation documents as
in effect on such date of certification, and (b) its by-laws as in effect on
such date.
(S)11.3 Corporate Action. All corporate action necessary for the
----------------
valid execution, delivery and performance by each Borrower and each of its
Subsidiaries of this Credit Agreement and the other Loan Documents to which it
is or is to become a party shall have been duly and effectively taken, and
evidence thereof satisfactory to the Banks shall have been provided to each of
the Banks.
(S)11.4 Incumbency Certificate. Each of the Banks shall have
----------------------
received from each Borrower and each of its Subsidiaries an incumbency
certificate, dated as of the Closing Date, signed by a duly authorized officer
of such Borrower or such Subsidiary, and giving the name and bearing a specimen
signature of each individual who shall be authorized: (a) to sign, in the name
and on behalf of Borrower or such Subsidiary, each of the Loan Documents to
which such Borrower or such Subsidiary is or is to become a party; (b) in the
case of such Borrower, to make Loan Requests; and (c) to give notices and to
take other action on such Persons behalf under the Loan Documents.
(S)11.5 Legality of Transactions. No change in applicable law shall
------------------------
have occurred as a consequence of which it shall have become and continue to be
unlawful (a) for any Bank or the Agent to perform any of its agreements or
obligations under any of the Loan Documents to which any such Person is a party
on the Closing Date or (b) for any Borrower or any of its Subsidiaries to
perform any of its agreements or obligations under any of the Loan Documents,
the Acquisition Documents or the Capitalization Documents to which it is a party
on the Closing Date.
(S)11.6 Validity of Liens. The Security Documents shall be effective
-----------------
to create in favor of the Agent a legal, valid and enforceable first (except for
Permitted Liens entitled to priority under applicable law) security interest in
and lien upon the Collateral. All filings, recordings, deliveries of instruments
and other actions necessary or desirable in the opinion of the Agent to protect
and preserve such security interests shall have been duly
<PAGE>
effected. The Agent shall have received evidence thereof in form and substance
satisfactory to the Agent.
(S)11.7 UCC Search Results. The Agent shall have received UCC searches
------------------
with respect to the Collateral, indicating no liens other than Permitted Liens
and otherwise in form and substance satisfactory to the Agent.
(S)11.8 Survey and Taxes. The Agent shall have received (a) an updated
----------------
Survey of each Mortgaged Property together with a Surveyor Certificate relating
thereto and (b) evidence of payment of real estate taxes and municipal charges
on all Real Estate not delinquent on or before the Closing Date.
(S)11.9 Title Insurance. The Agent shall have received a Title Policy
---------------
covering each Mortgaged Property (or commitments to issue such policies, with
all conditions to issuance of the Title Policy deleted by an authorized agent of
the Title Insurance Company) together with proof of payment of all fees and
premiums for such policies, from the Title Insurance Company and in amounts
satisfactory to the Agent, insuring the interest of the Agent and each of the
Banks as mortgagee under the Mortgages.
(S)11.10 Landlord Consents. The Borrowers and their Subsidiaries shall
-----------------
have delivered to the Agent all landlord consents required by the Agent,
together in each case with such estoppel certificates as the Agent may request.
(S)11.11 Certificates of Insurance. The Agent shall have received (a) a
-------------------------
certificate of insurance from an independent insurance broker dated as of the
Closing Date, identifying insurers, types of insurance, insurance limits, and
policy terms, and otherwise describing the insurance obtained in accordance with
the provisions of the Security Agreements and (b) certified copies of all
policies evidencing such insurance (or certificates therefore signed by the
insurer or an agent authorized to bind the insurer).
(S)11.12 Borrowing Base Report. The Agent shall have received from the
---------------------
Borrowers the initial Borrowing Base Report dated as of March 31, 1994.
(S)11.13 Proceedings and Documents. All corporate, partnership,
-------------------------
governmental and other proceedings in connection with the transactions
contemplated by the Loan Documents and all instruments and documents incidental
thereto, shall be in form and substance reasonably satisfactory to the Banks and
the Banks shall have received all such counterpart originals or certified or
other copies of all such instruments and documents as the Banks shall have
reasonably requested.
(S)11.14 Accounts Receivable Aging Report. The Agent shall have received
--------------------------------
from the Borrowers the most recent Accounts Receivable aging report of the
Borrowers and their Subsidiaries dated as of a date which shall be no more than
thirty (30) days
<PAGE>
prior to the Balance Sheet Date and the Borrowers shall have notified the Agent
in writing on the Closing Date of any material deviation from the Accounts
Receivable values reflected in such Accounts Receivable aging report and shall
have provided the Agent with such supplementary documentation as the Agent may
reasonably request.
(S)11.15 Appraisals; Hazardous Waste Assessments. The Agent shall have
---------------------------------------
received appraisals in form and substance satisfactory to the Agent from
appraisers satisfactory to the Bank regarding all Real Estate. The Agent also
shall have received hazardous waste site assessments from environmental
engineers and in form and substance satisfactory to the Agent, covering all Real
Estate and all other real property in respect of which any Borrower or any of
its Subsidiaries may have material liability, whether contingent or otherwise,
for dumping or disposal of Hazardous Substances.
(S)11.16 Financial Condition. The Banks shall be satisfied that the
-------------------
financial statements referred to in (S)7.5 fairly present the business and
financial condition of the Borrowers, as at and for the periods ending on the
respective dates thereof, and that, except for changes described in writing to
the Banks and acceptable to them, there has been no material adverse change in
the assets, business or financial condition of any Borrower since the applicable
dates set forth in (S)7.5 hereof.
(S)11.17 Opinion of Counsel. Each of the Banks and the Agent shall have
------------------
received a favorable legal opinion addressed to the Banks and the Agent, dated
as of the Closing Date, in form and substance satisfactory to the Banks and the
Agent, from:
(a) Willkie Farr & Gallagher, counsel to the Borrowers and their
Subsidiaries;
(b) Tyler, Cooper & Alcorn, Connecticut counsel to the Borrowers and
their Subsidiaries;
(c) Trenam, Simmons, Kemker, Scharf, Barkin, Frye & O'Neill, Florida
counsel to the Borrowers and their Subsidiaries; and
(d) Stinson, Mag & Fizzell, P.C., Missouri counsel to the Borrowers.
(S)11.18 Payment of Fees. The Borrowers shall have paid to the Banks or
---------------
the Agent, as appropriate, the Facility Fee and Agent's fee pursuant to
(S)(S)5.1 and 5.2.
(S)11.19 Payoff Letter. The Agent shall have received a payoff letter
-------------
from Bank of Boston Connecticut, indicating the amount of the loan obligations
of the Borrowers to Bank of Boston Connecticut to be discharged on the Closing
Date and an acknowledgment by Bank of Boston Connecticut that upon receipt of
such funds it will forthwith execute and deliver to the Agent for filing all
termination statements and take such other actions as may be
<PAGE>
necessary to discharge all mortgages, deeds of trust and security interests
granted by the Borrowers or any of their Subsidiaries in favor of Bank of Boston
Connecticut.
(S)11.20 Disbursement Instructions. The Agent shall have received
-------------------------
disbursement instructions from the Borrowers, indicating that a portion of the
proceeds of the Loans, in an amount equal to the aggregate loan obligations of
the Borrowers to Bank of Boston Connecticut are to be paid to Bank of Boston
Connecticut.
(S)11.21 Solvency Certificate. The Agent shall have received from the
--------------------
Borrowers a certificate of the chief financial officer of Holdings, addressed to
the Agent and the Banks, regarding the solvency of the Borrowers after the
consummation of the transactions contemplated herein and such certificate shall
be in form and substance satisfactory to the Banks.
(S)11.22 Bank Agency Agreements. The Agent shall have received an
----------------------
agreement, in form and substance satisfactory to the Agent, from each bank at
which any Borrower or any of its Subsidiaries maintains depositary accounts
(including bank agency or lock box agreements) concerning the Agent's interest
in such accounts.
(S)11.23 Equity Contribution. The Banks shall have received evidence
-------------------
of the consummation of the equity contribution made by the Holdings Stockholders
into Holdings in an aggregate amount of not less than $43,502,337.36 in cash and
that the capital structure of the Borrowers is otherwise satisfactory to the
Banks in all respects.
(S)11.24 Closing of Acquisition. Holdings shall have completed on the
----------------------
Closing Date simultaneously with the making of the initial Loans the purchase
from the Seller of the Shares pursuant to the Acquisition Documents without
recourse to any provision of the Acquisition Documents permitting the waiver by
Holdings of any material condition, obligation, covenant or other requirement.
The purchase price to be paid by Holdings for the Shares shall not exceed
$83,100,000 plus or minus, as the case may be, amounts in respect of any
purchase price adjustments made after the closing of the Acquisition pursuant to
the terms of the Stock Purchase Agreement.
(S)11.25 Acquisition Documents. The Borrowers shall have delivered to
---------------------
Agent evidence satisfactory to the Agent in all respects of the successful
completion of the Acquisition on terms and conditions satisfactory to the Banks
in all respects. Copies of each of the Acquisition Documents, as executed and
delivered by the respective parties thereto shall have been furnished to the
Banks and all of the conditions to the Acquisition specified in the Acquisition
Documents shall have been and shall continue to be satisfactory in all respects.
The Agent shall have received a fully executed copy of each such document,
certified as true and correct by the Borrowers.
<PAGE>
(S)11.26 H-S-R. The Agent shall have received evidence satisfactory to
-----
the Agent that either (a) the premerger waiting period under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "H-S-R ACT"), is not
applicable to the transactions contemplated hereby and by the Acquisition
Documents or (b) the premerger waiting period has expired with no adverse action
taken by any governmental authority.
(S)11.27 Collateral Note. In addition to the Term Notes and the
---------------
Revolving Notes, each of the Borrowers shall have duly executed and delivered a
certain Collateral Note, dated of even date herewith, in the original principal
amount of $2,500,000 (the "Collateral Note") to the Agent, it being understood,
however, that (a) the Collateral Note, together with the Term Notes, represents
the outstanding amounts owed by the Borrowers under the Term Loan, (b) the
aggregate amount of all payments or recoveries on the Collateral Note shall not
exceed the amount of the Term Loan (exclusive of the Collateral Note) and (c)
any payments or recoveries on the Collateral Note shall be credited to the
unpaid amount of the Term Loan and in such order of application as the Banks may
determine.
(S)12 CONDITIONS TO ALL BORROWINGS. The obligations of the Banks to
----------------------------
make any Loan, including the Revolving Credit Loan and the Term Loan, in each
case whether on or after the Closing Date, shall also be subject to the
satisfaction of the following conditions precedent:
(S)12.1 Representations True; No Event of Default. Each of the
-----------------------------------------
representations and warranties of the Borrowers and their Subsidiaries contained
in this Credit Agreement, the other Loan Documents or in any document or
instrument delivered pursuant to or in connection with this Credit Agreement
shall be true as of the date as of which they were made and shall also be true
at and as of the time of the making of such Loan, with the same effect as if
made at and as of that time (except to the extent of changes resulting from
transactions contemplated or permitted by this Credit Agreement and the other
Loan Documents and changes occurring in the ordinary course of business that
singly or in the aggregate are not materially adverse, and to the extent that
such representations and warranties relate expressly to an earlier date) and no
Default or Event of Default shall have occurred and be continuing.
(S)12.2 No Legal Impediment. No change shall have occurred in any law or
-------------------
regulations thereunder or interpretations thereof that in the reasonable opinion
of any Banks would make it illegal for such Banks to make such Loan.
(S)12.3 Governmental Regulation. Each Bank shall have received such
-----------------------
statements in substance and form reasonably satisfactory to such Bank as such
Bank shall require for the purpose of compliance with any applicable regulations
of the Comptroller of the Currency or the Board of Governors of the Federal
Reserve System.
<PAGE>
(S)12.4 Proceedings and Documents. All proceedings in connection with the
-------------------------
transactions contemplated by this Credit Agreement, the other Loan Documents and
all other documents incident thereto shall be satisfactory in substance and in
form to the Banks and to the Agent and the Agent's Special Counsel, and the
Banks, the Agent and such counsel shall have received all information and such
counterpart originals or certified or other copies of such documents as the
Agent may reasonably request.
(S)12.5 Borrowing Base Report. The Agent and the Banks shall have
---------------------
received the most recent Borrowing Base Report required to be delivered to the
Agent and the Banks in accordance with (S)8.4(g).
(S)12.6 Future Advances Tax Payment. As a further condition precedent to
---------------------------
the Banks' obligations to make any Revolving Credit Loans in excess of an
aggregate amount of $14,000,000 (calculated as the sum of all Revolving Credit
Loans advanced hereunder without deduction for any repayments of such Revolving
Credit Loans and regardless of whether such Loans are outstanding at the time of
reference hereto), the Borrowers shall have executed and delivered to the Agent
a notice of future advance in form and substance satisfactory to the Agent and
shall have paid to the Agent any mortgage, recording, intangible, documentary
stamp or other similar taxes and charges which the Agent reasonably has
determined to be payable to the applicable state or any county or municipality
thereof in order to insure that the Mortgages secure the Obligations with
respect to the Revolving Credit Loans then being requested by the Borrowers.
(S)13 EVENTS OF DEFAULT; ACCELERATION; ETC.
-------------------------------------
(S)13.1 Events of Default and Acceleration. If any of the following
----------------------------------
events ("Events of Default" or, if the giving of notice or the lapse of time or
both is required, then, prior to such notice or lapse of time, "Defaults") shall
occur:
(a) the Borrowers shall fail to pay any principal of the Loans when
the same shall become due and payable, whether at the stated date of maturity or
any accelerated date of maturity or at any other date fixed for payment;
(b) any Borrower or any of its Subsidiaries shall fail to pay any
interest on the Loans, the commitment fee, the Agent's fee, or other sums due
hereunder or under any of the other Loan Documents, within five (5) Business
Days after the same shall become due and payable, whether at the stated date of
maturity or any accelerated date of maturity or at any other date fixed for
payment;
(c) any Borrower shall fail to comply with any of its covenants
contained in (S)(S) 8, 9 or 10 (other than the covenants set forth in (S)(S)8.2,
8.5, 8.7, 8.11, 8.14, 9.3, and 9.8 hereof);
(d) any Borrower shall fail to comply with any of its covenants
contained in (S)(S)8.2, 8.5, 8.7, 8.11, 8.14, 9.3 and 9.8
<PAGE>
hereof within fifteen (15) days after the Agent has given notice of such failure
to the Borrowers;
(e) any Borrower or any of its Subsidiaries shall fail to perform any
term, covenant or agreement contained herein or in any of the other Loan
Documents (other than those specified elsewhere in this (S)13.1) for thirty (30)
days after written notice of such failure has been given to such Borrower by the
Agent;
(f) any representation or warranty of any Borrower or any of its
Subsidiaries in this Credit Agreement or any of the other Loan Documents or in
any other document or instrument delivered pursuant to or in connection with
this Credit Agreement shall prove to have been false in any material respect
upon the date when made or deemed to have been made or repeated;
(g) any Borrower or any of its Subsidiaries shall fail to pay at
maturity, or within any applicable period of grace (not to exceed thirty (30)
days), any obligation in excess of $100,000 for borrowed money or credit
received or in respect of any Capitalized Leases or fail to observe or perform
any material term, covenant or agreement contained in any agreement by which it
is bound, evidencing or securing obligations in excess of $100,000 in respect of
borrowed money or credit received or in respect of any Capitalized Leases for
such period of time as would permit (assuming the giving of appropriate notice
if required) the holder or holders thereof or of any obligations issued
thereunder to accelerate the maturity thereof;
(h) any Borrower or any of its Subsidiaries shall make an assignment
for the benefit of creditors, or admit in writing its inability to pay or
generally fail to pay its debts as they mature or become due, or shall petition
or apply for the appointment of a trustee or other custodian, liquidator or
receiver of such Borrower or any of its Subsidiaries or of any substantial part
of the assets of such Borrower or any of its Subsidiaries or shall commence any
case or other proceeding relating to such Borrower or any of its Subsidiaries
under any bankruptcy, reorganization, arrangement, insolvency, readjustment of
debt, dissolution or liquidation or similar law of any jurisdiction, now or
hereafter in effect, or shall take any action to authorize or in furtherance of
any of the foregoing, or if any such petition or application shall be filed or
any such case or other proceeding shall be commenced against such Borrower or
any of its Subsidiaries and such Borrower or any of its Subsidiaries shall
indicate its approval thereof, consent thereto acquiescence therein or otherwise
remain undismissed for a period of sixty (60) days;
(i) a decree or order is entered appointing any such trustee,
custodian, liquidator or receiver or adjudicating any Borrower or any of its
Subsidiaries bankrupt or insolvent, or approving a petition in any such case or
other proceeding, or a decree or order for relief is entered in respect of such
Borrower or any Subsidiary of such Borrower in an involuntary case under federal
bankruptcy laws as now or hereafter constituted (which
<PAGE>
order is not dismissed within sixty (60) days after the entry thereof);
(j) there shall remain in force, undischarged, unsatisfied, unstayed
for more than sixty (60) days, whether or not consecutive, any final judgment
(unless bonded pending appeal) against the Borrowers or any of their
Subsidiaries that, with other outstanding final judgments, undischarged, against
the Borrowers or any of their Subsidiaries exceeds in the aggregate $1,000,000;
(k) the holders of all or any part of the Subordinated Debt shall
accelerate the maturity of all or any part of the Subordinated Debt or the
Subordinated Debt shall be prepaid, redeemed or repurchased in whole or in part;
(l) if any of the Loan Documents shall be cancelled, terminated,
revoked or rescinded otherwise than in accordance with the terms thereof or with
the express prior written agreement, consent or approval of the Banks, or any
action at law, suit or in equity or other legal proceeding to cancel, revoke or
rescind any of the Loan Documents shall be commenced by or on behalf of any
Borrower or any of its Subsidiaries party thereto or any of their respective
stockholders, or any court or any other governmental or regulatory authority or
agency of competent jurisdiction shall make a determination that, or issue a
judgment, order, decree or ruling to the effect that, any one or more of the
Loan Documents is illegal, invalid or unenforceable in accordance with the terms
thereof;
(m) with respect to any Guaranteed Pension Plan, an ERISA Reportable
Event shall have occurred and the Majority Banks shall have determined in their
reasonable discretion that such event reasonably could be expected to result in
liability of the Borrowers or any of their Subsidiaries to the PBGC or such
Guaranteed Pension Plan in an aggregate amount exceeding $1,000,000 and such
event in the circumstances occurring reasonably could constitute grounds for the
termination of such Guaranteed Pension Plan by the PBGC or for the appointment
by the appropriate United States District Court of a trustee to administer such
Guaranteed Pension Plan; or a trustee shall have been appointed by the United
States District Court to administer such Plan; or the PBGC shall have instituted
proceedings to terminate such Guaranteed Pension Plan;
(n) any Borrower or any of its Subsidiaries shall be enjoined,
restrained or in any way prevented by the order of any court or any
administrative or regulatory agency from conducting any material part of its
business and such order shall continue in effect for more than thirty (30) days;
(o) there shall occur any material damage to, or loss, theft or
destruction of, any Collateral, whether or not insured, or any strike, lockout,
labor dispute, embargo, condemnation, act of God or public enemy, or other
casualty, which in any such case causes, for more than fifteen (15) consecutive
days, the cessation
<PAGE>
or substantial curtailment of revenue producing activities at any facility of
any Borrower or any of its Subsidiaries if such event or circumstance is not
covered by business interruption insurance and would have a material adverse
effect on the business or financial condition of such Borrower or such
Subsidiary;
(p) there shall occur the loss, suspension or revocation of, or
failure to renew, any license or permit now held or hereafter acquired by any
Borrower or any of its Subsidiaries if such loss, suspension, revocation or
failure to renew would have a material adverse effect on the business or
financial condition of such Borrower or such Subsidiary;
(q) the Borrowers or any of their Subsidiaries shall be indicted for a
federal crime, a punishment for which could include the forfeiture of any assets
of the Borrowers or such Subsidiaries included in the Borrowing Base or any
assets of the Borrowers or such Subsidiaries not included in the Borrowing Base
but having a fair market value in excess of $1,000,000; or
(r) Warburg shall, at any time, legally and beneficially own less than
(i) thirty-six percent (36%) of the issued and outstanding Class A Voting Common
Stock of Holdings or (ii) sixty percent (60%) of the issued and outstanding
Preferred Stock of Holdings, in each case as adjusted pursuant to any stock
split, stock dividend or recapitalization or reclassification of the capital of
Holdings;
(s) the Original Holdings Stockholders shall, at any time, legally and
beneficially own less than fifty one percent (51%) of the issued and outstanding
Voting Stock of Holdings, or adjusted pursuant to any stock split, stock
dividend or recapitalization or reclassification of the capital of Holdings;
then, and in any such event, so long as the same may be continuing, the Agent
may, and upon the request of the Majority Banks shall, by notice in writing to
the Borrowers declare all amounts owing with respect to this Credit Agreement,
the Notes and the other Loan Documents to be, and they shall thereupon forthwith
become, immediately due and payable without presentment, demand, protest or
other notice of any kind, all of which are hereby expressly waived by the
Borrowers; provided that in the event of any Event of Default specified in
--------
(S)(S)13.1(h), 13.1(i) or 13.1(l), all such amounts shall become immediately due
and payable automatically and without any requirement of notice from the Agent
or any Bank; provided further that in the event of any Event of Default
--------
specified in (S)(S)13.1(h), 13.1(i) or 13.1(l), the Commitments of the Banks
shall immediately terminate and all such amounts owing shall become immediately
due and payable automatically and without any requirement of notice from the
Agent or the Banks. No remedy herein conferred upon the Banks is intended to be
exclusive of any other remedy and each and every remedy shall be cumulative and
shall be in addition to every other remedy given hereunder or now or hereafter
existing at law or in equity or by statute or any other provision of law.
<PAGE>
(S)13.2 Termination of Commitments. If any one or more of the Events
--------------------------
of Default specified in (S)13.1(h), (S)13.1(i) or (S)13.1(l) shall occur, any
unused portion of the Total Commitment hereunder shall forthwith terminate and
each of the Banks shall be relieved of all further obligations to make Loans to
the Borrowers. If any other Event of Default shall have occurred and be
continuing, or if on any Drawdown Date the conditions precedent to the making of
the Loans to be made on such Drawdown Date are not satisfied, the Agent may and,
upon the request of the Majority Banks, shall, by notice to the Borrowers,
terminate the unused portion of the credit hereunder, and upon such notice being
given such unused portion of the credit hereunder shall terminate immediately
and each of the Banks shall be relieved of all further obligations to make
Loans. No termination of the credit hereunder shall relieve any Borrower or any
of its Subsidiaries of any of the Obligations.
(S)13.3 Remedies. In case any one or more of the Events of Default shall
--------
have occurred and be continuing, and whether or not the Banks shall have
accelerated the maturity of the Loans pursuant to (S)13.1, each Bank, if owed
any amount with respect to the Loans, may, with the consent of the Majority
Banks but not otherwise, proceed to protect and enforce its rights by suit in
equity, action at law or other appropriate proceeding, whether for the specific
performance of any covenant or agreement contained in this Credit Agreement and
the other Loan Documents or any instrument pursuant to which the Obligations to
such Bank are evidenced, including as permitted by applicable law the obtaining
of the ex parte appointment of a receiver, and, if such amount shall have become
-- -----
due, by declaration or otherwise, proceed to enforce the payment thereof or any
other legal or equitable right of such Bank. No remedy herein conferred upon
any Bank or the Agent or the holder of any Note is intended to be exclusive of
any other remedy and each and every remedy shall be cumulative and shall be in
addition to every other remedy given hereunder or now or hereafter existing at
law or in equity or by statute or any other provision of law.
(S)13.4 Distribution of Collateral Proceeds. In the event that,
-----------------------------------
following the occurrence or during the continuance of any Default or Event of
Default, the Agent or any Bank, as the case may be, receives any monies in
connection with the enforcement of any the Security Documents, or otherwise with
respect to the realization upon any of the Collateral, such monies shall be
distributed for application as follows:
(a) First, to the payment of, or (as the case may be) the
reimbursement of the Agent for or in respect of all reasonable costs, expenses,
disbursements and losses which shall have been incurred or sustained by the
Agent in connection with the collection of such monies by the Agent, for the
exercise, protection or enforcement by the Agent of all or any of the rights,
remedies, powers and privileges of the Agent under this Credit Agreement or any
of the other Loan Documents or in respect of the Collateral or in support of any
provision of adequate indemnity to the Agent against any taxes or liens which by
law shall have, or may have, priority over the rights of the Agent to such
monies;
<PAGE>
(b) Second, to all other Obligations in such order or preference as
the Majority Banks may determine; provided, however, that distributions in
-------- -------
respect of such obligations shall be made (i) pari passu among Obligations with
---- -----
respect to the Agent's fee payable pursuant to (S)5.2 and all other Obligations
and (ii) Obligations owing to the Banks with respect to each type of Obligation
such as interest, principal, fees and expenses, shall be made among the Banks
pro rata; and provided, further, that the Agent may in its discretion make
- --- ---- -------- -------
proper allowance to take into account any Obligations not then due and payable;
(c) Third, upon payment and satisfaction in full or other provisions
for payment in full satisfactory to the Banks and the Agent of all of the
Obligations, to the payment of any obligations required to be paid pursuant to
(S)9-504(1)(c) of the Uniform Commercial Code of the State of Connecticut as in
effect from time to time; and
(d) Fourth, the excess, if any, shall be returned to the Borrowers or
to such other Persons as are entitled thereto.
(S)14 SETOFF. (a) Regardless of the adequacy of any collateral, during
------
the continuance of any Event of Default, any deposits or other sums credited by
or due from any of the Banks to any Borrower and any securities or other
property of such Borrower in the possession of such Bank may be applied to or
set off by such Bank against the payment of Obligations and any and all other
liabilities, direct, or indirect, absolute or contingent, due or to become due,
now existing or hereafter arising, of such Borrower to such Bank. Each of the
Banks agrees with each other Bank that (a) if an amount to be set off is to be
applied to Indebtedness of the Borrowers to such Bank, other than Indebtedness
evidenced by the Notes held by such Bank, such amount shall be applied ratably
to such other Indebtedness and to the Indebtedness evidenced by all such Notes
held by such Bank, and (b) if such Bank shall receive from any Borrower, whether
by voluntary payment, exercise of the right of setoff, counterclaim, cross
action, enforcement of the claim evidenced by the Notes held by such Bank by
proceedings against such Borrower at law or in equity or by proof thereof in
bankruptcy, reorganization, liquidation, receivership or similar proceedings, or
otherwise, and shall retain and apply to the payment of the Note or Notes held
by such Bank any amount in excess of its ratable portion of the payments
received by all of the Banks with respect to the Notes held by all of the Banks,
such Bank will make such disposition and arrangements with the other Banks with
respect to such excess, either by way of distribution, pro tanto assignment of
--- -----
claims, subrogation or otherwise as shall result in each Bank receiving in
respect of the Notes held by it, its proportionate payment as contemplated by
this Credit Agreement; provided that if all or any part of such excess payment
--------
is thereafter recovered from such Bank, such disposition and arrangements shall
be rescinded and the amount restored to the extent of such recovery, but without
interest.
<PAGE>
(b) In case any Event of Default shall have occurred and be continuing, to
the extent that any Bank has made Loans or holds Notes exceeding in the
aggregate principal amount such Bank's Commitment Percentage of the then
outstanding aggregate principal amount of the Loans held by the Banks, the other
Banks shall purchase such participations in such Bank's Loans as to result in
the outstanding aggregate principal amount of the Loans made by each Bank to
equal each such Bank's Commitment Percentage of the then outstanding aggregate
principal amount of the Loans. Each of the Borrowers hereby agrees that any
Bank so purchasing a participation from another Bank pursuant to this paragraph
may, to the fullest extent permitted by law, exercise all of its rights to
payment (including the right of set-off) with respect to such participation as
fully as if such Bank were the direct creditor of the Borrower of such Loan in
the amount of such participation.
(S)15 THE AGENT.
---------
(S)15.1 Authorization. The Agent is authorized to take such action on
-------------
behalf of each of the Banks and to exercise all such powers as are hereunder and
under any of the other Loan Documents and any related documents delegated to the
Agent, together with such powers as are reasonably incident thereto, provided
--------
that no duties or responsibilities not expressly assumed he rein or therein
shall be implied to have been assumed by the Agent. The relationship between the
Agent and the Banks is and shall be that of agent and principal only, and
nothing contained in this Credit Agreement or any of the other Loan Documents
shall be construed to constitute the Agent as a trustee for any Bank.
(S)15.2 Employees and Agents. The Agent may exercise its powers and
--------------------
execute its duties by or through employees or agents and shall be entitled to
take, and to rely on, advice of counsel concerning all matters pertaining to its
rights and duties under this Credit Agreement and the other Loan Documents. The
Agent may utilize the services of such Persons as the Agent in its sole
discretion may reasonably determine, and all reasonable fees and expenses of any
such Persons shall be paid by the Borrowers.
(S)15.3 No Liability. Neither the Agent nor any of its shareholders,
------------
directors, officers or employees nor any other Person assisting them in their
duties nor any agent or employee thereof, shall be liable for any waiver,
consent or approval given or any action taken, or omitted to be taken, in good
faith by it or them hereunder or under any of the other Loan Documents, or in
connection herewith or therewith, or be responsible for the consequences of any
oversight or error of judgment whatsoever, except that the Agent or such other
Person, as the case may be, may be liable for losses due to its willful
misconduct or gross negligence.
(S)15.4 No Representations. The Agent shall not be responsible for
------------------
the execution or validity or enforceability of this Credit Agreement, the Notes,
any of the other Loan Documents or any instrument at any time constituting, or
intended to constitute,
<PAGE>
collateral security for the Notes, or for the value of any such collateral
security or for the validity, enforceability or collectability of any such
amounts owing with respect to the Notes, or for any recitals or statements,
warranties or representations made herein or in any of the other Loan Documents
or in any certificate or instrument hereafter furnished to it by or on behalf of
the Borrowers or any of their Subsidiaries, or be bound to ascertain or inquire
as to the performance or observance of any of the terms, conditions, covenants
or agreements herein or in any instrument at any time constituting, or intended
to constitute, collateral security for the Notes or to inspect any of the
properties, books or records of the Borrowers or any of their Subsidiaries. The
Agent shall not be bound to ascertain whether any notice, consent, waiver or
request delivered to it by the Borrowers or any holder of any of the Notes shall
have been duly authorized or is true, accurate and complete. The Agent has not
made nor does it now make any representations or warranties, express or implied,
nor does it assume any liability to the Banks, with respect to the credit
worthiness or financial condition of the Borrowers or any of their Subsidiaries.
Each Bank acknowledges that it has, independently and without reliance upon the
Agent or any other Bank, and based upon such information and documents as it has
deemed appropriate, made its own credit analysis and decision to enter into this
Credit Agreement.
(S)15.5 Payments.
--------
(a) A payment by the Borrowers to the Agent hereunder or any of the
other Loan Documents for the account of any Bank shall constitute a payment to
such Bank. The Agent agrees promptly to distribute to each Bank such Bank's pro
---
rata share of payments received by the Agent for the account of the Banks
- ----
except as otherwise expressly provided herein or in any of the other Loan
Documents.
(b) If in the opinion of the Agent the distribution of any amount
received by it in such capacity hereunder, under the Notes or under any of the
other Loan Documents might involve it in liability, it may refrain from making
distribution until its right to make distribution shall have been adjudicated by
a court of competent jurisdiction. If a court of competent jurisdiction shall
adjudge that any amount received and distributed by the Agent is to be repaid,
each Person to whom any such distribution shall have been made shall either
repay to the Agent its proportionate share of the amount so adjudged to be
repaid or shall pay over the same in such manner and to such Persons as shall be
determined by such court.
(c) Notwithstanding anything to the contrary contained in this Credit
Agreement or any of the other Loan Documents, any Bank that fails (i) to make
available to the Agent its pro rata share of any Loan or (ii) to comply with the
--- ----
provisions of (S)14 with respect to making dispositions and arrangements with
the other Banks, where such Bank's share of any payment received, whether by
setoff or otherwise, is in excess of its pro rata share of such
--- ----
<PAGE>
payments due and payable to all of the Banks, in each case as, when and to the
full extent required by the provisions of this Credit Agreement, shall be deemed
delinquent (a "Delinquent Bank") and shall be deemed a Delinquent Bank until
such time as such delinquency is satisfied. A Delinquent Bank shall be deemed to
have assigned any and all payments due to it from the Borrowers, whether on
account of outstanding Loans, interest, fees or otherwise, to the remaining
nondelinquent Banks for application to, and reduction of, their respective pro
---
rata shares of all outstanding Loans. The Delinquent Bank hereby authorizes the
- ----
Agent to distribute such payments to the nondelinquent Banks in proportion to
their respective pro rata shares of all outstanding Loans. A Delinquent Bank
--- ----
shall be deemed to have satisfied in full a delinquency when and if, as a result
of application of the assigned payments to all outstanding Loans of the
nondelinquent Banks, the Banks' respective pro rata shares of all outstanding
--- ----
Loans have returned to those in effect immediately prior to such delinquency and
without giving effect to the nonpayment causing such delinquency.
(S)15.6 Holders of Notes. The Agent may deem and treat the payee of any
----------------
Note as the absolute owner or purchaser thereof for all purposes hereof until it
shall have been furnished in writing with a different name by such payee or by a
subsequent holder, assignee or transferee.
(S)15.7 Indemnity. The Banks ratably agree hereby to indemnify and hold
---------
harmless the Agent from and against any and all claims, actions and suits
(whether groundless or otherwise), losses, damages, costs, expenses (including
any expenses for which the Agent has not been reimbursed by the Borrowers as
required by (S)17), and liabilities of every nature and character arising out of
or related to this Credit Agreement, the Notes, or any of the other Loan
Documents or the transactions contemplated or evidenced hereby or thereby, or
the Agent's actions taken hereunder or thereunder, except to the extent that any
of the same shall be directly caused by the Agent's willful misconduct or gross
negligence.
(S)15.8 Agent as Bank. In its individual capacity, Bank of Boston
-------------
Connecticut shall have the same obligations and the same rights, powers and
privileges in respect to its Commitment and the Loans made by it, and as the
holder of any of the Notes, as it would have were it not also the Agent.
(S)15.9 Resignation. The Agent may resign at any time by giving sixty
-----------
(60) days' prior written notice thereof to the Banks and the Borrowers. Upon any
such resignation, the Majority Banks shall have the right to appoint a successor
Agent. Unless a Default or Event of Default shall have occurred and be
continuing, such successor Agent shall be reasonably acceptable to the
Borrowers. If no successor Agent shall have been so appointed by the Majority
Banks and shall have accepted such appointment within thirty (30) days after the
retiring Agent's giving of notice of resignation, then the retiring Agent may,
on behalf of the Banks, appoint a successor Agent, which shall be a financial
institution
<PAGE>
having a rating of not less than A or its equivalent by Standard & Poor's
Corporation. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations
hereunder. After any retiring Agent's resignation, the provisions of this Credit
Agreement and the other Loan Documents shall continue in effect for its benefit
in respect of any actions taken or omitted to be taken by it while it was acting
as Agent.
(S)15.10 Notification of Defaults and Events of Default. Each Bank
----------------------------------------------
hereby agrees that, upon learning of the existence of a Default or an Event of
Default, it shall promptly notify the Agent in writing thereof. The Agent
hereby agrees that upon receipt of any notice under this (S)15.10 it shall
promptly notify the other Banks in writing of the existence of such Default or
Event of Default.
(S)15.11 Duties in the Case of Enforcement. In case one of more Events of
---------------------------------
Default have occurred and shall be continuing, and whether or not acceleration
of the Obligations shall have occurred, the Agent shall, if (a) so requested by
the Majority Banks and (b) the Banks have provided to the Agent such additional
indemnities and assurances against expenses and liabilities as the Agent may
reasonably request, proceed to enforce the provisions of the Security Documents
authorizing the sale or other disposition of all or any part of the Collateral
and exercise all or any such other legal and equitable and other rights or
remedies as it may have in respect of such Collateral. The Majority Banks may
direct the Agent in writing as to the method and the extent of any such sale or
other disposition, the Banks hereby agreeing to indemnify and hold the Agent,
harmless from all liabilities incurred in respect of all actions taken or
omitted in accordance with such directions, provided that the Agent need not
--------
comply with any such direction to the extent that the Agent reasonably believes
the Agent's compliance with such direction to be unlawful or commercially
unreasonable in any applicable jurisdiction.
(S)16 EXPENSES. The Borrowers agree to pay (a) the reasonable costs
--------
of producing and reproducing this Credit Agreement, the other Loan Documents and
the other agreements and instruments mentioned herein, (b) any taxes (including
any interest and penalties in respect thereto) payable by the Agent or any of
the Banks (other than taxes based upon the Agent's or any Bank's net income) on
or with respect to the transactions contemplated by this Credit Agreement (the
Borrowers hereby agreeing to indemnify the Agent and each Bank with respect
thereto), (c) the reasonable fees, expenses and disbursements of the Agent's
Special Counsel or any local counsel to the Agent incurred in connection with
the preparation,
<PAGE>
administration or interpretation of the Loan Documents and other instruments
mentioned herein, each closing hereunder, and amendments, modifications,
approvals, consents or waivers hereto or hereunder, (d) the fees, expenses and
disbursements of the Agent incurred by the Agent in connection with the
preparation, administration, syndication or interpretation of the Loan Documents
and other instruments mentioned herein, including all title insurance premiums
and surveyor, engineering, appraisal and commercial finance examination charges,
(e) any fees, costs, expenses and bank charges, including bank charges for
returned checks, incurred by the Agent in establishing, maintaining or handling
agency accounts, lock box accounts and other accounts for the collection of any
of the Collateral; (f) all reasonable out-of-pocket expenses (including without
limitation reasonable attorneys' fees and costs, which attorneys may be
employees of any Bank or the Agent, and reasonable consulting, accounting,
appraisal, syndication, investment banking and similar professional fees and
charges) incurred by any Bank or the Agent in connection with (i) the
enforcement of or preservation of rights under any of the Loan Documents against
the Borrowers or any of their Subsidiaries or the administration thereof after
the occurrence of a Default or Event of Default and (ii) any litigation,
proceeding or dispute whether arising hereunder or otherwise, in any way related
to any Bank's or the Agent's relationship with the Borrowers or any of their
Subsidiaries and (g) all reasonable fees, expenses and disbursements of any Bank
or the Agent incurred in connection with UCC searches, UCC filings or mortgage
recordings. The covenants of this (S)16 shall survive payment or satisfaction of
all other Obligations.
(S)17 INDEMNIFICATION. The Borrowers agree to indemnify and hold
---------------
harmless the Agent and the Banks from and against any and all claims, actions
and suits whether groundless or otherwise, and from and against any and all
liabilities, losses, damages and expenses of every nature and character arising
out of this Credit Agreement or any of the other Loan Documents or the
transactions contemplated hereby including, without limitation, (a) any actual
or proposed use by the Borrowers or any of their Subsidiaries of the proceeds of
any of the Loans, (b) any actual or alleged infringement of any patent,
copyright, trademark, service mark or similar right of the Borrowers or any of
their Subsidiaries comprised in the Collateral, (c) the Borrowers or any of
their Subsidiaries entering into or performing this Credit Agreement or any of
the other Loan Documents or (d) with respect to the Borrowers and their
Subsidiaries and their respective properties and assets, the violation of any
Environmental Law, the presence, disposal, escape, seepage, leakage, spillage,
discharge, emission, release or threatened release of any Hazardous Substances
or any action, suit, proceeding or investigation brought or threatened with
respect to any Hazardous Substances (including, but not limited to, claims with
respect to wrongful death, personal injury or damage to property), in each case
including, without limitation, the reasonable fees and disbursements of counsel
and allocated costs of internal counsel incurred in connection with any such
investigation, litigation or other proceeding. In litigation, or the
preparation therefor, the Banks and the Agent shall be entitled to select their
own counsel and, in addition to the foregoing indemnity, the Borrowers agree to
pay promptly the reasonable fees and expenses of such counsel. If, and to the
extent that the obligations of the Borrowers under this (S)17 are unenforceable
for any reason, the Borrowers hereby agrees
<PAGE>
to make the maximum contribution to the payment in satisfaction of such
obligations which is permissible under applicable law. The covenants contained
in this (S)17 shall survive payment or satisfaction in full of all other
Obligations provided, however, that the Borrowers and their Subsidiaries shall
-------- -------
have no obligation hereunder to the Agent or any Bank with respect to
indemnified liabilities arising from the gross negligence or willful misconduct
of the Agent or any such Bank.
(S)18 SURVIVAL OF COVENANTS, ETC. All covenants, agreements,
--------------------------
representations and warranties made herein, in the Notes, in any of the other
Loan Documents or in any documents or other papers delivered by or on behalf of
the Borrowers or any of their Subsidiaries pursuant hereto shall be deemed to
have been relied upon by the Banks and the Agent, notwithstanding any
investigation heretofore or hereafter made by any of them, and shall survive the
making by the Banks of any of the Loans, as herein contemplated, and shall
continue in full force and effect so long as any amount due under this Credit
Agreement or the Notes or any of the other Loan Documents remains outstanding or
any Bank has any obligation to make any Loans hereunder, and for such further
time as may be otherwise expressly specified in this Credit Agreement. All
statements contained in any certificate or other paper delivered to any Bank or
the Agent at any time by or on behalf of any Borrower or any of its Subsidiaries
pursuant hereto or in connection with the transactions contemplated hereby shall
constitute representations and warranties by such Borrower or such Subsidiary
hereunder.
(S)19 ASSIGNMENT AND PARTICIPATION.
----------------------------
(S)19.1 Conditions to Assignment by Banks. Except as provided herein,
---------------------------------
each Bank may assign to one or more Eligible Assignees all or a portion of its
interests, rights and obligations under this Credit Agreement (including all or
a portion of its Commitment Percentage and Commitment and the same portion of
the Loans at the time owing to it and the Notes held by it; provided that (a)
--------
the Agent and unless a Default or Event of Default shall have occurred, the
Borrowers shall have given their prior written consent to such assignment, which
consent, in the case of the Borrowers, will not be unreasonably withheld, (b)
each such assignment shall be of a constant, and not a varying, percentage of
all the assigning Bank's rights and obligations under this Credit Agreement, (c)
each assignment shall be in an amount that is a whole multiple of $5,000,000,
and (d) unless a Default or Event of Default shall have occurred each Bank
(other than Bank of Boston Connecticut) which is a Bank on the date hereof shall
retain, free of any such assignment, an amount of its Commitment of not less
than $5,000,000, (e) unless a Default or Event of Default shall have occurred,
Bank of Boston Connecticut shall retain free of any such assignment (exclusive
of assignments to its Affiliates) not less than forty percent (40%) of the Total
Commitment and (f) the parties to such assignment shall execute and deliver to
the Agent, for recording in the Register (as hereinafter defined), an Assignment
and Acceptance, substantially in the form of Exhibit D
------- -
<PAGE>
hereto (an "Assignment and Acceptance"), together with any Notes subject to such
assignment. Upon such execution, delivery, acceptance and recording, from and
after the effective date specified in each Assignment and Acceptance, which
effective date shall be at least five (5) Business Days after the execution
thereof, (i) the assignee thereunder shall be a party hereto and, to the extent
provided in such Assignment and Acceptance, have the rights and obligations of a
Bank hereunder, and (ii) the assigning Bank shall, to the extent provided in
such assignment and upon payment to the Agent of the registration fee referred
to in (S)19.3, be released from its obligations under this Credit Agreement.
(S)19.2 Certain Representations and Warranties; Limitations; Covenants. By
--------------------------------------------------------------
executing and delivering an Assignment and Acceptance, the parties to the
assignment thereunder confirm to and agree with each other and the other parties
hereto as follows: (a) other than the representation and warranty that it is the
legal and beneficial owner of the interest being assigned thereby free and clear
of any adverse claim, the assigning Bank makes no representation or warranty and
assumes no responsibility with respect to any statements, warranties or
representations made in or in connection with this Credit Agreement or the
execution, legality, validity, enforceability, genuineness, sufficiency or value
of this Credit Agreement, the other Loan Documents or any other instrument or
document furnished pursuant hereto; (b) the assigning Bank makes no
representation or warranty and assumes no responsibility with respect to the
financial condition of the Borrowers and their Subsidiaries or any other Person
primarily or secondarily liable in respect of any of the Obligations, or the
performance or observance by the Borrowers and their Subsidiaries or any other
Person primarily or secondarily liable in respect of any of the Obligations of
any of their obligations under this Credit Agreement or any of the other Loan
Documents or any other instrument or document furnished pursuant hereto or
thereto; (c) such assignee confirms that it has received a copy of this Credit
Agreement, together with copies of the most recent financial statements referred
to in (S)7.5 and (S)8.4 and such other documents and information as it has
deemed appropriate to make its own credit analysis and decision to enter into
such Assignment and Acceptance; (d) such assignee will, independently and
without reliance upon the assigning Bank, the Agent or any other Bank and based
on such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
this Credit Agreement; (e) such assignee represents and warrants that it is an
Eligible Assignee; (f) such assignee appoints and authorizes the Agent to take
such action as agent on its behalf and to exercise such powers under this Credit
Agreement and the other Loan Documents as are delegated to the Agent by the
terms hereof or thereof, together with such powers as are reasonably incidental
thereto; (g) such assignee agrees that it will perform in accordance with their
terms all of the obligations that by the terms of this Credit Agreement are
required to be performed by it as a Bank; and (h) such assignee represents and
warrants that it is legally authorized to enter into such Assignment and
Acceptance.
<PAGE>
(S)19.3 Register. The Agent shall maintain a copy of each Assignment
--------
and Acceptance delivered to it and a register or similar list (the "Register")
for the recordation of the names and addresses of the Banks and the Commitment
Percentage of, and principal amount of the Revolving Credit Loans owing to the
Banks from time to time. The entries in the Register shall be conclusive, in the
absence of manifest error, and the Borrowers, the Agent and the Banks may treat
each Person whose name is recorded in the Register as a Bank hereunder for all
purposes of this Credit Agreement. The Register shall be available for
inspection by the Borrowers and the Banks at any reasonable time and from time
to time upon reasonable prior notice. Upon each such recordation, the assigning
Bank agrees to pay to the Agent a registration fee in the sum of $2,500.00.
(S)19.4 New Notes. Upon its receipt of an Assignment and Acceptance
---------
executed by the parties to such assignment, together with each Note subject to
such assignment, the Agent shall (a) record the information contained therein in
the Register, and (b) give prompt notice thereof to the Borrowers and the Banks
(other than the assigning Bank). Within five (5) Business Days after receipt of
such notice, the Borrowers, at its own expense, shall execute and deliver to the
Agent, in exchange for each surrendered Note, a new Note to the order of such
Eligible Assignee in an amount equal to the amount assumed by such Eligible
Assignee pursuant to such Assignment and Acceptance and, if the assigning Bank
has retained some portion of its obligations hereunder, a new Note to the
order of the assigning Bank in an amount equal to the amount retained by it
hereunder. Such new Notes shall provide that they are replacements for the
surrendered Notes, shall be in an aggregate principal amount equal to the
aggregate principal amount of the surrendered Notes, shall be dated the
effective date of such in Assignment and Acceptance and shall otherwise be
substantially the form of the assigned Notes. Within five (5) Business Days of
issuance of any new Notes pursuant to this (S)19.4, the Borrowers shall deliver
an opinion of counsel, addressed to the Banks and the Agent, relating to the due
authorization, execution and delivery of such new Notes and the legality,
validity and binding effect thereof, in form and substance satisfactory to the
Banks. The surrendered Notes shall be cancelled and returned to the Borrowers.
(S)19.5 Participations. Each Bank may sell participations to one or
--------------
more banks or other entities in all or a portion of such Bank's rights and
obligations under this Credit Agreement and the other Loan Documents; provided
--------
that (a) each such participation shall be in an amount of not less than
$1,000,000 or multiples thereof, (b) any such sale or participation shall not
affect the rights and duties of the selling Bank hereunder to the Borrowers and
(c) the only rights granted to the participant pursuant to such participation
arrangements with respect to waivers, amendments or modifications of the Loan
Documents shall be the rights to approve waivers, amendments or modifications
that would reduce the principal of or the interest rate on any Loans, extend the
term or increase the amount of the Commitment of such Bank as it relates to such
participant, reduce the amount of any commitment fees to which
<PAGE>
such participant is entitled, extend any regularly scheduled payment date for
principal or interest or release any of the Collateral.
(S)19.6 Disclosure. The Borrowers agrees that in addition to disclosures
----------
made in accordance with standard and customary banking practices any Bank may
disclose information obtained by such Bank pursuant to this Credit Agreement to
assignees or participants and potential assignees or participants hereunder;
provided that such assignees or participants or potential assignees or
- --------
participants shall agree (a) to treat in confidence such information, (b) not to
disclose such information to a third party and (c) not to make use of such
information for purposes of transactions unrelated to such contemplated
assignment or participation.
(S)19.7 Assignee or Participant Affiliated with the Borrowers. If any
-----------------------------------------------------
assignee Bank is an Affiliate of the Borrowers, then any such assignee Bank
shall have no right to vote as a Bank hereunder or under any of the other Loan
Documents for purposes of granting consents or waivers or for purposes of
agreeing to amendments or other modifications to any of the Loan Documents or
for purposes of making requests to the Agent pursuant to (S)13.1 or (S)13.2, and
the determination of the Majority Banks shall for all purposes of this Agreement
and the other Loan Documents be made without regard to such assignee Bank's
interest in any of the Loans. If any Bank sells a participating interest in any
of the Loans to a participant, and such participant is any Borrower or an
Affiliate of any Borrower, then such transferor Bank shall promptly notify the
Agent of the sale of such participation. A transferor Bank shall have no right
to vote as a Bank hereunder or under any of the other Loan Documents for
purposes of granting consents or waivers or for purposes of agreeing to
amendments or modifications to any of the Loan Documents or for purposes of
making requests to the Agent pursuant to (S)13.1 or (S)13.2 to the extent that
such participation is beneficially owned by any Borrower or any Affiliate of
such Borrower, and the determination of the Majority Banks shall for all
purposes of this Agreement and the other Loan Documents be made without regard
to the interest of such transferor Bank in the Loans to the extent of such
participation.
(S)19.8 Miscellaneous Assignment Provisions. If any assignee Bank is not
-----------------------------------
incorporated under the laws of the United States of America or any state
thereof, it shall, prior to the date on which any interest or fees are payable
hereunder or under any of the other Loan Documents for its account, deliver to
the Borrowers and the Agent certification as to its exemption from deduction or
withholding of any United States federal income taxes. If any Reference Bank
transfers all of its interest, rights and obligations under this Credit
Agreement, the Agent shall, in consultation with the Borrowers and with the
consent of the Borrowers and the Majority Banks, appoint another Bank to act as
a Reference Bank hereunder. Anything contained in this (S)19 to the contrary
notwithstanding, any Bank may at any time pledge all or any portion of its
interest and rights under this Credit Agreement (including all or any portion of
its Notes) to any of the twelve
<PAGE>
Federal Reserve Banks organized under (S)4 of the Federal Reserve Act, 12 U.S.C.
(S)341. No such pledge or the enforcement thereof shall release the pledgor Bank
from its obligations hereunder or under any of the other Loan Documents.
(S)19.9 Assignment by Borrowers. No Borrowers shall assign or transfer
-----------------------
any of its rights or obligations under any of the Loan Documents without the
prior written consent of each of the Banks.
(S)20 NOTICES, ETC. Except as otherwise expressly provided in this
------------
Credit Agreement, all notices and other communications made or required to be
given pursuant to this Credit Agreement or the Notes shall be in writing and
shall be delivered in hand, mailed by United States registered or certified
first class mail, postage prepaid, sent by overnight courier, or sent by
telegraph, telecopy, facsimile or telex and confirmed by delivery via courier or
postal service, addressed as follows:
(a) if to the Borrowers, c/o Merocel Corporation, 950 Flanders Road,
Mystic, Connecticut 06355, Attention: Mark Adams, President, or at such other
address for notice as the Borrowers shall last have furnished in writing to the
Person giving the notice;
(b) if to the Agent, at 81 West Main Street, Waterbury, Connecticut
06702, Attention: Garth Collins, Vice President, or such other address for
notice as the Agent shall last have furnished in writing to the Person giving
the notice; and
(c) if to any Bank, at such Bank's address set forth on Schedule 1
----------
hereto, or such other address for notice as such Bank shall have last furnished
in writing to the Person giving the notice.
Any such notice or demand shall be deemed to have been duly given or made
and to have become effective (i) if delivered by hand, overnight courier or
facsimile to a responsible officer of the party to which it is directed, at the
time of the receipt thereof by such officer or the sending of such facsimile and
(ii) if sent by registered or certified first-class mail, postage prepaid, on
the third Business Day following the mailing thereof.
(S)21 GOVERNING LAW. THIS CREDIT AGREEMENT AND, EXCEPT AS OTHERWISE
-------------
SPECIFICALLY PROVIDED THEREIN, EACH OF THE OTHER LOAN DOCUMENTS ARE CONTRACTS
UNDER THE LAWS OF THE STATE OF CONNECTICUT AND SHALL FOR ALL PURPOSES BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID STATE (EXCLUDING
THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). EACH BORROWER AGREES THAT
ANY SUIT FOR THE ENFORCEMENT OF THIS CREDIT AGREEMENT OR ANY OF THE OTHER LOAN
DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF CONNECTICUT OR ANY
FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF
SUCH COURT AND SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWERS
BY MAIL AT THE ADDRESS SPECIFIED IN (S)21. EACH BORROWER HEREBY WAIVES ANY
OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY
<PAGE>
SUCH SUIT OR ANY SUCH COURT IN THE STATE OF CONNECTICUT OR THAT SUCH SUIT IS
BROUGHT IN AN INCONVENIENT COURT.
(S)22 HEADINGS. The captions in this Credit Agreement are for
--------
convenience of reference only and shall not define or limit the provisions
hereof.
(S)23 COUNTERPARTS. This Credit Agreement and any amendment hereof
------------
may be executed in several counterparts and by each party on a separate
counterpart, each of which when executed and delivered shall be an original, and
all of which together shall constitute one instrument. In proving this Credit
Agreement it shall not be necessary to produce or account for more than one such
counterpart signed by the party against whom enforcement is sought.
(S)24 ENTIRE AGREEMENT, ETC. The Loan Documents and any other
---------------------
documents executed in connection herewith or therewith express the entire
understanding of the parties with respect to the transactions contemplated
hereby. Neither this Credit Agreement nor any term hereof may be changed,
waived, discharged or terminated, except as provided in (S)26.
(S)25 WAIVER OF JURY TRIAL. Each Borrower, as an inducement to the Agent
--------------------
and the Banks to enter into this Credit Agreement, hereby waives its right to a
jury trial with respect to any action or claim arising out of any dispute in
connection with this Credit Agreement, the Notes or any of the other Loan
Documents, any rights or obligations hereunder or thereunder or the performance
of which rights and obligations. Except as prohibited by law, each Borrower
hereby waives any right it may have to claim or recover in any litigation
referred to in the preceding sentence any special, exemplary, punitive or
consequential damages or any damages other than, or in addition to, actual
damages. Each Borrower (a) certifies that no representative, agent or attorney
of any Bank or the Agent has represented, expressly or otherwise, that such Bank
or the Agent would not, in the event of litigation, seek to enforce the
foregoing waivers and (b) acknowledges that the Agent and the Banks have been
induced to enter into this Credit Agreement, the other Loan Documents to which
it is a party and the Subordination Documents to which it is a party by, among
other things, the waivers and certifications contained herein.
(S)26 CONSENTS, AMENDMENTS, WAIVERS, ETC. Any consent or approval
----------------------------------
required or permitted by this Credit Agreement to be given by all of the Banks
may be given, and any term of this Credit Agreement, the other Loan Documents or
any other instrument related hereto or mentioned herein may be amended, and the
performance or observance by any Borrower or any of its Subsidiaries of any
terms of this Credit Agreement, the other Loan Documents or such other
instrument or the continuance of any Default or Event of Default may be waived
(either generally or in a particular instance and either retroactively or
prospectively) with, but only with, the written consent of the Borrowers and the
written consent of the Majority Banks. Notwithstanding the foregoing, the rate
of interest on the Notes (other than interest accruing pursuant to
<PAGE>
(S)5.8(b) following the effective date of any waiver by the Majority Banks of
the Default or Event of Default relating thereto), the term of the Notes, the
scheduled payment dates for principal and interest under the Notes, the amount
of the Commitments of the Banks, and the amount of commitment fee hereunder may
not be changed without the written consent of the Borrowers and the written
consent of each Bank affected thereby; the definition of Majority Banks may not
be amended without the written consent of all of the Banks; and the amount of
the Agent's Fee payable for the Agent's account and (S)15 may not be amended
without the written consent of the Agent. Furthermore, the Agent shall not
release any of the Collateral (other than Collateral which is permitted to be
sold or otherwise disposed of pursuant to the terms hereof or the terms of the
other Loan Documents) without the written consent of each Bank. No waiver shall
extend to or affect any obligation not expressly waived or impair any right
consequent thereon. No course of dealing or delay or omission on the part of the
Agent or any Bank in exercising any right shall operate as a waiver thereof or
otherwise be prejudicial thereto. No notice to or demand upon the Borrowers
shall entitle the Borrowers to other or further notice or demand in similar or
other circumstances.
(S)27 SEVERABILITY. The provisions of this Credit Agreement are
------------
severable and if any one clause or provision hereof shall be held invalid or
unenforceable in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect only such clause or provision, or part thereof, in
such jurisdiction, and shall not in any manner affect such clause or provision
in any other jurisdiction, or any other clause or provision of this Credit
Agreement in any jurisdiction.
(S)28 COMMERCIAL TRANSACTION; PREJUDGMENT REMEDY WAIVER. EACH BORROWER
-------------------------------------------------
REPRESENTS, WARRANTS AND ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS LOAN
AGREEMENT AND THE OTHER LOAN DOCUMENTS ARE A PART IS A "COMMERCIAL TRANSACTION"
WITHIN THE MEANING OF CHAPTER 903A OF CONNECTICUT GENERAL STATUTES, AS AMENDED.
EACH BORROWER HEREBY WAIVES ITS RIGHT TO NOTICE AND PRIOR COURT HEARING OR COURT
ORDER UNDER CONNECTICUT GENERAL STATUTES SECTIONS 52-278a ET. SEQ. AS AMENDED OR
UNDER ANY OTHER STATE OR FEDERAL LAW WITH RESPECT TO ANY AND ALL PREJUDGMENT
REMEDIES THE AGENT OR THE BANKS MAY EMPLOY TO ENFORCE THEIR RIGHTS AND REMEDIES
HEREUNDER AND UNDER THE OTHER LOAN DOCUMENTS. MORE SPECIFICALLY, EACH BORROWER
ACKNOWLEDGES THAT THE AGENT'S ATTORNEY AND/OR THE BANKS' ATTORNEY MAY, PURSUANT
TO CONN. GEN. STAT. (S)52-278f, ISSUE A WRIT FOR A PREJUDGMENT REMEDY WITHOUT
SECURING A COURT ORDER. EACH BORROWER ACKNOWLEDGES AND RESERVES ITS RIGHT TO
NOTICE AND A HEARING SUBSEQUENT TO THE ISSUANCE OF A WRIT FOR PREJUDGMENT REMEDY
AS AFORESAID AND THE AGENT AND THE BANKS ACKNOWLEDGES BY SUCH BORROWER'S RIGHT
TO SAID HEARING SUBSEQUENT TO THE ISSUANCE OF SAID WRIT.
<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed this Credit
Agreement as of the date first set forth above.
MEROCEL/XOMED HOLDINGS, INC.
By: /s/ Mark K. Adams
-----------------------------
Mark K. Adams
Its President
MEROCEL CORPORATION
By: /s/ Mark K. Adams
-----------------------------
Mark K. Adams
Its President
XOMED-TREACE, INC.
By: /s/ Mark K. Adams
-----------------------------
Mark K. Adams
Its President
XOMED-TREACE, P.R. INC.
By: /s/ Mark K. Adams
-----------------------------
Mark K. Adams
Its President
BANK OF BOSTON CONNECTICUT,
individually and as Agent
By: /s/ Garth J. Collins
-----------------------------
Garth J. Collins
Its Assistant Vice President
CHEMICAL BANK
By: /s/ Authorized Signatory
-----------------------------
Its
<PAGE>
SCHEDULE 2
----------
TO CREDIT AGREEMENT
-------------------
The following terms shall have the meanings set forth in this Schedule 2 or
----------
elsewhere in the provisions of this Credit Agreement referred to below:
Accounts Receivable. All rights of the Borrowers (other than Holdings and
-------------------
Xomed P.R.) to payment for goods sold, leased or otherwise marketed in the
ordinary course of business and all rights of the Borrowers (other than Holdings
and Xomed P.R.) to payment for services rendered in the ordinary course of
business and all sums of money or other proceeds due thereon pursuant to
transactions with account debtors, except for that portion of the sum of money
or other proceeds due thereon that relate to sales, use or property taxes in
conjunction with such transactions, recorded on books of account in accordance
with generally accepted accounting principles.
Acquisition. The acquisition by Holdings of the Shares pursuant to the
-----------
terms of the Stock Purchase Agreement.
Acquisition Documents. The Stock Purchase Agreement, together with all
---------------------
schedules, exhibits, and annexes thereto, and all agreements and documents
required to be entered into or delivered pursuant to the Stock Purchase
Agreement or in connection with the Acquisition, all in the form delivered to
the Agent on the date of the Acquisition.
Affiliate. Any Person that would be considered to be an affiliate of any
---------
Borrower under Rule 144(a) of the Rules and Regulations of the Securities and
Exchange Commission, as in effect on the date hereof, if such Borrower were
issuing securities.
Agent's Head Office. The Agent's head office located at 31 Pratt Street,
-------------------
Hartford, Connecticut 06103, or at such other location as the Agent may
designate from time to time.
Agent. Bank of Boston Connecticut acting as agent for the Banks.
-----
Agent's Special Counsel. Bingham, Dana & Gould or such other counsel as
-----------------------
may be approved by the Agent that represents the Agent when acting on behalf of
the Banks in accordance with the terms hereof.
Assignment and Acceptance. See (S)19.1.
-------------------------
Balance Sheet Date. February 28, 1994.
------------------
Banks. Bank of Boston Connecticut and the other lending institutions
-----
listed on Schedule 1 hereto and any other Person who becomes an assignee of any
----------
rights and obligations of a Bank pursuant to (S)19.
Base Rate. The higher of (a) the annual rate of interest announced from
---------
time to time by The First National Bank of Boston at its head office in Boston,
Massachusetts, as its "base rate" and
<PAGE>
Page 2 of Schedule 2
(b) one-half of one percent (1/2%) above the Federal Funds Effective Rate. For
the purposes of this definition, "Federal Funds Effective Rate" shall mean for
any day, the rate per annum equal to the weighted average of the rates on
overnight federal funds transactions with members of the Federal Reserve System
arranged by federal funds brokers, as published for such day (or, if such day is
not a Business Day, for the next preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day that is a
Business Day, the average of the quotations for such day on such transactions
received by the Agent from three funds brokers of recognized standing selected
by the Agent.
Base Rate Loans. Revolving Credit Loans and all or any portion of the Term
---------------
Loan bearing interest calculated by reference to the Base Rate.
Borrowers. As defined in the preamble hereto.
---------
Borrowing Base. At the relevant time of reference thereto, an amount
--------------
determined by the Agent by reference to the most recent Borrowing Base Report
delivered to the Banks and the Agent pursuant to (S)8.4(g), which is equal to
the sum of:
(a) 85% of Domestic Eligible Accounts Receivable for which invoices
have been issued and are payable; plus
(b) 80% of Foreign Eligible Accounts Receivable for which invoices
have been issued and are payable; plus
(c) the lesser of (i) $7,000,000 and (ii) the sum of (A) 35% of the
net book value (determined on a first-in first-out basis at lower of cost or
market) of raw material Eligible Inventory and (B) 45% of the net book value
(determined on a first-in first-out basis at the lower of cost or market of
finished goods Eligible Inventory.
Borrowing Base Report. A Borrowing Base Report signed by the principal
---------------------
financial officer of Holdings and in substantially the form of Exhibit E hereto.
---------
Business Day. Any day on which banking institutions in Hartford,
------------
Connecticut and New York, New York are open for the transaction of banking
business.
Capital Assets. Fixed assets, both tangible (such as land, buildings,
--------------
fixtures, machinery and equipment) and intangible (such as patents, copyrights,
trademarks, franchises and good will); provided that Capital Assets shall not
--------
include any item customarily charged directly to expense or depreciated over a
useful life of twelve (12) months or less in accordance with generally accepted
accounting principles.
<PAGE>
Page 3 of Schedule 2
Capital Expenditures. Amounts paid or indebtedness incurred by any
--------------------
Borrower or any of its Subsidiaries in connection with the purchase or lease by
such Borrower or any of its Subsidiaries of Capital Assets that would be
required to be capitalized and shown on the balance sheet of such Person in
accordance with generally accepted accounting principles.
Capitalization Documents. Collectively, the Restated Certificate of
------------------------
Incorporation of Holdings and the Exchange and Purchase of Stock Agreement dated
April 15, 1994 among Holdings and Warburg and the other Holdings Stockholders,
together with all documents, agreements and instruments executed in connection
therewith.
Capitalized Leases. Leases under which any Borrower or any of its
------------------
Subsidiaries is the lessee or obligor, the discounted future rental payment
obligations under which are required to be capitalized on the balance sheet of
the lessee or obligor in accordance with generally accepted accounting
principles.
CERCLA. See (S)7.20.
------
Class A Voting Common Stock. Class A Common Stock, par value $0.01 per
----- - ------ ------ -----
share, of Holdings.
Closing Date. The first date on which the conditions set forth in (S)11
------------
have been satisfied and any Revolving Credit Loans and the Term Loan are to be
made.
Code. The Internal Revenue Code of 1986, as amended.
----
Collateral. All of the property, rights and interests of the Borrowers and
----------
their Subsidiaries that are or are intended to be subject to the security
interests and mortgages created by the Security Documents.
Collateral Note. See (S)11.27.
---------------
Collateral Assignment of Leases, Rentals and Property Income. The
------------------------------------------------------------
Collateral Assignment of Leases, Rentals and Property Income, dated or to be
dated on or prior to the Closing Date, made by Merocel in favor of the Agent and
in form and substance satisfactory to the Banks and Agent.
Commitment. With respect to each Bank, the amount set forth on Schedule 1
---------- ----------
hereto as the amount of such Bank's commitment to make Revolving Credit Loans to
the Borrower, as the same may be reduced from time to time; or if such
commitment is terminated pursuant to the provisions hereof, zero.
Commitment Percentage. With respect to each Bank, the percentage set forth
---------------------
on Schedule 1 hereto as such Bank's percentage of the aggregate Commitments of
----------
all of the Banks.
<PAGE>
Page 4 of Schedule 2
Consolidated or consolidated. With reference to any term defined herein,
------------ ------------
shall mean that term as applied to the accounts of Holdings and its
Subsidiaries, consolidated in accordance with generally accepted accounting
principles.
Consolidated Excess Cash Flow. For any period, an amount equal to (a) the
-----------------------------
sum of (i) Earnings Before Interest and Taxes for such period, plus (ii)
----
depreciation and amortization, less (b) cash payments for all taxes paid during
----
such period, less (c) Capital Expenditures made during such period, less (d)
---- ----
scheduled payments of long term debt during such period, less (e) all interest
----
expense paid during such period, less (f) any fees paid to the Agent or the
----
Banks under the Loan Documents during such period; provided, that no Section 338
--------
Event shall be included when calculating Consolidated Excess Cash Flow
hereunder.
Consolidated Financial Obligations. With respect to any fiscal period, an
----------------------------------
amount equal to the sum of all principal, interest and fee payments on
Indebtedness that become due and payable or that are to become due and payable
during such fiscal period pursuant to any agreement or instrument to which
Holdings or any of its Subsidiaries is a party relating to the borrowing of
money or the obtaining of credit or in respect of Capitalized Leases. Demand
obligations shall be deemed to be due and payable during any fiscal year during
which such obligations are outstanding.
Consolidated Net Income (or Deficit). The consolidated net income (or
------------------------------------
deficit) of Holdings and its Subsidiaries, after deduction of all expenses,
taxes, and other proper charges, determined in accordance with generally
accepted accounting principles; provided, that no Section 338 Event shall be
--------
included when calculating Consolidated Net Income hereunder.
Consolidated Operating Cash Flow. For any period, an amount equal to (a)
--------------------------------
the sum of (i) Earnings Before Interest and Taxes for such period, plus (ii)
----
depreciation and amortization, less (b) the sum of (i) cash payments for all
----
taxes paid during such period, plus (ii) Capital Expenditures made during such
----
period to the extent permitted hereunder; provided, that no Section 338 Event
--------
shall be included when calculating Consolidated Operating Cash Flow hereunder.
Consolidated Shareholders Equity. An amount equal to the sum of (a) the
--------------------------------
Consolidated capital accounts (including common stock and preferred stock, but
excluding treasury stock) of Holdings and its Subsidiaries, plus (b) the
----
Consolidated earned surplus and capital surplus of Holdings and its
Subsidiaries, minus (c) the Consolidated book value of all assets acquired by
-----
Holdings and its Subsidiaries after the Closing Date not in the ordinary course
of
<PAGE>
<PAGE>
Page 5 of Schedule 2
business which, under generally accepted accounting principles, would be treated
as intangible assets; provided, that no Section 338 Event shall be included when
--------
calculating Consolidated Shareholders Equity hereunder.
Consolidated Total Interest Expense. For any period, the aggregate amount
-----------------------------------
of interest required to be paid or accrued by Holdings and its Subsidiaries
during such period on all Indebtedness of Holdings and its Subsidiaries
outstanding during all or any part of such period, whether such interest was or
is required to be reflected as an item of expense or capitalized, including
payments consisting of interest in respect of Capitalized Leases and including
commitment fees, agency fees, facility fees, balance deficiency fees and similar
fees or expenses in connection with the borrowing of money.
Consolidated Total Liabilities. All liabilities of Holdings and its
------------------------------
Subsidiaries determined on a consolidated basis in accordance with generally
accepted accounting principles and all Indebtedness of Holdings and its
Subsidiaries, whether or not so classified.
Conversion Request. A notice given by the Borrowers to the Agent of the
------------------
Borrowers' election to convert or continue Loan in accordance with (S)2.7
Credit Agreement. This Credit Agreement, including the Schedules and
----------------
Exhibits hereto.
Default. See (S)13.1.
-------
Distribution. The declaration or payment of any dividend on or in respect
------------
of any shares of any class of capital stock of any Borrower, other than
dividends payable solely in shares of common stock of such Borrower; the
purchase, redemption, or other retirement of any shares of any class of capital
stock of such Borrower, directly or indirectly through a Subsidiary of such
Borrower or otherwise; the return of capital by such Borrower to its
shareholders as such; or any other distribution on or in respect of any shares
of any class of capital stock of such Borrower.
Dollars or $. Dollars in lawful currency of the United States of America.
------- -
Domestic Eligible Accounts Receivable. Eligible Accounts Receivable that
-------------------------------------
are payable by account debtors located within the United States of America.
Domestic Lending Office. Initially, the office of each Bank designated as
-----------------------
such in Schedule 1 hereto; thereafter, such other office of such Bank, if any,
----------
located within the United States that will be making or maintaining Base Rate
Loans.
<PAGE>
Page 6 of Schedule 2
Drawdown Date. The date on which any Revolving Credit Loan or the Term
-------------
Loan is made or is to be made, and the date on which any Revolving Credit Loan
is converted or continued in accordance with (S)2.7 or all or any portion of the
Term Loan is converted or continued in accordance with (S)4.5(b).
Earnings Before Interest and Taxes. The consolidated earnings (or loss)
-------- ------ -------- --- -----
from the consolidated earnings (or loss) from the operations of Holdings and its
Subsidiaries for any period, after all expenses and other proper charges but
before payment or provision for any income taxes or interest expense for such
period, determined in accordance with generally accepted accounting principles.
Eligible Accounts Receivable. The aggregate of the unpaid portions of
----------------------------
Accounts Receivable (net of any credits, rebates, offsets, holdbacks or other
adjustments or commissions payable to third parties that are adjustments to such
Accounts Receivable) (a) that the Borrowers reasonably and in good faith
determine to be collectible; (b) that are with account debtors that (i) are not
Affiliates of any Borrower, (ii) purchased the goods or services giving rise to
the relevant Account Receivable in an arm's length transaction, (iii) are not
insolvent or involved in any case or proceeding, whether voluntary or
involuntary, under any bankruptcy, reorganization, arrangement, insolvency,
adjustment of debt, dissolution, liquidation or similar law of any jurisdiction
and (iv) are, in the Majority Banks' reasonable judgment, creditworthy; (c) that
are in payment of obligations that have been fully performed and are not subject
to dispute or any other similar claims that would reduce the cash amount payable
therefor; (d) that are not subject to any pledge, restriction, security interest
or other lien or encumbrance other than those created by the Loan Documents; (e)
in which the Agent has a valid and perfected first priority security interest;
(f) that are not outstanding for more than the earlier to occur of (i) ninety
(90) days past the earlier to occur of (A) the date of the respective invoices
therefor and (B) the date of shipment thereof in the case of goods or the end of
the calendar month following the provision thereof in the case of services and
(ii) thirty (30) days past the due date thereof; (g) that are not due from any
single account debtor if more than twenty percent (20%) of the aggregate amount
of all Accounts Receivable owing from such account debtor would otherwise not be
Eligible Accounts Receivable; (h) that are payable in Dollars; and (i) that are
not payable from on office outside of the United States or Canada unless (1) the
relevant account debtor and related Accounts Receivable have been approved in
writing by the Agent or (2) the relevant account debtor has delivered to the
applicable Borrower an irrevocable letter of credit, in form and substance
satisfactory to the Agent, issued or confirmed by a financial institution
satisfactory to the Agent sufficient to cover the amount owing by such account
debtor to such Borrower (and if required by the Agent, the original has been
delivered to the Agent and the issuer thereof notified of the assignment of the
proceeds thereof to the Agent for the account of the Banks).
<PAGE>
Page 7 of Schedule 2
Eligible Assignee. Any of (a) a commercial bank organized under the laws
-----------------
of the United States, or any State thereof or the District of Columbia, and
having total assets in excess of $1,000,000,000; (b) a savings and loan
association or savings bank organized under the laws of the United States, or
any State thereof or the District of Columbia, and having a net worth of at
least $100,000,000, calculated in accordance with generally accepted accounting
principles; (c) a commercial bank organized under the laws of any other country
which is a member of the Organization for Economic Cooperation and Development
(the "OECD"), or a political subdivision of any such country, and having total
assets in excess of $1,000,000,000, provided that such bank is acting through a
--------
branch or agency located in the country in which it is organized or another
country which is also a member of the OECD; (d) the central bank of any country
which is a member of the OECD; and (e) if, but only if, any Event of Default has
occurred and is continuing, any other bank, insurance company, commercial
finance company or other financial institution approved by the Agent, such
approval not to be unreasonably withheld.
Eligible Inventory. With respect to the Borrowers (other than Holdings and
------------------
Xomed P.R.), finished goods and raw materials inventory owned by the Borrowers
(other than Holdings and Xomed P.R.); provided that Eligible Inventory shall not
--------
include any inventory (i) held on consignment, or not otherwise owned by any
Borrower, or of a type no longer sold by such Borrower, (ii) which has been
returned by a customer or is damaged or subject to any legal encumbrance other
than Permitted Liens, (iii) which is not in the possession of such Borrower
unless the Agent has received a waiver from the party in possession of such
inventory in form and substance satisfactory to the Agent, (iv) which is held by
such Borrower on property leased by such Borrower, unless the Agent has received
a waiver from the lessor of such leased property and, if any, sublessor thereof
in form and substance satisfactory to the Agent, (v) as to which appropriate
Uniform Commercial Code financing statements showing such Borrower as debtor and
the Agent as secured party have not been filed in the proper filing office or
offices in order to perfect the Agent's security interest therein, (vi) which
has been shipped to a customer of such Borrower regardless of whether such
shipment is on a consignment basis, (vii) which is not located within the United
States of America, Canada or Australia, (viii) which the Majority Banks
reasonably deem to be obsolete or not marketable or (ix) which is a so-called
"demonstration system" or is otherwise in the possession of any sales
representative of any of the Borrowers.
Employee Benefit Plan. Any employee benefit plan within the meaning of
---------------------
(S)3(3) of ERISA maintained of contributed to by the Borrower or any ERISA
Affiliate, other than a Multiemployer Plan.
Environmental Laws. See (S)7.20(a).
------------------
ERISA. The Employee Retirement Income Security Act of 1974.
-----
<PAGE>
Page 8 of Schedule 2
ERISA Affiliate. Any Person which is treated as a single employer with the
---------------
Borrower under (S)414 of the Code.
ERISA Reportable Event. A reportable event with respect to a Guaranteed
----------------------
Pension Plan within the meaning of (S)4043 of ERISA and the regulations
promulgated thereunder as to which the requirement of notice has not been
waived.
Eurocurrency Reserve Rate. For any day with respect to a Eurodollar Rate
------------ ------- ----
Loan, the maximum rate (expressed as a decimal) at which any lender subject
thereto would be required to maintain reserves under Regulation D of the Board
of Governors of the Federal Reserve System (or any successor or similar
regulations relating to such reserve requirements) against "Eurocurrency
Liabilities" (as that term is used in Regulation D), if such liabilities were
outstanding. The Eurocurrency Reserve Rate shall be adjusted automatically on
and as of the effective date of any change in the Eurocurrency Reserve Rate.
Eurodollar Business Day. Any day on which commercial banks are open for
---------- -------- ---
international business (including dealings in Dollar deposits) in London or such
other eurodollar interbank market as may be selected by the Agent in its sole
discretion acting in good faith.
Eurodollar Lending Office. Initially, the office of each Bank designated
---------- ------- ------
as such in Schedule 1 hereto; thereafter, such other office of such Bank, if
-------- -
any, that shall be making or maintaining Eurodollar Rate Loans.
Eurodollar Rate. For any Interest Period with respect to a Eurodollar Rate
---------- ----
Loan, the rate of interest equal to (a) the arithmetic average of the rates per
annum for each Reference Bank (rounded upwards to the nearest 1/16 of one
percent) of the rate at which such Reference Bank's Eurodollar Lending Office is
offered Dollar deposits two Eurodollar Business Days prior to the beginning of
such Interest Period in the interbank eurodollar market where the eurodollar and
foreign currency and exchange operations of such Eurodollar Lending Office are
customarily conducted, for delivery on the first day of such Interest Period for
the number of days comprised therein and in an amount comparable to the amount
of the Eurodollar Rate Loan of such Reference Bank to which such Interest Period
applies, divided by (b) a number equal to 1.00 minus the Eurocurrency Reserve
Rate, if applicable.
Eurodollar Rate Loans. Revolving Credit Loans and all or any portion of
---------- ---- -----
the Term Loan bearing interest calculated by reference to the Eurodollar Rate.
Event of Default. See (S)13.1.
----------------
Existing Subsidiaries. Collectively, Merocel, Xomed and Xomed Puerto Rico.
---------------------
<PAGE>
Page 9 of Schedule 2
Fee Letter Agreements. The letter agreements, each dated or to be dated on
--- ------ ----------
or prior to the Closing Date, between the Borrowers and each Bank, each in form
and substance satisfactory to such Bank.
Foreign Eligible Accounts Receivable. Eligible Accounts Receivable that
------------------------------------
are payable by account debtors located outside the United States of America.
Foreign Bank. Any Bank that is not incorporated under the laws of the
------------
United States or any state thereof.
Generally accepted accounting principles. (a) When used in (S)10, whether
----------------------------------------
directly or indirectly through reference to a capitalized term used therein,
means (i) principles that are consistent with the principles promulgated or
adopted by the Financial Accounting Standards Board and its predecessors, in
effect for the fiscal year ended on the Balance Sheet Date, and (ii) to the
extent consistent with such principles, the accounting practice of Holdings
reflected in its financial statements for the year ended on the Balance Sheet
Date, and (b) when used in general, other than as provided above, means
principles that are (i) consistent with the principles promulgated or adopted by
the Financial Accounting Standards Board and its predecessors, as in effect from
time to time, and (ii) consistently applied with past financial statements of
Holdings adopting the same principles, provided that in each case referred to in
this definition of "generally accepted accounting principles" a certified public
accountant would, insofar as the use of such accounting principles is pertinent,
be in a position to deliver an unqualified opinion (other than a qualification
regarding changes in generally accepted accounting principles) as to financial
statements in which such principles have been properly applied.
Guaranteed Pension Plan. Any employee pension benefit plan within the
-----------------------
meaning of (S)3(3) of ERISA maintained or contributed to by any Borrower or any
ERISA Affiliate the benefits of which are guaranteed on termination in full or
in part by the PBGC pursuant to Title IV of ERISA, other than a Multiemployer
Plan.
Hazardous Substances. See (S)7.20(b).
--------------------
Holdings. As defined in the preamble hereto.
--------
Holdings Stockholders. Collectively, Warburg, Accel IV L.P., Accel
---------------------
Investors '94 L.P., Accel Keiretsu L.P., Ellmore C. Patterson Partners, Prosper
Partners, Vertical Fund Associates, L.P., Vertical Medical Partners, L.P.,
Vertical Partners, L.P., Mark K. Adams, Solomon Rosenblatt, Ronald J. Cercone,
Robert A. Reeves and William Miller or any of their respective successors or
assigns.
H-S-R Act. See (S)11.10.
---------
Indebtedness. All obligations, contingent and otherwise, that in
------------
accordance with generally accepted accounting principles should
<PAGE>
Page 10 of Schedule 2
be classified upon the Borrowers' balance sheet as liabilities, or to which
reference should be made by footnotes thereto, including in any event and
whether or not so classified: (a) all debt and similar monetary obligations,
whether direct or indirect; (b) all liabilities secured by any mortgage, pledge,
security interest, lien, charge or other encumbrance existing on property owned
or acquired subject thereto, whether or not the liability secured thereby shall
have been assumed; and (c) all guarantees, endorsements and other contingent
obligations whether direct or indirect in respect of indebtedness of others,
including any obligation to supply funds to or in any manner to invest in,
directly or indirectly, the debtor, to purchase indebtedness, or to assure the
owner of indebtedness against loss, through an agreement to purchase goods,
supplies, or services for the purpose of enabling the debtor to make payment of
the indebtedness held by such owner or otherwise, and the obligations to
reimburse the issuer in respect of any letters of credit.
International Assets. See (S)7.5.
------------- ------
Interest Payment Date. As to any Loan, the first day of each calendar
-------- ------- ----
month following the Closing Date.
Interest Period. With respect to each Revolving Credit Loan or all or
-------- ------
any relevant portion of the Term Loan, (a) initially, the period commencing on
the Drawdown Date of such Loan and ending on the last day of one of the periods
set forth below, as selected by the Borrowers in a Loan Request (i) for any Base
Rate Loan, the last day of the calendar quarter; and (ii) for any Eurodollar
Rate Loan, 1, 2 or 3 months; and (b) thereafter, each period commencing on the
last day of the next preceding Interest Period applicable to such Revolving
Credit Loan or all or such portion of the Term Loan and ending on the last day
of one of the periods set forth above, as selected by the Borrowers in a
Conversion Request; provided that all of the foregoing provisions relating to
--------
Interest Periods are subject to the following:
(A) if any Interest Period with respect to a Eurodollar Rate Loan
would otherwise end on a day that is not a Eurodollar Business Day, that
Interest Period shall be extended to the next succeeding Eurodollar Business Day
unless the result of such extension would be to carry such Interest Period into
another calendar month, in which event such Interest Period shall end on the
immediately preceding Eurodollar Business Day;
(B) if any Interest Period with respect to a Base Rate Loan would end
on a day that is not a Business Day, that Interest Period shall end on the next
succeeding Business Day;
(C) if the Borrowers shall fail to give notice as provided in (S)2.7,
the Borrowers shall be deemed to have requested a conversion of the affected
Eurodollar Rate Loan to a Base Rate Loan on the last day of the then current
Interest Period with respect thereto;
<PAGE>
Page 11 of Schedule 2
(D) any Interest Period relating to any Eurodollar Rate Loan that
begins on the last Eurodollar Business Day of a calendar month (or on a day for
which there is no numerically corresponding day in the calendar month at the end
of such Interest Period) shall end on the last Eurodollar Business Day of a
calendar month; and
(E) any Interest Period relating to any Eurodollar Rate Loan that
would otherwise extend beyond the Revolving Credit Loan Maturity Date (if
comprising a Revolving Credit Loan) or the Term Loan Maturity Date (if
comprising the Term Loan or a portion thereof) shall end on the Revolving Credit
Loan Maturity Date or (as the case may be) the Term Loan Maturity Date.
Investments. All expenditures made and all liabilities incurred
-----------
(contingently or otherwise) for the acquisition of stock or Indebtedness of, or
for loans, advances, capital contributions or transfers of property to, or in
respect of any guaranties (or other commitments as described under
Indebtedness), or obligations of, any Person. In determining the aggregate
amount of Investments outstanding at any particular time: (a) the amount of any
Investment represented by a guaranty shall be taken at not less than the
principal amount of the obligations guaranteed and still outstanding; (b) there
shall be included as an Investment all interest accrued with respect to
Indebtedness constituting an Investment unless and until such interest is paid;
(c) there shall be deducted in respect of each such Investment any amount
received as a return of capital (but only by repurchase, redemption, retirement,
repayment, liquidating dividend or liquidating distribution); (d) there shall
not be deducted in respect of any Investment any amounts received as earnings on
such Investment, whether as dividends, interest or otherwise, except that
accrued interest included as provided in the foregoing clause (b) may be
deducted when paid; and (e) there shall not be deducted from the aggregate
amount of Investments any decrease in the value thereof.
Loan Documents. This Credit Agreement, the Notes, the Subordination
--------------
Agreements, the Acquisition Documents, the Capitalization Documents and the
Security Documents and any other agreement, instrument or document executed in
connection with any of the foregoing.
Loan Request. See (S)2.6.
------------
Loans. The Revolving Credit Loans and the Term Loan.
-----
Majority Banks. As of any date of determination, (a) if there are two (2)
--------------
or less Banks, the Banks holding one hundred percent (100%) of the outstanding
principal amount of the Notes on such date; and if no such principal is
outstanding, the Banks whose aggregate Commitments constitute one hundred
percent (100%) of the Total Commitments; and (b) if there are more than two (2)
Banks, the Banks holding at least sixty-six and two-thirds (66 2/3%) of the
outstanding principal amount of the Notes on such date; and if no such principal
is outstanding, the Banks whose aggregate
<PAGE>
Page 12 of Schedule 2
Commitments constitutes at least sixty-six and two thirds percent (66 2/3%) of
the Total Commitment.
Merocel FSC. Merocel Foreign Sales Corp., a United States Virgin Island
-----------
Corporation.
Merocel Stock Pledge Agreement. The Stock Pledge Agreement between Merocel
------------------------------
and the Agent, dated or to be dated on or prior to the Closing Date, in form and
substance satisfactory to the Agent.
Mortgaged Property. Any Real Estate which is subject to any Mortgage.
------------------
Mortgages. The several mortgages and deeds of trust, dated or to be dated
---------
on or prior to the Closing Date, from the Borrowers and their Subsidiaries to
the Agent with respect to the fee and leasehold interests of the Borrowers and
their Subsidiaries in the Real Estate and in form and substance satisfactory to
the Banks and the Agent.
Multiemployer Plan. Any multiemployer plan within the meaning of (S)3(37)
------------------
of ERISA maintained or contributed to by the Borrower or any ERISA Affiliate.
Notes. The Term Notes, the Revolving Credit Notes and the Collateral Note.
-----
Obligations. All indebtedness, obligations and liabilities of any Borrower
-----------
and its Subsidiaries to any of the Banks and the Agent, individually or
collectively, existing on the date of this Credit Agreement or arising
thereafter, direct or indirect, joint or several, absolute or contingent,
matured or unmatured, liquidated or unliquidated, secured or unsecured, arising
by contract, operation of law or otherwise, arising or incurred under this
Credit Agreement or any of the other Loan Documents or in respect of any of the
Loans made or any of the Notes or other instruments at any time evidencing any
thereof or in respect of any cash management services provided by the Agent to
any Borrower.
Original Holdings Stockholders. Collectively, Warburg, Vertical Fund
-------- -------- ------------
Associates, L.P., Vertical Medical Partners, L.P., Vertical Partners, L.P.,
Accel IV L.P., Accel Investors '94 L.P., Accel Keiretsu L.P., Ellmore C.
Patterson Partners, Prosper Partners, Solomon Rosenblatt and Mark K. Adams.
Patent Assignments. The several Patent Assignments, dated or to be dated
------------------
on or prior to the Closing Date, made by the Borrowers and their Subsidiaries in
favor of the Agent and in form and substance satisfactory to the Banks and the
Agent.
PBGC. The Pension Benefit Guaranty Corporation created by (S)4002 of ERISA
----
and any successor entity or entities having similar responsibilities.
<PAGE>
Page 13 of Schedule 2
Permitted Liens. Liens, security interests and other encumbrances
---------------
permitted by (S)9.2.
Person. Any individual, corporation, partnership, trust, unincorporated
------
association, business, or other legal entity, and any government or any
governmental agency or political subdivision thereof.
Preferred Stock. Collectively, (i) Series A Convertible Preferred Stock,
--------- -----
par value $1.00 per share, of Holdings, (ii) Series B Convertible Preferred
Stock, par value $1.00 per share, of Holdings and (iii) Series C Redeemable
Preferred Stock, par value $1.00 per share of Holdings, in each case as
described in, and being subject to the terms, limitations and relative rights
and preferences set forth in, the Restated Certificate of Incorporation of
Holdings on the date hereof.
Real Estate. All real property at any time owned or leased (as lessee or
-----------
sublessee) by any Borrower or any of its Subsidiaries.
Record. The grid attached to a Note, or the continuation of such grid, or
------
any other similar record, including computer records, maintained by any Bank
with respect to any Loan referred to in such Note.
Reference Bank. Bank of Boston Connecticut and Chemical Bank.
--------------
Restated Certificate of Incorporation. The Restated Certificate of
-------- ----------- -- -------------
Incorporation of Holdings dated April 15, 1994, as in effect on the date hereof.
Revolving Credit Loan Maturity Date. April 15, 1999.
-----------------------------------
Revolving Credit Loans. Revolving credit loans made or to be made by the
----------------------
Banks to the Borrowers pursuant to (S)2.
Revolving Credit Note Record. A Record with respect to a Revolving Credit
----------------------------
Note.
Revolving Credit Notes. See (S)2.4.
----------------------
Rights. See (S)9.11.
------
Section 338 Event. Any incremented deductions arising out of any basis
-----------------
step-up under (S)338(h)(10) of the Code to certain assets from the allocation of
the purchase price under the Stock Purchase Agreement in conjunction with the
Acquisition.
Security Agreement. The Security Agreement, dated or to be dated on or
------------------
prior to the Closing Date, among the Borrowers and the Agent and in form and
substance satisfactory to the Banks and the Agent.
<PAGE>
Page 14 of Schedule 2
Security Documents. The Security Agreement, the Mortgages, the Collateral
------------------
Assignment of Leases, Rentals and Property Income, the Patent Assignments, the
Trademark Assignments, the Merocel Stock Pledge Agreement, the Stock Pledge
Agreement, the Subsidiary Guaranties and the Subsidiary Security Agreements.
Seller. The "Seller" as defined in the Stock Purchase Agreement.
------
Settlement. The making of, or receiving of, payments in immediately
----------
available funds, by the Banks to or from the Agent in accordance with (S)2.9(b)
hereof to the extent necessary to cause each Bank's actual share of the
outstanding amount of the Revolving Credit Loans to be equal to each Bank's
Commitment Percentage of the outstanding amount of such Revolving Credit Loans,
in any case when, prior to such event or action, the actual share is not so
equal.
Settlement Amount. See (S)2.9(b) hereof.
-----------------
Settling Bank. See (S)2.9(b) hereof.
-------------
Settlement Date. See (S)2.9.
---------------
Shares. The "Shares" as defined in the Stock Purchase Agreement.
------
Stock Option Plan. Merocel/Xomed Holdings, Inc. 1994 Stock Option Plan, in
-----------------
the form which has been delivered to each of the Banks on the date hereof.
Stock Pledge Agreement. The Stock Pledge Agreement, dated or to be dated
----------------------
on or prior to the Closing Date, between Holdings and the Agent, in form and
substance satisfactory to the Banks and the Agent.
Stock Purchase Agreement. That certain Stock Purchase Agreement dated as
------------------------
of March 3, 1994 by and between Merocel and the Seller.
Subordinated Loan Agreements. Collectively, any agreements, instruments or
----------------------------
documents evidencing the Subordinated Debt, each in form and substance
satisfactory to the Majority Banks in all respects.
Subordinated Debt. Unsecured Indebtedness of any Borrower or any of its
-----------------
Subsidiaries to any Holdings Stockholder that is expressly subordinated and made
junior to the payment and performance in full of the Obligations pursuant to
Subordination Agreements in form and substance satisfactory to the Agent and the
Banks, and evidenced as such by the Subordinated Loan Agreements, which in no
event shall exceed $1,000,000 in the aggregate at any time outstanding.
<PAGE>
Page 15 of Sechedule 2
Subordination Agreements. Collectively, the Subordination Agreements among
------------------------
the Borrowers, the holders of Subordinated Debt and the Agent on behalf of the
Banks, each in form and substance satisfactory to the Majority Banks.
Subsidiary. Any corporation, association, trust, or other business entity
----------
of which the designated parent shall at any time own directly or indirectly
through a Subsidiary or Subsidiaries at least a majority (by number of votes) of
the outstanding Voting Stock.
Subsidiary Guaranties. Collectively, the Guaranties, each in form and
---------- ----------
substance satisfactory to the Agent and the Banks, from each Subsidiary of the
Borrowers to the Agent and the Banks.
Subsidiary Security Agreements. Collectively, the Security Agreements
---------- -------- ----------
between each Subsidiary of the Borrowers and the Agent on behalf of the Banks,
each in form and substance satisfactory to the Banks, to be executed and
delivered after the date hereof.
Survey. In relation to each Mortgaged Property, an instrument survey of
------
such Mortgaged Property dated as of a date subsequent to January 15, 1994, which
shall show the location of all buildings, structures, easements and utility
lines on such Mortgaged Property, shall be sufficient to remove the survey
exception from the Title Policy, shall show that all buildings and structures
are within the lot lines of such Mortgaged Property, shall not show any
encroachments by others, shall show the zoning district or districts in which
such Mortgaged Property is located in a flood hazard district as established by
the Federal Emergency Management Agency or any successor agency or is located in
any flood plain, flood hazard or wetland protection district established under
federal, state or local law.
Surveyor Certificate. In relation to each Mortgaged Property for which a
--------------------
Survey has been conducted, a certificate executed by the surveyor who prepared
such Survey dated as of a recent date and containing such information relating
to such Mortgaged Property as the Agent or the Title Insurance Company may
require, such certificate to be satisfactory to the Agent in form and substance.
Term Loan. See (S)4.1.
---------
Term Loan Maturity Date. April 15, 1999.
-----------------------
Term Notes. See (S)4.2.
----------
Term Note Record. A Record with respect to a Term Note.
----------------
Title Insurance Company shall mean First American Title Insurance Company.
-----------------------
Title Policy. In relation to each Mortgaged Property, an ALTA standard
------------
form title insurance policy issued by the Title Insurance
<PAGE>
Page 16 of Schedule 2
Company (with such reinsurance or co-insurance as the Agent may require, any
such reinsurance to be with direct access endorsements) in such amount as may be
determined by the Agent insuring the priority of the Mortgage of such Mortgaged
Property and that the Borrowers or one of their Subsidiaries holds marketable
fee simple or leasehold, as applicable, title to such Mortgaged Property,
subject only to the encumbrances permitted by such Mortgage and which shall not
contain exceptions for mechanics liens, persons in occupancy or matters which
would be shown by a survey (except as may be permitted by such Mortgage), shall
not insure over any matter except to the extent that any such affirmative
insurance is acceptable to the Agent in its sole discretion, and shall contain
such endorsements and affirmative insurance as the Agent in its discretion may
require, including but not limited to (a) comprehensive endorsement, (b)
variable rate of interest endorsement, (c) usury endorsement, (d) revolving
credit endorsement, (e) tie-in endorsement, (f) doing business endorsement and
(g) ALTA form 3.1 zoning endorsement.
Total Commitment. The sum of the Commitments of the Banks, as in effect
----------------
from time to time.
Trademark Assignments. The several Trademark Assignments, dated or to be
---------------------
dated on or prior to the Closing Date, made by the Borrowers and their
Subsidiaries in favor of the Agent and in form and substance satisfactory to the
Banks and the Agent.
Type. As to any Revolving Credit Loan or all or any portion of the Term
----
Loan, its nature as a Base Rate Loan or a Eurodollar Rate Loan.
Voting Stock. Stock or similar interests, of any class or classes (however
------------
designated), the holders of which are at the time entitled, as such holders, to
vote for the election of a majority of the directors (or persons performing
similar functions) of the corporation, association, trust or other business
entity involved, whether or not the right so to vote exists by reason of the
happening of a contingency.
Warburg. Warburg, Pincus Investors, L.P., a Delaware limited partnership.
-------
(S)1.2. Rules of Interpretation.
-----------------------
(a) A reference to any document or agreement shall include such
document or agreement as amended, modified or supplemented from time to time in
accordance with its terms and the terms of this Credit Agreement.
(b) The singular includes the plural and the plural includes the
singular.
(c) A reference to any law includes any amendment or modification
to such law.
<PAGE>
Page 17 of Schedule 2
(d) A reference to any Person includes its permitted successors
and permitted assigns.
(e) Accounting terms not otherwise defined herein have the
meanings assigned to them by generally accepted accounting principles applied on
a consistent basis by the accounting entity to which they refer.
(f) The words "include", "includes" and "including" are not
limiting.
(g) All terms not specifically defined herein or by generally
accepted accounting principles, which terms are defined in the Uniform
Commercial Code as in effect in the State of Connecticut, have the meanings
assigned to them therein.
(h) Reference to a particular "(S)" refers to that section of this
Credit Agreement unless otherwise indicated.
(i) The words "herein", "hereof", "hereunder" and words of like
import shall refer to this Credit Agreement as a whole and not to any particular
section or subdivision of this Credit Agreement.
<PAGE>
EXHIBIT 10.3
FOURTH AMENDMENT AND WAIVER AGREEMENT
-------------------------------------
FOURTH AMENDMENT AND WAIVER AGREEMENT (this "AGREEMENT") dated as of June
7, 1996 by and among (1) Xomed Surgical Products, Inc., formerly known as
Merocel/Xomed Holdings, Inc. ("HOLDINGS"), (2) Merocel Corporation ("MEROCEL"),
(3) Xomed, Inc., formerly known as Xomed-Treace, Inc. ("XOMED"), (4) Xomed-
Treace, P.R. Inc. ("XOMED P.R."), (5) TreBay Medical Corporation ("TREBAY" and,
together with Holdings, Merocel, Xomed and Xomed P.R., collectively, the
"BORROWERS" and each, singularly, a "BORROWER"), (6) Bank of Boston Connecticut
("BKBCT"), Chemical Bank, Bank of Scotland and Internationale Nederlanden (U.S.)
Capital Corporation as banks (collectively, the "BANKS" and individually, a
"BANK"), and (7) BKBCT as agent (the "AGENT") for the Banks, with respect to a
certain Credit Agreement dated as of April 15, 1994 by and among the Borrowers,
the Banks and the Agent, as amended by a certain First Amendment Agreement dated
June 24, 1994, an Amendment and Waiver Agreement dated as of March 31, 1995, a
Second Amendment and Waiver Agreement dated as of July 3, 1995, a Third
Amendment and Waiver Agreement dated as of April 15, 1996 and a Joinder
Agreement dated as of April 16, 1996 (collectively, the "CREDIT AGREEMENT").
W I T N E S S E T H:
WHEREAS, pursuant to the terms of the Credit Agreement, the Banks made
loans to the Borrowers; and
WHEREAS, the Borrowers have requested that the Banks and the Agent waive
certain provisions of the Credit Agreement and amend certain terms and
conditions of the Credit Agreement; and
WHEREAS, the Banks and the Agent are willing to waive certain provisions of
the Credit Agreement and amend certain terms and conditions of the Credit
Agreement on the terms and conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
(S)1. DEFINITIONS. Capitalized terms used herein without definition that
-----------
are defined in the Credit Agreement shall have the same meanings herein as
therein.
(S)2. RATIFICATION OF EXISTING AGREEMENTS. All of the Borrowers'
-----------------------------------
obligations and liabilities to the Banks and the Agent as evidenced by or
otherwise arising under the Credit Agreement, the Notes and the other Loan
Documents, are, by each Borrower's execution of this Agreement, ratified and
confirmed in all respects. In addition, by each Borrower's execution of this
Agreement, each Borrower represents and warrants that no counterclaim, right
<PAGE>
-2-
of set-off or defense of any kind exists or is outstanding with respect to such
obligations and liabilities.
(S)3. REPRESENTATIONS AND WARRANTIES; ACKNOWLEDGMENT. The Borrowers hereby
----------------------------------------------
represent and warrant to the Agent and the Banks as follows:
(a) Each has adequate power to execute and deliver this
Agreement and each other document to which it is a party in connection herewith
and to perform its respective obligations hereunder or thereunder. This
Agreement and each other document executed in connection herewith has been
executed and delivered by each Borrower and do not contravene any law, rule or
regulation applicable to any of them or any of the terms of any other indenture,
agreement or undertaking to which any of them is a party. The obligations
contained in this Agreement and each other document executed in connection
herewith to which each is a party, taken together with the obligations under the
Loan Documents, constitute the legal, valid and binding obligations enforceable
against each Borrower, as the case may be, in accordance with their respective
terms.
(b) After giving effect to the transactions contemplated hereby, no
Event of Default under and as defined in any of the Loan Documents has occurred
and is continuing .
(c) All of the representations and warranties made by the Borrowers
in the Credit Agreement, the Notes and the other Loan Documents are true and
correct on the date hereof as if made on and as of the date hereof, except to
the extent of changes resulting from transactions contemplated or permitted by
the Credit Agreement and the other Loan Documents and changes occurring in the
ordinary course of business that singly or in the aggregate are not materially
adverse, and to the extent that any of such representations and warranties
relate expressly to an earlier date.
(S)4. WAIVERS. Subject to the satisfaction of the conditions set forth
-------
below, the Banks and the Agent waive those Events of Default set forth on
Schedule 1 attached hereto and made a part hereof. The waivers set forth above
- ----------
in this (S)4 shall be effective only for those Events of Default set forth on
Schedule 1 attached hereto and only for the periods set forth therein and such
- ----------
waivers shall not entitle the Borrowers to any future waiver in similar or other
circumstances. Without limiting the foregoing, upon the occurrence of an Event
of Default after the date set forth above, or if an Event of Default has
occurred and is continuing on the date hereof that is not set on Schedule 1, the
----------
Agent, upon the request of the Majority Banks, shall be free in its sole and
absolute discretion to accelerate the payment in full of the Borrowers'
indebtedness to the Banks and the Agent under the Credit Agreement and the other
Loan Documents, and each Bank and the Agent, with the consent of the Majority
Banks, may proceed to enforce any or all of such Bank's and the Agent's, as
<PAGE>
-3-
applicable, rights under or in respect of the Credit Agreement, the Notes and
the other Loan Documents and applicable law.
(S)5. CONDITIONS PRECEDENT. The effectiveness of the waivers and amendments
--------------------
set forth herein shall be subject to the satisfaction on or before the date
hereof of each of the following conditions precedent:
(a) Representations and Warranties. All of the representations and
------------------------------
warranties made by the Borrowers herein, whether directly or incorporated by
reference, shall be true and correct on the date hereof, except as provided in
(S)3 hereof.
(b) Delivery. The parties hereto shall have executed and delivered
--------
this Agreement in form and substance satisfactory to the Banks and the Agent.
(c) Guaranties. Each of Xomed International, Inc., Xomed Canada,
----------
Inc., Xomed Australia PTY Limited, Xomed U.K. Ltd., Xomed France, S.A. and Xomed
Deutschland, GmbH (collectively, the "New Subsidiaries") shall have guaranteed
the payment and performance of the Obligations pursuant to guaranties, each in
form and substance satisfactory to the Agent and Banks.
(d) Stock Pledge Agreements. Holdings, Xomed and their Subsidiaries
-----------------------
shall have executed and delivered to the Agent stock pledge agreements, each in
form and substance satisfactory to the Agent and Banks with respect to all of
the issued and outstanding stock of each of the New Subsidiaries. In addition,
Holdings, Xomed and their Subsidiaries shall have delivered to the Agent all of
the issued and outstanding stock of Xomed International, Inc., Xomed Canada,
Inc., Xomed U.K. Ltd. and FessCo, Inc., together with undated stock powers
executed in blank with respect thereto.
(e) Security Agreements. Each of the New Subsidiaries shall have
-------------------
executed and delivered to the Agent a security agreement, in form and substance
satisfactory to the Agent and the Banks.
(S)6. AMENDMENTS TO THE CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS.
-----------------------------------------------------------
(a) Amendments to Schedule 2 of the Credit Agreement.
------------------------------------------------
(i) The definition of "Security Documents" appearing in Schedule 2
----------
of the Credit Agreement is hereby amended in its entirety to read as
follows:
"Security Documents. The Security Agreement, the Mortgages, the
Collateral Assignment of Leases, Rentals and Property Income, the
Patent Assignments, the Trademark Assignments, the Merocel Stock
Pledge Agreement, the Stock Pledge Agreement, the Subsidiary
Guaranties and the
<PAGE>
-4-
Subsidiary Security Agreements, the Life
Insurance Assignments and the Subsidiary Stock Pledge
Agreements."
(ii) The following new definition is hereby added to Schedule 2 of
----------
the Credit Agreement:
"Subsidiary Stock Pledge Agreements. The Stock Pledge Agreements
----------------------------------
between certain of the Subsidiaries of Holdings and the Agent,
each in form and substance satisfactory to the Banks and the
Agent."
(b) Amendment to Schedule 7.8. Schedule 7.8 of the Credit Agreement is
-------------------------
hereby amended by adding the information set forth on Schedule 2 attached hereto
----------
and made a part hereof.
(c) Amendment to Schedule 7.9. Schedule 7.9 of the Credit Agreement is
-------------------------
hereby amended by adding the information set forth on Schedule 3 attached hereto
----------
and made a part hereof.
(d) Amendment to Schedule 9.2. Schedule 9.2 of the Credit Agreement is
-------------------------
hereby amended in its entirety as set forth on Schedule 4 attached hereto and
----------
made a part hereof.
(S)7. ADDITIONAL COVENANTS. Without any prejudice or impairment whatsoever
--------------------
to any of the Banks' and/or Agent's rights and remedies contained in the Credit
Agreement and the covenants contained therein, the Notes or in any of the other
Loan Documents, the Borrowers additionally covenant and agree with the Banks and
Agent as follows:
(a) The Borrowers shall comply and continue to comply with all of the
terms, covenants and provisions contained in the Credit Agreement, the Notes and
the other Loan Documents, except as such terms, covenants and provisions are
expressly modified by this Agreement upon the terms set forth herein.
(b) On or before June 15, 1996, the Borrowers shall deliver the
financial statements required under (S)8.4(a) of the Credit Agreement to each of
the Banks.
(c) On or before June 30, 1996, the Agent shall receive evidence
satisfactory to it that all requisite corporate action necessary for the valid
execution, delivery and performance by each of the New Subsidiaries of the new
Subsidiary Guaranties, the Subsidiary Security Agreement of the New
Subsidiaries, the Subsidiary Stock Pledge Agreements and all other instruments
and documents delivered by the New Subsidiaries in connection therewith shall
have been duly and effectively taken.
<PAGE>
-5-
(d) On of before September 7, 1996, the Agent shall have received all
of the issued and outstanding stock of Xomed Australia PTY Limited, Xomed
France, S.A. and Xomed Duetschland, GmbH, together with undated stock powers
executed in blank with respect thereto.
(e) The Borrowers shall at any time or from time to time execute and
deliver such further instruments, and take such further action as the Agent
and/or Banks may reasonably request, in each case further to effect the purposes
of this Agreement, the Credit Agreement, the Notes and the other Loan Documents.
Each of the Borrowers expressly acknowledges and agrees that any failure by
any Borrower to comply with the terms and conditions of this (S)7 or any other
provisions contained in this Agreement shall constitute an Event of Default
under the Credit Agreement.
(S)8. EXPENSES. The Borrowers agree to pay to the Agent and the Banks upon
--------
demand (a) an amount equal to any and all out-of-pocket costs or expenses
(including reasonable legal fees and disbursements and appraisal expenses)
incurred or sustained by the Agent and/or Banks in connection with the
preparation of this Agreement and related matters and (b) from time to time any
and all out-of-pocket costs or expenses (including commercial examiner fees and
legal fees and disbursements) hereafter incurred or sustained by the Agent
and/or Banks in connection with the administration of credit extended by the
Banks and the Agent to the Borrowers or the preservation of or enforcement of
the Agent's and the Banks' rights under the Credit Agreement, the Notes or the
other Loan Documents or in respect of any of the Borrowers' other obligations to
the Banks and/or the Agent.
(S)9. NO WAIVER BY BANKS AND/OR AGENT. Except as otherwise expressly
-------------------------------
provided for herein, nothing in this Agreement shall extend to or affect in any
way any of the Borrowers' obligations or the Agent's or any Bank's rights and
remedies arising under the Credit Agreement, the Notes or the other Loan
Documents, and neither the Agent nor any Bank shall be deemed to have waived any
or all of the Agent's and/or such Bank's rights or remedies with respect to any
Event of Default (other than an Event of Default arising under the Credit
Agreement as described in (S)4 hereof and then only to the extent set forth in
(S)4 hereof) or event or condition which, with notice or the lapse of time, or
both would become an Event of Default and which upon the Borrowers' execution
and delivery of this Agreement might otherwise exist or which might hereafter
occur.
(S)10. MISCELLANEOUS PROVISIONS.
------------------------
(a) Except as otherwise expressly provided by this Agreement, all
of the respective terms, conditions and provisions of the Credit Agreement, the
Notes and the other Loan Documents shall remain the same. It is declared and
agreed by each of the parties hereto that the Credit Agreement, the Notes and
<PAGE>
-6-
the other Loan Documents, each as amended hereby, shall continue in full force
and effect, and that this Agreement and the Credit Agreement, the Notes and the
other Loan Documents, as applicable, shall be read and construed as one
instrument.
(b) This Agreement is intended to take effect under, and shall be
construed according to and governed by, the laws of the State of Connecticut.
(c) This Agreement may be executed in any number of counterparts,
but all such counterparts shall together constitute but one instrument. In
making proof of this Agreement it shall not be necessary to produce or account
for more than one counterpart signed by each party hereto by and against which
enforcement hereof is sought.
<PAGE>
-7-
IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement to be
executed in its name and behalf by its duly authorized officer as of the date
first written above.
XOMED SURGICAL PRODUCTS, INC.
(formerly known as Merocel/Xomed
Holdings, Inc.)
By: /s/ Thomas E. Timbie
------------------------------
Its Vice President and Chief Financial Officer
MEROCEL CORPORATION
By: /s/ David R. Grant
------------------------------
Its Vice President
XOMED, INC.
(formerly known as Xomed-Treace, Inc.
By: /s/ David R. Grant
------------------------------
Its Vice President
XOMED-TREACE, P.R. INC.
By: /s/ David R. Grant
------------------------------
Its Vice President
TREBAY MEDICAL CORPORATION
By: /s/ Thomas E. Timbie
------------------------------
Its Vice President and Chief
Financial Officer
<PAGE>
-8-
BANK OF BOSTON CONNECTICUT,
Individually and as Agent
By: /s/ Garth J. Collins
----------------------------
Garth J. Collins
Its Vice President
CHEMICAL BANK
By: /s/ Authorized Signatory
----------------------------
Its
BANK OF SCOTLAND
By: /s/ Catherine M. Oniffrey
----------------------------
Its Vice President
INTERNATIONALE NEDERLANDEN
(U.S.) CAPITAL CORPORATION
By: /s/ Authorized Signatory
----------------------------
Its
The undersigned Guarantor
acknowledges and accepts the
foregoing and ratifies and confirms
its obligations under its
Unlimited Guaranty:
MEROCEL FOREIGN SALES
CORP.
By: /s/ Peter Murphy
-------------------------
Its Secretary and Treasurer
<PAGE>
EXHIBIT 10.4
THIRD AMENDMENT AND WAIVER AGREEMENT
----- --------- --- ------ ---------
THIRD AMENDMENT AND WAIVER AGREEMENT (this "AGREEMENT") dated as of April
15, 1996 by and among (1) Xomed Surgical Products, Inc., formerly known as
Merocel/Xomed Holdings, Inc. ("HOLDINGS"), (2) Merocel Corporation ("MEROCEL"),
(3) Xomed, Inc., formerly known as Xomed-Treace, Inc. ("XOMED"), (4) Xomed-
Treace, P.R. Inc. ("XOMED P.R." and, together with Holdings, Merocel and Xomed,
collectively, the "BORROWERS" and each, singularly, a "BORROWER"), (5) Bank of
Boston Connecticut ("BKBCT"), Chemical Bank, Bank of Scotland and Internationale
Nederlanden (U.S.) Capital Corporation as banks (collectively, the "BANKS" and
individually, a "BANK"), and (6) BKBCT as agent (the "AGENT") for the Banks,
with respect to a certain Credit Agreement dated as of April 15, 1994 by and
among the Borrowers, the Banks and the Agent, as amended by a certain First
Amendment Agreement dated as of June 24, 1994, an Amendment and Waiver Agreement
dated as of March 31, 1995 and a Second Amendment and Waiver Agreement dated as
of July 3, 1995 (collectively, the "CREDIT AGREEMENT").
W I T N E S S E T H:
WHEREAS, pursuant to that certain Stock Purchase Agreement dated as of
April 16, 1996 (the "PURCHASE AGREEMENT") among Holdings, Trebay Medical
Corporation and the stockholders of Trebay (collectively, the "TREBAY
STOCKHOLDERS"), Holdings desires, among other things, to purchase all of the
issued and outstanding shares of common stock, par value $0.01 per share, of
Trebay (the "TREBAY COMMON STOCK") in exchange for (i) the issuance and delivery
by Holdings to each Trebay Stockholder of the following: (A) certificates,
registered in the name of such Trebay Stockholder, representing the number of
shares of Series A Convertible Preferred Stock, par value $1.00 per share, of
Holdings as more particularly described in the Purchase Agreement and (B)
certificates, registered in the name of such Trebay Stockholder, representing
the number of shares of Series C Redeemable Preferred Stock, par value $1.00 per
share, of Holdings as more particularly set forth in the Purchase Agreement; and
WHEREAS, the terms of the Loan Documents restrict Holdings from purchasing
the Trebay Common Stock and complying with certain other provisions of the
Purchase Agreement; and
WHEREAS, Borrowers have requested that the Banks and the Agent waive (i)
the above referenced restrictions and (ii) the Borrowers' performance with
certain other terms of the Loan Documents, all subject to the terms and
conditions set forth herein; and
WHEREAS, the Banks and the Agent are willing to (i) amend certain terms and
conditions of the Credit Agreement and (ii) waive such restriction on
<PAGE>
-2-
the purchase of the Trebay Common Stock and the other provisions contemplated by
the Purchase Agreement, all on the terms and conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
(S)1. DEFINITIONS. Capitalized terms used herein without definition that
-----------
are defined in the Credit Agreement shall have the same meanings herein as
therein.
(S)2. RATIFICATION OF EXISTING AGREEMENTS. All of the Borrowers'
------------ -- -------- ----------
obligations and liabilities to the Banks and the Agent as evidenced by or
otherwise arising under the Credit Agreement, the Notes and the other Loan
Documents, are, by each Borrower's execution of this Agreement, ratified and
confirmed in all respects. In addition, by each Borrower's execution of this
Agreement, each Borrower represents and warrants that no counterclaim, right of
set-off or defense of any kind exists or is outstanding with respect to such
obligations and liabilities.
(S)3. REPRESENTATIONS AND WARRANTIES; ACKNOWLEDGMENT. The Borrowers hereby
--------------- --- ----------- --------------
represent and warrant to the Agent and the Banks as follows:
(a) Each has adequate power to execute and deliver this Agreement
and each other document to which it is a party in connection herewith and to
perform its respective obligations hereunder or thereunder. This Agreement and
each other document executed in connection herewith has been executed and
delivered by each Borrower and do not contravene any law, rule or regulation
applicable to any of them or any of the terms of any other indenture, agreement
or undertaking to which any of them is a party. The obligations contained in
this Agreement and each other document executed in connection herewith to which
each is a party, taken together with the obligations under the Loan Documents,
constitute the legal, valid and binding obligations enforceable against each
Borrower, as the case may be, in accordance with their respective terms.
(b) After giving effect to the transactions contemplated hereby, no
Event of Default under and as defined in any of the Loan Documents has
occurred and is continuing.
(c) All of the representations and warranties made by the Borrowers
in the Credit Agreement, the Notes and the other Loan Documents are true
and correct on the date hereof as if made on and as of the date hereof,
except to the extent of changes resulting from transactions contemplated or
permitted by the Credit Agreement and the other Loan Documents and changes
occurring in the ordinary course of
<PAGE>
-3-
business that singly or in the aggregate are not materially adverse, and to
the extent that any of such representations and warranties relate expressly
to an earlier date.
(S)4. WAIVERS. Subject to the satisfaction of the conditions set forth
-------
below, the Banks and the Agent consent to the transactions contemplated by the
Purchase Agreement and waive those Events of Default set forth on Schedule 1
-------- -
attached hereto and made a part hereof that will result from the purchase by
Holdings of the Trebay Common Stock and the compliance by Holdings with the
other provisions of the Purchase Agreement. The consent and waivers set forth
above in this (S)4 shall be effective only for those Events of Default set forth
on Schedule 1 attached hereto occurring on or before June 3, 1996 and such
-------- -
waivers shall not entitle the Borrowers to any future waiver in similar or other
circumstances. Without limiting the foregoing, upon the occurrence of an Event
of Default after the date set forth above, or if an Event of Default has
occurred and is continuing on the date hereof that is not set forth herein, the
Agent, upon the request of the Majority Banks, shall be free in its sole and
absolute discretion to accelerate the payment in full of the Borrowers'
indebtedness to the Banks and the Agent under the Credit Agreement and the other
Loan Documents, and each Bank and the Agent, with the consent of the Majority
Banks, may proceed to enforce any or all of such Bank's and the Agent's, as
applicable, rights under or in respect of the Credit Agreement, the Notes and
the other Loan Documents and applicable law.
(S)5. CONDITIONS PRECEDENT. The effectiveness of the waivers and
---------- ---------
amendments set forth herein shall be subject to the satisfaction on or before
April 17, 1996 of each of the following conditions precedent:
(a) Representations and Warranties. All of the representations and
--------------- --- ----------
warranties made by the Borrowers herein, whether directly or incorporated by
reference, shall be true and correct on the date hereof, except as provided in
(S)3 hereof.
(b) Delivery. The parties hereto shall have executed and delivered
--------
this Agreement in form and substance satisfactory to the Banks and the Agent.
(c) Purchase Agreement. The Purchase Agreement shall be in form
-------- ---------
and substance satisfactory to the Agreement and the Banks. Holdings, Trebay and
the Trebay Stockholders shall have executed and delivered to the Agent a
certified copy of the Purchase Agreement.
(d) Corporate Action. The Agent shall have received evidence
--------- ------
satisfactory to it that all requisite corporate action necessary for the valid
execution, delivery and performance by Holdings of the Purchase Agreement, this
Agreement and all other instruments and documents delivered by Holdings
<PAGE>
-4-
and its Subsidiaries in connection therewith shall have been duly and
effectively taken.
(e) Amendment Fee. The Borrower shall have paid to the Agent on
--------- ---
behalf of the Banks on the date hereof a non-refundable amendment fee equal to
$15,000.
(S)6. AMENDMENTS TO THE CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS.
-----------------------------------------------------------
(a) Amendment to Preamble. The Preamble to the Credit Agreement is
--------- -- --------
hereby amended in its entirety:
"This CREDIT AGREEMENT is made as of the 15th day of April, 1994, by and
among MEROCEL CORPORATION ("Merocel"), XOMED INC. (formerly known as Xomed-
Treace, Inc.) ("Xomed"), XOMED-TREACE, P.R., INC. ("Xomed P.R."), TREBAY MEDICAL
CORPORATION ("Trebay") and XOMED SURGICAL PRODUCTS, INC. (formerly known as
Merocel/Xomed Holdings, Inc.) ("Holdings" and, together with Merocel, Xomed,
P.R., Xomed and Trebay, the "Borrowers" and each, singularly, a "Borrower"),
each a Delaware corporation having its principal place of business at 950
Flanders Road, Mystic, Connecticut 06355, and BANK OF BOSTON CONNECTICUT and the
other lending institutions listed on Schedule 1 attached hereto (collectively,
-------- -
the "Banks") and BANK OF BOSTON CONNECTICUT as agent for itself and the other
Banks (in such capacity, the "Agent")."
(b) Amendments to Schedule 2 of the Credit Agreement.
---------- -- -------- - -- --- ------ ---------
(i) The definition of "Acquisition" appearing in Schedule 2
----------
is hereby amended in its entirety to read as follows:
"Acquisitions. Collectively, the acquisition by Holdings of
------------
the shares pursuant to the Stock Purchase Agreement and the
purchase of the Trebay Common Stock pursuant to the Trebay
Stock Purchase Agreement.
(ii) The definition of "Acquisition Documents" appearing in
Schedule 2 is hereby amended in its entirety to read as follows:
----------
"Acquisition Documents. The Stock Purchase Agreement and the
---------------------
Trebay Stock Purchase Agreement, together with all schedules,
exhibits, and annexes thereto, and all agreements and documents
required to be entered into or delivered pursuant to the Stock
Purchase Agreement and/or the Trebay Stock Purchase Agreement
or in connection with the Acquisitions, all in the form
delivered to the Agent on the date of the applicable
Acquisition."
<PAGE>
-5-
(iii) The definition of "Security Documents" appearing in
Schedule 2 is hereby amended by adding the following new language to
-------- -
the end of such definition:
"and the Life Insurance Assignment."
(iv) The definition of "seller" appearing in Schedule 2 is
----------
hereby amended in its entirety to read as follows:
"Seller. The "Seller" as defined in the Stock Purchase
------
Agreement and the Stockholders under the Trebay Stock Purchase
Agreement."
(v) The following new definitions are hereby added to Schedule
--------
2 of the Credit Agreement:
-
"Life Insurance Assignment. The Life Insurance Assignment
---- --------- ----------
executed and delivered by Trebay to the Agent on behalf of the
Banks."
"Trebay. See the Preamble hereto."
------
"Trebay Common Stock. The "Company Common Stock" as
------ ------ ------
defined in the Trebay Stock Purchase Agreement."
"Trebay Stock Purchase Agreement. That certain Stock
------ ----- -------- ---------
Purchase Agreement dated as of April 16, 1996 by and among
Holdings, Trebay and the stockholders of Trebay."
(c) Amendment to Section 9.1. Section 9.1 of the Credit Agreement
--------- -- ------- ---
is hereby amended by adding the following new subsection (j)
thereto:
(j) On or before July 10, 1996, Indebtedness of Trebay not in
excess of $150,000 to First Union Bank arising in connection
with certain revolving credit arrangements between Trebay and
First Union Bank; provided, that such revolving credit
--------
arrangements must be terminated and paid in full on or before
July 10, 1996."
(d) Amendment to Section 9.3(e). Section 9.3(e) of the Credit
--------- -- ------- -------
Agreement is hereby amended in its entirety to read as follows:
"(e) The acquisition of the capital stock of (i) Xomed and
Xomed Puerto Rico and (ii) Trebay, pursuant to the Acquisition
Documents."
<PAGE>
-6-
(e) Amendment to Section 9.3(g). Section 9.3(g) of the Credit
--------- -- ------- ------
Agreement is hereby amended in its entirety to read as follows:
"(g) loans and advances to (i) employees of such Borrower or its
Subsidiaries for (A) travel and relocation expenses in the ordinary
course of business in an outstanding aggregate amount for all such
loans not to exceed $500,000 at any time for all Borrowers, and (B)
the purchase of the capital stock of Holdings in an outstanding
aggregate amount for all such loans not to exceed $1,100,000 at any
time for all Borrowers and (ii) with respect to Trebay only, James
T. Treace in an aggregate principal amount not in excess of $883,330
and as evidenced by a certain Promissory Note dated November 7,
1995."
(f) Amendment to Section 9.5(a). Section 9.5(a) of the Credit
--------- -- ------- ------
Agreement is hereby amended by adding the following at the end of such
subsection:
"or (vi) the acquisition by Holdings of all of the Shares of
Trebay"
(S)7. ADDITIONAL COVENANTS. Without any prejudice or impairment
---------- ---------
whatsoever to any of the Banks' and/or Agent's rights and remedies contained in
the Credit Agreement and the covenants contained therein, the Notes or in any of
the other Loan Documents, the Borrowers additionally covenant and agree with the
Banks and Agent as follows:
(a) The Borrowers shall comply and continue to comply with all of
the terms, covenants and provisions contained in the Credit Agreement, the Notes
and the other Loan Documents, except as such terms, covenants and provisions are
expressly modified by this Agreement upon the terms set forth herein.
(b) On or before April 25, 1996, the Borrowers shall pay all fees
and expenses incurred by the Banks and Agent in connection with this Agreement
and the other Loan Documents on or prior to such date.
(c) On or before April 25, 1996, the borrowers shall cause Trebay
to execute and deliver to the Banks and the Agent a written agreement and
acknowledgment, in form and substance satisfactory to the Banks and the Agent,
regarding the terms and conditions of this Agreement and each of the other Loan
Documents and Trebay's status and obligations as a Borrower hereunder and under
the other Loan Documents.
(d) On or before April 25, 1996, the Borrowers (including, without
limitation, Trebay) shall execute and deliver to the Agent an amended and
restated Security Agreement and amended and restated Notes, each in form and
substance satisfactory to the Agent and the Banks. In addition, pursuant to
<PAGE>
-7-
pledge, assignment and security agreements, each in form and substance
satisfactory to the Banks and the Agent, the Borrowers shall cause Trebay to
grant to the Agent on behalf of the Banks a valid and perfected first (subject
only to Permitted Liens) security interest in all of its properties and assets.
The Borrowers acknowledge and agree that all of such security and pledge
agreements shall be included in the definition of Security Documents under the
Credit Agreement.
(e) On or before April 25, 1996, Holdings shall execute and deliver
an amendment to the Stock Pledge Agreement to evidence the Holding's pledge of
all of the Trebay Common Stock to the Agent, for the benefit of the Banks, such
amendment to be in form and substance satisfactory to the Banks and the Agent.
(f) On or before April 25, 1996, the Borrowers shall deliver to the
Agent, a favorable opinion addressed to the Agent and Lenders in form and
substance satisfactory to the Agent, from Willkie Farr & Gallagher, counsel to
the Borrowers.
(g) On or before April 25, 1996, the Borrowers shall cause Trebay
to execute and deliver to the Agent on behalf of the Banks an assignment, in
form and substance satisfactory to the Agent and the Banks, of certain life
insurance policies issued to Trebay that cover the lives of James T. Treace and
F. Barry Bays.
(h) The Borrowers shall at any time or from time to time execute
and deliver such further instruments, and take such further action as the Agent
and/or Banks may reasonably request, in each case further to effect the purposes
of this Agreement, the Credit Agreement, the Notes and the other Loan Documents.
(i) The Borrowers will not effect or cause any amendment or
modification of the Purchase Agreement in any material respect without the prior
written consent of the Majority Banks.
Each of the Borrowers expressly acknowledges and agrees that any failure by
any Borrower to comply with the terms and conditions of this (S)7 or any other
provisions contained in this Agreement shall constitute an Event of Default
under the Credit Agreement.
(S)8. EXPENSES. The Borrowers agree to pay to the Agent and the Banks upon
--------
demand (a) an amount equal to any and all out-of-pocket costs or expenses
(including reasonable legal fees and disbursements and appraisal expenses)
incurred or sustained by the Agent and/or Banks in connection with the
preparation of this Agreement and related matters and (b) from time to time any
and all out-of-pocket costs or expenses (including commercial examiner fees and
legal fees and disbursements) hereafter incurred or sustained by the Agent
<PAGE>
-8-
and/or Banks in connection with the administration of credit extended by the
Banks and the Agent to the Borrowers or the preservation of or enforcement of
the Agent's and the Banks' rights under the Credit Agreement, the Notes or the
other Loan Documents or in respect of any of the Borrowers' other obligations to
the Banks and/or the Agent.
(S)9. NO WAIVER BY BANKS AND/OR AGENT. Except as otherwise expressly
-- ------ -- ----- ------ -----
provided for herein, nothing in this Agreement shall extend to or affect in any
way any of the Borrowers' obligations or the Agent's or any Bank's rights and
remedies arising under the Credit Agreement, the Notes or the other Loan
Documents, and neither the Agent nor any Bank shall be deemed to have waived any
or all of the Agent's and/or such Bank's rights or remedies with respect to any
Event of Default (other than an Event of Default arising under the Credit
Agreement as described in (S)4 hereof and then only to the extent set forth in
(S)4 hereof) or event or condition which, with notice or the lapse of time, or
both would become an Event of Default and which upon the Borrowers' execution
and delivery of this Agreement might otherwise exist or which might hereafter
occur.
(S)10. MISCELLANEOUS PROVISIONS.
------------- ----------
(a) Except as otherwise expressly provided by this Agreement, all
of the respective terms, conditions and provisions of the Credit Agreement, the
Notes and the other Loan Documents shall remain the same. It is declared and
agreed by each of the parties hereto that the Credit Agreement, the Notes and
the other Loan Documents, each as amended hereby, shall continue in full force
and effect, and that this Agreement and the Credit Agreement, the Notes and the
other Loan Documents, as applicable, shall be read and construed as one
instrument.
(b) This Agreement is intended to take effect under, and shall be
construed according to and governed by, the laws of the State of Connecticut.
(c) This Agreement may be executed in any number of counterparts,
but all such counterparts shall together constitute but one instrument. In
making proof of this Agreement it shall not be necessary to produce or account
for more than one counterpart signed by each party hereto by and against which
enforcement hereof is sought.
<PAGE>
-9-
IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement
to be executed in its name and behalf by its duly authorized officer as of the
date first written above.
XOMED SURGICAL PRODUCTS, INC.
(formerly known as Merocel/Xomed
Holdings, Inc.)
/s/ Mark K. Adams
By:____________________________
Its President
MEROCEL CORPORATION
/s/ Mark K. Adams
By:____________________________
Its President
XOMED, INC.
(formerly known as Xomed-Treace, Inc.
/s/ Mark K. Adams
By:____________________________
Its President
XOMED-TREACE, P.R. INC.
/s/ Mark K. Adams
By:____________________________
Its President
BANK OF BOSTON CONNECTICUT,
Individually and as Agent
/s/ Garth J. Collins
By:____________________________
Garth J. Collins
Its Vice President
<PAGE>
-10-
CHEMICAL BANK
/s/ Authorized Signatory
By:____________________________
Its Vice President
BANK OF SCOTLAND
/s/ Catherine M. Oniffrey
By:____________________________
Its Vice President
INTERNATIONALE NEDERLANDEN
(U.S.) CAPITAL CORPORATION
/s/ Authorized Signatory
By:____________________________
Its
The undersigned Guarantor
acknowledges and accepts the
foregoing and ratifies and confirms
its obligations under its
Unlimited Guaranty:
MEROCEL FOREIGN SALES
CORP.
/s/ Mark K. Adams
By:____________________
Its President
<PAGE>
EXHIBIT 10.5
SECOND AMENDMENT AND WAIVER AGREEMENT
-------------------------------------
SECOND AMENDMENT AND WAIVER AGREEMENT (this "AGREEMENT") dated as of July
3rd, 1995 by and among (1) Xomed Surgical Products, Inc., formerly known as
Merocel/Xomed Holdings, Inc. ("HOLDINGS"), (2) Merocel Corporation ("MEROCEL"),
(3) Xomed, Inc., formerly known as Xomed-Treace, Inc. ("XOMED"), (4) Xomed-
Treace, P.R. Inc. ("XOMED P.R." and, together with Holdings, Merocel and Xomed,
collectively, the "BORROWERS" and each, singularly, a "BORROWER"), (5) Bank of
Boston Connecticut ("BKBCT"), Chemical Bank, Bank of Scotland and Internationale
Nederlanden (U.S.) Capital Corporation as banks (collectively, the "BANKS" and
individually, a "BANK"), and (6) BKBCT as agent (the "AGENT") for the Banks,
with respect to a certain Credit Agreement dated as of April 15, 1994 by and
among the Borrowers, the Banks and the Agent, as amended by a certain First
Amendment Agreement dated as of June 24, 1994 and an Amendment and Waiver
Agreement dated as of March 31, 1995 (collectively, the "CREDIT AGREEMENT").
W I T N E S S E T H:
WHEREAS, pursuant to the Credit Agreement, the Banks made loans to the
Borrowers; and
WHEREAS, the Borrowers have requested that the Banks and the Agent amend
certain terms and conditions of the Credit Agreement; and
WHEREAS, on June 9, 1995 Holdings changed its name from Merocel/Xomed
Holdings, Inc. to Xomed Surgical Products, Inc. (hereinafter referred to as
"XOMED SURGICAL"); and
WHEREAS, on June 5, 1995 Xomed changed its name from Xomed-Treace, Inc. to
Xomed, Inc. (hereinafter referred to as "NEW XOMED"); and
WHEREAS, pursuant to that certain Asset Purchase Agreement dated June 29,
1995 (the "PURCHASE AGREEMENT") between New Xomed and Microtek Medical, Inc.
("MICROTEK"), New Xomed desires to sell certain of the Collateral owned by New
Xomed as more particularly described on Schedule 1 attached hereto
----------
(collectively, the "XOMED ASSETS") to Microtek in exchange for (i) the payment
by Microtek to New Xomed of an amount equal to $1,325,000, (ii) Microtek's
execution and delivery of three (3) promissory notes in the amounts of
$1,125,000, $100,000 and $100,000, respectively (collectively, the "PLEDGED
NOTES") and (iii) the transfer by Microtek of certain of its personal property
assets as more particularly described on Schedule 2 attached hereto
----------
(collectively, the "MICROTEK ASSETS"); and
WHEREAS, the terms of the Loan Documents restrict Xomed Surgical and New
Xomed from changing their respective names; and
<PAGE>
-2-
WHEREAS, the terms of the Loan Documents also restrict New Xomed from
selling any Collateral, including, without limitation, the Xomed Assets; and
WHEREAS, Borrowers have requested that the Banks and the Agent waive the
above referenced restrictions and release the Agent's security interest in and
lien on the Xomed Assets, all subject to the terms and conditions set forth
herein; and
WHEREAS, the Banks and the Agent are willing to (i) amend certain terms and
conditions of the Credit Agreement, (ii) waive such restriction on the change of
names of each of Xomed Surgical and New Xomed, (iii) waive such restrictions on
the sale of the Xomed Assets and (iv) release the Agent's security interest in
and lien on the Xomed Assets, all on the terms and conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
(S)1. DEFINITIONS. Capitalized terms used herein without definition
-----------
that are defined in the Credit Agreement shall have the same meanings herein as
therein.
(S)2. RATIFICATION OF EXISTING AGREEMENTS. All of the Borrowers'
-----------------------------------
obligations and liabilities to the Banks and the Agent as evidenced by or
otherwise arising under the Credit Agreement, the Notes and the other Loan
Documents, are, by each Borrower's execution of this Agreement, ratified and
confirmed in all respects. In addition, by each Borrower's execution of this
Agreement, each Borrower represents and warrants that no counterclaim, right of
set-off or defense of any kind exists or is outstanding with respect to such
obligations and liabilities.
(S)3. REPRESENTATIONS AND WARRANTIES. All of the representations and
------------------------------
warranties made by the Borrowers in the Credit Agreement, the Notes and the
other Loan Documents are true and correct on the date hereof as if made on and
as of the date hereof, except to the extent of changes resulting from
transactions contemplated or permitted by the Credit Agreement and the other
Loan Documents and changes occurring in the ordinary course of business that
singly or in the aggregate are not materially adverse, and to the extent that
any of such representations and warranties relate expressly to an earlier date.
(S)4. WAIVERS. Subject to the satisfaction of the conditions set forth
-------
below, the Banks and the Agent waive these Events of Default that occur under
Section 9.5 of the Credit Agreement as a result of the sale by New Xomed of the
Xomed Assets and under Section 4(c) of the Security Agreement as a result of the
change of names of each of Xomed Surgical and New Xomed; provided, that
--------
<PAGE>
-3-
the Agent shall release its security interest in and lien on the Xomed Assets
only upon the fulfillment by the Borrowers of all of the terms and conditions
contained herein and upon the Agent's receipt of a fully perfected first
priority security interest in and to the Microtek Assets. The waivers set forth
in this (S)4 shall be effective only for those Events of Default contained in
Section 9.5 of the Credit Agreement and Section 4(c) of the Security Agreement
as specified in the preceding sentence occurring on or before the date hereof
and such waiver shall not entitle the Borrowers to any future waiver in similar
or other circumstances. Without limiting the foregoing, upon the occurrence of
an Event of Default after the date hereof, or if an Event of Default has
occurred and is continuing on the date hereof that is not set forth herein, the
Agent, upon the request of the Majority Banks, shall be free in its sole and
absolute discretion to accelerate the payment in full of the Borrowers'
indebtedness to the Banks and the Agents under the Credit Agreement and the
other Loan Documents, and each Bank, with the consent of the Majority Banks, and
the Agent, upon the request of the Majority Banks, may proceed to enforce any or
all of such Bank's and the Agent's, as applicable, rights under or in respect of
the Credit Agreement, the Notes and the other Loan Documents and applicable law.
(S)5. AMENDMENTS TO THE CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS.
-----------------------------------------------------------
(a) References to Holdings. The parties hereto agree that all
----------------------
existing references in the Credit Agreement and the other Loan Documents to
"Holdings" or "Merocel/Xomed Holdings, Inc." shall hereinafter refer to "Xomed
Surgical" and "Xomed Surgical Products, Inc." respectively, and all existing
references in the Credit Agreement and the other Loan Documents to "Xomed" and
"Xomed-Treace, Inc." shall hereinafter refer to "New Xomed" and "Xomed, Inc."
respectively. All references to "Holdings," "Merocel/Xomed Holdings, Inc.,"
"Xomed" and "Xomed-Treace, Inc." in the Credit Agreement and Loan Documents
shall be read consistent with this Section 5(a).
(b) Preamble. The Preamble to the Credit Agreement is hereby
--------
amended in its entirety to read as follows:
"This CREDIT AGREEMENT is made as of the 15th day of April,
1994, by and among MEROCEL CORPORATION ("Merocel"), XOMED, INC
(formerly known as XOMED-TREACE, INC.) ("New Xomed"), XOMED-
TREACE, P.R. INC. ("Xomed P.R.") and XOMED SURGICAL PRODUCTS,
INC. (formerly known as Merocel/Xomed Holdings, Inc.) ("Xomed
Surgical" and, together with Merocel, New Xomed and Xomed P.R.,
the "Borrowers" and each, singularly, a "Borrower"), each a
Delaware corporation having its principal place of business at
950 Flanders Road, Mystic, Connecticut 06355, and BANK OF BOSTON
CONNECTICUT and the other lending institutions listed on Schedule
--------
1 attached hereto (collectively, the "Banks") and BANK OF BOSTON
-
<PAGE>
-4-
CONNECTICUT as agent for itself and the other Banks (in such capacity,
the "Agent")."
(c) Amendment to Schedule 2. The definition of "Security Documents"
------------------------
appearing on Page 14 of Schedule 2 of the Credit Agreement is hereby amended in
its entirety to read as follows:
"Security Documents. The Security Agreement, the Mortgages, the
-------------------
Collateral Assignment of Leases, Rentals and Property Income, the Patent
Assignments, as amended, the Trademark Assignments, as amended, the Merocel
Stock Pledge Agreement, the Stock Pledge Agreement, the Note Pledge
Agreement, the Subsidiary Guaranties and the Subsidiary Security
Agreements."
(d) Amendment to Schedule 2. The following new definition is hereby
------------------------
added to Schedule 2 of the Credit Agreement:
----------
"Note Pledge Agreement. The Note Pledge Agreement dated July 3, 1995,
----------------------
between New Xomed and the Agent, in form and substance satisfactory to the
Banks and Agent."
(e) Amendment to Schedule 9.3. The word "None" under the heading
--------------------------
"Xomed-Treace, Inc." on Schedule 9.3 of the Credit Agreement is hereby deleted
------------
and the following substituted therefor:
"Those certain Promissory Notes each executed and delivered by
Microtek Medical, Inc. in favor of Xomed, Inc. dated July 3, 1995 in the
amounts of $1,125,000, $100,000 and $100,000, respectively."
(S)6. AMENDMENTS TO THE SECURITY DOCUMENTS.
------------------------------------
(a) Amendment to Schedule 2 to the Security Agreement. At such
--------------------------------------------------
time as all of the terms and conditions of this Agreement are met, Schedule
--------
2 of the Security Agreement is hereby amended as described on Schedule 3
- ----------
attached hereto.
(b) Amendment to Schedule 4 to the Security Agreement.
--------------------------------------------------
Schedule 4 of the Security Agreement is hereby amended by adding those
----------
locations described on Schedule 4 attached hereto.
----------
(c) Amendment to Schedule A to the Xomed Patent Assignment. At such
-------------------------------------------------------
time as all of the terms and conditions of this Agreement are met, Schedule
--------
A of the Xomed Patent Assignment is hereby amended as described on Schedule
-
5 attached hereto.
----------
(d) Amendment to Schedule A to the Xomed Trademark Assignment.
----------------------------------------------------------
At such time as all of the terms and conditions of this Agreement
<PAGE>
-5-
are met, Schedule A as well as the Annex to Exhibit 1 of the Xomed Trademark
---------- ---------
Assignment are each hereby amended as described on Schedule 6 attached hereto.
----------
(S)7. CONDITIONS PRECEDENT. The effectiveness of the amendments and
--------------------
waiver contemplated hereby shall be subject to the satisfaction on or before the
date hereof of each of the following conditions precedent:
(a) Representations and Warranties. All of the representations and
------------------------------
warranties made by the Borrowers herein, whether directly or incorporated by
reference, shall be true and correct on the date hereof, except as provided in
(S)3 hereof.
(b) Delivery. The parties hereto shall have executed and delivered this
--------
Agreement in form and substance satisfactory to the Banks and the Agent.
(c) Fees and Expenses. The Borrowers shall have paid all fees and
-----------------
expenses incurred by the Banks and Agent in connection with this Agreement and
the other Loan Documents on or prior to the date hereof.
(d) Microtek Assets. New Xomed shall have taken title to the Microtek
---------------
Assets free and clear of any and all liens and security interests other than
those liens and security interests in favor of Chemical Bank.
(e) Xomed Asset Proceeds. New Xomed shall have paid $1,325,000 to the
--------------------
Agent, on behalf of the Banks, to be applied to the outstanding principal amount
of the Term Loan in accordance with the provisions of Section 4.3(d) of the
Credit Agreement.
(f) Note Pledge Agreement. New Xomed shall have executed and delivered the
---------------------
Note Pledge Agreement to the Agent and shall have delivered and properly
endorsed the original Pledged Notes (as defined in the Note Pledge Agreement) to
the Agent.
(S)8. ADDITIONAL COVENANTS. Without any prejudice or impairment
--------------------
whatsoever to any of the Banks' and/or Agent's rights and remedies contained in
the Credit Agreement and the covenants contained therein, the Notes or in any of
the other Loan Documents, the Borrowers additionally covenant and agree with the
Banks and Agent as follows:
(a) The Borrowers shall comply and continue to comply with all
of the terms, covenants and provisions contained in the Credit Agreement, the
Notes and the other Loan Documents, except as such terms, covenants and
provisions are expressly modified by this Agreement upon the terms set forth
herein.
<PAGE>
-6-
(b) On or before July 15, 1995, each of Xomed Surgical and New
Xomed shall execute and deliver all UCC-3 financing statements and all other
documents and agreements required by the Agent to continue to maintain the
Agent's properly perfected first priority security interest in and lien on the
Collateral.
(c) On or before July 31, 1995, New Xomed shall execute and
deliver, or cause to be executed and delivered, all documents and agreements
required by the Agent to enable the Agent, on behalf of the Banks, to acquire a
fully perfected first priority security interest in and lien on the Microtek
Assets free and clear of any and all liens and encumbrances whatsoever,
including, without limitation, those liens in favor of Chemical Bank.
Contemporaneously therewith, the Agent shall execute such documents and
agreements as required to release its lien on and security interest in the Xomed
Assets.
(d) The Borrowers shall at any time or from time to time execute
and deliver such further instruments, and take such further action as the Agent
and/or Banks may reasonably request, in each case further to effect the purposes
of this Agreement, the Credit Agreement, the Notes and the other Loan Documents.
Each of the Borrowers expressly acknowledges and agrees that
any failure by any Borrower to comply with the terms and conditions of this (S)8
or any other provisions contained in this Agreement shall constitute an Event of
Default under the Credit Agreement.
(S)9. EXPENSES. The Borrowers agree to pay to the Agent and the Banks
--------
upon demand (a) an amount equal to any and all out-of-pocket costs or expenses
(including reasonable legal fees and disbursements and appraisal expenses)
incurred or sustained by the Agent and/or Banks in connection with the
preparation of this Agreement and related matters and (b) from time to time any
and all out-of-pocket costs or expenses (including commercial examiner fees and
legal fees and disbursements) hereafter incurred or sustained by the Agent
and/or Banks in connection with the administration of credit extended by the
Banks and the Agent to the Borrowers or the preservation of or enforcement of
the Agent's and the Banks' rights under the Credit Agreement, the Notes or the
other Loan Documents or in respect of any of the Borrowers' other obligations to
the Banks and/or the Agent.
(S)10. NO WAIVER BY BANKS AND/OR AGENT. Except as otherwise expressly
-------------------------------
provided for herein, nothing in this Agreement shall extend to or affect in any
way any of the Borrowers' obligations or the Agent's or any Bank's rights and
remedies arising under the Credit Agreement, the Notes or the other Loan
Documents, and neither the Agent nor any Bank shall be deemed to have waived any
or all of the Agent's and/or such Bank's rights or remedies with respect to any
Event of Default (other than an Event of Default arising under the Credit
<PAGE>
-7-
Agreement as described in (S)4 hereof and then only to the extent set forth in
(S)4 hereof) or event or condition which, with notice or the lapse of time, or
both would become an Event of Default and which upon the Borrowers' execution
and delivery of this Agreement might otherwise exist or which might hereafter
occur.
(S)11. MISCELLANEOUS PROVISIONS.
------------------------
(a) Except as otherwise expressly provided by this Agreement,
all of the respective terms, conditions and provisions of the Credit Agreement,
the Notes and the other Loan Documents shall remain the same. It is declared and
agreed by each of the parties hereto that the Credit Agreement, the Notes and
the other Loan Documents, each as amended hereby, shall continue in full force
and effect, and that this Agreement and the Credit Agreement, the Notes and the
other Loan Documents, as applicable, shall be read and construed as one
instrument.
(b) This Agreement is intended to take effect under, and shall
be construed according to and governed by, the laws of the State of Connecticut.
(c) This Agreement may be executed in any number of
counterparts, but all such counterparts shall together constitute but one
instrument. In making proof of this Agreement it shall not be necessary to
produce or account for more than one counterpart signed by each party hereto by
and against which enforcement hereof is sought.
IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement
to be executed in its name and behalf by its duly authorized officer as of the
date first written above.
XOMED SURGICAL PRODUCTS, INC.
(formerly known as Merocel/Xomed
Holdings, Inc.)
/s/ Mark K. Adams
By:____________________________
Its President
MEROCEL CORPORATION
/s/ Mark K. Adams
By:____________________________
Its President
<PAGE>
-8-
XOMED, INC.
(formerly known as Xomed-Treace, Inc.
/s/ Mark K. Adams
By:____________________________
Its President
XOMED-TREACE, P.R. INC.
/s/ Mark K. Adams
By:____________________________
Its President
BANK OF BOSTON CONNECTICUT,
Individually and as Agent
/s/ Garth J. Collins
By:____________________________
Garth J. Collins
Its Vice President
CHEMICAL BANK
/s/ Elizabeth Bhuchalski
By:____________________________
Its Vice President
BANK OF SCOTLAND
/s/ Elizabeth Wilson
By:____________________________
Its Vice President and
Branch Manager
<PAGE>
-9-
INTERNATIONALE NEDERLANDEN
(U.S.) CAPITAL CORPORATION
/s/ Authorized Signatory
By:____________________________
Its
The undersigned Guarantor
acknowledges and accepts the
foregoing and ratifies and confirms
its obligations under its
Unlimited Guaranty:
MEROCEL FOREIGN SALES
CORP.
/s/ Mark K. Adams
By:_________________
Its President
<PAGE>
EXHIBIT 10.6
AMENDMENT AND WAIVER AGREEMENT
------------------------------
AMENDMENT AND WAIVER AGREEMENT (this "AGREEMENT") dated as of March 31,
1995 by and among (1) Merocel/Xomed Holdings, Inc. ("HOLDINGS"), (2) Merocel
Corporation ("MEROCEL"), (3) Xomed-Treace, Inc. ("XOMED"), (4) Xomed-Treace,
P.R. Inc. ("XOMED P.R." and, together with Holdings, Merocel and Xomed,
collectively, the "BORROWERS" and each, singularly, a "BORROWER"), (5) Bank of
Boston Connecticut ("BKBCT"), Chemical Bank, Bank of Scotland and Internationale
Nederlanden (U.S.) Capital Corporation as banks (collectively, the "BANKS" and
individually, a "BANK"), and (6) BKBCT as agent (the "AGENT") for the Banks,
with respect to a certain Credit Agreement dated as of April 15, 1994 by and
among the Borrower, the Banks and the Agent, as amended by a certain First
Amendment Agreement dated as of June 24, 1994 (collectively, the "CREDIT
AGREEMENT").
W I T N E S S E T H:
WHEREAS, pursuant to the terms of the Credit Agreement, the Banks made
loans to the Borrowers; and
WHEREAS, the Borrower has requested that the Banks and the Agent waive
certain Events of Default which exist under the Credit Agreement and amend
certain terms and conditions of the Credit Agreement; and
WHEREAS, the Banks and the Agent are willing to waive such Events of
Default and amend certain terms and conditions of the Credit Agreement on the
terms and conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
(S)1. DEFINITIONS. Capitalized terms used herein without definition
-----------
that are defined in the Credit Agreement shall have the same meanings herein as
therein.
(S)2. RATIFICATION OF EXISTING AGREEMENTS. All of the Borrowers'
-----------------------------------
obligations and liabilities to the Banks and the Agent as evidenced by or
otherwise arising under the Credit Agreement, the Notes and the other Loan
Documents, are, by each Borrower's execution of this Agreement, ratified and
confirmed in all respects. In addition, by each Borrower's execution of this
Agreement, each Borrower represents and warrants that no counterclaim, right
<PAGE>
-2-
of set-off or defense of any kind exists or is outstanding with respect to such
obligations and liabilities.
(S)3. REPRESENTATIONS AND WARRANTIES. All of the representations and
------------------------------
warranties made by the Borrowers in the Credit Agreement, the Notes and the
other Loan Documents are true and correct on the date hereof as if made on and
as of the date hereof, except to the extent of changes resulting from
transactions contemplated or permitted by the Credit Agreement and the other
Loan Documents and changes occurring in the ordinary course of business that
singly or in the aggregate are not materially adverse, and to the extent that
any of such representations and warranties relate expressly to an earlier date.
(S)4. WAIVERS. Subject to the satisfaction of the conditions set forth
-------
below, the Banks and the Agent waive those Events of Default that have occurred
under the Credit Agreement as a result of the Borrowers' failure on or before
the date hereof to comply with those sections of the Credit Agreement set forth
on Schedule 1 attached hereto. The waiver set forth in this (S)4 shall be
-------- -
effective only for those Events of Default contained in the Credit Agreement as
specified in the preceding sentence occurring on or before the date hereof and
such waiver shall not entitle the Borrowers to any future waiver in similar or
other circumstances. Without limiting the foregoing, upon the occurrence of an
Event of Default after the date hereof, or if an Event of Default has occurred
and is continuing on the date hereof that is not set forth on Schedule 1, the
----------
Agent, upon the request of the Majority Banks, shall be free in its sole and
absolute discretion to accelerate the payment in full of the Borrowers'
indebtedness to the Banks and the Agents under the Credit Agreement and the
other Loan Documents, and each Bank, with the consent of the Majority Banks, and
the Agent, upon the request of the Majority Banks, may proceed to enforce any or
all of such Bank's and the Agent's, as applicable, rights under or in respect of
the Credit Agreement, the Notes and the other Loan Documents and applicable law.
(S)5. AMENDMENTS TO THE CREDIT AGREEMENT.
----------------------------------
(a) Amendment to (S)10.3. Section 10.3 of the Credit Agreement
---------------------
is hereby amended in its entirety to read as follows:
"Consolidated Shareholders Equity. Holdings will not permit the
---------------------------------
Consolidated Shareholders Equity of Holdings and its Subsidiaries for any
fiscal quarter ending after the Closing Date to be less than $46,000,000
plus on a cumulative basis, fifty percent (50%) of positive Consolidated
----
Net Income of Holdings and its Subsidiaries for each fiscal year of
Holdings beginning with the fiscal year ending December 31, 1994."
<PAGE>
-3-
(b) Amendment to Schedule 2. The definition of "Earnings Before Interest
-----------------------
and Taxes" appearing on Page 6 of Schedule 2 of the Credit Agreement is hereby
amended by adding the following to the end of such definition:
"provided, that no Section 338 Event or any amortization expense
--------
shall be included when calculating Earnings Before Interest and Taxes
hereunder."
(S)6. ADDITIONAL COVENANTS. Without any prejudice or impairment
--------------------
whatsoever to any of the Banks' and/or Agent's rights and remedies contained in
the Credit Agreement and the covenants contained therein, the Notes or in any of
the other Loan Documents, the Borrowers additionally covenant and agree with the
Banks and Agent as follows:
(a) The Borrowers shall comply and continue to comply with all
of the terms, covenants and provisions contained in the Credit Agreement, the
Notes and the other Loan Documents, except as such terms, covenants and
provisions are expressly modified by this Agreement upon the terms set forth
herein.
(b) On or before May 12, 1995, Holdings will provide to the
Banks and the Agent all of the financial information required under Section
8.4(a) of the Credit Agreement for the fiscal year ending December 31, 1994 and
will provide to the Banks and the Agent such other financial information as the
Banks and/or Agent may reasonably request from time to time and at the
Borrowers' expense, shall permit the Banks and/or Agent to enter upon and
inspect the Borrowers' books and records, to make extracts therefrom and to
discuss the Borrowers' affairs with the Borrowers' employees, officers,
directors and the holders of any Subordinated Debt.
(c) The Borrowers shall at any time or from time to time execute
and deliver such further instruments, and take such further action as the Agent
and/or Banks may reasonably request, in each case further to effect the purposes
of this Agreement, the Credit Agreement, the Notes and the other Loan Documents.
Each of the Borrowers expressly acknowledges and agrees that
any failure by any Borrower to comply with the terms and conditions of this (S)6
or any other provisions contained in this Agreement shall constitute an Event of
Default under the Credit Agreement.
(S)7. RELEASE OF PATENT LIEN. The Agent, on behalf of and with the
----------------------
consent of each of the Banks, hereby releases its lien on that certain patent
named "AUDIANT Bone Conductor" licensed by Xomed.
<PAGE>
-4-
(S)8. EXPENSES. The Borrowers agree to pay to the Agent and the Banks
--------
upon demand (a) an amount equal to any and all out-of-pocket costs or expenses
(including reasonable legal fees and disbursements and appraisal expenses)
incurred or sustained by the Agent and/or Banks in connection with the
preparation of this Agreement and related matters and (b) from time to time any
and all out-of-pocket costs or expenses (including commercial examiner fees and
legal fees and disbursements) hereafter incurred or sustained by the Agent
and/or Banks in connection with the administration of credit extended by the
Banks and the Agent to the Borrowers or the preservation of or enforcement of
the Agent's and the Banks' rights under the Credit Agreement, the Notes or the
other Loan Documents or in respect of any of the Borrowers' other obligations to
the Banks and/or the Agent.
(S)9. NO WAIVER BY BANKS AND/OR AGENT. Except as otherwise expressly
-------------------------------
provided for herein, nothing in this Agreement shall extend to or affect in any
way any of the Borrowers' obligations or the Agent's or any Bank's rights and
remedies arising under the Credit Agreement, the Notes or the other Loan
Documents, and neither the Agent nor any Bank shall be deemed to have waived any
or all of the Agent's and/or such Bank's rights or remedies with respect to any
Event of Default (other than an Event of Default arising under the Credit
Agreement as a result of the Borrowers' failure to comply with those sections of
the Credit Agreement set forth on Schedule 1 attached hereto and then only to
-------- -
the extent set forth in (S)4 hereof) or event or condition which, with notice or
the lapse of time, or both would become an Event of Default and which upon the
Borrowers' execution and delivery of this Agreement might otherwise exist or
which might hereafter occur.
(S)10. MISCELLANEOUS PROVISIONS.
------------------------
(a) Except as otherwise expressly provided by this Agreement,
all of the respective terms, conditions and provisions of the Credit Agreement,
the Notes and the other Loan Documents shall remain the same. It is declared and
agreed by each of the parties hereto that the Credit Agreement, the Notes and
the other Loan Documents, each as amended hereby, shall continue in full force
and effect, and that this Agreement and the Credit Agreement, the Notes and the
other Loan Documents, as applicable, shall be read and construed as one
instrument.
(b) This Agreement is intended to take effect under, and shall
be construed according to and governed by, the laws of the State of Connecticut.
(c) This Agreement may be executed in any number of
counterparts, but all such counterparts shall together constitute but one
instrument. In making proof of this Agreement it shall not be necessary to
<PAGE>
-5-
produce or account for more than one counterpart signed by each party hereto by
and against which enforcement hereof is sought.
IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement
to be executed in its name and behalf by its duly authorized officer as of the
date first written above.
MEROCEL/XOMED HOLDINGS, INC.
/s/ Mark K. Adams
By:____________________________
Mark K. Adams
Its President
MEROCEL CORPORATION
/s/ Mark K. Adams
By:____________________________
Mark K. Adams
Its President
XOMED-TREACE, INC.
/s/ Mark K. Adams
By:____________________________
Mark K. Adams
Its President
XOMED-TREACE, P.R. INC.
/s/ Mark K. Adams
By:____________________________
Mark K. Adams
Its President
<PAGE>
-6-
BANK OF BOSTON CONNECTICUT,
Individually and as Agent
By: /s/ Garth J. Collins
----------------------------
Garth J. Collins
Its Vice President
CHEMICAL BANK
By: /s/ Authorized Signatory
----------------------------
Its
BANK OF SCOTLAND
By: /s/ Authorized Signatory
----------------------------
Its
INTERNATIONALE NEDERLANDEN
(U.S.) CAPITAL CORPORATION
By: /s/ Authorized Signatory
----------------------------
Its
<PAGE>
EXHIBIT 10.7
FIRST AMENDMENT AGREEMENT
-------------------------
FIRST AMENDMENT AGREEMENT (this "Agreement") dated as of June 24, 1994 by
and among (1) Merocel/Xomed Holdings, Inc. ("Holdings"), (2) Merocel Corporation
("Merocel"), (3) Xomed-Treace, Inc. ("Xomed"), (4) Xomed-Treace, P.R. Inc.
("Xomed P.R."), (5) Bank of Boston Connecticut ("BKBCT"), Chemical Bank, Bank of
Scotland and Internationale Nederlanden (U.S.) Capital Corporation as banks
(collectively, the "Banks" and individually, a "Bank"), and (6) BKBCT as agent
(the "Agent") for the Banks, with respect to a certain Credit Agreement dated as
of April 15, 1994 (the "Credit Agreement") by and among the Borrower, the Banks
and the Agent.
W I T N E S S E T H:
WHEREAS, the Borrowers have requested that the Banks and the Agent amend
certain provisions of the Credit Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. Definitions. Capitalized terms used herein without definition
-----------
that are defined in the Credit Agreement shall have the same meanings herein as
therein.
SECTION 2. Ratification of Existing Agreements. All of the Borrowers'
------------ -- -------- ----------
obligations and liabilities to the Banks and the Agent as evidenced by or
otherwise arising under the Credit Agreement, the Notes and the other Loan
Documents, are, by each Borrower's execution of this Agreement, ratified and
confirmed in all respects. In addition, by each Borrower's execution of this
Agreement, each Borrower represents and warrants that no counterclaim, right of
set-off or defense of any kind exists or is outstanding with respect to such
obligations and liabilities.
SECTION 3. Representations and Warranties. All of the representations and
--------------- --- ----------
warranties made by the Borrowers in the Credit Agreement, the Notes and the
other Loan Documents are true and correct on the date hereof as if made on and
as of the date hereof, except to the extent of changes resulting from
transactions contemplated or permitted by the Credit Agreement and the other
Loan Documents and changes occurring in the ordinary course of business that
singly or in the aggregate are not materially adverse, and to the extent that
any of such representations and warranties relate expressly to an earlier date.
SECTION 4. Amendments to the Credit Agreement.
---------- -- --- ------ ---------
(a) Amendment to Schedule 1. Schedule 1 of the Credit Agreement is hereby
-----------------------
amended as of the date hereof to read as follows:
<PAGE>
-2-
"Schedule 1
----------
Lending Institutions
COMMITMENT
----------
BANKS COMMITMENT PERCENTAGE
----- ---------- ----------
Bank of Boston Connecticut $6,553,191.48 46.8085%
81 West Main Street
Waterbury, Connecticut
Chemical Bank $3,574,468.10 25.5319%
277 Park Avenue
New York, New York 10172
Bank of Scotland $1,936,170.21 13.8298%
565 Fifth Avenue
New York, New York 10017
Internationale $1,936,170.21 13.8298%
Nederlanden (U.S.)
Capital Corporation
200 Galleria Parkway N.W.
Suite 950
Atlanta, GA 30339
(b) Amendment to Section l9.1(c). Section l9.1(c) on page 60 of the Credit
----------------------------
Agreement is hereby amended in its entirety to read as follows:
"(c) each assignment shall be in an amount that is not less than $5,000,000
unless such assigning Bank is assigning its entire Commitment and its entire
Term Loan,"
SECTION 5. Conditions Precedent. The effectiveness of the amendments and
---------- ---------
waivers contemplated hereby shall be subject to the satisfaction on or before
the date hereof of each of the following conditions precedent:
(a) All of the representations and warranties made by the Borrowers herein,
whether directly or incorporated by reference, shall be true and correct on the
date hereof, except as provided in SECTION 3 hereof.
(b) The Agent shall have received evidence satisfactory to
the Agent that no Default or Event of Default shall have occurred
and be continuing.
SECTION 6. Miscellaneous Provisions.
------------- ----------
(a) Except as otherwise expressly provided by this Agreement, all of the
respective terms, conditions and provisions of the Credit Agreement, the Notes
and the other Loan Documents shall remain the same. It is declared and agreed by
each of the parties hereto that the Credit Agreement, the Notes and the other
<PAGE>
-3-
Loan Documents, each as amended hereby, shall continue in full force and effect,
and that this Agreement and the Credit Agreement, the Notes and the other Loan
Documents, as applicable, shall be read and construed as one instrument.
(b) This Agreement is intended to take effect under, and shall be construed
according to and governed by, the laws of the State of Connecticut.
(c) This Agreement may be executed in any number of counterparts, but all
such counterparts shall together constitute but one instrument. In making proof
of this Agreement it shall not be necessary to produce or account for more than
one counterpart signed by each party hereto by and against which enforcement
hereof is sought.
IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement
to be executed in its name and behalf by its duly authorized officer as of the
date first written above.
MEROCEL/XOMED HOLDINGS, INC.
By: /s/ Mark K. Adams
----------------------------
Mark K. Adams
Its President
MEROCEL CORPORATION
By: /s/ Mark K. Adams
----------------------------
Mark K. Adams
Its President
XOMED-TREACE, INC.
By: /s/ Mark K. Adams
----------------------------
Mark K. Adams
Its President
XOMED-TREACE, P.R. INC.
By: /s/ Mark K. Adams
----------------------------
Mark K. Adams
Its President
(Signatures continued on next page)
<PAGE>
-4-
BANK OF BOSTON CONNECTICUT,
Individually and as Agent
By: /s/ Garth J. Collins
----------------------------
Garth J. Collins
Its Assistant Vice President
CHEMICAL BANK
By:
----------------------------
Its
BANK OF SCOTLAND
By:
----------------------------
Its
INTERNATIONALE NEDERLANDEN
(U.S.) CAPITAL CORPORATION
By:
----------------------------
Its
<PAGE>
-5-
BANK OF BOSTON CONNECTICUT,
Individually and as Agent
By:
----------------------------
Garth J. Collins
Its Assistant Vice President
CHEMICAL BANK
By: /s/ Elizabeth L. Buttenworth
----------------------------
Elizabeth L. Buttenworth
Its Vice President
BANK OF SCOTLAND
By:
----------------------------
Its
INTERNATIONALE NEDERLANDEN
(U.S.) CAPITAL CORPORATION
By:
----------------------------
Its
<PAGE>
-6-
BANK OF BOSTON CONNECTICUT,
Individually and as Agent
By:
----------------------------
Garth J. Collins
Its Assistant Vice President
CHEMICAL BANK
By:
----------------------------
Its
BANK OF SCOTLAND
By: /s/ Catherine M. Oniffrey
----------------------------
Catherine M. Oniffrey
Its Vice President
INTERNATIONALE NEDERLANDEN
(U.S.) CAPITAL CORPORATION
By:
----------------------------
Its
<PAGE>
-7-
BANK OF BOSTON CONNECTICUT,
Individually and as Agent
By:
----------------------------
Garth J. Collins
Its Assistant Vice President
CHEMICAL BANK
By:
----------------------------
Its
BANK OF SCOTLAND
By:
----------------------------
Its
INTERNATIONALE NEDERLANDEN
(U.S.) CAPITAL CORPORATION
By: /s/ James W. Latimer
----------------------------
James W. Latimer
Its Managing Director
<PAGE>
EXHIBIT 10.8
SECOND AMENDED AND RESTATED
XOMED SURGICAL PRODUCTS, INC.
1996 STOCK OPTION PLAN
* * *
ARTICLE I
Purpose
-------
This 1996 Stock Option Plan (the "Plan") is intended as an incentive
and to encourage stock ownership by officers and certain other key employees of
Xomed Surgical Products, Inc. (the "Company") and its subsidiaries in order to
increase their proprietary interest in the Company's success and to encourage
them to remain in the employ of the Company.
The word "Company", when used in the Plan with reference to
employment, shall include subsidiaries of the Company. The word "subsidiary",
when used in the Plan, shall mean any subsidiary of the Company within the
meaning of Section 424(f) of the Internal Revenue Code of 1986, as amended (the
"Code").
It is intended that certain options granted under this Plan will
qualify as "incentive stock options" under Section 422 of the Code.
ARTICLE II
Administration
--------------
The Plan shall be administered by a Stock Option Committee (the
"Committee") appointed by the Board of Directors of the Company (the "Board").
Subject to the provisions of the Plan, the Committee shall have sole authority,
in its absolute discretion: (a) to determine which of the eligible employees of
the Company and its subsidiaries shall be granted options; (b) to authorize the
granting of both incentive stock options and non-qualified options; (c) to
determine the times when options shall be granted and the number of shares to be
optioned; (d) to determine the option price of the shares subject to each
option, which price shall be not less than the minimum specified in ARTICLE V;
(e) to determine the time or times when each option becomes exercisable, the
duration of the exercise period and any other restrictions on the exercise of
options issued hereunder; (f) to prescribe the form or forms of the option
agreements under the Plan (which forms shall be consistent with the terms of
the
<PAGE>
Plan but need not be identical); (g) to adopt, amend and rescind such rules
and regulations as, in its opinion, may be advisable in the administration of
the Plan; and (h) to construe and interpret the Plan, the rules and regulations
and the option agreements under the Plan and to make all other determinations
deemed necessary or advisable for the administration of the Plan. All
decisions, determinations and interpretations of the Committee shall be final
and binding on all optionees.
ARTICLE III
Stock
-----
The stock to be optioned under the Plan shall be shares of authorized
but unissued Class A Common Stock of the Company, $.01 par value, or previously
issued shares of Class A Common Stock reacquired by the Company (the "Stock").
Under the Plan, the total number of shares of Stock which may be purchased
pursuant to options granted hereunder shall not exceed, in the aggregate,
778,000 shares, except as such number of shares shall be adjusted in accordance
with the provisions of ARTICLE X hereof.
The number of shares of Stock available for grant of options under the
Plan shall be decreased by the sum of the number of shares with respect to which
options have been issued and are then outstanding and the number of shares
issued upon exercise of options. In the event that any outstanding option under
the Plan for any reason expires, is terminated, or is cancelled prior to the end
of the period during which options may be granted, the shares of Stock called
for by the unexercised portion of such option may again be subject to an option
under the Plan.
ARTICLE IV
Eligibility of Participants
---------------------------
Subject to ARTICLE VII, officers and other key employees of the
Company or of its subsidiaries (excluding any person who is a member of the
Committee) shall be eligible to receive options under the Plan. In addition,
options which are not incentive stock options may be granted to directors,
consultants, or other key persons who the Committee determines shall receive
options under the Plan.
2
<PAGE>
ARTICLE V
Option Price
------------
In the case of each incentive stock option granted under the Plan, the
option price shall be not less than the fair market value of the Stock at the
time the incentive stock option was granted. In the case of options other than
incentive stock options, the option price shall not be less than 50% of the fair
market value of the stock at the time the option was granted. The fair market
value shall be deemed for all purposes of the Plan to be the mean between the
highest and lowest sale prices reported as having occurred on any Exchange with
which the Company's Common Stock may be listed and traded on the date the option
is granted, or, if there is no such sale on that date, then on the last
preceding date on which such a sale was reported. If the Company's Common Stock
is not listed on any Exchange but the Common Stock is quoted in the National
Market System of the National Association of Securities Dealers Automated
Quotation System on a last sale basis then the fair market value of the Stock
shall be deemed to be the mean between the high and low price reported on the
date the option is granted, or, if there is no such sale on that date, then on
the last preceding date on which a sale was reported. If the Common Stock is
not quoted in the National Market System of the National Association of
Securities Dealers Automated Quotation System on a last sale basis, then the
fair market value of the Stock shall mean the amount determined by the Board to
be the fair market value based upon a good faith attempt to value the Stock
accurately and computed in accordance with applicable regulations of the
Internal Revenue Service. In no event shall the option price be less than the
par value per share of Stock on the date an option is granted.
ARTICLE VI
Exercise and Terms of Options
-----------------------------
The Committee shall determine the dates after which options may be
exercised, in whole or in part. If an option is exercisable in installments,
installments or portions thereof which are exercisable and not exercised shall
remain exercisable.
Any other provision of the Plan to the contrary notwithstanding and
subject to ARTICLE VII, no option shall be exercised after the date ten years
from the date of grant of such option (the "Termination Date").
3
<PAGE>
Except as otherwise provided by the Committee at the time an option is
granted or by any amendment to an outstanding option:
(i) If prior to the Termination Date, an optionee shall cease to be
employed by the Company or any subsidiary thereof by reason of a disability
within the meaning of Section 105(d)(4) of the Code, the option may remain
exercisable for a period not extending beyond one year after the date of
cessation of employment to the extent it was exercisable at the time of
cessation of employment.
(ii) In the event of the death of an optionee prior to the
Termination Date and while employed by the Company or a subsidiary thereof or
while entitled to exercise an option pursuant to the preceding paragraph, the
optionee's options may remain exercisable at any time prior to the Termination
Date but in no event later than one year from the date of death, by the person
or person to whom the optionee's rights under the option pass by will or the
applicable laws of descent and distribution to the extent that the optionee was
entitled to exercise it on the date of death.
(iii) If an optionee voluntarily terminates employment with the
Company for reasons other than death, disability, or retirement on or after the
normal retirement age set forth in the Company's policies (a "Voluntary
Termination"), or if an optionee's employment with the Company is terminated for
Cause, as hereinafter defined, unless otherwise provided by the Committee, all
options previously granted to such optionee which have not been exercised prior
to such termination shall lapse and be cancelled. If at the time of a Voluntary
Termination the Company was entitled to terminate the optionee's employment for
Cause, as hereinafter defined, all shares of Stock received pursuant to options
exercised after the Company was so entitled shall be purchased by the Company
for the exercise price of such shares paid by the optionee. If the Company
terminates an optionee's employment without Cause, as hereinafter defined,
unless otherwise provided by the Committee, all options previously granted to
such optionee which were exercisable immediately prior to such termination shall
continue to be exercisable for period not extending beyond three months after
the date of such termination.
For purposes of the Plan, the Company shall have "Cause" to terminate
an optionee's employment if the Company has cause to terminate the optionee's
employment under any existing employment agreement between the optionee and the
Company or, in the absence of an employment agreement between the optionee and
the Company, upon (A) the determination by the Board that the
4
<PAGE>
optionee has ceased to perform his duties to the Company (other than as a result
of his incapacity due to physical or mental illness or injury), which failure
amounts to an intentional and extended neglect of his duties to the Company, (B)
the Board's determination that the optionee has engaged or is about to engage in
conduct materially injurious to the Company, or (C) the optionee having been
convicted of a felony.
ARTICLE VII
Special Provisions Applicable to
Incentive Stock Options Only
----------------------------
The aggregate fair market value (determined as of the time the option
is granted) of the Stock with respect to which any incentive stock options may
be exercisable for the first time by the optionee in any calendar year (under
this Plan or any other stock option plan of the Company or any parent or
subsidiary thereof) shall not exceed $100,000. To the extent that such
aggregate fair market value exceeds $100,000 such options or portions thereof
shall be non-qualified stock options.
No incentive stock option may be granted to an individual who, at the
time the option is granted, owns directly, or indirectly within the meaning of
Section 424(d) of the Code, stock possessing more than 10 percent of the total
combined voting power of all classes of stock of the Company or of any parent or
subsidiary thereof, unless such option (i) has an option price of at least 110
percent of the fair market value of the Stock on the date of the grant of such
option; and (ii) such option cannot be exercised more than five years after the
date it is granted.
ARTICLE VIII
Payment for Shares
------------------
Payment for shares of Stock purchased under an option granted
hereunder shall be made in full upon exercise of the option, by certified or
bank cashier's check payable to the order of the Company, by the surrender or
delivery to the Company of shares of its Common Stock or by any other means
acceptable to the Company and designated by the Committee. The Stock purchased
shall thereupon be promptly delivered; provided, however, that the Company may,
in its discretion, require that an optionee pay to the Company, at the time of
exercise, such amount as the Company deems necessary to satisfy its obligation
to withhold
5
<PAGE>
Federal, state or local income or other taxes incurred by reason of the exercise
or the transfer of shares thereupon.
ARTICLE IX
Non-Transferability of Option Rights
------------------------------------
No option shall be transferable except by will or the laws of descent
and distribution. During the lifetime of the optionee, the option shall be
exercisable only by him.
ARTICLE X
Adjustment for Recapitalization, Merger, Etc.
---------------------------------------------
The aggregate number of shares of Stock which may be issued pursuant
to options granted hereunder, the number of shares of Stock covered by each
outstanding option and the price per share thereof in each such option shall be
appropriately adjusted for any increase or decrease in the number of outstanding
shares of stock resulting from a stock split or other subdivision or
consolidation of shares of Stock or for other capital adjustments or payments of
stock dividends or distributions or other increases or decreases in the
outstanding shares of Stock without receipt of consideration by the Company.
In the event of any change in the outstanding shares of Stock by
reason of any recapitalization, merger, consolidation, spin-off, combination or
exchange of shares or other corporate change, or any distributions to common
shareholders other than cash dividends, the Committee shall make such
substitution or adjustment, if any, as it deems to be equitable, as to the
number or kind of shares of Stock or other securities issued or reserved for
issuance pursuant to the Plan, and the number or kind of shares of Stock or
other securities covered by outstanding options, and the option price thereof.
In instances where another corporation or other business entity is being
acquired by the Company, and the Company has assumed outstanding employee option
grants and/or the obligation to make future or potential grants under a prior
existing plan of the acquired entity, similar adjustments are permitted at the
discretion of the Committee. The Committee shall notify optionees of any
intended sale of all or substantially all of the Company's assets within a
reasonable time prior to such sale.
The foregoing adjustments and the manner of application of the
foregoing provisions shall be determined by the Committee in its sole
discretion. Any such adjustment may provide for the
6
<PAGE>
elimination of any fractional share which might otherwise become subject to an
option.
ARTICLE XI
No Obligation to Exercise Option
--------------------------------
Granting of an option shall impose no obligation on the recipient to
exercise such option.
ARTICLE XII
Use of Proceeds
---------------
The proceeds received from the sale of Stock pursuant to the Plan
shall be used for general corporate purposes.
ARTICLE XIII
Rights as a Stockholder
-----------------------
An optionee or a transferee of an option shall have no rights as a
stockholder with respect to any share covered by his option until he shall have
become the holder of record of such share, and he shall not be entitled to any
dividends or distributions or other rights in respect of such share for which
the record date is prior to the date on which he shall have become the holder of
record thereof.
ARTICLE XIV
Employment Rights
-----------------
Nothing in the Plan or in any option granted hereunder shall confer on
any optionee any right to continue in the employ of the Company or any of its
subsidiaries, or to interfere in any way with the right of the Company or any of
its subsidiaries to terminate the optionee's employment at any time.
ARTICLE XV
Compliance with the Law
-----------------------
The Company is relieved from any liability for the non-issuance or
non-transfer or any delay in issuance or transfer
7
<PAGE>
of any shares of Stock subject to options under the Plan which results from the
inability of the Company to obtain or in any delay in obtaining from any
regulatory body having jurisdiction all requisite authority to issue or transfer
shares of Stock of the Company either upon exercise of the options under the
Plan or shares of Stock issued as a result of such exercise if counsel for the
Company deems such authority necessary for lawful issuance or transfer of any
such shares. Appropriate legends may be placed on the stock certificates
evidencing shares issued upon exercise of options to reflect such transfer
restrictions.
ARTICLE XVI
Cancellation of Options
-----------------------
The Committee, in its discretion, may, with the consent of any
optionee, cancel any outstanding option hereunder.
ARTICLE XVII
Expiration Date of Plan
-----------------------
No option shall be granted hereunder after April 15, 2004.
ARTICLE XVIII
Amendment or Discontinuance of Plan
-----------------------------------
The Board may, without the consent of the Company's stockholders or
optionees under the Plan, at any time terminate the Plan entirely and at any
time or from time to time amend or modify the Plan, provided that no such action
shall adversely affect options theretofore granted hereunder without the
optionee's consent, and provided further that no such action by the Board,
without approval of the stockholders, may (a) increase the total number of
shares of Stock which may be purchased pursuant to options granted under the
Plan, except as contemplated in ARTICLE X or (b) decrease the minimum option
price.
8
<PAGE>
EXHIBIT 10.9
EXECUTION COPY
--------------
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated as of April 16, 1996, is made between Xomed
Surgical Products, Inc., a Delaware corporation (the "Company"), and James T.
Treace (the "Employee").
1. Employment. The Company hereby employs the Employee and the
----------
Employee hereby accepts employment all upon the terms and conditions herein set
forth.
2. Duties. The Employee is engaged as the Chairman of the Board of
------
Directors and Chief Executive Officer of the Company and hereby promises to
perform and discharge well and faithfully the duties which may be assigned to
him from time to time by the Company in connection with the conduct of their
businesses.
3. Extent of Services. The Employee shall devote his entire time,
------------------
attention and energies to the business of the Company and shall not, during the
term of this Agreement, be engaged in any other business activity, regardless of
whether such business activity is pursued for gain, profit or other pecuniary
advantage; but this shall not be construed as preventing the Employee from
investing his personal assets in businesses which do not compete with the
Company in such form or manner as will not require any services on the part of
the Employee in the operation of the affairs of the companies in which such
investments are made and in which his participation is solely that of an
investor, and except that the Employee may purchase securities in any
corporation whose securities are regularly traded provided that such purchase
shall not result in his collectively owning beneficially at any time one percent
(1%) or more of the equity securities of any corporation engaged in a business
competitive to that of the Company.
4. Compensation.
------------
(a) For services rendered under this Agreement, the Company shall pay
the Employee an aggregate salary of $230,000 per annum (the "Base Salary"),
payable (after deduction of applicable payroll taxes) in equal semi-monthly
installments on the 15th and last day of each month or on the preceding business
day if such day is a Saturday, Sunday or holiday.
(b) In addition to salary payments under paragraph 4(a) above, the
Employee shall be eligible for and participate in
<PAGE>
the Key Executive Bonus Program adopted by the Company, which program will
provide for a bonus in an amount up to and at the 50% level of an employee's
salary upon attainment of the bonus criteria. The Employee shall also be
eligible for and participate in such fringe benefits as shall be generally
provided to executives of the Company, including medical insurance and
retirement programs which may be adopted from time to time during the term
hereof by the Company. The Employee shall be responsible for making any
generally applicable employee contributions required under such fringe benefit
programs.
(c) Simultaneously with the execution of this Agreement, in
consideration of his entering into this Agreement, the Company will grant the
Employee 73,000 stock options under the Company Stock Option Plan, at an option
price per share equal to $9.58, such options to vest in equal installments on
each of the first four anniversaries of the date hereof.
(d) During the term of this Agreement, the Employee shall be eligible
for participation in the Company's 1994 Stock Option Plan, which plan is
administered by the Company's Compensation Committee. Target bonuses shall be
set at, in the aggregate, not less than 100,000 stock options for the Employee
during the term of this Agreement. Corporate performance objectives shall be
established by the Compensation Committee, with the input of the Employee, on a
basis consistent with the Company's past practice and the general practices of
similar businesses, and the criteria used in measuring the degree of attainment
of such objectives shall be consistent with past practice and the general
practices of similar businesses.
(e) The Compensation Committee of the Company shall review the
Employee's compensation at least once per year and award such bonuses or make
such increases to the Base Salary as the Compensation Committee, in its sole
discretion, determines are merited, based upon the Employee's performance and
consistent with compensation policies of the Company.
5. Sick Leave and Vacation. During the term of this Agreement, the
-----------------------
Employee shall be entitled to annual vacation of at least three (3) weeks in
length each year, or such greater time period if permitted by Company policy.
The Employee shall also be entitled to sick leave consistent with Company
policy.
6. Expenses. During the term of this Agreement, the Company shall
--------
reimburse the Employee for all reasonable out-of-pocket expenses incurred by the
Employee in connection with the business of the Company and in performance of
his duties
-2-
<PAGE>
under this Agreement upon the Employee's presentation to the Company of an
itemized accounting of such expenses with reasonable supporting data.
7. Term.
----
(a) The Employee's employment under this Agreement shall commence on
the date first set forth above and shall expire on the third anniversary of such
date. Notwithstanding the foregoing, the Company may at its election, subject
to paragraph 7(b) below, terminate the obligations of the Company under this
Agreement as follows:
(i) Upon 30 days' notice if the Employee becomes physically or
mentally incapacitated or is injured so that he is unable to perform the
services required of him hereunder and such inability to perform continues for a
period in excess of six months and is continuing at the time of such notice; or
(ii) For "Cause" upon notice of such termination to the Employee.
For purposes of this Agreement, the Company shall have "Cause" to terminate its
obligations hereunder upon (A) the determination by the Board of Directors of
the Company (the "Board") that the Employee has ceased to perform his duties
hereunder (other than as a result of his incapacity due to physical or mental
illness or injury), which failure amounts to an intentional and extended neglect
of his duties hereunder, (B) the Employee's death, (C) the Board's determination
that the Employee has engaged or is about to engage in conduct materially
injurious to the Company, (D) the Employee's having been convicted of a felony,
or (E) the Employee's participation in activities proscribed by the provisions
of paragraphs 9 or 10 hereof or material breach of any of the other covenants
herein; or
(iii) Without Cause upon 30 days' notice of such termination to the
Employee.
(b) (i) If this Agreement is terminated pursuant to paragraph 7(a)(i)
above, the Employee shall receive salary continuation pay from the date of such
termination until the third anniversary of the date hereof at the rate of 75% of
the Base Salary, reduced by applicable payroll taxes and further reduced by the
amount received by the Employee during such period under any Company-maintained
disability insurance policy or plan or under Social Security or similar laws.
Such salary continuation payments shall be paid periodically to the Employee as
provided in paragraph 4(a) for the payment of the Base Salary.
-3-
<PAGE>
(ii) If this Agreement is terminated pursuant to paragraph 7(a)(ii)
above, the Employee shall receive no salary continuation pay or severance pay.
(iii) If this Agreement is terminated pursuant to paragraph 7(a)(iii)
above, the Employee shall receive salary continuation pay for a period of twelve
(12) months from and after the date of such termination (the "Salary
Continuation Period") equal to the Base Salary. Such salary continuation
payments (less applicable payroll taxes) shall be paid periodically to the
Employee as provided in paragraph 4(a) for the payment of the Base Salary.
(c) During the Salary Continuation Period, the Employee shall be under
no obligation to mitigate the costs to any of the Company of the salary
continuation payments.
(d) Not later than ninety (90) days prior to the expiration of the
stated term of the Agreement, the parties shall begin to negotiate in good faith
the terms of any extension of this Agreement, provided that no party shall be
under any obligation to enter into such an extension.
8. Representations. The Employee hereby represents to the Company
---------------
that (a) he is legally entitled to enter into this Agreement and to perform the
services contemplated herein, and (b) he has the full right, power and
authority, subject to no rights of third parties, to grant to the Company the
rights contemplated by paragraph 10 hereof.
9. Disclosure of Information. The Employee recognizes and
-------------------------
acknowledges that the Company's and its predecessors' trade secrets, know-how
and proprietary processes as they may exist from time to time are valuable,
special and unique assets of the Company's businesses, access to and knowledge
of which are essential to the performance of the Employee's duties hereunder.
The Employee will not, during or after the term of his employment by any of the
Company, in whole or in part, disclose such secrets, know-how or processes to
any person, firm, corporation, association or other entity for any reason or
purpose whatsoever, nor shall the Employee make use of any such property for his
own purposes or for the benefit of any person, firm, corporation or other entity
(except the Company) under any circumstances during or after the term of his
employment, provided that after the term of his employment these restrictions
shall not apply to such secrets, know-how and processes which are then in the
public domain (provided further that the Employee was not responsible,
-4-
<PAGE>
directly or indirectly, for such secrets, know-how or processes entering the
public domain without the Company's consent).
10. Inventions. The Employee hereby sells, transfers and assigns to
----------
the Company or to any person, or entity designated by the Company all of the
entire right, title and interest of the Employee in and to all inventions,
ideas, disclosures and improvements, whether patented or unpatented, and
copyrightable material, made or conceived by the Employee, solely or jointly,
during the term hereof which relate to methods, apparatus, designs, products,
processes or devices, sold, leased, used or under consideration or development
by the Company or any of its predecessors, or which otherwise relate to or
pertain to the business, functions or operations of the Company or any of its
predecessors or which arise from the efforts of the Employee during the course
of his employment for the Company or any of its predecessors. The Employee
shall communicate promptly and disclose to the Company, in such form as the
Company requests, all information, details and data pertaining to the
aforementioned inventions, ideas, disclosures and improvements; and the Employee
shall execute and deliver to the Company such formal transfers and assignments
and such other papers and documents as may be necessary or required of the
Employee to permit the Company or any person or entity designated by the Company
to file and prosecute the patent applications and, as to copyrightable material,
to obtain copyright thereof. Any invention relating to the business of the
Company and disclosed by the Employee within one year following the termination
of this Agreement shall be deemed to fall within the provisions of this
paragraph unless proved to have been first conceived and made following such
termination.
11. Covenants Not To Compete or Interfere. For a period ending
-------------------------------------
twelve (12) months from and after the termination of the Employee's employment
hereunder, the Employee shall not (whether as an officer, director, owner,
employee, partner or other direct or indirect participant) engage in any
Competitive Business. "Competitive Business" shall mean the manufacturing,
supplying, producing, selling, distributing or providing for sale of (A) any
product, device or instrument manufactured from or using polyvinal acetal (PVAc)
material or technology or (B) any eye, ear, nose or throat product, device or
instrument (x) of a type manufactured or sold by the Company or its subsidiaries
or (y) in clinical development sponsored by the Company or its subsidiaries, in
each case, as of the date of termination of the Employee's employment. For such
period, the Employee shall also not interfere with, disrupt or attempt to
disrupt the relationship, contractual or otherwise, between the Company or
-5-
<PAGE>
its subsidiaries and any customer, supplier, lessor, lessee or employee of the
Company or its subsidiaries. It is the intent of the parties that the agreement
set forth in this paragraph 11 apply in all parts of the world.
Employee agrees that a monetary remedy for a breach of the agreement
set forth in this paragraph 11 will be inadequate and impracticable and further
agrees that such a breach would cause the Company irreparable harm, and that the
Company shall be entitled to temporary and permanent injunctive relief without
the necessity of proving actual damages. In the event of such a breach,
Employee agrees that the Company shall be entitled to such injunctive relief,
including temporary restraining orders, preliminary injunctions and permanent
injunctions as a court of competent jurisdiction shall determine.
It is the desire and intent of the parties that the provisions of this
paragraph 11 shall be enforced to the fullest extent permissible under the laws
and public policies applied in each jurisdiction in which enforcement is sought.
Accordingly, if any particular portion of this paragraph 11 shall be adjudicated
to be invalid or unenforceable, this paragraph 11 shall be deemed curtailed,
whether as to time or location, to the minimum extent required for its validity
under the applicable law and shall be binding and enforceable with respect to
the Employee as so curtailed, such curtailment to apply only with respect to the
operation of this paragraph in the particular jurisdiction in which such
adjudication is made. If a court in any jurisdiction, in adjudicating the
validity of this paragraph 11, imposes any additional terms or restrictions with
respect to the agreement set forth in this paragraph 11, this paragraph 11 shall
be deemed amended to incorporate such additional terms or restrictions.
12. Injunctive Relief. If there is a breach or threatened breach of
-----------------
the provisions of paragraphs 9, 10 or 11 of this Agreement, the Company shall be
entitled to an injunction restraining the Employee from such breach. Nothing
herein shall be construed as prohibiting the Company from pursuing any other
remedies for such breach or threatened breach.
13. Relocation. The Employee shall be entitled
----------
to reimbursement by the Company of those costs associated with his relocation
from Safety Harbor, Florida to the Jacksonville, Florida area in accordance with
current Company relocation policy. If not provided for in the policy,
additional reimbursements shall include early lease termination expenses not to
exceed $9,000.
-6-
<PAGE>
14. Car Allowance. The Employee shall be entitled to the use of a
-------------
leased Company car at a monthly rate, including taxes, not to exceed $650.00.
Any lease payment amounts in the excess of $650.00 shall be paid for by the
Employee on a monthly basis through a payroll deduction. The Company shall also
pay for all associated insurance, registration fees and regularly scheduled
maintenance for the Company car. Customary personal expenses for gas and oil
and cleaning shall not be reimbursed by the Company. If such Company car is
utilized for any business-related activity, the Company shall reimburse the
Employee for mileage in accordance with the then current Company policy for such
reimbursement.
15. Insurance. The Company may, at its election and for its benefit,
---------
insure the Employee against accidental loss or death, and the Employee shall
submit to such physical examination and supply such information as may be
required in connection therewith.
16. Notices. Any notice required or permitted to be given under this
-------
Agreement shall be sufficient if in writing and if sent by registered mail to
511 Haverhill Lane, Safety Harbor, Florida 34695, in the case of the Employee,
or to Xomed Surgical Products, Inc., 6743 South Point Drive North, Jacksonville,
Florida 32216, in the case of the Company, or to such other officer or address
as the Company shall notify the Employee.
17. Waiver of Breach. A waiver by the Company or Employee of a
----------------
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by the other party.
18. Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the laws of the State of Florida.
19. Assignment. This Agreement may be assigned, without the consent
----------
of the Employee, by the Company to any person, partnership, corporation, or
other entity which has purchased substantially all the assets of such Company,
provided such assignee assumes all the liabilities of such Company hereunder.
20. Entire Agreement. This instrument contains the entire agreement
----------------
of the parties and supersedes any and all agreements, letters of intent or
understandings between the Employee and the Company, its subsidiaries or any of
the Company's principal shareholders. It may be changed only by an agreement in
writing signed by a party against whom enforcement of any waiver, change,
-7-
<PAGE>
modification, extension or discharge is sought.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day first hereinabove written.
XOMED SURGICAL PRODUCTS, INC.
By:/s/Elizabeth H. Weatherman
------------------------------
Name: Elizabeth H. Weatherman
Title: Secretary
EMPLOYEE
/s/James. T. Treace
__________________________________
James T. Treace
-9-
<PAGE>
EXHIBIT 10.10
EXECUTION COPY
--------------
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated as of April 16, 1996, is made between Xomed
Surgical Products, Inc., a Delaware corporation (the "Company"), and F. Barry
Bays (the "Employee").
1. Employment. The Company hereby employs the Employee and the
----------
Employee hereby accepts employment all upon the terms and conditions herein set
forth.
2. Duties. The Employee is engaged as the Senior Vice-President of
------
Operations and Chief Operating Officer of the Company and hereby promises to
perform and discharge well and faithfully the duties which may be assigned to
him from time to time by the Company in connection with the conduct of their
businesses.
3. Extent of Services. The Employee shall devote his entire time,
------------------
attention and energies to the business of the Company and shall not, during the
term of this Agreement, be engaged in any other business activity, regardless of
whether such business activity is pursued for gain, profit or other pecuniary
advantage; but this shall not be construed as preventing the Employee from
investing his personal assets in businesses which do not compete with the
Company in such form or manner as will not require any services on the part of
the Employee in the operation of the affairs of the companies in which such
investments are made and in which his participation is solely that of an
investor, and except that the Employee may purchase securities in any
corporation whose securities are regularly traded provided that such purchase
shall not result in his collectively owning beneficially at any time one percent
(1%) or more of the equity securities of any corporation engaged in a business
competitive to that of the Company.
4. Compensation.
------------
(a) For services rendered under this Agreement, the Company shall pay
the Employee an aggregate salary of $175,000 per annum (the "Base Salary"),
payable (after deduction of applicable payroll taxes) in equal semi-monthly
installments on the 15th and last day of each month or on the preceding business
day if such day is a Saturday, Sunday or holiday.
(b) In addition to salary payments under paragraph 4(a) above, the
Employee shall be eligible for and participate in the Key Executive Bonus
Program adopted by the Company, which
<PAGE>
program will provide for a bonus in an amount up to and at the 50% level of an
employee's salary upon attainment of the bonus criteria. The Employee shall also
be eligible for and participate in such fringe benefits as shall be generally
provided to executives of the Company, including medical insurance and
retirement programs which may be adopted from time to time during the term
hereof by the Company. The Employee shall be responsible for making any
generally applicable employee contributions required under such fringe benefit
programs.
(c) Simultaneously with the execution of this Agreement, in
consideration of his entering into this Agreement, the Company will grant the
Employee 42,000 stock options under the Company Stock Option Plan, at an option
price per share equal to $9.58, such options to vest in equal installments on
each of the first four anniversaries of the date hereof.
(d) During the term of this Agreement, the Employee shall be eligible
for participation in the Company's 1994 Stock Option Plan, which plan is
administered by the Company's Compensation Committee. Target bonuses shall be
set at, in the aggregate, not less than 50,000 stock options for the Employee
during the term of this Agreement. Corporate performance objectives shall be
established by the Compensation Committee, with the input of the Employee, on a
basis consistent with the Company's past practice and the general practices of
similar businesses, and the criteria used in measuring the degree of attainment
of such objectives shall be consistent with past practice and the general
practices of similar businesses.
(e) The Compensation Committee of the Company shall review the
Employee's compensation at least once per year and award such bonuses or make
such increases to the Base Salary as the Compensation Committee, in its sole
discretion, determines are merited, based upon the Employee's performance and
consistent with compensation policies of the Company.
5. Sick Leave and Vacation. During the term of this Agreement, the
-----------------------
Employee shall be entitled to annual vacation of at least three (3) weeks in
length each year, or such greater time period if permitted by Company policy.
The Employee shall also be entitled to sick leave consistent with Company
policy.
6. Expenses. During the term of this Agreement, the Company shall
--------
reimburse the Employee for all reasonable out-of-pocket expenses incurred by the
Employee in connection with the business of the Company and in performance of
his duties
-2-
<PAGE>
under this Agreement upon the Employee's presentation to the Company
of an itemized accounting of such expenses with reasonable supporting data.
7. Term.
----
(a) The Employee's employment under this Agreement shall commence on
the date first set forth above and shall expire on the third anniversary of such
date. Notwithstanding the foregoing, the Company may at its election, subject
to paragraph 7(b) below, terminate the obligations of the Company under this
Agreement as follows:
(i) Upon 30 days' notice if the Employee becomes physically or
mentally incapacitated or is injured so that he is unable to perform the
services required of him hereunder and such inability to perform continues for a
period in excess of six months and is continuing at the time of such notice; or
(ii) For "Cause" upon notice of such termination to the Employee.
For purposes of this Agreement, the Company shall have "Cause" to terminate its
obligations hereunder upon (A) the determination by the Board of Directors of
the Company (the "Board") that the Employee has ceased to perform his duties
hereunder (other than as a result of his incapacity due to physical or mental
illness or injury), which failure amounts to an intentional and extended neglect
of his duties hereunder, (B) the Employee's death, (C) the Board's determination
that the Employee has engaged or is about to engage in conduct materially
injurious to the Company, (D) the Employee's having been convicted of a felony,
or (E) the Employee's participation in activities proscribed by the provisions
of paragraphs 9 or 10 hereof or material breach of any of the other covenants
herein; or
(iii) Without Cause upon 30 days' notice of such termination to the
Employee.
(b) (i) If this Agreement is terminated pursuant to paragraph 7(a)(i)
above, the Employee shall receive salary continuation pay from the date of such
termination until the third anniversary of the date hereof at the rate of 75% of
the Base Salary, reduced by applicable payroll taxes and further reduced by the
amount received by the Employee during such period under any Company-maintained
disability insurance policy or plan or under Social Security or similar laws.
Such salary
-3-
<PAGE>
continuation payments shall be paid periodically to the Employee as provided in
paragraph 4(a) for the payment of the Base Salary.
(ii) If this Agreement is terminated pursuant to paragraph 7(a)(ii)
above, the Employee shall receive no salary continuation pay or severance pay.
(iii) If this Agreement is terminated pursuant to paragraph 7(a)(iii)
above, the Employee shall receive salary continuation pay for a period of twelve
(12) months from and after the date of such termination (the "Salary
Continuation Period") equal to the Base Salary. Such salary continuation
payments (less applicable payroll taxes) shall be paid periodically to the
Employee as provided in paragraph 4(a) for the payment of the Base Salary.
(c) During the Salary Continuation Period, the Employee shall be under
no obligation to mitigate the costs to any of the Company of the salary
continuation payments.
(d) Not later than ninety (90) days prior to the expiration of the
stated term of the Agreement, the parties shall begin to negotiate in good faith
the terms of any extension of this Agreement, provided that no party shall be
under any obligation to enter into such an extension.
8. Representations. The Employee hereby represents to the Company
---------------
that (a) he is legally entitled to enter into this Agreement and to perform the
services contemplated herein, and (b) he has the full right, power and
authority, subject to no rights of third parties, to grant to the Company the
rights contemplated by paragraph 10 hereof.
9. Disclosure of Information. The Employee recognizes and
-------------------------
acknowledges that the Company's and its predecessors' trade secrets, know-how
and proprietary processes as they may exist from time to time are valuable,
special and unique assets of the Company's businesses, access to and knowledge
of which are essential to the performance of the Employee's duties hereunder.
The Employee will not, during or after the term of his employment by any of the
Company, in whole or in part, disclose such secrets, know-how or processes to
any person, firm, corporation, association or other entity for any reason or
purpose whatsoever, nor shall the Employee make use of any such property for his
own purposes or for the benefit of any person, firm, corporation or other entity
(except the Company) under any circumstances during or after the term
-4-
<PAGE>
of his employment, provided that after the term of his employment these
restrictions shall not apply to such secrets, know-how and processes which are
then in the public domain (provided further that the Employee was not
responsible, directly or indirectly, for such secrets, know-how or processes
entering the public domain without the Company's consent).
10. Inventions. The Employee hereby sells, transfers and assigns to
----------
the Company or to any person, or entity designated by the Company all of the
entire right, title and interest of the Employee in and to all inventions,
ideas, disclosures and improvements, whether patented or unpatented, and
copyrightable material, made or conceived by the Employee, solely or jointly,
during the term hereof which relate to methods, apparatus, designs, products,
processes or devices, sold, leased, used or under consideration or development
by the Company or any of its predecessors, or which otherwise relate to or
pertain to the business, functions or operations of the Company or any of its
predecessors or which arise from the efforts of the Employee during the course
of his employment for the Company or any of its predecessors. The Employee
shall communicate promptly and disclose to the Company, in such form as the
Company requests, all information, details and data pertaining to the
aforementioned inventions, ideas, disclosures and improvements; and the Employee
shall execute and deliver to the Company such formal transfers and assignments
and such other papers and documents as may be necessary or required of the
Employee to permit the Company or any person or entity designated by the Company
to file and prosecute the patent applications and, as to copyrightable material,
to obtain copyright thereof. Any invention relating to the business of the
Company and disclosed by the Employee within one year following the termination
of this Agreement shall be deemed to fall within the provisions of this
paragraph unless proved to have been first conceived and made following such
termination.
11. Covenants Not To Compete or Interfere. For a period ending
-------------------------------------
twelve (12) months from and after the termination of the Employee's employment
hereunder, the Employee shall not (whether as an officer, director, owner,
employee, partner or other direct or indirect participant) engage in any
Competitive Business. "Competitive Business" shall mean the manufacturing,
supplying, producing, selling, distributing or providing for sale of (A) any
product, device or instrument manufactured from or using polyvinal acetal (PVAc)
material or technology or (B) any eye, ear, nose or throat product, device or
instrument (x) of a type manufactured or sold by the Company or its subsidiaries
or (y) in clinical development sponsored by the Company or its
-5-
<PAGE>
subsidiaries, in each case, as of the date of termination of the Employee's
employment. For such period, the Employee shall also not interfere with, disrupt
or attempt to disrupt the relationship, contractual or otherwise, between the
Company or its subsidiaries and any customer, supplier, lessor, lessee or
employee of the Company or its subsidiaries. It is the intent of the parties
that the agreement set forth in this paragraph 11 apply in all parts of the
world.
Employee agrees that a monetary remedy for a breach of the agreement
set forth in this paragraph 11 will be inadequate and impracticable and further
agrees that such a breach would cause the Company irreparable harm, and that the
Company shall be entitled to temporary and permanent injunctive relief without
the necessity of proving actual damages. In the event of such a breach,
Employee agrees that the Company shall be entitled to such injunctive relief,
including temporary restraining orders, preliminary injunctions and permanent
injunctions as a court of competent jurisdiction shall determine.
It is the desire and intent of the parties that the provisions of this
paragraph 11 shall be enforced to the fullest extent permissible under the laws
and public policies applied in each jurisdiction in which enforcement is sought.
Accordingly, if any particular portion of this paragraph 11 shall be adjudicated
to be invalid or unenforceable, this paragraph 11 shall be deemed curtailed,
whether as to time or location, to the minimum extent required for its validity
under the applicable law and shall be binding and enforceable with respect to
the Employee as so curtailed, such curtailment to apply only with respect to the
operation of this paragraph in the particular jurisdiction in which such
adjudication is made. If a court in any jurisdiction, in adjudicating the
validity of this paragraph 11, imposes any additional terms or restrictions with
respect to the agreement set forth in this paragraph 11, this paragraph 11 shall
be deemed amended to incorporate such additional terms or restrictions.
12. Injunctive Relief. If there is a breach or threatened breach of
-----------------
the provisions of paragraphs 9, 10 or 11 of this Agreement, the Company shall be
entitled to an injunction restraining the Employee from such breach. Nothing
herein shall be construed as prohibiting the Company from pursuing any other
remedies for such breach or threatened breach.
13. Relocation. The Employee shall be entitled to reimbursement
----------
by the Company of those costs associated with his relocation from Clearwater,
Florida to the Jacksonville, Florida
-6-
<PAGE>
area in accordance with current Company relocation policy. If not provided for
in the policy, additional reimbursements shall include interim housing expenses
not to exceed $800 per month for a period not to exceed twelve (12) months or
until the Employee sells his current Clearwater, Florida residence, whichever is
sooner.
14. Car Allowance. The Employee shall be entitled to the use of a
-------------
leased Company car at a monthly rate, including taxes, not to exceed $650.00.
Any lease payment amounts in the excess of $650.00 shall be paid for by the
Employee on a monthly basis through a payroll deduction. The Company shall also
pay for all associated insurance, registration fees and regularly scheduled
maintenance for the Company car. Customary personal expenses for gas and oil
and cleaning shall not be reimbursed by the Company. If such Company car is
utilized for any business-related activity, the Company shall reimburse the
Employee for mileage in accordance with the then current Company policy for such
reimbursement.
15. Insurance. The Company may, at its election and for its benefit,
---------
insure the Employee against accidental loss or death, and the Employee shall
submit to such physical examination and supply such information as may be
required in connection therewith.
16. Notices. Any notice required or permitted to be given under this
-------
Agreement shall be sufficient if in writing and if sent by registered mail to
1929 Bays Manor, Clearwater, Florida 34624, in the case of the Employee, or to
Xomed Surgical Products, Inc., 6743 South Point Drive North, Jacksonville,
Florida 32216, in the case of the Company, or to such other officer or address
as the Company shall notify the Employee.
17. Waiver of Breach. A waiver by the Company or Employee of a
----------------
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by the other party.
18. Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the laws of the State of Florida.
19. Assignment. This Agreement may be assigned, without the consent
----------
of the Employee, by the Company to any person, partnership, corporation, or
other entity which has purchased
-7-
<PAGE>
substantially all the assets of such Company, provided such assignee assumes all
the liabilities of such Company hereunder.
20. Entire Agreement. This instrument contains the entire agreement
----------------
of the parties and supersedes any and all agreements, letters of intent or
understandings between the Employee and the Company, its subsidiaries or any of
the Company's principal shareholders. It may be changed only by an agreement in
writing signed by a party against whom enforcement of any waiver, change,
modification, extension or discharge is sought.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the day first hereinabove written.
XOMED SURGICAL PRODUCTS, INC.
By:/s/Elizabeth H. Weatherman
--------------------------------
Name: Elizabeth H. Weatherman
Title: Secretary
EMPLOYEE
/s/F. Barry Bays
-----------------------------------
F. Barry Bays
-9-
<PAGE>
EXHIBIT 21
Subsidiaries
State or Other Jurisidiction
Subsidiary of Incorporation or Organization
---------- --------------------------------
1. Merocel Corporation Delaware
2. Merocel Foreign Sales
Corp. (1) Virgin Islands
3. Xomed, Inc. Delaware
4. Xomed International, Inc. Delaware
5. Xomed Canada, Inc. (2) Canada
6. Xomed Australia PTY Limited (2) Australia
7. Xomed U.K. Ltd. (2) Great Britain
8. Xomed France, S.A. (2) France
9. Xomed Deutschland, GmbH (2) Germany
10. Xomed - Treace, P.R. Inc. Delaware
11. FESSCo., Inc. Delaware
12. TreBay Medical Corporaton Delaware
(1) A subsidiary of Merocel Corporation.
(2) A subsidiary of Xomed International, Inc.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial Data" and to the use of our reports dated June
19, 1996, May 31, 1996 and May 31, 1996 related to Xomed Surgical Products,
Inc., Xomed, Inc., and TreBay Medical Corporation, respectively, in the
Registration Statement and related Prospectus of Xomed Surgical Products, Inc.
for the Registration of 2,500,000 shares of its Class A Common Stock.
ERNST & YOUNG LLP
Jacksonville, Florida
August 20, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS IN THE REGISTRANT'S REGISTRATION STATEMENT ON
FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-29-1996
<CASH> 417 521
<SECURITIES> 0 0
<RECEIVABLES> 13,782 10,490
<ALLOWANCES> 483 599
<INVENTORY> 11,994 14,412
<CURRENT-ASSETS> 27,927 28,049
<PP&E> 17,393 17,592
<DEPRECIATION> 2,038 1,209
<TOTAL-ASSETS> 93,123 96,087
<CURRENT-LIABILITIES> 15,693 16,988
<BONDS> 32,719 30,322
31,454 30,619
26,315 27,931
<COMMON> 10 11
<OTHER-SE> (13,068) (10,228)
<TOTAL-LIABILITY-AND-EQUITY> 93,123 96,087
<SALES> 59,865 32,942
<TOTAL-REVENUES> 59,865 32,942
<CGS> 23,175 12,690
<TOTAL-COSTS> 23,175 12,690
<OTHER-EXPENSES> 31,947 23,607<F1>
<LOSS-PROVISION> 125 116
<INTEREST-EXPENSE> 3,063 1,536
<INCOME-PRETAX> 1,680 (4,891)
<INCOME-TAX> 1,355 (1,956)
<INCOME-CONTINUING> 325 (2,935)
<DISCONTINUED> 306 0
<EXTRAORDINARY> (2,485) 0
<CHANGES> 0 0
<NET-INCOME> (1,854) (2,935)
<EPS-PRIMARY> .01 (.75)
<EPS-DILUTED> 0 0
<FN>
<F1> Includes amounts for write-off of acquired research and development costs
($3,612) and a restructuring charge ($3,093)
</FN>
</TABLE>
