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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from __________ to __________
Commission File No. 000-21517
XOMED SURGICAL PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 06-1393528
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6743 SOUTHPOINT DRIVE, NORTH
JACKSONVILLE, FLORIDA 32216-0980
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 296-9600
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Not applicable Not applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of registrant's Common Stock (the "Common Stock")
held by non-affiliates based on the closing price on February 16, 1999 was
$432,538,875.
As of February 16, 1999 there were outstanding 12,142,691 shares of Common
Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission prior to April 30, 1999 are incorporated by
reference in Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
AS USED IN THIS ANNUAL REPORT ON FORM 10-K, REFERENCES TO THE "COMPANY" OR
"XOMED" REFER TO XOMED SURGICAL PRODUCTS, INC. AND ITS DIRECT AND INDIRECT
SUBSIDIARIES, UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES.
THIS ANNUAL REPORT ON FORM 10-K 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" UNDER THIS ITEM AND IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH
SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION
TO PUBLICLY RELEASE ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH SELECTED
HISTORICAL FINANCIAL INFORMATION (ITEM 6) AND THE CONSOLIDATED FINANCIAL
STATEMENTS OF THE COMPANY, WHICH ARE INCLUDED IN THIS FORM 10-K.
OVERVIEW
Xomed is a leading developer, manufacturer and marketer of a broad line of
surgical products for use by ear, nose and throat ("ENT") specialists and
ophthalmic surgeons. The Company's broad line of products includes, in its core
ENT market, powered tissue-removal systems and other microendoscopy instruments,
implantable devices, nerve monitoring systems, disposable fluid-control products
and image guided surgery systems. The Company also offers a line of ophthalmic
and other products. For the year ended December 31, 1998, approximately 77% of
Xomed's revenues were derived from disposable and implantable products. The
Company distributes its products through a direct sales organization of nearly
100 persons in the U.S. and selected other countries and through a network of
over 130 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 29% of the Company's net sales were
derived from international markets for the year ended December 31, 1998. With
nearly 30 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 in the midst of a conversion from
conventional surgical approaches to less-traumatic approaches that involve 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 is being 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.
BACKGROUND
The business of Xomed, Inc., the Company's predecessor, was established in
1970 to manufacture and distribute ventilation tube implants for the middle ear.
In 1979, Bristol-Myers Squibb Company ("Bristol-Myers") acquired the business.
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"), 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
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products primarily used in sinus surgery and rhinology. The Company, prior to
April 15, 1994, consisted solely of Merocel.
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 was allocated to goodwill. Of this amount, $49.9 million related
to continuing operations and is being amortized over a 25-year life; $6.1
million related to the surgical drapes segment, which was sold in July 1995. As
a result of this goodwill and certain other intangible assets, amortization of
intangibles is a significant expense in the Company's Consolidated Income
Statement (2.6% of net sales).
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 $45.9 million in long-term debt. In connection with
the Xomed Acquisition, management implemented a restructuring plan for
Xomed-Treace that included closing manufacturing operations in Puerto Rico and
eliminating certain overhead in other facilities.
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 ENT sales force to distributing this line through an independent dealer
network. The Company effected this change to enable the Company's direct ENT
sales force to focus exclusively on ENT products. As a result of this change,
the Company's net sales were approximately $2.1 million lower in 1996 than they
would have been if the ophthalmic product line had continued to be distributed
through the Company's direct sales force. In a further effort to improve
ophthalmic sales, during 1998 the Company replaced several of these independent
dealers with direct sales representatives devoted exclusively to the ophthalmic
product line.
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. The Company effected this change so that its entire
portfolio of ENT products could be distributed through a single distribution
channel focused exclusively on ENT products. As a result of this change, the
Company's net sales were approximately $1.2 million higher in 1996 than they
would have been if the Merocel product line had continued to be distributed
through independent dealers.
ACQUISITION OF TREBAY. In April 1996 the Company acquired TreBay Medical
Corporation ("TreBay") which acquisition 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 $2.4 million was allocated to in-process research and development and
charged to expense in the second quarter of 1996. The in-process research and
development was valued based upon an independent valuation utilizing
management's projections of cash flows and cost to achieve technological
feasibility of the products. The products acquired from TreBay have either
achieved technological feasibility or are no longer under development, and
therefore, no additional costs are required to achieve technological
feasibility.
RESTRUCTURING AND OTHER CHARGES. During the second quarter of 1996, the
Company's new management team initiated cost savings programs that resulted in
reductions of 50 employees at the Company's three domestic locations. The
reductions included 20 management and administrative employees at the Company's
Mystic, Connecticut manufacturing facility, 17 management and administrative
employees at the Company's Jacksonville, Florida headquarters and 13 management
and production employees at the Company's St. Louis, Missouri manufacturing
facility that was closed in December 1996. The restructuring eliminated
redundant overhead at the sites and was undertaken to yield cost savings
primarily in general and administrative expense. The Company incurred a
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. Most of the affected employees were terminated in the second quarter
of 1996 with severance beginning at that time. The Company had completed its
cost-saving programs as of December 31, 1997. See Note 6 of the Consolidated
Financial Statements included in this Annual Report on Form 10-K.
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During the fourth quarter of 1998, the Company incurred special charges
related primarily to an acquisition, supplier terminations, restructuring
charges and an asset impairment. These special charges totaled $3.8 million and
were comprised of: (i) $1.2 million related to the write-off of acquired
in-process research and development resulting from the Company's acquisition of
Micro-France in December, 1998; (ii) $1.0 million related to the termination of
two supplier agreements; (iii) $0.8 million in restructuring charges related to:
(a) the transfer of a portion of the manufacturing process for Merocel sinus
packing material from the Company's facility in Mystic, Connecticut to its main
facility in Jacksonville, Florida and (b) the closure of the Company's sales
office in Paris, France, which is being consolidated into its recently acquired
Micro-France office in St. Aubin, France, and (iv) $0.8 million related to the
write-down of the Company's portfolio of investments, which loss is deemed to be
other-than temporary. See Note 6 of the Consolidated Financial Statements
included in this Annual Report on Form 10-K.
PUBLIC OFFERING. On July 14, 1998, the Company completed a secondary
offering of its Common Stock raising net proceeds of $20.2 million through the
sale of 1,092,000 shares (split adjusted) of its Common Stock. The net proceeds
were added to the Company's investment portfolio and will be utilized for
general corporate purposes and acquisitions. Certain shareholders of the Company
also sold 1,495,500 shares (split adjusted) of Common Stock during the offering
generating net proceeds to those shareholders of $28.7 million.
ACQUISITION OF MICRO-FRANCE. On December 30, 1998, the Company acquired,
through its subsidiary Xomed France Holdings, SNC, all of the issued and
outstanding capital shares of Etablissements Boutmy, S.A., a French company that
manufactures and distributes hand-held surgical instruments in the ENT,
laporoscopy and orthopaedic markets under the name Micro-France
("Micro-France"). See Note 1 of the Consolidated Financial Statements included
in this Annual Report on Form 10-K.
OTHER RECENT EVENTS
STOCK SPLIT. Effective November 30, 1998, the Company declared a stock
split whereby each shareholder of record on November 16, 1998 received as a
dividend for every two shares of Common Stock held, one additional share of
Common Stock. The shareholders received cash in lieu of fractional shares.
WARBURG, PINCUS INVESTORS, L.P. STOCK DISTRIBUTION. Warburg, Pincus
Investors, L.P. ("Warburg") informed the Company that, on November 4, 1998, it
distributed to its partners approximately 1.2 million shares of Common Stock,
representing approximately 51% of Warburg's holdings in the Company and 15% of
the Company's outstanding Common Stock. Further, on January 12, 1999, Warburg
distributed substantially all of its remaining holdings in the Company to its
partners. Warburg also informed the Company that the distribution is consistent
with Warburg's practice of distributing the shares of investments it deems
successful directly to its partners. The partners receiving the distribution
consist primarily of institutional investors including several large public and
private pension funds. After the distributions, Warburg's remaining holdings
represented less than 1% of the Company's outstanding stock.
PRODUCT AND MARKET DEVELOPMENTS. In December 1997, the Company introduced
the XPS(R) 2000 microresector system, which includes enhancements to its
original XPS StraightShot(R) system. Both systems are utilized in endoscopic
sinus surgery as well as in certain head and neck procedures including the
removal of adenoids and laryngeal polyps. In July 1998, the Company received
approval to market the XPS(R) 2000 in Japan. In September 1998, the Company
entered a strategic alliance with Sofamor Danek (acquired by Medtronics in
January 1999) to distribute Sofamor Danek's image guided surgery technology into
the ENT market. The Company began shipping this product in December 1998.
MARKET OPPORTUNITY
More than an estimated 25,000 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 9,000 of those specialists practicing in the U.S. 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 9,000 ENT specialists in the U.S.,
approximately 3,300 currently practice facial plastic and reconstructive
surgery.
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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.
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 is enabling ENT surgeons
to better address the current challenges of ENT procedures. For example, powered
cutting devices adapted for use in particular surgical procedures 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 blades for these newly developed
powered cutting devices are disposable and thus sales of these blades represent
a significant portion of the market growth of these devices. In addition, recent
technological advances in computer-assisted image guided surgery are allowing
ENT surgeons to perform more complex procedures. 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 that 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 are
readily adopting 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
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 (approximately $10,000) capital investment.
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STRATEGY
The Company's objective is to enhance its leading position in the ENT
market and to enter new markets. The Company's strategy for achieving this
objective is to:
CONTINUE TO 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 leverage these
relationships with new and existing products and increase penetration of its
existing customer base.
FACILITATE ENT MARKET CONVERSION TO LESS-TRAUMATIC APPROACHES. The ENT
market is in the midst of 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 adenoids, laryngeal procedures, face and
brow lifts and facial sculpting. As part of facilitating this conversion, the
Company is continuing 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 continued advances in 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.
EMPHASIZE PRODUCT INNOVATIONS THROUGH INTERNAL RESEARCH AND DEVELOPMENT AND
CORPORATE ALLIANCES. The Company plans to develop new proprietary products and
product enhancements primarily through internal research and development
efforts. The Company will invest significantly in research and development in an
effort to introduce technological advancements in the ENT market. When
appropriate, the Company may augment its internal development programs by
acquiring or licensing products or technology from other organizations.
MAINTAIN A BROAD LINE OF ENT PRODUCTS WITH PARTICULAR EMPHASIS ON
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 over 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 approximately 77.0% of the Company's sales in 1998.
One of the Company's principal goals is to continue to develop additional
disposable products for use with its instrumentation systems.
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
direct sales force of nearly 100 persons in the U.S. and selected other
countries and through a network of over 130 independent distributors. The
Company's core ENT products are sold in the U.S. only on a direct sales basis.
Approximately 29% of its net sales in 1998 were made outside the U.S. through
direct operations in the United Kingdom, Canada, France, Germany and Australia,
as well as through over 120 independent international distributors, many of whom
distribute the Company's products exclusively.
LEVERAGE CORE COMPETENCIES BY ENTERING NEW MARKETS. The Company intends to
enter new medical and surgical products markets through acquisition and new
product development. The Company believes that it can leverage its core
competencies, including the ability to rapidly develop innovative new products,
expertise in commercializing clinical knowledge, relationships with physicians
and managerial expertise, beyond the ENT market to enter new markets on a
selective basis. Potential areas for new market entry and expansion include
plastic and reconstructive surgery, ophthalmology, and orthopaedics.
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MAJOR ENT SUBSPECIALTIES
The three major subspecialties within the ENT market are sinus and
rhinology, head and neck and otology.
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. Large numbers of the U.S. population 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 visualize and gain access to the deeper
sinus cavities through the natural sinus passageways. ENT surgeons also
experience significant difficulty gaining the control needed to remove the
tissue effectively. These limitations 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. Because powered instrumentation designed
specifically for sinus surgery enables greater access to structures, improves
visualization at the site and enables quicker removal of tissue, overall
operating time can be reduced by approximately 25% from that of traditional
surgical methods with general surgical instruments.
Surgeons performing complex endoscopic sinus procedures often utilize a
series of CAT scans or MRI scans taken prior to surgery to assist in identifying
key anatomical landmarks. During surgery, the physician refers to these static
images and the real-time image displayed via the endoscope. Recent advancements
in computer-assisted image guided systems now allow the CAT scan information to
be loaded into a computer and correlated to the surgeon's instruments. As a
result, the surgeon can determine the precise location of his instrument within
the operative field even when direct visualization is limited. This is
especially useful during revision or complicated surgeries due to distorted
normal anatomical landmarks. The Company believes this new technology, referred
to as image guided surgery, represents a significant growth opportunity as it
may allow surgeons to perform complex procedures that previously might not have
been attempted. Additionally, as surgeons become more comfortable with the
technology, the Company believes that image guided surgery could become the
standard of care for all but the most routine sinus procedures.
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).
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Tonsillectomies and adenoidectomies are performed to treat chronic
inflammation and soreness. 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 have typically been
removed by using 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 an acoustic neuroma, a benign
tumor located on the cranial nerve adjacent to the inner ear. The symptoms of
this condition 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. Approximately 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 due to 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.
Other common facial plastic surgical procedures include face and brow
lifts. During these procedures, the surgeon peels the skin at the hairline,
pulls the facial muscles and skin taut and then stitches the long incision made
at the hairline. In addition to the post-operative swelling and bruising from
the procedure, the patient is left with a relatively large scar at the hairline
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 1.3 million of these procedures performed in 1997 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. Re-engineering in the design and material of
the prostheses has, in recent years, improved surgeon technique and patient
hearing outcomes.
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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 in ophthalmic and
orthopaedic procedures. Set forth below is a description of the Company's
products by related subspecialty:
SINUS AND RHINOLOGY
Approximately 43%, 37% and 34% of the Company's net sales in 1998, 1997 and
1996, respectively, 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 microresector product designed exclusively for use in ENT
procedures. These products cut soft tissue and bone through a unique oscillating
blade design powered by a small, lightweight surgical handpiece. In the first
quarter of 1997, the Company introduced its XPS(R) powered tissue-removal system
and in the fourth quarter of 1997, the Company introduced its enhanced XPS(R)
2000 Straight Shot(R) system. This new ENT specific system, which employs
straight and curved disposable blades and burs, offers the ENT surgeon
significantly increased power with limited blade clogging. The XPS(R) system
accounted for approximately 65% of Xomed's core ENT business sales growth during
1998 and the Company had over 1,750 units in place worldwide at the end of 1998.
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(TM) rigid endoscopes and EndoScrub(R) endoscope lense cleaning system.
The EndoScrub(R) endoscope lens cleaning system, which was introduced in 1992
and is exclusive to the Company, 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.
IMAGE GUIDED SURGERY. In September 1998, the Company entered a strategic
alliance with Sofamor Danek (acquired by Medtronics in January 1999) to
distribute Sofamor Danek's image guided surgery technology into the ENT market.
Under the terms of the agreement, Xomed is responsible for distributing the ENT
image guided system under its trade name "LandmarX(TM)" and Sofamor Danek is
responsible for product development, manufacturing and support. This system,
specifically developed for ENT surgery, allows the surgeon to navigate through
the procedure using the additional information supplied by CAT scan x-ray
images. In addition to these x-ray images, the surgeon has access to the direct,
real time surgical images viewed through the endoscope. The Company began
shipping this product in December 1998.
HAND INSTRUMENTATION. The Company provides a complete line of sinus surgery
hand instrumentation comprised of over 400 patterns that have been developed to
provide surgeons with an ergonomic design and enhanced 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, airway
and irrigation catheters and powered sinus burs.
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HEAD AND NECK
Approximately 23%, 23% and 25% of the Company's net sales in 1998, 1997 and
1996, respectively, 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 systems, powered systems and facial
plastic implant products. Head and neck surgical techniques are being developed
which use the more precise tissue removal of powered instrumentation systems,
similar to those being 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. In mid-1997, the Company
introduced several procedure specific blades to address perceived market
opportunities for the conversion of certain head and neck procedures to powered
instrumentation, thereby further leveraging the Company's installed base of XPS
StraightShot(R) systems. Specifically, the Company has introduced cutter blades
for use in facial sculpting procedures where facial fatty tissue is removed for
cosmetic and other reasons; adenoidectomy blades for more complete and less
traumatic removal of adenoids; and laryngeal blades for the removal of polyps,
lesions and tumors located on the vocal cords. The Company believes that the
market opportunity for conversion of these procedures to powered technology is
at least as significant as the powered sinus conversion opportunity.
POWERED DRILL SYSTEMS. Head and neck surgery requires precision,
high-powered drilling 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 PowerForma(R) electric drill system
that uses the XPS(R) console and includes a surgical handpiece and disposable
and reusable cutting burs. This new system provides 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
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. The Company is a worldwide distributor
for Implantech Associates, Inc. in the ENT market, providing a broad line of
facial plastic implants, including implants to augment the chin, nose and cheek.
HAND INSTRUMENTATION. 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 17%, 19% and 21% of the Company's net sales in 1998, 1997 and
1996, respectively, 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 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.
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VENTILATION TUBES. Vent tubes are small tubes surgically implanted into the
eardrum 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(TM) 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, hydroxyapatite and
other biocompatible 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. The Company also produces and markets
the Skeeter(R) otologic drill system, which is designed for middle ear
procedures.
OPHTHALMIC AND OTHER
Approximately 17% of the Company's net sales in 1998 and 21% of its net
sales in 1997 and 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(TM) trademark
through a combination of direct sales representatives and 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 other surgical procedures are micro
knives, cannulae, trephines, blades, sponges, cauteries, penlights and other
miscellaneous products and kits. In addition, in the fourth quarter of 1998, the
Solan division introduced the Flapmaker(TM)(1) microkeratome device, which is
used during LASIK refractive surgery procedures. The system includes a console
and a disposable microkeratome, which creates a flap on the cornea to allow the
refractive surgery to take place. The Company's Solan division team has a
management team dedicated to 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 markets through distributors under the TreBay name. The net sales of
orthopaedic products totaled 6%, 9% and 0% of the ophthalmic and other category
for 1998, 1997 and 1996, respectively.
SALES AND MARKETING
The Company has an established worldwide distribution system with an
ENT-focused direct sales force and independent distributors for select product
specialties and geographic markets. The Company sells to substantially all of
the approximately 9,000 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 surgeons at leading academic
institutions whom 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 marketing
personnel specialize according to subspecialty within the ENT market as well as
by category of product.
In the international market, the Company sells through both a direct sales
force and over 120 independent 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 and the Middle East using independent distributors.
The Company believes it has experienced significant international sales gains as
a result of creating a dedicated sales force in certain markets focused
exclusively on selling its products.
- --------
(1) Flapmaker is a trademark of Hawken Industries, Inc.
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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 and equipment to
ICOT in connection with the training of these ENT surgeons. 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 a combination of direct sales representatives and
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 direct
sales representatives and dealers specializing in ophthalmic product sales.
Outside of the U.S., the Solan ophthalmic product line is typically marketed
through the same direct and independent distributor system as the Company's ENT
product lines. The TreBay brand of orthopaedic hip revision instruments is
marketed in the U.S. through an exclusive arrangement with a major orthopaedic
company.
The Company seeks to maintain inventory levels that provide its customers
with a high standard of service. In addition, the Company may build inventories
in advance of new product launches to support sales as well as to provide its
sales force with product samples. The Company generally allows its customers to
return products for any reason within 45 days of shipment.
PRODUCT DEVELOPMENT
In each of the last four years, new products have accounted for an
increasing percentage of the Company's total sales. In 1998, 1997 and 1996,
products introduced within the last three years of the relevant fiscal year
represented approximately 35%, 29%, and 23% of the Company's ENT sales,
respectively.
The Company believes that it has a strong base of proprietary engineering,
manufacturing and biomaterials capabilities. The Company also believes it has
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 and head and neck 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 helps implement 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 has entered into royalty agreements or, in certain cases,
consulting agreements, with more than 30 ENT specialists as part of its product
development activities. The royalty agreements generally provide that the
specialist is entitled to a percentage of the revenues generated from the
Company's sales of products developed by the Company in collaboration with the
specialist. In addition, the royalty agreements generally provide that all
products developed in collaboration between the specialist and the Company will
be the exclusive property of the Company, subject to the specialist's right to
receive royalties. The Company is not obligated to make material payments under
any of the royalty or consulting agreements.
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 the Company's various hand instruments,
implants, electrical powered systems, polymer products and disposable products.
Currently, the Company's research and development department consists of
thirteen engineers experienced in various technical specialties relevant to 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
intended to complement current products and new "state of the art" devices that
fit within the overall Company's business strategy. During 1998, 1997 and 1996,
the Company spent $4.7 million, $4.1 million, and $3.7 million, respectively, in
connection with research and development activities.
The Company also is pursuing research and development projects that target
markets outside of ENT. The Company currently has active projects to develop
products for the plastic and reconstructive surgery market.
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SUPPLIERS
Although most of the purchased components utilized by the Company in
manufacturing are available from more than one supplier, certain materials,
including thermoplastic elastomer ("TPE") based materials and certain
fluoropolymers used in its ventilation tubes, are obtained from a single
supplier. Daikin America, Inc. supplies the Company with the TPE-based materials
and is not obligated to supply the materials to the Company for any fixed period
of time. If the supply of materials from a single source supplier were
interrupted in the future, 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 need 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.
In addition to purchased components for manufacturing, the Company also
sources certain finished products or near finished products from third parties
for distribution into the ENT and ophthalmic markets. Although most products
obtained in this manner are available from more than one supplier, certain
products, including the Company's LandmarX(TM) image guided surgery system and
the Company's Flapmaker(TM) microkeratome system include proprietary technology
which is owned by the respective suppliers. If the supply of these products were
to be interrupted, replacement or alternative sources may not be readily
obtainable due to the high cost and expertise required to develop replacement
technology internally or the inability to secure similar technology from
alternative 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 products; 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, complete approval or clearance processes and
supply sufficient 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 with 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 Significant Competition."
The Company competes with Smith & Nephew ENT (a division of Smith & Nephew
plc formerly known as Richards Medical Company) 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 Conmed
Corporation) 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 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 manufacturing, labeling,
promotion 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 marketing clearance from the FDA 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. There is no assurance that such clearance will be
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granted for any of the Company's products that are under development or any of
its 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.
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. The 510(k) pre-market
notification process generally takes at least three months. 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 products currently marketed by the Company either have received
FDA marketing clearance pursuant to 510(k) pre-market notifications or PMA
applications 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
generally 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 and/or to stop marketing until new 510(k)s
are cleared by the FDA.
Failure to comply with applicable regulatory requirements could result in,
among other things, warning letters, fines, injunctions, civil monetary
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 the FDA's Quality System
Regulations ("QSR"). These regulations require that the Company manufacture its
products and maintain its documents in a prescribed manner with respect to
design, 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
malfunctions 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.
The Company is also subject to numerous federal, state and local laws
relating to such matters as safe working
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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 that 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 European Union ("EU"), CE mark certification
procedures became available in January 1995 for medical devices. Since June
1998, medical devices must display the CE mark to be sold in EU countries.
Successful completion of these procedures allows certified devices to be placed
on the market in all EU countries. In order to obtain the right to affix the CE
mark to their products, medical device companies must obtain certification that
their processes meet European quality standards, including certification that
their design and manufacturing facilities comply with ISO 9001 standards. All of
the Company's products marketed in the countries comprising the EU have been CE
marked. The Company successfully obtained certification under the ISO 9001
standards in November 1995. 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 Sections 801(e) and/or 802 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.
Other trends in third party reimbursement programs may impact the Company's
results of operations and financial position. During the past several years,
major third-party payors have substantially revised their reimbursement
methodologies in an attempt to contain their health care reimbursement costs.
Medicare 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
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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.
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 January 31, 1999, the Company held 62 U.S. patents and 11 foreign
patents, and had filed 40 additional U.S. patent applications and 4 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 pursuing 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 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.
Additionally, such an adverse determination could require the company to pay
retroactive license fees or other monetary damages.
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
16
<PAGE>
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
against this risk, including maintaining general liability and commercial
liability insurance policies which include adequate coverage for product
liability claims. The Company evaluates its insurance requirements on an ongoing
basis to enable it to maintain adequate levels of coverage. 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 and/or
insurance coverage for these actions, and that the ultimate outcome of these
actions will not have a material adverse effect on the Company's business,
financial condition and results of operation.
EMPLOYEES
As of December 31, 1998, the Company had 724 full-time employees and 5
temporary employees, including 309 in production, 122 in professional and
technical positions, 100 in administration and 198 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.
RISK FACTORS
THE FOLLOWING FACTORS ARE AMONG THOSE THAT MAY CAUSE THE COMPANY'S ACTUAL
RESULTS TO DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K.
POSSIBLE ADVERSE EFFECTS OF SIGNIFICANT 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 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 Company does not maintain key man life insurance that
provides for the payment of proceeds to the Company on any of its employees. The
loss of the services of certain of these individuals or of other key personnel
could have a material adverse effect on the Company. Although the Company has
entered into an employment agreement with each of James T. Treace, its
President, Chief Executive Officer and Chairman, and F. Barry Bays, its Senior
Vice President, Operations and Chief Operating Officer, that includes
non-competition covenants, there can be no assurance that either of these
individuals or any
17
<PAGE>
other key employee will not terminate his or her employment with 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. See "Employees."
RISKS ASSOCIATED WITH DIRECT INTERNATIONAL SALES OPERATIONS AND CURRENCY
EXCHANGE RISKS. Within the past four years, the Company has established direct
sales operations in five countries. The failure of these direct sales operations
to develop successfully may have a material adverse effect 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 1998 and 30% of net sales in 1997, and the Company expects that
international sales will continue to be a significant portion of the Company's
business. Fluctuations in currency exchange rates, as well as increases in duty
rates, and difficulties in obtaining export licenses may adversely affect the
Company's international business. 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. Although the Company in 1997 began hedging its intercompany
foreign currency receivables to protect against uncertainty in the level of
future exchange rates, there can be no assurance that such hedging will succeed
in protecting against such uncertainty. International sales in emerging
economies are also subject to potential political and economic instability,
regional conflicts, unexpected changes in regulatory requirements, longer
payments cycles, great difficulty in receivable collection, potentially adverse
tax consequences and trade restrictions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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.
UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT FOR COSTS OF PRODUCTS.
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. Although the Company believes 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, there can be no assurance that the development of such
products will have this effect or that third-party payors will reimburse the
costs of such instrumentation. In addition, although the Company does not depend
on reimbursement from third-party payors with respect to its products used in
surgical cosmetic procedures, there can be no assurance these procedures will
not become subject to third-party reimbursement in the future. 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 product suppliers.
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
government or third-party payors does not provide coverage and adequate
reimbursement levels for use of the Company's 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
18
<PAGE>
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 "Third-Party
Reimbursement."
UNCERTAINTY OF EFFECT OF POTENTIAL 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 is 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's business, financial condition and
results of operations.
EXTENSIVE 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 the manufacturing, labeling,
promotion 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 a 510(k) pre-market notification or obtain approval
through a more detailed application process resulting in a 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
will not require the Company to submit new 510(k)s for any of the changes made
to the devices and/or to stop marketing until new 510(k)s are cleared by the
FDA.
All of the products currently marketed by the Company either have received
marketing clearance pursuant to 510(k) pre-market notifications or PMA
applications filed by the Company and cleared by the FDA, or are exempt from
obtaining marketing clearance by virtue of (1) their status as pre-amendment
devices (I.E. devices introduced into interstate commerce prior to May 28, 1976)
or (2) their 510(k) exemption by regulation where applicable. 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 with 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, the FDA's Quality System Regulations ("QSR") must be adhered
to with respect to all of the products manufactured by the Company and its
contract manufacturers. Ongoing compliance with QSR 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 design, 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
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<PAGE>
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 monetary
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. Any of the actions could result in adverse publicity for the
Company and could damage the Company's reputation.
A portion of the Company's revenue is dependent upon sales of its products
outside the U.S. Foreign regulatory bodies have established carrying regulations
governing product standards, packaging requirements, labeling requirements,
import restrictions, tariff regulations, duties and tax requirements. Since June
1998, medical devices cannot be sold in 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
and maintain certification that its processes meet European quality standards,
including certification that its design and manufacturing facility complies with
ISO 9001 standards. All of the Company's products marketed in the countries
comprising the trading members of the EU have been CE marked. There can be no
assurance that the Company will be able to maintain 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 "Government Regulation."
The Company also is subject to various federal and state laws pertaining to
health care "fraud and abuse," including anti-kickback laws and false claims
laws. Anti-kickback laws make it illegal to knowingly and willfully offer, pay
solicit or receive any remuneration (including any kickback, bribe or rebate)
directly or indirectly, overtly or covertly, in cash or in kind in return for or
to induce (a) the referral of an individual for the furnishing or arranging for
the furnishing of any item or service, or (b) the purchasing, leasing, ordering,
or arranging for or recommending purchasing, leasing, or ordering of any good,
facility, service, or item. False claims laws prohibit anyone from knowingly and
willfully presenting, or causing to be presented, claims for payment that
contain false or fraudulent information. Violations of these laws are punishable
by criminal and/or civil sanctions including, in some instances, imprisonment
and exclusion from participation in federal health care programs, including
Medicare and Medicaid. The Company has never been challenged by a governmental
authority under these laws and believes that, based on this history, its
operations are in material compliance with such laws. However, because of the
broad scope of some of these laws, there can be no assurance that one or more of
the Company's practices would not be challenged by governmental authorities
under certain of these laws, that the Company would not be required to alter its
practices as a result, or that the occurrence of one or more of these events
would not result in material adverse effect on the Company's business, financial
condition and results of operations.
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. The Company's competitive position and business operations do not
materially depend on any expired patents or patents expiring in the near future.
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
enforceability of patents issued with respect to biomedical products can be
highly uncertain. Federal court decisions establishing legal standards for
determining the validity and scope of patents are in transition. There can be no
assurance that the historical legal standard surrounding questions of validity
and scope will continue to be applied or that current defenses as to issued
patents in the field will offer protection in the future. 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 that the Company would ultimately be able to
protect meaningful rights to such unpatented proprietary technology.
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The commercial success of the Company will also depend in part on its not
infringing patents issued to others or 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 termination of the licenses or conversion of
the licenses from being exclusive to nonexclusive in nature.
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 proprietary rights of other parties. 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 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's business, financial condition and
results of operations. See "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 TPE-based materials and
certain fluoropolymers used in certain of its ventilation tubes, currently are
obtained from a single source. Although it is not presently the case, if the
supply of materials from a single source vendor were interrupted, replacement or
alternative sources might 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.
In addition to purchased components for manufacturing, the Company also
sources certain finished products or near finished products from third parties
for distribution into the ENT and ophthalmic market. Although most products
obtained in this manner are available from more than one supplier, certain
products including the Company's LandmarX(TM) image guided surgery system and
the Company's Flapmaker(TM) microkeratome system include proprietary technology
which is owned by the respective suppliers. If the supply of these products were
interrupted in the future, replacement or alternative sources may not be readily
obtainable due to the high cost and expertise required to develop replacement
technology internally or the inability to secure similar technology from
alternative suppliers. See "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
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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 "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.
ANTI-TAKEOVER CONSIDERATIONS. The Company's Second Restated Certificate of
Incorporation authorizes 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 Common Stock of the
Company and could adversely affect the prevailing market price of the Common
Stock. The rights of the holders of 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. In addition, the Company is subject to the provisions of
Section 203 of the Delaware General Corporation Law, which could prohibit or
delay a merger, takeover or other change in control of the Company and therefore
discourage attempts to acquire the Company.
ITEM 2. PROPERTIES
The Company owns its 109,000 square foot corporate headquarters and
manufacturing facility located in Jacksonville, Florida. Over 30,000 square feet
is dedicated to manufacturing and a new 45,000 square foot
distribution/warehouse facility was completed in November of 1998. The Company
has numerous manufacturing capabilities at the Jacksonville facility, including:
injection molding; insert molding; computerized numerical control machining;
CAD/CAM; form, fill and seal; ethylene oxide gas sterilization utilizing a
Joslyn gas 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.
Construction of additional administrative offices has begun and is scheduled to
be completed in 1999.
The Company owns a 34,000 square-foot manufacturing facility and a 6,300
square-foot distribution facility in Mystic, Connecticut where the Company's
Merocel product line of fluid-control products is manufactured. Also, the
Company owns a 26,000 square-foot manufacturing facility in St. Aubin, France
where it manufactures precision hand-held instruments.
In addition to these owned properties, the Company leases office and
warehouse space at its direct sales locations in Mississauga, Canada; Bristol,
England; Gilching, Germany; Sydney, Australia; and Paris, France (which will be
closed in 1999 as a result of the acquisition of Micro-France). See Note 6 of
the Consolidated Financial Statements included in this Annual Report on Form
10-K.
Currently, the Company operates two manufacturing shifts in Jacksonville
and one shift in Mystic and St. Aubin and has the ability to increase production
levels of its current product line without expanding its manufacturing
facilities. The Company believes that the properties, in conjunction with the
planned expansion, are adequate to serve the Company's business operations for
the at least the next two years.
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ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock began trading on the NASDAQ National Market on October 11,
1996 at $21 per share.
The following shows the high and low market prices for each quarter over
the last two years:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
- ----------- --------------------- ---------------------- --------------------- ---------------------
MARKET
PRICE 1998 1997 1998 1997 1998 1997 1998 1997
- ----------- --------- ---------- ---------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $19-5/8 $13-1/3 $22-1/8 $20-7/16 $27-1/8 $16-7/16 $32-5/8 $16
Low $14 $7-13/16 $17-3/4 $10-3/16 $18-1/2 $12-7/16 $24-5/8 $13-3/16
</TABLE>
The total number of holders of record of Common Stock as of February 26,
1999 was approximately 120. The Company's Common Stock closed at $36.375 on that
date.
The Company historically has not paid cash dividends on the Common Stock
and does not anticipate paying cash dividends in the next few years. In
addition, the Company's Amended and Restated Credit Agreement with its bank
restricts the payment of dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the
consolidated financial statements of the Company for each of the five years
ended December 31, 1998. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operation" and the consolidated financial statements and notes
thereto included in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994(l)
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
FINANCIAL RESULTS
Sales, net .......................................... $ 91,383 $ 77,240 $ 65,664 $ 59,865 $ 42,475
Cost of sales ....................................... 35,284 30,475 25,926 22,256 15,350
Amortization of acquisition costs allocated to
inventory ........................................ -- -- -- 919 3,883
--------- --------- --------- --------- ---------
Gross margin ........................................ 56,099 46,765 39,738 36,690 23,242
OPERATING EXPENSES
Selling, general and administrative .............. 34,335 30,334 26,799 27,077 19,126
Research and development ......................... 4,681 4,088 3,659 2,405 1,958
Amortization of intangibles (2) .................. 2,417 2,374 2,421 2,579 2,652
Write-off of acquired research and development (3) 1,153 -- 2,380 -- --
Restructuring and other charges (4) .............. 1,809 -- 3,093 -- --
--------- --------- --------- --------- ---------
Total operating expenses ............................ 44,395 36,796 38,352 32,061 23,736
--------- --------- --------- --------- ---------
Operating income from continuing operations ......... 11,704 9,969 1,386 4,629 (494)
Interest income (expense), net ...................... 559 (104) (2,205) (3,063) (2,148)
Loss on impairment of investments (5) ............... (828) -- -- -- --
Other income, net ................................... 69 234 525 114 313
--------- --------- --------- --------- ---------
Income before income tax expense (benefit) .......... 11,504 10,099 (294) 1,680 (2,329)
Income tax expense (benefit) ........................ 4,424 3,969 873 1,355 (774)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations ............ $ 7,080 $ 6,130 $ (1,167) $ 325 $ (1,555)
========= ========= ========= ========= =========
PER SHARE (6)
Income (loss) from continuing operations available
to common shareholders ........................... $ 0.61 $ 0.56 $ 0.76 $ (2.35) $ (3.47)
========= ========= ========= ========= =========
Income (loss) from continuing operations available
to common shareholders - diluted ................. $ 0.59 $ 0.54 $ (0.15) $ (2.35) $ (3.47)
========= ========= ========= ========= =========
Weighted average common shares outstanding-diluted .. 12,088 11,268 7,802 1,514 1,227
========= ========= ========= ========= =========
FINANCIAL CONDITION
Working capital ..................................... $ 32,534 $ 26,106 $ 18,460 $ 12,234 $ 12,744
Cost in excess of net assets acquired, net .......... 49,488 42,399 44,389 46,381 54,300
Total assets ........................................ 141,996 95,727 94,056 93,123 95,720
Long-term debt including redeemable preferred stock . 13,062 -- 3,563 90,488 89,985
Total shareholders' equity (deficit) ................ 114,242 86,509 79,567 (13,058) (7,336)
</TABLE>
- --------
(1) The statement of operations data includes the results of operations of
Xomed-Treace since the date of its acquisition by the Company in April
1994.
(2) Amortization of intangibles included in total operating expenses includes
amortization of foreign distribution rights of $162,000 and $838,000,
respectively, for the years ended December 31, 1995 and 1994, respectively.
(3) Research and development acquired in the purchase of TreBay Medical for the
year ended December 31, 1996. Research and development acquired in the
purchase of Micro-France for the year ended December 31, 1998. See Note
No.1 to the Consolidated Financial Statements included in this Annual
Report on Form 10-K.
(4) Restructuring charge related to combination of certain operations and
termination of employees for the year ended December 31, 1996.
Restructuring charge related to combination of certain operations and
termination of certain employees and termination of two supplier agreements
for the year ended December 31, 1998. See Note No.6 to the Consolidated
Financial Statements included in this Annual Report on Form 10-K.
(5) Loss recorded related to a portion of the Company's portfolio of
investments. See Note No. 5 to the Consolidated Financial Statements
included in this Annual Report on Form 10-K.
(6) The earnings per share have been adjusted to give effect to the
three-for-two split of the Company's Common Stock effective November 30,
1998. See Note 8 to the Consolidated Financial Statements included in this
Annual Report on Form 10-K. Additionally, basic earnings per share for 1994
and 1995 were reduced by accreted preferred stock dividends of $2.20 and
$2.57 per share, respectively, and increased in 1996 by $1.04 per share
related to dividend forgiveness. Diluted earnings per share was affected
similarly in 1994 and 1995, but not affected in 1996 due to the dilutive
effect of the preferred shares using the if-converted method of calculating
per share earnings when preferred stock is outstanding.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
THIS ANNUAL REPORT ON FORM 10-K 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 "BUSINESS--RISK FACTORS" AND BELOW. READERS ARE CAUTIONED NOT To
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF
THE DATE HEREOF. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO PUBLICLY
RELEASE ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH SELECTED
HISTORICAL FINANCIAL INFORMATION (ITEM 6) AND THE CONSOLIDATED FINANCIAL
STATEMENTS OF THE COMPANY, WHICH ARE INCLUDED IN THIS FORM 10-K.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET SALES. Net sales increased 18.3% to $91.4 million in 1998 from $77.2
million in 1997. 65.3% of the increase relates to growth of the XPS(R) powered
tissue removal system and related disposable products. The Company's core ENT
business of sinus and rhinology, head and neck and otology increased 23.4%,
which resulted in these product lines representing 82.6% of the Company's
revenue in 1998 as compared to 79.2% in 1997. Non-ENT business decreased 1.1%,
relating primarily to a reduction in sales of orthopaedic instruments under a
contract with one customer and discontinuance of certain product lines in the
international market. These decreases were partially offset by a 5.9% increase
in sales of Solan ophthalmic products. Total domestic sales increased 20.1% and
international sales increased 14.1% in 1998 over 1997. Increased sales to Japan
accounted for 37.7% of the total increase in international sales. During 1998,
the Company received regulatory approval to sell its XPS(R) system and
PowerForma(R) drill in Japan. Excluding the unfavorable effects of foreign
currency comparisons, international sales were up 16.3% from 1997.
COST OF SALES. Cost of sales increased 15.8% to $35.3 million in 1998 from
$30.5 million in 1997. As a percent of sales, cost of sales was 38.6% in 1998 as
compared to 39.5% in 1997. Gross profit was 61.4% in 1998 as compared to 60.5%
in 1997. The improvement in gross profit primarily relates to increased sales of
disposable products for the XPS(R) system, manufacturing cost reductions, and
price increases in certain product lines.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 13.2% to $34.3 million from $30.3 million in
1997. For 1998, as a percent of sales, selling, general and administrative
expenses were 37.6% as compared to 39.3%, in 1997. This decrease, as a percent
of sales, is due to increasing sales and certain semi-fixed general and
administrative expenses.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 14.5%
to $4.7 million in 1998 but decreased as a percent of sales to 5.1% in 1998 from
5.3% during 1997. Major new product spending in 1998 related to straight and
curved cutter blades, enhancements to the XPS(R) system, development of the
NIM-Response(TM) nerve integrity monitor, increased clinical and regulatory
activity, and other projects. The Company believes it has a strong base of
proprietary engineering, manufacturing and biomaterial capabilities upon which
to build its future research and development efforts.
AMORTIZATION. Amortization expense increased to $2,417 million from $2,374
million in 1997. The amortization relates primarily to approximately $49.9
million of goodwill generated from the Xomed Acquisition in April 1994, which is
being amortized over 25 years.
WRITE-OFF OF ACQUIRED RESEARCH AND DEVELOPMENT. The Micro-France
acquisition was accounted for under the purchase method of accounting.
Accordingly, the purchase price of approximately $13.0 million, net of cash
acquired, 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 a cost in excess of net assets acquired of $10.2
million, of which $1.2 million was allocated to in-process research and
development and charged to expense in the fourth quarter of 1998. The in-process
research and development was valued based on management's projections of cash
flows, the estimated stage of completion of the development project and costs to
achieve technological feasibility of
25
<PAGE>
the products. Estimated costs to achieve technological feasibility are less than
$50,000.
RESTRUCTURING AND OTHER CHARGES. As noted previously under "Business--
Background", the Company incurred restructuring and other charges in the fourth
quarter of 1998 of $1.8 million consisting of (i) $580,000 related to the
transfer of a portion of the manufacturing process for Merocel sinus packing
material from the Company's facility in Mystic, Connecticut to its main facility
in Jacksonville, Florida, (ii) $ 261,000 related to the closure of the Company's
sales office in Paris, France, which is being consolidated into its recently
acquired Micro-France office in St. Aubin, France, and (iii) $1.0 million
related to the termination of two supplier agreements. See Note 6 of the
Consolidated Financial Statements included in this Annual Report on Form 10-K.
INTEREST AND OTHER. Interest expense decreased 70.1% to $84,000 in 1998
from $280,000 in 1997 due to lower average debt levels during the current
period. Interest and dividend income increased 265.3% to $643,000 in 1998 from
$176,000 in 1997. The increase of $467,000 relates to a higher average balance
of invested assets during the current period due to proceeds from a secondary
stock offering as previously discussed in "Business--Background". Other income
decreased to $69,000 in 1998 from $234,000 in 1997. The majority of this
decrease relates to foreign currency exchange costs.
LOSS ON IMPAIRMENT OF INVESTMENT. In the fourth quarter of 1998, the
Company recognized a loss of $828,000 related to a write-down of the Company's
portfolio of investments, which loss was deemed to be other-than temporary. See
Note 5 of the Consolidated Financial Statements included in this Annual Report
on Form 10-K.
INCOME TAXES. The Company's effective tax rate was 38.5% for 1998 as
compared to 39.3% in 1997. This difference related principally to the
dividend-received exclusion on dividend income.
NET INCOME. Net income increased 15.5% to $7.1 million in 1998 from $6.1
million in 1997. As discussed above, the Company incurred $3.8 million of
special charges ($2.3 million after tax) consisting of (i) $1.2 million related
to the write-off of acquired research and development, (ii) $1.8 million related
to restructuring and other charges and (iii) $828,000 related to loss on
impairment of investments. Excluding the effect of these items, net income would
have been $9.4 million, which represents an increase of 53.2% over the $6.1
million reported in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES. Net sales increased 17.6% to $77.2 million in 1997 from $65.7
million in 1996. On a sequential quarter basis, the Company generated overall
sales growth of 9.2% in the first quarter of 1997, 15.4% in the second quarter,
17.7% in the third quarter and 27.9% in the fourth quarter when compared to the
prior year's comparable quarters. The improvement in sales growth in each
successive quarter of 1997 relates principally to accelerating growth in sinus
and rhinology product lines as a result of the Company's introduction of its XPS
Straight Shot(R) system used in endoscopic sinus procedures and an overall
improvement in the Company's international business in the third and fourth
quarters due to recent new product introductions and improving availability of
funding in certain international healthcare systems in which the Company
competes. In the core businesses of sinus and rhinology, head and neck and
otology, sales increased 17.2% in 1997 over 1996, which resulted in these
product lines representing 79.2% of the Company's revenue in 1997 as compared to
79.5% in 1996. Total domestic sales increased 20.5% in 1997 compared with 1996,
and international sales increased 11.5% in 1997 compared with 1996. Excluding
the unfavorable effects of foreign currency comparisons, international sales
were up 15% from 1996.
COST OF SALES. Cost of sales increased 17.6% to $30.5 million in 1997 from
$25.9 million in 1996. As a percent of sales, cost of sales was 39.5% in 1997
and 1996. Gross profit was 60.5% for both 1997 and 1996. The margin in 1997 was
depressed due to higher volumes of lower margin products, including the
orthopaedic instrument line, which was offset by higher margins in sinus and
rhinology attributed to new product introductions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 13.2% to $30.3 million from $26.8 million in
1996. For 1997, as a percent of sales, selling, general and administrative
expenses were 39.3%, as compared to 40.8% in 1996. This decrease, as a percent
of sales, is due to increasing sales and certain semi-fixed general and
administrative expenses.
26
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expenses increased 11.7%
to $4.1 million in 1997 from $3.7 million in 1996, but decreased as a percent of
sales to 5.3% in 1997 from 5.6% during 1996. Major new product spending in 1997
related to straight and curved cutter blades, enhancements to the XPS(R)
microresector system - coupled with the introduction of the XPS(R) 2000
microresector system in December 1997 - as well as other projects.
OPERATING INCOME. Operating income for 1997 was $10.0 million compared to
$1.4 million for 1996. The increase in operating income of $8.6 million for 1997
from 1996 relates to the discussion above, and also to a $3.1 million
restructuring charge and the $2.4 million write-off of in-process research and
development in conjunction with the purchase of TreBay, both of which were
recorded in the second quarter of 1996. For 1997, operating income as a percent
of sales was 12.9% compared to 10.4% for 1996, after adding back the
restructuring and write-off charges which occurred only in 1996. This increase
as a percent of sales related to fixed amortization expense and semi-fixed
expenses within the general and administrative category.
INTEREST AND OTHER. Interest expense decreased 88.3% to $280,000 for 1997
from $2.4 million in 1996 due to lower average debt levels during the current
period. Other income, net was $234,000 for 1997 compared to $525,000 in 1996.
This decrease of $291,000 related principally to the expiration of a royalty
agreement in late 1996.
INCOME TAXES. The Company's effective tax rate was 39.3% for 1997. The
Company had tax expense of $873,000 on a loss of $294,000 for the year ended
December 31, 1996. The Company incurred tax expense instead of a tax benefit on
the loss due to the lack of tax benefit related to the write-off of in-process
research and development costs.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which is required to be adopted for fiscal
years beginning after June 15, 1999, although earlier application is permitted
as of the beginning of any fiscal quarter. SFAS 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, changes in the fair value of the derivatives are offset against the
change in fair value of the hedged assets or liabilities and either included as
a component of comprehensive income or recognized in earnings. The Company is in
the process of determining what effect the adoption of SFAS 133 will have on the
Company's results of operations, cash flows or financial position.
RECENT EVENTS
STOCK SPLIT. Effective November 30, 1998, the Company declared a stock
split whereby each shareholder of record on November 16, 1998 received as a
dividend for every two shares of Common Stock held, one additional share of
Common Stock. The shareholders received cash in lieu of fractional shares.
WARBURG, PINCUS INVESTORS, L.P. STOCK DISTRIBUTION. Warburg, Pincus
Investors, L.P. ("Warburg") informed the Company that, on November 4, 1998, it
distributed to its partners approximately 1.2 million shares of Common Stock,
representing approximately 51% of Warburg's holdings in the Company and 15% of
the Company's outstanding Common Stock. Further, on January 12, 1999, Warburg
distributed substantially all of its remaining holdings in the Company to its
partners. Warburg also informed the Company that the distribution is consistent
with Warburg's practice of distributing the shares of investments it deems
successful directly to its partners. The partners receiving the distribution
consist primarily of institutional investors including several large public and
private pension funds. After the distributions, Warburg's remaining holdings
represented less than 1% of the Company's outstanding stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company entered into an Amended and Restated Credit Agreement with its
bank in May 1997 under which it may borrow through a revolving credit facility
(the "line of credit") up to $25 million to be used for working
27
<PAGE>
capital needs and potential acquisitions. See Note No. 7 to the Consolidated
Financial Statements included in this Annual Report on Form 10-K.
For the year ended December 31, 1998, the Company generated $9.7 million
from operating activities as compared with $6.4 million cash generated in the
prior year. In 1998, the Company had a net use of cash of $4.7 million within
inventory, accounts receivable and accounts payable as compared to a net use of
cash within these components of $6.6 million in 1997. An increase in inventories
of $4.8 million comprised a significant use of cash in 1998 primarily due to
increased inventories of instruments, XPS(R)-related products and
nerve-monitoring products which is related to the Company's growth in sales.
Cash used in investing activities was $40.7 million in 1998 as compared to
$2.3 million used in 1997. $17.4 million of the proceeds from the secondary
stock offering was invested in preferred stocks pending use for other operating
and investing purposes. The Company acquired Micro-France at the end of 1998 for
$13.0 million net of cash acquired. Property and equipment expenditures were
$7.7 million in 1998 as compared to $2.4 million in 1997, primarily related to
expansion of the warehouse and production facilities at Jacksonville, Florida.
During 1998, the Company paid certain suppliers $2.5 million related to product
distribution rights.
Cash provided by financing activities was $33.5 million in 1998 compared to
$3.0 million used in 1997. The Company received $20.2 million from a secondary
stock offering in July 1998. The borrowing on the line of credit increased $13.1
million in 1998 to finance the acquisition of Micro-France. During 1998,
$292,000 was received from the exercise of stock options as compared to $655,000
in 1997.
The Company expects to spend approximately $9.7 million in 1999 on capital
acquisitions of which $5.7 million relates to its corporate headquarters
expansion (See Item 2--Properties). The Company expects to fund these
expenditures with cash from operations.
Based on the Company's ability to generate cash flow from operations and
with the availability of borrowing under its line of credit, the Company
believes it will be able to finance its working capital and expansion needs for
the next 24 months.
YEAR 2000
The Company has undertaken an internal assessment of its operations,
including its information systems, financial systems and its manufacturing
processes, in order to determine the extent to which the Company may be
adversely affected by Year 2000 issues. The Company's focus on this issue is to
avoid any adverse effect on business operations and ensure that transactions
with customers, suppliers, and financial institutions are fully supported. This
internal assessment is approximately 90% complete at present, and the Company
expects to finish the assessment process by June 1999. The Company plans to
devote the necessary resources to resolve any significant Year 2000 issues in a
timely manner. To date, the Company has performed limited testing of systems,
and may conduct further testing and/or an external audit following the
conclusion of its assessment. To date, only internal time and costs have been
incurred related to investigating and testing related to the Year 2000 issue.
These costs are immaterial to date. Present estimates for further expenditures
of both employee time and expenses to address Year 2000 issues are between
$50,000 and $100,000, respectively.
The Company has surveyed its significant suppliers, customers and other
third parties to determine their Year 2000 readiness and, to date, has received
responses from approximately 60% of those surveyed, a majority of whom have
certified they are compliant. The Company has conferred with significant
customers to assure that various systems used for data and information exchanges
between them will be compatible following December 31, 1999. The Company has
also initiated a formal program to advise customers, distributors and suppliers
of the Year 2000 issue; however, the Company believes it has no material
exposure to contingencies related to the Year 2000 issue for the products it has
sold.
28
<PAGE>
Based on its assessments to date, the Company believes it will not
experience any material disruption as a result of Year 2000 issues in internal
manufacturing processes, information processing or interface with key customers,
or with processing orders and billing. Possible Year 2000 worst case scenarios
include the interruption of significant parts of the Company's business as a
result of critical information systems failure or the failure of suppliers,
distributors or customers. Any such interruption may have a material adverse
impact on future results. Since their possibility cannot be eliminated, the
Company is incorporating Year 2000 concerns into its contingency plans for
dealing with catastrophic events. Although the Company expects its remediation
efforts will be completed on a timely basis, failure to do so could have a
material adverse effect on the Company's systems and results of operations which
could lead to an inability to process customer orders, ship products, bill
customers and collect payments. While the Company has taken the steps outlined
above, there can be no certainty that the systems and products of other
companies on which the Company relies will not have a material adverse effect on
the Company's operations. In addition, if certain third party service providers,
such as those supplying electricity, water or telephone service, experience
difficulties resulting in disruption of service to the Company, a shutdown of
the Company's facilities could occur for the duration of the disruption. At
present, the Company has not developed contingency plans but intends to
determine whether to develop any such plan in fiscal year 1999. Based on
existing information, the Company believes the anticipated spending to become
Year 2000 compliant will not have a material adverse effect on the Company's
financial condition, cash flows or results of operations. Nevertheless, there
can be no assurance that Year 2000 issues will not have a material adverse
effect on the Company's business, results of operation and financial condition.
SALES
SALES BY PRODUCT CLASSIFICATION. The Company derives 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 distributes through independent
dealers as well as a direct sales force. The following table summarizes the
Company's worldwide product line sales during the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
SALES:
<S> <C> <C> <C>
Sinus and Rhinology............................. $38,981 $28,848 $22,247
Head and Neck................................... 21,372 17,847 16,114
Otology......................................... 15,124 14,465 13,841
------- ------- -------
Total Core Business........................... 75,477 61,160 52,202
Ophthalmic and Other............................ 15,906 16,080 13,462
------- ------- -------
Total......................................... $91,383 $77,240 $65,664
======= ======= =======
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
-------- -------- --------
PERCENTAGE OF TOTAL SALES:
Sinus and Rhinology............................... 42.7% 37.4% 33.9%
Head and Neck..................................... 23.4 23.1 24.5
Otology........................................... 16.5 18.7 21.1
------- ------- -------
Total Core Business.......................... 82.6 79.2 79.5
Ophthalmic and Other.............................. 17.4 20.8 20.5
------- ------- -------
Total 100.0% 100.0% 100.0%
======= ======= =======
</TABLE>
SALES BY GEOGRAPHIC MARKET. The Company distributes its products on a
worldwide basis through an almost 100-person direct sales force in the U.S. and
selected other countries and through a network of over 130 independent
distributors. The Company's core ENT products are sold in the U.S. only on a
direct sales basis.
Approximately 29%, 30% and 32% of the Company's net sales in 1998, 1997 and
1996, respectively, were made outside the U.S. through direct operations in the
United Kingdom, Canada, France, Germany and Australia, as
29
<PAGE>
well as through independent international distributors, many of whom distribute
the Company's products exclusively. The portion of sales made outside the U.S.
in 1998 was lower than 1997 primarily due to economic difficulties in the Asia
region as well as the unfavorable effects of foreign currency rate comparisons
in international markets in 1998. The portion of sales made outside the U.S. in
1997 was lower than 1996 primarily due to international markets only having six
months of sales from the Company's new XPS(R) system compared with the twelve
months in the U.S. due to a later international introduction date as well as the
unfavorable effects of foreign currency rate comparisons in international
markets in 1997. The following table summarizes the Company's U.S. and
international sales for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
SALES:
U.S.......................................... $ 64,625 $ 53,798 # 44,647
International................................ 26,758 23,442 21,017
-------- -------- --------
Total ................................ $ 91,383 $ 77,240 # 65,664
======== ======== ========
PERCENTAGE OF TOTAL SALES:
U.S. ...................................... 70.7% 69.7% 68.0%
International.............................. 29.3% 30.3% 32.0%
-------- -------- --------
Total................................. 100.0% 100.0% 100.0%
======== ======== ========
</TABLE>
SALES BY EQUIPMENT VS. DISPOSABLE PRODUCTS. The Company places particular
emphasis on disposable products and implantable devices, which represented 77.0%
of sales in 1998 as compared with 79.6% of the total in 1997. One of the
Company's principal objectives is to continue to develop additional disposable
products for use with its instrumentation systems. The portion of sales from
disposable and implantable products was lower in 1998 than in 1997 primarily due
to increased sales of instruments and LandmarX(TM) image guided surgery systems
as previously described under "Products - Sinus and Rhinology". The portion of
sales from disposable and implantable products was lower in 1997 than 1996
primarily due to the addition of orthopaedic instrument sales in 1997 which did
not occur in 1996 and the introduction of the XPS(R) system during 1997 which
initially generates equipment sales followed by on-going revenues from
disposable products in later periods. The following table summarizes the
Company's sales of equipment and instrumentation products as well as disposable
and implantable products for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
SALES:
Equipment and Instrumentation Products...... $ 20,983 $ 15,768 $ 10,178
Disposable and Implantable Products......... 70,400 61,472 55,486
-------- -------- --------
Total.................................. $ 91,383 $ 77,240 $ 65,664
======== ======== ========
PERCENTAGE OF TOTAL SALES:
Equipment and Instrumentation Products...... 23.0% 20.4% 15.5%
Disposable and Implantable Products......... 77.0 79.6% 84.5%
-------- -------- --------
Total.................................. 100.0% 100.0% 100.0%
======== ======== ========
</TABLE>
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY
A portion of the Company's operations consists of sales activities in
foreign markets. The Company manufactures its products in the United States and
sells them outside the U.S. through a combination of international distributors
and five wholly-owned subsidiaries. Sales to the third party distributors are in
U.S. dollars and sales to the wholly-owned subsidiaries are in their local
currencies.
30
<PAGE>
As a result, the Company's financial results could be significantly
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in those foreign markets. The principal exposure on sales to
third party distributors stems from the potential for weak economic conditions
in the foreign market, thus weakening the foreign currency, decreasing the
customers' buying power and potentially decreasing the Company's sales. The
Company does not currently hedge this exposure. The Company's exposure on sales
to its subsidiaries in their currencies is two-pronged: (1) the exposure related
to the weakening of local currency when payment of the trade payable is made,
thus translating into fewer dollars; and (2) upon translation of the
subsidiaries' monthly financial statements, that a weakening local currency
would cause lower market sales to be recorded in U.S. Dollars than what would
have occurred had the currency been stable as compared to the U.S. Dollar.
However, in the latter instance, cost of goods sold and operating expenses would
also be translated at lower amounts and accordingly, the effect on net income
would be mitigated.
To mitigate the effects of item (1) described above, the Company enters
into short-term forward exchange contracts on those foreign currency receivables
to hedge almost the entire amounts. The exposures hedged include the Australian
and Canadian Dollars, French Franc, German Deutschmark and British Pound.
Hypothetically, if exchange rates were to change by 10% as compared to the U.S.
Dollar, the effects on the Company's receivables from its foreign receivables
would be materially offset by the Company's hedge. Foreign currency exchange
cost charged to expense for 1998 was approximately $58,000.
As a result of item (2) described above, the Company's earnings are
affected by fluctuations in the value of the U.S. Dollar as compared to the
currencies of the foreign markets in which the Company has subsidiaries. This
exposure relates to the translation of the foreign subsidiaries' earnings from
their respective functional currencies into the U.S. Dollar. As of the beginning
of 1998, the result of a uniform 10% strengthening in the value of the U.S.
Dollar relative to the currencies in which the Company's foreign subsidiaries
operate would affect income from operations by less than $25,000 for the year
ending December 31, 1998. This calculation assumes that each exchange rate would
change in the same direction relative to the U.S. Dollar. In addition, the
Company's sensitivity analysis of the effects of changes in foreign currency
exchange rates does not consider a potential change in sales levels or local
currency prices.
INTEREST RATE EXPOSURE
The Company is exposed to interest rate risk stemming from its preferred
stock portfolio. The Company has entered into short sales of U.S. Treasury Bond
futures ("derivatives") in order to hedge the effects of interest rates on these
investments. The Company believes that the value of the U.S. Treasury Bond
futures correlates inversely to the value of the preferred stocks upon changes
in interest rates. Accordingly, the Company's objective is to offset any gain or
loss on the exposed investments with gains or losses from the derivatives. The
Company does not use the derivatives for trading or speculative purposes.
Additionally, by adopting this strategy the Company is exposed to the
possibility that the gains and losses realized on the derivatives will not
correlate inversely with the gains and losses on the investments. As noted
previously in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," this situation occurred in the third and fourth quarters
of 1998 and the Company recorded losses of $828,000.
As of December 31, 1998, the Company holds positions in short sales of U.S.
Treasury Bonds ("Bonds") with a notional amount of $10.9 million based on a
price of $127.78. Upon closing out the short sale contracts, the Company could
experience gains and losses depending on the price of the Bonds. Assuming a
hypothetical increase or decrease of 10%, the price range of $115 to $140.56
would result in a potential gain of $1 million or a potential loss of $1
million. However, these ranges reflect the effect of interest rates on the hedge
strategy and not the exposed risk. Over the past ten years, investments in
preferred stocks at the Company's level would typically react inversely to the
amounts noted above and materially offset the gains or losses noted above.
Based on the Company's current program of liquidating these investments
over the next several months, the Company's belief that market conditions for
these investments are improving, and the valuation reserves established at
December 31, 1998, the Company does not anticipate incurring material future
losses on its investment portfolio. Based on the uncertainty of market
conditions, however, there can be no assurance that material future losses will
be avoided.
31
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements begin on page F-1 in this Annual Report on Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is hereby incorporated by reference
to such information contained in the Company's definitive proxy statement
relating to the Annual Meeting of Stockholders of the Company scheduled to be
held on May 13, 1999 (the "Proxy Statement"), which is expected to be filed
pursuant to Regulation 14A of the Securities and Exchange Act of 1934 not later
than 120 days after the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference
to such information contained in the Proxy Statement, which is expected to be
filed pursuant to Regulation 14A of the Securities and Exchange Act of 1934 not
later than 120 days after the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference
to such information contained in the Proxy Statement, which is expected to be
filed pursuant to Regulation 14A of the Securities and Exchange Act of 1934 not
later than 120 days after the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference
to such information contained in the Proxy Statement, which is expected to be
filed pursuant to Regulation 14A of the Securities and Exchange Act of 1934 not
later than 120 days after the end of the fiscal year covered by this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this Annual Report on
Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted since the required information is
not present or not present in amounts sufficient to require
submission of the schedule or because the information required is
included in the consolidated financial statements, including the
summary of significant accounting policies and the notes to the
consolidated financial statements.
32
<PAGE>
3. EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Stock Purchase Agreement among The Stockholders of
Etablissements Boutmy, S.A. and Xomed France Holdings,
S.N.C. dated December 30, 1998. 1
3.1 Second Restated Certificate of Incorporation. 1
3.2 Restated By-Laws. 1
3.3 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, Prospect 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. 2
4 Specimen of Company's Common Stock Certificate. 3
10.1 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. 2
10.2 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, International
Nederlanden (U.S.) Capital Corporation and Bank of
Boston Connecticut, as Agent. 2
10.3 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. 2
10.4 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. 2
10.5 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. 2
10.6 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. 2
10.7 Fifth Amendment and Waiver Agreement, dated as of
September 3, 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, The
Chase Manhattan Bank (formerly known as Chemical Bank),
Bank of Scotland, Internationale Nederlanden (U.S.)
Capital Corporation and Bank of Boston Connecticut, as
Agent. 4
10.8 Separation Agreement, dated as of May 10, 1996, between
the Company and Mark K. Adams. 4
10.9 Agreement, dated as of September 12, 1996, by and 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, Prospect Partners,
Vertical Fund Associates, L.P., Mark K.
33
<PAGE>
Adams, Solomon Rosenblatt, Ronald J. Cercone, William R.
Miller, Robert A. Reeves, First Union Capital Partners,
Inc., James T. Treace, John R. Treace, Dan H. Treace, F.
Barry Bays, Thomas E. Timbie, Thomas Drury and David R.
Grant. 3
10.10 Compliance Agreement, dated as of April 1, 1996, by and
between Daikin America, Inc. and Xomed Surgical
Products, Inc. 3
10.11 Supply Agreement, dated as of November 9, 1994, by and
between TreBay Medical Corporation (formerly known as
Micromed Development Corporation) and Consolidated
Polymer Technologies. 3
10.12 Sixth Amendment and Waiver Agreement, dated as of
December 30, 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, The
Chase Manhattan Bank (formerly known as Chemical Bank),
Bank of Scotland, Internationale Nederlanden (U.S.)
Capital Corporation and Bank of Boston Connecticut, as
Agent.5
10.13.1 Xomed Surgical Products, Inc. 1996 Stock Option Plan. 2
10.13.2 Third Amended and Restated Xomed Surgical Products, Inc.
1996 Stock Option Plan.6
10.13.3 Third Amended and Restated Xomed Surgical Products, Inc.
1996 Stock Option Plan (incorporating amendments
approved at May 21, 1998 annual meeting of
stockholders). 1
10.14 Amended and Restated Credit Agreement dated as of May 5,
1997 among the Company, Bank of Boston Connecticut, as
agent, and the Banks named therein. 6
10.15 Employment Agreement dated as of February 24, 1999
between the Company and James T. Treace. 1
10.16 Employment Agreement dated as of February 24, 1999
between the Company and F. Barry Bays. 1
21 Subsidiaries. 1
23 Consent of Ernst & Young LLP. 1
27 Financial Data Schedule. 1
(b) REPORTS ON FORM 8-K
None
- -------------------------------
1 Filed herewith.
2 Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-10515).
3 Incorporated by reference to Amendment No. 3 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-10515).
4 Incorporated by reference to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-10515).
5 Incorporated by reference to the Registrant's Annual Report
on Form 10-K dated December 31, 1996.
6 Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q dated June 28, 1997.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 22, 1999.
XOMED SURGICAL PRODUCTS, INC.
By: /s/ JAMES T. TREACE
---------------------------
James T. Treace
President, Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
President, Chief Executive Officer and
Chairman of the Board
/s/ James T. Treace (Principal Executive Officer) March 22, 1999
- --------------------------------
James T. Treace
Vice President and Chief Financial
Officer (Principal Financial and
/s/ Thomas E. Timbie Accounting Officer) March 22, 1999
- --------------------------------
Thomas E. Timbie
/s/ Richard B. Emmitt Director March 22, 1999
- --------------------------------
Richard B. Emmitt
/s/ William R. Miller Director March 22, 1999
- --------------------------------
William R. Miller
/s/ Rodman W. Moorhead, III Director March 22, 1999
- --------------------------------
Rodman W. Moorhead, III
/s/ James E. Thomas Director March 22, 1999
- --------------------------------
James E. Thomas
/s/ Elizabeth H. Weatherman Director March 22, 1999
- --------------------------------
Elizabeth H. Weatherman
</TABLE>
35
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
REFERENCE
-----------------
FORM 10-K PAGE
NUMBER
-----------------
<S> <C>
Report of Independent Auditors F-2
Consolidated Balance Sheets at December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1998 F-4
Consolidated Statements of Changes in Shareholders' Equity for each of
the three years in the period ended December 31, 1998 F-5
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1998 F-6
Notes to Consolidated Financial Statements F-7
</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, 1998
and 1997, 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, 1998. 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, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
February 22, 1999
Jacksonville, Florida
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 4,256 $ 1,712
Accounts receivable, less allowance for doubtful accounts of $901
and $735 at December 31, 1998 and 1997, respectively .......... 18,516 13,277
Other receivables ............................................... 287 620
Inventories ..................................................... 22,368 16,238
Prepaid and other assets ........................................ 1,203 1,083
Deferred income taxes ........................................... 96 1,404
--------- ---------
Total current assets ............................................... 46,726 34,334
Investment securities .............................................. 16,584 --
Notes receivable from officers ..................................... 826 724
Property, plant and equipment, net ................................. 21,769 15,403
Cost in excess of net assets acquired, net ......................... 49,488 42,399
Other assets ....................................................... 4,293 2,867
Deferred income taxes .............................................. 2,310 --
--------- ---------
Total assets ....................................................... $ 141,996 $ 95,727
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 5,325 $ 3,493
Accrued expenses ................................................ 4,923 2,403
Accrued payroll and commissions ................................. 2,989 2,332
Accrued restructuring costs ..................................... 955 --
--------- ---------
Total current liabilities .......................................... 14,192 8,228
Deferred credits ................................................... 500 990
Long-term debt ..................................................... 13,062 --
Shareholders' equity:
Preferred stock, $1.00 par value, 1,000,000 shares authorized,
-0- shares issued and outstanding ............................. -- --
Common Stock, voting, $.01 par value, 30,000,000 shares
authorized, 12,140,068 shares issued and outstanding .......... 81 73
Accumulated earnings (deficit) .................................. 3,621 (3,459)
Additional paid-in capital ...................................... 110,831 90,264
Cumulative translation adjustments .............................. (122) (88)
Deferred stock compensation ..................................... (169) (281)
--------- ---------
Total shareholders' equity ......................................... 114,242 86,509
--------- ---------
Total liabilities and shareholders' equity ......................... $ 141,996 $ 95,727
========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Sales, net ....................................................... $ 91,383 $ 77,240 $ 65,664
Cost of sales .................................................... 35,284 30,475 25,926
-------- -------- --------
Gross profit ..................................................... 56,099 46,765 39,738
Operating expenses:
Selling, general and administrative ......................... 34,335 30,334 26,799
Research and development .................................... 4,681 4,088 3,659
Amortization of intangibles ................................. 2,417 2,374 2,421
Write-off of acquired research and development .............. 1,153 -- 2,380
Restructuring and other charges ............................. 1,809 -- 3,093
-------- -------- --------
Total operating expenses ......................................... 44,395 36,796 38,352
-------- -------- --------
Income from operations ........................................... 11,704 9,969 1,386
Interest and dividend income ..................................... 643 176 194
Interest expense ................................................. (84) (280) (2,399)
Other income, net ................................................ 69 234 525
Loss on impairment of investments ................................ (828) -- --
-------- -------- --------
Income (loss) before income tax expense .......................... 11,504 10,099 (294)
Income tax expense ............................................... 4,424 3,969 873
-------- -------- --------
Net income (loss) ................................................ $ 7,080 $ 6,130 $ (1,167)
======== ======== ========
Per share :
Net income (loss) available to common shareholders .......... $ .61 $ 0.56 $ 0.76
======== ======== ========
Net income (loss) available to common shareholders - assuming
dilution $ .59 $ 0.54 $ (0.15)
======== ======== ========
Weighted average common shares outstanding ....................... 11,513 10,985 4,133
======== ======== ========
Weighted average common shares outstanding - diluted ............. 12,088 11,268 7,802
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NON-VOTING
COMMON STOCK COMMON STOCK ADDITIONAL ACCUMULATED
------------------------ --------------------- PAID-IN EARNINGS/
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995......................... 888,180 $ 6 640,166 $ 4 $ -- $ (12,719)
Net loss............................................. -- -- -- -- -- (1,167)
Accretion of cumulative preferred stock dividends.... -- -- -- -- -- (3,262)
Forgiveness of cumulative preferred stock dividends.. -- -- -- -- -- 7,559
Stock options exercised.............................. 156,900 1 -- -- 188 --
Shareholders stock returned.......................... -- -- -- -- -- --
Acquisition of minority interest in subsidiary....... 12,000 -- -- -- 180 --
Stock compensation, net of tax....................... -- -- -- -- 596 --
Proceeds from initial public stock offering.......... 4,312,500 29 -- -- 53,976 --
Conversion of preferred stock to Common Stock........ 4,882,578 33 -- -- 34,535 --
Conversion of non-voting Common Stock to voting
Common Stock...................................... 640,166 4 (640,166) (4) -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996......................... 10,892,324 73 -- -- 89,475 (9,589)
Comprehensive income:
Net income........................................ -- -- -- -- -- 6,130
Foreign currency translation...................... -- -- -- -- -- --
Comprehensive income................................. -- -- -- -- -- --
Stock options exercised.............................. 111,150 -- -- -- 655 --
Net tax benefits from stock options.................. -- -- -- -- 134 --
Amortization of unearned compensation................ -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997......................... 11,003,474 73 -- -- 90,264 (3,459)
Comprehensive income:
Net income........................................ -- -- -- -- -- 7,080
Foreign currency translation...................... -- -- -- -- -- --
Comprehensive income................................. -- -- -- -- -- --
Proceeds from secondary stock offering............... 1,092,000 8 -- -- 20,149 --
Stock options exercised.............................. 44,594 -- -- -- 292 --
Net tax benefits from stock options.................. -- -- -- -- 126 --
Amortization of unearned compensation................ -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998......................... 12,140,068 $ 81 -- $ -- $ 110,831 $ 3,621
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER SHAREHOLDERS'
COMPREHENSIVE NOTE UNEARNED
INCOME/(LOSS) RECEIVABLE COMPENSATION TOTAL
------------ ------------- ------------ ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995......................... $ -- $ (349) $ -- $ (13,058)
Net loss............................................. -- -- -- (1,167)
Accretion of cumulative preferred stock dividends.... -- -- -- (3,262)
Forgiveness of cumulative preferred stock dividends.. -- -- -- 7,559
Stock options exercised.............................. -- -- -- 189
Shareholders stock returned.......................... -- 162 -- 162
Acquisition of minority interest in subsidiary....... -- -- -- 180
Stock compensation, net of tax....................... -- -- (392) 204
Proceeds from initial public stock offering.......... -- -- -- 54,005
Conversion of preferred stock to Common Stock........ -- 187 -- 34,755
Conversion of non-voting Common Stock to voting
Common Stock...................................... -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1996......................... -- -- (392) 79,567
Comprehensive income:
Net income........................................ -- -- -- 6,130
Foreign currency translation...................... (88) -- -- (88)
----------
Comprehensive income................................. -- -- -- 6,042
----------
Stock options exercised.............................. -- -- -- 655
Net tax benefits from stock options.................. -- -- -- 134
Amortization of unearned compensation................ -- -- 111 111
---------- ---------- ---------- ----------
Balance at December 31, 1997......................... (88) -- (281) 86,509
Comprehensive income:................................
Net income........................................ -- -- -- 7,080
Foreign currency translation...................... (34) -- -- (34)
----------
Comprehensive income................................. -- -- -- 7,046
----------
Proceeds from secondary stock offering............... -- -- -- 20,157
Stock options exercised.............................. -- -- -- 292
Net tax benefits from stock options.................. -- -- -- 126
Amortization of unearned compensation................ -- -- 112 112
---------- ---------- ---------- ----------
Balance at December 31, 1998......................... $ (122) $ -- $ (169) $ 114,242
========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ..................................................... $ 7,080 $ 6,130 $ (1,167)
Adjustments to reconcile net income (loss) to net cash provided by
Operating activities:
Depreciation ...................................................... 2,352 2,340 2,285
Amortization ...................................................... 2,709 2,776 2,564
Loss on disposal of property and equipment and investments ........ 876 60 301
Translation adjustments ........................................... (34) 288 41
Write-off of acquired research and development .................... 1,153 -- 2,380
Changes in operating assets and liabilities net of effects of
purchased business:
(Increase) decrease in accounts and other receivables, net ...... (2,568) (3,282) 2,456
(Increase) decrease in inventories, net ......................... (4,825) (1,563) (2,530)
(Increase) decrease in deferred income taxes .................... (1,002) 2,002 266
(Increase) decrease in other assets ............................. 345 (251) (141)
Increase (decrease) in accounts payable and accrued expenses .... 2,646 (980) (1,099)
Increase (decrease) in accrued restructuring costs .............. 955 (1,155) (512)
-------- -------- --------
Net cash provided by operating activities ............................. 9,687 6,365 4,844
INVESTING ACTIVITIES
Purchases of property and equipment ................................... (7,706) (2,426) (2,379)
Purchases of investment securities .................................... (17,428) -- --
Loans to officers ..................................................... -- -- 353
Proceeds from certificates of deposit ................................. -- 140 721
Purchase of other assets .............................................. (2,500) -- (807)
Purchases of businesses (including cash received in 1996) ............. (13,020) -- 2,000
-------- -------- --------
Net cash provided by (used in) investing activities ................... (40,654) (2,286) (112)
FINANCING ACTIVITIES
Proceeds from revolving line of credit ................................ 13,062 12,302 29,416
Payments on revolving line of credit .................................. -- (503) (37,034)
Payments on term notes payable and capital lease ...................... -- (15,450) (26,096)
Exercise of stock options ............................................. 292 655 189
Issuance of stock ..................................................... 20,157 -- 54,005
Repurchases of redeemable preferred stock ............................. -- -- (25,000)
-------- -------- --------
Net cash provided by (used in) financing activities ................... 33,511 (2,996) (4,520)
-------- -------- --------
Net increase in cash and cash equivalents ............................. 2,544 1,083 212
Cash and cash equivalents at beginning of period ...................... 1,712 629 417
-------- -------- --------
Cash and cash equivalents at end of period ............................ $ 4,256 $ 1,712 $ 629
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest .......................................................... $ 84 $ 282 $ 2,499
======== ======== ========
Income Taxes ...................................................... $ 4,882 $ 1,529 $ 579
======== ======== ========
Decrease in preferred stock attributable to forgiveness of cumulative
preferred stock dividends:
Series A .......................................................... $ -- $ -- $ 141
Series B .......................................................... -- -- 1,473
Series C .......................................................... -- -- 2,684
-------- -------- --------
$ -- $ -- $ 4,298
======== ======== ========
Non-cash financing and investing activities:
Purchase of business with preferred stock, net of cash received ... $ -- $ -- $ 4,583
======== ======== ========
Conversion of preferred stock to common ........................... $ -- $ -- $ 34,755
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION
Xomed Surgical Products, Inc. (the "Company"), a Delaware corporation, was
organized on April 5, 1994 for the purpose of acquiring, on April 15, 1994, all
of the outstanding stock of Xomed-Treace, Inc. and Xomed-Treace, P.R. Inc.
(collectively, "Xomed, Inc.") and Merocel Corporation ("Merocel"). The Company
had no operations or material assets prior to this transaction. As the owners of
the Company were also owners of Merocel, these transactions have been accounted
for as if Xomed, Inc. 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.
Xomed is a leading developer, manufacturer and marketer of a broad line of
surgical products for use by ear, nose and throat ("ENT") specialists. The
Company's broad line of products, includes in its core ENT market, 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 sells
its products worldwide utilizing a direct sales force in the U.S. and selected
other countries and third party distributors outside the U.S. Trade credit is
extended based on consideration of the financial capabilities of the customer
and letters of credit are obtained in certain situations. Concentrations of
credit risk with respect to the Company's extending of trade credit, which
generally is not collateralized, is limited due to the large number of customers
and their dispersion across different geographic areas.
On December 30, 1998 the Company purchased 100% of the stock of
Etablissements Boutmy, S.A. ("Micro-France") of Saint Aubin, France. The stock
was acquired by a subsidiary of the Company from the shareholders of
Micro-France. Micro-France develops, manufactures and distributes hand-held
instruments for the ENT, plastic surgery and endoscopy markets. The purchase
price was $13,020, net of approximately $4,000 in cash. The purchase resulted in
cost in excess of assets acquired of $9,000 (amortized straight-line over a
25-year period) and $1,153 of cost allocated to in-process research and
development, which was written-off immediately. The purchased assets have been
included in the Company's December 31, 1998 Consolidated Balance Sheet. See Note
17 for proforma operations data.
On April 16, 1996 the Company acquired TreBay Medical Corporation
("TreBay") which was involved in the development of ENT surgical specialty
products. The acquisition, which was accomplished through the issuance of
preferred stock, was accounted for under the purchase method of accounting and
accordingly, the results of operations have been included in the Company's
consolidated financial statements since the date of acquisition. The purchase
price of approximately $6,600 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 approximately $4,400, of which $2,400 was allocated to in-process research
and development and was subsequently written off. The executive management of
TreBay replaced former management of the Company (see Note 6). The acquisition
was funded through the issuance of approximately $2,800 of redeemable preferred
stock and $3,700 of convertible preferred stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of Merocel and subsidiary, TreBay, and Xomed, Inc. and subsidiaries. As of
December 31, 1998, the Consolidated Balance Sheet includes the assets and
liabilities and excess of purchase cost over the fair values of net assets
purchased of Micro-France. 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 when purchased to be cash
equivalents.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 value. Market value for raw materials is
based on replacement cost and for work-in-process and finished goods on net
realizable value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to expense 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 asset categories as follows--building and building improvements 27 to 35
years and machinery and equipment including assets under capital leases 3 to 15
years.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") 109, ACCOUNTING FOR INCOME TAXES, which
requires the use of the liability method of accounting for deferred income
taxes.
REVENUE RECOGNITION
The Company recognizes revenue when inventory is shipped to the customer.
AMORTIZATION
Amortization of cost in excess of assets acquired is amortized over 25
years. Accumulated amortization totaled $9,671 and $7,680 as of December 31,
1998 and 1997, respectively. Amortization of other intangibles is amortized on a
straight-line basis over the life of the related agreements ranging from four to
15 years.
The Company periodically assesses the recoverability of goodwill at the
product line level. Cash flows and profitability of each product line as well as
changes in the operations of businesses acquired are reviewed to determine if
impairment exists. If this review indicates that goodwill will not be
recoverable, the Company's carrying value of the goodwill is reduced to the
estimated value of the discounted cash flows.
RESEARCH AND DEVELOPMENT
Expenditures related to research and development of new products and
processes, including research related to product alternatives, are expensed as
incurred.
TRANSLATION ADJUSTMENTS
Prior to the fourth quarter of 1997, translation gains and losses of
foreign currencies related to foreign operations are included in income from
operations and totaled $341 (loss), and $41 (loss) for the ten months ended
October 31, 1997, and year ended December 31, 1996, respectively. The financial
results of these foreign operations were translated using a combination of
current and historical rates. Subsequent to October 1997, translation gains and
losses are included as a component of shareholder's equity, assets and
liabilities of the foreign operations are translated at current rates, and
revenues and expenses are translated at average rates during the period. This
change resulted from a change in the designation of the functional currency from
the U.S. Dollar to the foreign currency.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
due to decreased dependence of the foreign operations on their parent for
financing, marketing and distribution activities.
STOCK COMPENSATION
The Company follows the intrinsic value method of accounting for stock
based compensation prescribed in ACCOUNTING PRINCIPLES BOARD OPINION NO. 25 -
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Accordingly, stock compensation
expense is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the exercise price.
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.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 128,
EARNINGS PER SHARE. SFAS 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share exclude any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share are very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented and,
where appropriate, restated to conform to SFAS 128 requirements.
COMPREHENSIVE INCOME
The FASB issued SFAS 130, REPORTING COMPREHENSIVE INCOME, effective for
fiscal years beginning after December 15, 1997. SFAS 130 requires companies to
report another measure of operations called Comprehensive Income. This measure,
in addition to "net income", includes as income or loss the following items,
which if present are included in the equity section of the Balance Sheet: (1)
unrealized gains and losses on certain investments in debt and equity
securities; (2) foreign currency translation; and (3) minimum pension liability
adjustments. The Company has presented the applicable items of comprehensive
income in the Consolidated Statement of Changes in Shareholders' Equity. Income
tax expense (benefit) has not been provided on the translation adjustments
because earnings will be permanently reinvested in those foreign subsidiaries.
SEGMENT DISCLOSURES
Effective January 1, 1998, the Company adopted the FASB's SFAS 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS 131
supersedes SFAS 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE.
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments and also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The adoption of SFAS 131 did not affect results of operations or
financial position but did affect the disclosure of segment information. See
Note 16, Segment Information.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS
In June 1998, the FASB issued SFAS 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. The Company expects to adopt SFAS 133
effective January 1, 2000. SFAS 133 will require the Company to recognize all
derivatives on the balance sheet at fair value. The Company does not anticipate
that the adoption of this Statement
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
will have a significant effect on its results of operations or financial
position. See Note 5, Investments and Financial Instruments.
RECLASSIFICATIONS
Certain prior year amounts in the consolidated financial statements have
been reclassified to conform to the current year presentation.
3. INVENTORIES
Inventories are summarized as follows:
DECEMBER 31,
1998 1997
-------- --------
Finished goods ........................ $ 14,332 $ 10,224
Work in process ....................... 2,817 1,447
Raw materials and packaging 8,144 6,584
Reserve for obsolescence .............. (2,925) (2,017)
======== ========
$ 22,368 $ 16,238
======== ========
Reserves for obsolescence were increased by $1,782, $1,213 and $1,209 for
1998, 1997 and 1996, respectively. Reserve reductions from inventory written off
were $874, $247 and $559 for 1998, 1997 and 1996, respectively. The reserve for
obsolescence was $1,051, and $401 as of December 31, 1996 and December 31, 1995,
respectively.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, less allowances for depreciation,
is as follows:
DECEMBER 31,
1998 1997
-------- --------
Land and land improvements ....... $ 1,774 $ 1,413
Building and building improvements 10,984 6,564
Machinery and equipment .......... 18,025 14,959
-------- --------
30,783 22,936
Allowances for depreciation ...... (11,030) (8,734)
-------- --------
19,753 14,202
Capital projects in process ...... 2,016 1,201
======== ========
$ 21,769 $ 15,403
======== ========
Depreciation expense, including expense on assets under capital lease
obligations, is approximately $2,352, $2,340 and $2,285 for the years ended
December 31, 1998, 1997 and 1996, respectively.
5. INVESTMENTS AND FINANCIAL INSTRUMENTS
FOREIGN CURRENCY
The Company enters into foreign currency forward exchange contracts to
hedge intercompany trade accounts receivable from its foreign subsidiaries. The
Company's forward exchange contracts do not subject the Company to risk from
exchange rate movements because gains and losses on such contracts offset gains
and losses on the trade
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
5. INVESTMENTS AND FINANCIAL INSTRUMENTS (CONTINUED)
accounts receivable being hedged. If the counterparties to the forward exchange
contracts do not fulfill their obligations to deliver the contracted currencies,
the Company could be at risk for any currency exchange rate movements.
For intercompany receivables, the contracts require the Company to sell
foreign currencies (Australian Dollar, Canadian Dollar, British Pound, French
Franc and the German Deutschmark) in exchange for the U.S. Dollar. At December
31, 1998, the Company held $954, $1,365, $1,205, $1,876 and $1,193,
respectively, in foreign currency forward exchange contracts which mature in
early 1999. These contracts are marked to market each month. The resulting gains
or losses are included in other income and are generally offset by gains or
losses on the exposures being hedged. Foreign currency exchange cost charged to
expense for 1998 was approximately $58.
INVESTMENTS
Investments consist of marketable preferred stocks and variable rate
corporate and educational institution bonds both of which are designated as
available for sale. Accordingly, the securities and bonds are marked to market,
and the unrealized gains and losses are included, net of taxes, as a separate
component of shareholders' equity. The investments consist of preferred stocks
valued at $14.9 million and cash held in a money market fund totaling $1.7
million.
Net losses recognized in the Company's statement of operations for 1998
total $828, and were comprised of losses realized on the Company's investments
of $253 as well as its hedging strategy, noted below, of $575.
In order to manage the interest rate risk on the preferred stock, the
Company has entered into derivative financial instruments with off-balance sheet
risk. The Company enters into short sales of futures contracts on U.S. Treasury
Bonds in order to hedge the effect of interest rate risk on its preferred stock
portfolio. The futures contracts are designated at inception as a hedge of the
interest rate risk on the preferred stocks based on the assumption that changes
in interest rates on U.S. Treasury Bonds are inversely correlated with changes
in the market value of the preferred stocks. The Company entered these short
sales of U.S. Treasury Bond futures when the price was at approximately
$123-$124 during late August and September 1998. Due to uncertainties in the
U.S. political arena and world economic crises, much of the liquidity in the
money markets was used to purchase U.S. Treasury Bonds ("flight to quality").
Thus the price of the bonds increased at a time when the Company was
contractually required to close out the short sales. Accordingly, the Company
realized losses during the process of closing out the contracts and rolling into
new quarterly contracts. Traditionally, interest rate changes would be the cause
of increases or decreases in the prices of Treasury Bonds. Because interest
rates were not decreasing as would have been expected given an increase in
Treasury Bond prices, there was not a corresponding offsetting gain in the
preferred stock portfolio. In fact, due to credit risk issues in some of the
financial institutions in which the Company had positions, net losses were
incurred.
The Company believed that both the credit risk issues noted above and the
"flight to quality" were temporary. The hedging technique of short selling the
U.S. Treasury Bonds has had a direct inverse correlation with the value of
preferred stocks for over 10 years, and the Company did not believe these losses
were other than temporary. Accordingly, as of the end of September 26 1998, the
Company had deferred realized and unrealized losses of $307 and $338,
respectively.
On December 30, 1998, as noted in Note 1, the Company purchased
Micro-France for $13,020 net of approximately $4,000 in cash and made the
decision to liquidate its preferred stock portfolio in an orderly manner in late
winter and spring of 1999. The Company still believes that there is an inverse
correlation between interest rates on the U.S. Treasury Bond and the market
value of preferred stocks. However, due to the fact that the stock portfolio had
taken on a short-term nature because of the decision to liquidate, the Company
reduced its hedge exposure (and therefore its ability to generate any offsetting
future gains). As a result, the Company presently believes there will not be a
turnaround in the value of the investments as a whole and that the losses are
other than
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
5. INVESTMENTS AND FINANCIAL INSTRUMENTS (CONTINUED)
temporary. As of December 31, 1998, the Company had realized losses of $450 and
unrealized losses of $378. The total of these losses of $828 was written off as
of December 31, 1998.
As of December 31, 1998, the Company holds positions in short sales of U.S.
Treasury Bonds (the "Bonds") with a zero carrying value and a notional amount of
$10,861 and has a put of U.S. Treasury Bonds with a notional value of $6,100.
The put is a purchased option, has a value of $16 and will not cost the Company
funds in addition to the premium, which was paid and expensed. Upon closing out
the short sale contracts, the Company could experience gains or losses depending
on the price of the Bonds. Of course, if traditional market forces are driving
the theoretical charges noted above, the Company would likely incur offsetting
losses or gains, as the case may be, in the preferred stocks' valuations.
6. RESTRUCTURING AND OTHER CHARGES
1998 RESTRUCTURING AND OTHER CHARGES
The Board of Directors of the Company, in the fourth quarter of 1998,
approved a restructuring of its manufacturing operations at its Merocel facility
in Mystic, Connecticut. The Merocel facility produces surgical sponge material
for post-operative sinus packing. Due to an ongoing shortage of available labor
in the Mystic, Connecticut area, most of the secondary operations, which include
packaging, assembly and warehousing functions, will be transferred to the
Company's main facility in Jacksonville, Florida where similar activities for
other products currently take place. Approximately 34 production employees in
the Merocel facility will be displaced due to the product transfer. As a result,
the Company incurred a charge in the fourth quarter totaling $580 related to
anticipated severance payments of $434 and assets to be disposed with a net book
value of $146. The transfer is expected to be substantially complete by the
second quarter of 1999 and fully implemented by the end of 1999. The Merocel
facility will continue with its primary operations related to the chemical
processes involved in the production of surgical sponge material. To date, the
operation has not had difficulty in retaining the more highly skilled labor
involved with these processes.
In conjunction with the acquisition of Micro-France in 1998, the Company
will close its direct selling site, Xomed France, located in Paris, France and
will incur costs of $135 related to severance pay, $104 related to lease
termination fees and $22 related to other exit costs. At December 31, 1998, $261
was accrued for these costs, which are expected to be paid in the first half of
1999. The reduction includes 6 employees who will not be relocating to
Saint-Aubin, France, and who do not represent any particular group of employees.
The Company also wrote-off the amortized portion of license fees in 1998
related to two distribution agreements which were ended and accrued other
related costs. The Company terminated its distribution agreement with an
instrument maker whereby the Company distributed the hand-held instruments in
the U.S. In addition, the Company's relationship with another supplier ended. In
connection with these agreements the Company wrote-off license fees of $788,
equipment of $120 and accrued legal fees and other costs of $60.
1996 RESTRUCTURING CHARGES
In conjunction with the purchase of TreBay in 1996, the Company recorded an
accrual totaling $647 related to severance and relocation costs of $598 and
lease termination costs of $49. All employees of TreBay were terminated, except
the officers and two other individuals who relocated to Jacksonville, Florida,
the corporate headquarters of the Company. For the period from the acquisition
date through December 31, 1996, $250 was paid related to termination and
relocation benefits, $49 was paid related to lease termination costs and $162
was paid related to other acquisition costs. During 1997 the Company utilized
the remaining reserve as follows: $82 was paid related to termination and
relocation, $61 was paid related to lease termination, and $43 related to other
exit costs.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. RESTRUCTURING AND OTHER CHARGES (CONTINUED)
Simultaneous with the purchase of TreBay in 1996 and a plan by new
management to combine certain opera-tions (see Note 1), the Company recorded a
restructuring accrual of $3,100 which was comprised of $2,500 of termination
benefits and $600 of other exit costs. The reductions included 20 management and
administrative employees at the Company's Mystic, Connecticut manufacturing
facility, 17 management and administrative employees at the Company's
Jacksonville, Florida headquarters, 13 management and production employees at
the Company's St. Louis, Missouri manufacturing facility and 2 management level
employees internationally. For the period from the accrual date through the end
of 1996, the Company had paid out termination benefits totaling $2,000 and paid
approximately $100 related to other exit costs. As of December 31, 1996, the
Mystic, Connecticut facility maintained only manufacturing operations, and in
December 1996, the St. Louis facility was closed. During 1997, the Company
utilized the remaining reserve as follows: paid termination benefits of $500,
wrote off property related to the St. Louis facility closure of approximately
$300, paid other exit costs of $100 and reversed the remaining reserve of
approximately $100 against selling, general and administrative expenses.
7. LONG-TERM DEBT
The Company was obligated under a revolving line-of-credit agreement with
interest payable monthly and all outstanding principal due May 5, 2000; interest
at LIBOR (5.0604% at December 31, 1998) plus 1.25% or at the lender's base rate
(7.75% at December 31, 1998).
In May 1997 the Company entered into an Amended and Restated Credit
Agreement (the "Credit Agreement") with its bank. Under the terms of the Credit
Agreement, the Company may borrow under a line-of-credit up to a maximum
capacity of $25,000 to be used for working capital and operating needs and
acquisitions. The amount available to the Company at any given time is based
upon various percentages of the Company's outstanding inventories and accounts
receivable and certain other assets. Availability at December 31, 1998 was
approximately $23,600. The Company must repay any principal amounts outstanding
on the line-of-credit in excess of the borrowing base. In any event, all
outstanding principal on the line-of-credit is due and payable on May 5, 2000.
The Company pays a quarterly commitment fee which varies from .25% to .125% per
annum on the average daily unused balance on the line-of-credit during the
preceding calendar quarter.
The line-of-credit is collateralized by the receivables and inventory of
the Company and certain land and buildings at the Mystic, Connecticut facility
with a net book value of $41,005. The Credit Agreement has restrictions
regarding payment of dividends and incurrence of additional debt and requires
compliance with various financial covenants.
8. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
In October 1996 in conjunction with the Company's initial public offering
of stock, all then outstanding Series A and B Convertible Preferred shares were
converted to Common Stock. Approximately 80% of the Series C Redeemable
Preferred Stock was redeemed for cash and the balance was converted to Common
Stock. The Class B Common Stock ("Non-Voting Common Stock") was converted to
Common Stock.
In September 1996 the Company authorized 1,000,000 shares of a new issue of
preferred stock. The stock is undesignated as to its rights, preferences and
limitations, which the Board of Directors is authorized to set at a future date
prior to issuance.
In July 1998 the Company completed a second public stock offering in which
the Company raised $20.2 million through the sale of 1,092,000 shares of its
Common Stock.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)
COMMON STOCK
Each share of 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 any Preferred Stock issued in the future.
During 1996, the Company amended and restated its Restated Certificate of
Incorporation to, among other things, (i) change the designation of its Class A
Common Stock to "Common Stock," (ii) change the designation of its Class B
Common Stock to "Non-Voting Common Stock," (iii) increase the number of
authorized shares of Common Stock to 30,000,000 and (iv) authorize a class of
undesignated Preferred Stock, par value $.01 per share.
REDEEMABLE PREFERRED STOCK
The Series A, B and C Redeemable Preferred Stock, which was issued in 1994,
related to the purchase of the Company and was redeemed or converted into Common
Stock in the Company's initial public offering, was cancelled by a vote of
shareholders at the 1998 Annual Meeting of Stockholders.
The following table presents changes in redeemable preferred stock (in
thousands):
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
----------------------- ----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 .......... 546 $ 3,632 3,192 $ 21,251 410 $ 28,996
Accretion of dividends ................ -- 209 -- 1,223 -- 2,458
-------- -------- -------- -------- -------- --------
Balance at December 31, 1995 .......... 546 3,841 3,192 22,474 410 31,454
Accretion of dividends ................ -- 263 -- 922 -- 2,077
Forgiveness of dividends .............. -- (404) -- (2,395) -- (4,761)
Shareholders stock returned ........... (14) (91) -- -- (3) (208)
Issuance of shares for TreBay Medical . 585 3,736 -- -- 43 2,847
Redemption of preferred stock ......... -- -- -- -- (353) (25,000)
Conversion of preferred stock to common
Stock .............................. (1,117) (7,345) (3,192) (21,001) (97) (6,409)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1996 .......... -- $ -- -- $ -- -- $ --
======== ======== ======== ======== ======== ========
</TABLE>
9. 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, 1998, 1997 and
1996 was approximately $525, $481, and $510, respectively.
10. EMPLOYEE STOCK INCENTIVES
The Company has reserved an aggregate of 2,367,000 shares of its Common
Stock for grant or sale to key employees of the Company. As of December 31, 1998
and 1997, 752,114 and 443,301 options, respectively, were available for
additional grants. 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. In general, the options are granted at exercise
prices equal to the fair market value of Common Stock on the date of grant, have
a life of 10 years and provide for vesting over a four-year period. As of
December 31, 1998, 396,138 shares were exercisable. Total stock based
compensation cost recognized in the
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. EMPLOYEE STOCK INCENTIVES (CONTINUED)
Statement of Operations for the years ended December 31, 1998, 1997 and 1996
was $111, $111, and $54, respectively. During 1996, the Company granted 209,250
options with exercise prices below the then estimated fair market values. These
options have a weighted average exercise price of $7.10 and weighted average
fair value of $5.69.
The exercise price for options outstanding at the end of 1998 ranged from
$1.33 to $27.91. The following table summarizes option activity, which may be
exercised at various dates through January 2008:
<TABLE>
<CAPTION>
1998 1997 1996
WEIGHTED WEIGHTED WEIGHTED
1998 AVERAGE 1997 AVERAGE 1996 AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------------- -------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Beginning of the period
options outstanding........... 875,649 $ 7.99 703,299 $ 5.99 377,025 $ 3.78
Options granted................ 455,250 19.03 303,000 10.51 632,499 6.10
Options exercised.............. (44,594) 6.59 (111,150) 5.56 (156,900) 1.21
Options canceled............... (12,587) 10.79 (19,500) 8.09 (149,325) 5.91
--------------- --------------- --------------
End of period options
outstanding.................... 1,273,718 11.96 875,649 7.99 703,299 5.99
=============== =============== ==============
Options granted range of
option prices.................. $17.15 - $27.91 $10.04-$13.59 $6.24-$7.10
=============== =============== ==============
Options exercised range of
option prices.................. $1.33 - $10.04 $0.67-$7.03 $0.67-$6.39
=============== =============== ==============
Options exercisable at end of
year .......................... 396,138 $ 7.39 240,587 $ 6.47 182,271 $ 5.94
=============== =============== ==============
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. Accordingly, no compensation cost has
been recognized for stock options issued with exercise prices equal to the fair
value of the Common Stock on the date of grant. SFAS 123 requires the
determination of fair value of all options utilizing stock option valuation
models. In management's opinion, existing stock option valuation models do not
provide a reliable single measure of the fair value of employee stock options
that have vesting provisions and are not transferable. In providing the pro
forma disclosures below, the Company used the Black-Scholes option pricing model
with the following weighted average assumptions: (1) an expected volatility
factor for the Company's stock of .40; (2) a risk-free interest rate of 6.15%;
(3) an expected life of options of 3 years; and (4) no dividend payments. The
weighted-average grant date fair value of options granted in 1998, 1997 and 1996
was $6.76, $4.59 and $4.01, respectively. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the grant
date for awards consistent with the provisions of SFAS 123, the Company's net
income from continuing operations and income per share from continuing
operations would have been as follows:
1998 1997 1996
------ ------ ------
Net income--as reported....................... $7,080 $6,130 $3,130
Net income--adjusted.......................... $6,608 $5,908 $2,997
Net income per share--as reported............. $ 0.61 $ 0.56 $ 0.76
Net income per share--adjusted................ $ 0.58 $ 0.54 $ 0.73
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. EARNINGS PER SHARE
The following table sets forth the computation of shares for purposes of
the earnings per share calculation (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Weighted average shares outstanding ............ 11,513 10,985 4,133
Net effect of dilutive securities:
Stock options................................... 575 283 161
Convertible preferred stock..................... -- -- 3,508
------ ------ -----
Totals.......................................... 12,088 11,268 7,802
====== ====== =====
</TABLE>
Income from continuing operations and net income for 1996 for purposes of
computing earnings per share-basic include net forgiveness of dividends of
$4,297.
12. INCOME TAXES
The provision for income taxes (benefit) consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Domestic:
Federal................................... $ 4,192 $ 1,801 $ 496
State..................................... 463 360 206
Foreign................................... 96 65 --
------- ------- -------
4,751 2,226 702
Deferred:
Domestic.................................. (390) 1,527 540
Foreign................................... 63 216 (369)
------- ------- -------
$ 4,424 $ 3,969 $ 873
======= ======= ======
</TABLE>
During 1998, 1997 and 1996 the Company's tax liability was decreased $126,
$134 and $150, respectively, and additional paid-in capital increased due to the
early disposition of stock by a stock option holder. During 1997 the Company
utilized approximately $650 of operating loss carryforwards thereby reducing its
current liability.
Income tax expense (benefit) reconciled to the amount computed at statutory
rates is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ --------
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate...................... $4,025 $3,434 $ (103)
Purchased in-process research and development................ -- -- 833
State income taxes (net of federal income tax effect)........ 407 442 92
Increase in valuation allowance.............................. 199 156 --
Tax benefits related to export sales......................... (154) (209) --
Other, net................................................... (53) 146 51
------ ------ --------
$4,424 $3,969 $ 873
====== ====== ========
</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:
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
------- -------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards .......... $ 1,522 $ 1,505
Losses from foreign operations ............ 1,068 1,008
Patents and other intangibles ............. 743 511
Inventory ................................. 1,361 997
Non-deductible accrued expenses ........... 949 583
Purchased in-process research & development 297 --
AMT credit ................................ -- 44
Severance accruals ........................ 282 27
------- -------
6,222 4,675
Valuation allowance ....................... (940) (741)
------- -------
5,282 3,934
------- -------
Deferred income tax liabilities:
Amortization of goodwill .................. (2,134) (2,118)
Depreciation .............................. (742) (712)
Purchased research and development ........ -- (215)
------- -------
(2,876) (3,045)
------- -------
Total deferred income taxes, net .................... $ 2,406 $ 889
======= =======
</TABLE>
The valuation allowance at December 31, 1998 and 1997 relates to certain
losses from foreign operations incurred prior to 1996 and short-term capital
losses which management believes the ultimate realization of the related tax
benefits is not more likely than not at the present time. This allowance was
increased $199, $156 and $6 for 1998, 1997 and 1996, respectively, for losses of
these foreign operations. Foreign losses totaling approximately $2,029 can be
carried forward for periods ranging from five years to indefinitely.
Undistributed earnings reinvested indefinitely in foreign subsidiaries as
working capital and plant and equipment aggregated $393. Domestic loss
carryforwards total $3,854 and expire in 2009 through 2011.
13. RELATED PARTY TRANSACTIONS
At December 31, 1998 and 1997, the Company had outstanding a note
receivable totaling $826 and $724, respectively from an officer, which is
collateralized by 36,000 shares of Common Stock. In March of 1998, the note was
amended and restated. The interest rate was changed from 10% to 5.32%. At that
time, accrued interest of $102 was added to the principal portion of the note.
The note becomes a demand note on November 7, 2000 and, in any event, is payable
in full by November 7, 2002.
In connection with the acquisition of TreBay in April 1996, a significant
shareholder of the Company made loans to three officers to acquire the Company's
stock. At December 31, 1996, the aggregate principal value of notes payable to
the shareholder from the officers was $1,900. The notes were paid in July 1998.
14. LEASE COMMITMENTS
The Company was committed under noncancelable operating leases with terms
in excess of one year involving certain property and equipment. Rental expense
on all rental agreements totaled $580, $706, and $790 for the years ended
December 31, 1998, 1997 and 1996, respectively. In general, the Company has
options to renew its leases for varying periods of time. Annual minimum rental
commitments under these leases are as follows:
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
14. LEASE COMMITMENTS (CONTINUED)
YEAR ENDING DECEMBER 31,
1999..................................................... $237
2000..................................................... 183
2001..................................................... 140
2002..................................................... 107
2003 and thereafter...................................... 40
----
$707
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.
The Internal Revenue Service is currently examining tax returns for years
1994 through 1996. Management believes the ultimate resolution of this
examination will not result in a material adverse effect to the Company's
financial position or results of operations.
16. SEGMENT INFORMATION
The Company manufactures and distributes medical devices and supplies for
use by ENT physicians. The Company has a dedicated Vice President of Sales and
Vice President of Marketing devoted solely to its U.S. core ENT market. The
Company also offers a line of products for ophthalmic surgeons, which segment is
the sole focus of another Vice President. These two markets represent segments
identified for evaluating profitability and asset allocation. The "other"
category is comprised principally of orthopaedic sales. Sales of ophthalmic
products internationally are not as material proportionally as they are in the
U.S. Additionally, the President of Xomed International, Inc. is directly
responsible for all sales outside the U.S. International is the third segment
identified and measured. No other segments or operations are material to
consolidated sales or assets.
DISCLOSURES FOR PURPOSES OF SEGMENTAL REPORTING. Sales are recorded in the
geographical segment when and where products are delivered to the end user.
Related cost of sales reflects only economic costs (I.E., no intersegment
profit). Segment assets are reported based on specific identification where
possible, or if not, based on an allocation as a percentage of sales. Goodwill
is not allocated among the different segments.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
16. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DOMESTIC
--------------------------------------------------
CORE ENT OPHTHALMIC OTHER TOTAL INTERNATIONAL CONSOLIDATED
-------- ---------- -------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales 1998 $ 53,236 $ 9,540 $ 1,849 $ 64,625 $ 26,758 $ 91,383
1997 42,736 8,954 2,108 53,798 23,442 77,240
1996 35,071 8,359 1,217 44,647 21,017 65,664
Depreciation Expense 1998 $ 1,879 $ 84 $ 63 $ 2,026 $ 326 $ 2,352
1997 1,783 86 70 1,939 401 2,340
1996 1,869 78 71 2,018 267 2,285
Segment Profit 1998 $ 20,127 $ 2,765 $ 705 $ 23,597 $ 7,024 $ 30,621
1997 15,161 2,892 883 18,936 5,115 24,051
1996 9,834 3,297 868 13,999 5,282 19,281
Segment Assets 1998 $102,241 $ 12,583 $ 939 $115,763 $ 26,233 $141,996
1997 76,214 10,739 1,224 88,177 7,550 95,727
1996 73,117 11,542 2,136 86,795 7,261 94,056
Capital Expenditures 1998 $ 6,638 $ 662 $ 166 $ 7,466 $ 240 $ 7,706
1997 2,454 262 14 2,730 612 3,342
1996 2,140 73 21 2,234 137 2,371
</TABLE>
Reconciliation of Segment Profit to income (loss) before tax:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Indirect operating expenses:
General and administrative......................... $ 8,857 $ 7,620 $ 6,342
Amortization of intangibles........................ 2,417 2,374 2,421
Write-off of acquired research and development..... 1,153 -- 2,380
Restructuring charges and other.................... 1,809 -- 3,093
Research and development........................... 4,681 4,088 3,659
------- ------- -------
Total indirect expenses.............................. 18,917 14,082 17,895
------- ------- -------
Income from operations............................... 11,704 9,969 1,386
Interest, net........................................ 559 (104) (2,205)
Loss on impairment of investments.................... (828) -- --
Other income, net.................................... 69 234 525
======= ======= =======
Income (loss) before income taxes.................... $11,504 $10,099 $ (294)
======= ======= =======
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
17. PROFORMA STATEMENT OF OPERATIONS (UNAUDITED)
The following Statements of Income show the proforma results of operations
as if the acquisition of Micro-France had occurred on January 1, 1997:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------------- --------------------------------------
XOMED MICRO-FRANCE PRO FORMA XOMED MICRO-FRANCE PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
Sales, net........................... $91,383 $ 8,440 $99,823 $77,240 $ 8,196 $ 85,436
Cost of sales........................ 35,284 3,790 39,074 30,475 3,649 34,124
------- ------- ------- ------- ------- --------
Gross profit......................... 56,099 4,650 60,749 46,765 4,547 51,312
Operating expenses:
Selling, general and administration.. 34,335 2,331 36,666 30,334 2,532 32,866
Amortization of intangibles.......... 2,417 365(1) 2,782 2,374 365(1) 2,739
Write-off of acquired research
and development................... 1,153 -- 1,153 -- -- --
Restructuring and other charges...... 1,809 -- 1,809 -- -- --
Research and development............. 4,681 -- 4,681 4,088 -- 4,088
------- ------- ------- ------- ------- --------
Total operating expenses............. 44,395 2,696 47,091 36,796 2,897 39,693
Income from operations............... 11,704 1,954 13,658 9,969 1,650 11,619
Interest; net........................ (269) (740)(2) (1,009) (104) (792)(2) (896)
Other income, net.................... 69 -- 69 234 -- 234
------- ------- ------- ------- ------- --------
Income before income taxes........... 11,504 1,214 12,718 10,099 858 10,957
Income tax expense................... 4,424 506 4,930 3,969 358 4,327
------- ------- ------- ------- ------- -------
Proforma net income.................. $ 7,080 $ 708 $ 7,788 $ 6,130 $ 500 $ 6,630
======= ======= ======= ======= ======= ========
Proforma net income per share........ $ 0.64 $ 0.59
======= ========
Weighted average shares outstanding.. 12,088 11,268
======= ========
</TABLE>
(1) Represents proforma amortization of excess of purchase cost over net book
value of assets acquired.
(2) Proforma interest expense calculated based on funds required to acquire
Micro-France less cash acquired and cash flows in 1997 and 1998.
F-20
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
2.1 Stock Purchase Agreement among The Stockholders of Etablissements
Boutmy, S.A. and Xomed France Holdings, S.N.C. dated December 30,
1998.
3.1 Second Restated Certificate of Incorporation.
3.2 Restated By-Laws.
10.13.3 Third Amended and Restated Xomed Surgical Products, Inc. 1996 Stock
Option Plan (incorporating amendments approved at May 21, 1998
annual meeting of stockholders).
10.15 Employment Agreement dated as of February 24, 1999 between the
Company and James T. Treace.
10.16 Employment Agreement dated as of February 24, 1999 between the
Company and F. Barry Bays.
21 Subsidiaries.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
EXHIBIT 2.1
STOCK PURCHASE AGREEMENT
among
THE STOCKHOLDERS OF ETABLISSEMENTS BOUTMY S.A.
and
XOMED FRANCE HOLDINGS S.N.C.
December 30, 1998
<PAGE>
TABLE OF CONTENTS
1. SALE....................................................................2
1.1 Sale and Purchase of the Shares......................................2
1.2 Prior Events and Delivery of Documents...............................3
1.3 Purchase Price.......................................................4
2. REPRESENTATIONS AND WARRANTIES RELATING TO THE COMPANY..................5
2.1 Corporate Organization...............................................5
2.2 Subsidiaries and Interests...........................................6
2.3 Capitalization.......................................................6
2.4 Consents and Approvals...............................................7
2.5 Effect of the Sale...................................................7
2.6 Financial Statements - Dividends.....................................7
2.7 Prior Management of the Company......................................8
2.8 Compliance with Applicable Regulations...............................9
2.9 Litigation..........................................................10
2.10 Material Contracts.................................................10
2.11 Guarantees and Off-Balance-Sheet Commitments.......................12
2.12 Employees..........................................................12
2.13 Tax, Social Security and Customs...................................13
2.14 Intellectual Property..............................................14
2.15 Real Property and Leases...........................................15
2.16 Tangible Fixed Assets..............................................17
2.17 Intangible Property................................................17
2.18 Condition of Tangible Fixed Assets.................................17
2.19 Stocks.............................................................17
2.20 Environmental, Health and Safety Compliance........................18
2.21 Insurance..........................................................19
2.22 Year 2000 Information Technology Compliance........................19
<PAGE>
2.23 Services and Products..............................................20
2.24 Potential Conflicts of Interest....................................20
2.25 Customers and Suppliers............................................21
2.26 Bank Accounts and Powers of Attorney...............................21
2.27 Receivables........................................................21
2.28 Changeover to Euro.................................................22
2.29 Subsidies..........................................................22
2.30 Validity of Representation.........................................22
2.31 Fairness...........................................................22
ARTICLE 3. REPRESENTATIONS AND WARRANTIES BY XOMED.......................23
3.1 Corporate Organization..............................................23
3.2 Authorizations......................................................23
ARTICLE 4 REPRESENTATIONS AND WARRANTIES RELATING TO THE STOCKHOLDERS....23
4.1 Ownership of the Shares.............................................23
4.2 Capacity, Absence of Conflicts......................................24
4.3 Fees................................................................24
ARTICLE 5 INDEMNIFICATION................................................24
5.1 Indemnification by the Stockholders.................................24
5.2 Indemnification Procedures..........................................25
5.3 Limitations.........................................................28
5.4 Indemnification Guarantee on First Demand...........................30
5.5 Interest Payments...................................................31
ARTICLE 6. INTERPRETATION OF THIS AGREEMENT..............................31
6.1 Definitions.........................................................31
6.2 Applicable Law......................................................34
6.3 Arbitration.........................................................34
6.4 Commitments subsequent to the Sale..................................35
6.5 Paragraph and Section Headings......................................35
<PAGE>
6.6 Severability........................................................35
ARTICLE 7. NON-COMPETITION................................................35
ARTICLE 8. MISCELLANEOUS..................................................36
8.1 Notices and Communications..........................................36
8.2 Duties and Taxes....................................................37
8.3 Death - Transmission................................................37
8.4 Entire Agreement....................................................37
8.5 Time-limits and Waiver..............................................38
8.6 Counterparts........................................................38
<PAGE>
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT is entered into on December 30, 1998,
by and between:
1. Mr. Christian Boutmy, born in Bourbon l'Archambaut on July 17, 1943, a
French citizen, married under the system of separate estates for husband
and wife, resident at 8 rue des Petites Gollandieres, 17580 Le Bois Plage
en Re;
2. Mrs. Simone Boutmy, nee Bardon, born in Ygrande on August 14, 1945, a
French citizen, married under the system of separate estates for husband
and wife, resident at 8 rue des Petites Gollandieres, 17580 Le Bois Plage
en Re;
3. Ms Anne Boutmy, born in Bourbon l'Archambault on March 18, 1973, a French
citizen, resident at 8 rue des Petites Gollandieres, 17580 Le Bois Plage en
Re;
4. Mr. Albert Duplessis, born in Ygrande on November 9, 1926, a French
citizen, married under the system of a communal estate for husband and
wife, resident at Les Vignes, 03160 Ygrande;
5. Mrs. Antonine Duplessis, nee Nicolas, born in Ygrande on March 22, 1924, a
French citizen, married under the system of a communal estate for husband
and wife, resident at Les Vignes, 03160 Ygrande;
6. Mr. Max Boutmy, born in Bourbon l'Archambault on April 4, 1920, a French
citizen, married under the system of community of acquisitions after
marriage, resident at La Cosse, 03160 Bourbon l'Archambault;
7. Mrs. Andree Boutmy, nee Thibault, born in Agonges on January 6, 1922, a
French citizen, married under the system of community of acquisitions after
marriage, resident at La Cosse, 03160 Bourbon l'Archambault;
8. Mr. Jean-Claude Avenier, born in Saint Aubin le Monial on October 29, 1948,
a French citizen, married under the system of a communal estate for husband
and wife, resident at Le Midi, 03160 Saint Aubin le Monial;
9. Mrs. Rose Marie Bry, nee Boutmy, born in Moulins on February 22, 1967, a
French citizen, married under the system of separate estates for husband
and wife, resident at 2 bis rue Baudin, 92300 Levallois;
10. Mrs. Brigitte Pinaut, nee Deplessis, born in Ygrande on March 28, 1957, a
French citizen, married under the system of a communal estate for husband
and wife, resident at Les Bruyeres d'Hates, 03160 Bourbon l'Archambault;
11. Mr. Jean-Philippe Pinet, born in Bourbon l'Archambault on June 30, 1919, a
French citizen, married under the system
<PAGE>
of separate estates for husband and wife, resident at 16 avenue de la
Source, 94130 Nogent sur Marne.
(acting together jointly and severally and referred to collectively hereinafter
as the "STOCKHOLDERS")
ON THE ONE HAND
AND
12. Xomed Holdings SNC, a French SOCIETE EN NOM COLLECTIF with capital of FF.
14,001,000, having its registered office at 6 avenue de Norvege, ZA de
Courtaboeuf, 91140 Villebon-sur-Yvette, registered with the Registry of
Commerce and Companies of Evry under the number B 421 302 449, and
represented by Mr. Guy K. Williamson, duly authorized for this purpose,
(referred to hereinafter as "XOMED")
ON THE OTHER HAND,
RECITALS
A. At the date hereof the Stockholders own 1,875 shares (the "SHARES")
representing the entire capital and voting rights of Etablissements Boutmy,
a French SOCIETE ANONYME with capital of FF. 450,000, registered with the
Registry of Commerce and Companies of Moulins under the number B 973 050
193 and with its registered office at Saint Aubin le Monial, 03160 Bourbon
l'Archambault, France (the "COMPANY").
B. The Stockholders desire to sell the Shares to Xomed which desires to
purchase the Shares for the price and according to the clauses, terms and
conditions set forth hereinafter.
AGREEMENT
1. SALE
1.1 SALE AND PURCHASE OF THE SHARES
According to the terms and conditions hereof and subject thereto,
especially to the provisions of Article 1.2, the Stockholders sell to Xomed and
Xomed, in reliance upon the Stockholders' representations and warranties,
purchases the Shares from the Stockholders on the date hereof, free of all
Liens, rights, pledges, security, preemptive rights, options and any other
rights in favor of third parties.
<PAGE>
1.2 PRIOR EVENTS AND DELIVERY OF DOCUMENTS
As of the date hereof, the events described hereafter must have taken
place and the Stockholders shall have given Xomed the following documents:
(a) the Shares transfer forms (ORDRES DE MOUVEMENT) in Xomed's favor,
duly completed and signed by the Stockholders, to effect the transfer of all the
Shares to Xomed, and proof of the registration of the sale in the Company's
share transfer register; the Company's share transfer register; the stockholder
accounts register; complete and up-to-date minutes books of board and
stockholders meetings and the attendance register for board meetings;
(b) an accurate and complete list of all the directors of the Company
who have held office up until the date hereof; the letters of resignation of Mr.
Christian Boutmy, Mrs. Simone Boutmy and Ms. Anne Boutmy from their positions as
members of the board of directors of the Company specifying that such
resignations shall be effective as of the ordinary general stockholders' meeting
to be held on the date hereof; a certified copy of the minutes of the board of
directors meeting at which it was decided to call an ordinary general
stockholders' meeting to appoint Ms. Maryse Barrois Perrin, Mr. Guy K.
Williamson, Mr. F. Barry Bays and Mr. Thomas E. Timbie as new directors;
(c) Mr. Christian Boutmy's letter of resignation from his position as
chairman of the board of directors and Mrs. Simone Boutmy's letter of
resignation from her position as general manager of the Company, stating that
the Company does not owe them any money on any grounds whatsoever;
(d) a letter from Mrs. Simone Boutmy confirming her resignation as an
employee of the Company effective July 31, 1997 and stating that the Company
does not owe her any money on any grounds whatsoever;
(e) a certified copy of the minutes of the meeting of the board of
directors approving Xomed's acquisition of the Company pursuant to Article 11 of
the Bylaws of the Company;
(f) a copy of the minutes of the meeting of the workers committee of
the Company at which such committee gave its view over the planned transfer of
the Shares;
(g) a statement from Mr. Christian Boutmy indicating that (i) all of
the agreements governed by Articles 101 ET SEQ. of the French commercial
companies statute of July 24, 1966 which are set forth in SCHEDULE 2.24 hereto,
except for the lease with SCI Simone and Christian Boutmy covering the premises
located at 62 rue de Bercy, 75012 Paris, have been terminated and that all
payments owed to the Company thereunder have been duly made and that the Company
does not owe any money on any grounds whatsoever; and that (ii) all loans,
guarantees and other credit arrangements between the
<PAGE>
Company and its Stockholders, officers and employees have been terminated and
that all sums due to the Company thereunder have been duly paid;
(h) a copy, certified as true by Mr. Boutmy in his capacity as board
chairman, of the full release (ACTE DE MAINLEVEE DE NANTISSEMENT DE FONDS DE
COMMERCE) of the January 6, 1989 pledge of the Company's going concern in favor
of BANQUE NATIONALE DE PARIS;
(i) duly signed originals of the consulting agreements made with each
of Mr. Christian Boutmy and Mrs. Simone Boutmy in the forms attached hereto as
EXHIBIT A and EXHIBIT B;
(j) a document certifying repayment by the Company to Mr. Christian
Boutmy on October 30, 1998 of the latter's stockholder loan to the Company, such
repayment not exceeding FF. 1,612,713.36;
(k) a signed original of the guarantee on first demand issued by
Banque Nationale de Paris pursuant to Article 5.4 hereunder, matching the model
attached as EXHIBIT C hereto;
(l) any document testifying that the "Micro France" trademark, which
has been registered in Canada by Distribution Instrumentarium (Canada) Inc. and
for which an application for registration has been made in the United Sates by
Instrumentarium Surgical Corp., Inc. has been permanently retroceded to the
Company, together with a statement certifying that the Company does not owe any
sums on any grounds whatsoever in connection with this retrocession. The Parties
agree that, in the event that, upon the date hereof, retrocession of the "Micro
France" trademark as described above has not been fully completed and is not
effective with respect to third parties, the Stockholders shall be liable to
Xomed for all sums which Xomed or the Company may be required to pay (including
all procedural costs and fees of lawyers and special counsel) over and above the
FF. 150,000 provision included in the Final Balance Sheet, in order for the
"Micro France" trademark to be permanently retroceded.
1.3 PURCHASE PRICE
(a) The aggregate consideration paid for the Shares is ninety two
million French Francs (FF. 92,000,000) (the "PURCHASE PRICE").
(b) Xomed pays the Purchase Price to the Stockholders by bank check on
the date hereof, for which the Stockholders give Xomed good and valid discharge.
<PAGE>
2. REPRESENTATIONS AND WARRANTIES RELATING TO THE COMPANY
The Stockholders represent, warrant and certify as follows:
2.1 CORPORATE ORGANIZATION
(a) The Company is a SOCIETE ANONYME duly organized and validly
existing under the laws of France. Attached hereto as EXHIBIT D is a true,
complete and up-to-date copy of the Company's by-laws ("By-laws"), together with
a company information certificate (EXTRAIT K-BIS) issued by the Registry of
Commerce and Companies of Moulins. All formalities legally required for it to
correctly carry on its existence have been duly and validly carried out. No
resolution has been adopted providing for the amendment of the By-laws or for
the winding-up or liquidation of the Company and no steps have been taken to
this end. All of the company registers, minute books, stockholder accounts,
share transfer registers and other registers and documents of a similar kind
relating to the Company are accurate, up-to-date and faithfully reflect the
decisions taken and conform to all legal and regulatory requirements. The
decisions of the corporate boards and management of the Company have been taken
in compliance with the statutes and regulations in force and in accordance with
the Company's By-laws and are not subject to challenge. There has been no formal
request for the annulment or the winding-up of the Company, nor have any
insolvency proceedings been commenced with respect to the Company, nor any
temporary suspension of claims against the Company or moratorium or like
procedure been ordered, and the Company has never been insolvent. There is no
valid basis currently existing upon which it could be reasonably expected that a
third party could require the winding-up or liquidation of the Company.
(b) The Company is the valid holder of all the approvals, licenses,
permits and authorizations required for carrying on its business in France which
remain in force unchanged.
(c) Except as provided under SCHEDULE 2.1(c), no formality has been
accomplished by the Company or the Stockholders out of the French territory in
order to comply with local regulations applicable for performance of the
Company's activities in foreign countries. The Stockholders acknowledge that
they could be held liable, under the terms and conditions set forth in Article 5
below, if the formalities required by statute for performance of the Company's
activities in foreign countries have not been validly and properly carried in a
timely manner, or if the sale of the Shares has a negative effect in this
respect.
(d) There is no shareholder agreement or other commitments outside the
By-laws regarding the Company, its management or the Shares.
<PAGE>
(e) For all decisions and commitments of the Company which require
notice, publication or registration, such notices, publications and
registrations have been timely effectuated in conformity with applicable
statutory and regulatory requirements.
2.2 SUBSIDIARIES AND INTERESTS
The Company holds no interests in any companies other than Micro France
Italia s.r.l., a limited liability company organized under the laws of Italy
("MICRO FRANCE ITALY"). Micro France Italy has been duly and properly organized
in compliance with the rules in force and is the valid holder of all approvals,
licenses, permits and authorizations required under applicable statute for it to
carry on its business. The shares and other securities representing the capital
of Micro France Italia have been validly subscribed for, issued and fully paid
up, or, if they have been purchased, fully paid for, and are owned by the
Company free and clear of any Liens.
2.3 CAPITALIZATION
(a) On the date hereof, the capital stock of the Company consists of
one thousand eight hundred and seventy five (1,875) shares, par value two
hundred and forty French francs (FF. 240) per share. The names of the
Stockholders and the amounts of their holdings in the Company's capital are set
forth in SCHEDULE 2.3.
(b) All the Shares have been validly subscribed for, issued and are
fully paid up, and have not been issued or acquired in violation of any
preemptive or similar rights. The Shares are subject to the same rights, are
subject in all respects to the same obligations and may be transferred or sold
as set forth in the By-laws.
(c) The Stockholders have full and outright ownership of the Shares,
which are free of all Liens, any prior approval which may be required having
been obtained. There exists no basis upon which the Shares may be subject to an
action challenging ownership thereof. All authorizations have been obtained and
all formalities carried out which are a prerequisite for sale of the Shares to
Xomed.
(d) On the date hereof, there are no options, share rights, promises
or other agreements, decisions or commitments, whether written or verbal, under
which the Company could be obliged to issue or allocate, or cause to be issued
or allocated, any shares of capital stock or other securities representing a
part of the Company's capital, or the Stockholders or a third party to subscribe
for such issue in such a way as to have an impact on or modify the Company's
capital or voting rights
(e) Upon completion of the sale of the Shares to Xomed, Xomed shall
have full and outright ownership of the
<PAGE>
Company's Shares, free and clear of all Liens, as from the date hereof and
including attached dividends.
2.4 CONSENTS AND APPROVALS
Except as set forth in SCHEDULE 2.4, (i) the signing of this Agreement by
the Stockholders, and (ii) the fulfillment by the Stockholders of their
obligations and commitments hereunder do not require the Company to obtain any
consent, approval or authorization, whether explicit or tacit.
In addition, the Company's workers committee has been duly informed and
consulted.
2.5 EFFECT OF THE SALE
Except as set forth in SCHEDULE 2.5, the mere fact of Xomed's becoming the
owner of the Company's Shares and the performance of their obligations by the
Stockholders' under the Agreement shall not and cannot give rise to:
(a) any right for anyone to terminate earlier any of the Material
Contracts (as such term is defined hereafter in Article 2.10) or any other
agreement to which the Company is party, or to modify the effects thereof, or to
ask the Company to perform prematurely its obligations under the contracts and
agreements to which it is party;
(b) any breach or violation of any statutory or regulatory provisions,
any agreements, commitments, the By-laws or any court or other decision
concerning the Stockholders or the Company;
(c) any right for anyone to modify, cancel or withdraw any approval,
permit, license or authorization required for the Company lawfully to carry on
its business, or to cancel or withdraw favorable tax treatment, regardless of
whether or not this results from any approval, or any subsidy or other public
aid, or to refuse the transfer thereof to the Company.
2.6 FINANCIAL STATEMENTS - DIVIDENDS
(a) The Company's balance sheet, income statement and notes to said
financial statements for the fiscal year ended March 31, 1998 (the "1998
FINANCIAL STATEMENTS"), as delivered to Xomed, and the Final Balance Sheet have
been prepared in accordance with the Accounting Principles and are correct and
fairly reflect the assets, liabilities, financial position and business results
of the Company at each of those dates and for the periods which they cover. All
of these documents, plus the notes and attachments relating thereto, together
with the reports by the Company's statutory auditors and the board of directors,
plus the attachments thereto, have been prepared in accordance with the
Accounting Principles and are contained in SCHEDULE 2.6(a).
<PAGE>
(b) The total amount of the dividends distributed for the fiscal year
ended March 31, 1998 is 3,937,500 French francs. All dividends approved for
distribution for such fiscal year have been paid. Since March 31, 1998, no
dividends or interim dividends have been distributed, or approved and not
distributed, for any prior fiscal year, or for the current fiscal year.
(c) All transactions of the Company have been duly and timely recorded
in its accounting books and the Company does not have any debts, obligations,
commitments or liabilities which are not reflected on its Final Balance Sheet,
or which have not been revealed in this Agreement or in the Schedules thereto,
or which do not arise from the ordinary course of business since April 1, 1998
under conditions which conform to the terms of Article 2.7 hereof.
2.7 PRIOR MANAGEMENT OF THE COMPANY
Since April 1, 1998, except as set forth in SCHEDULE 2.7 or as reflected
in the Final Balance Sheet, all Company operations have been carried out as part
of the ordinary course of the Company's business and in accordance with its
customary practice. In particular, the Stockholders represent (without this list
being exhaustive) that since April 1, 1998:
(a) there have been no events and the Company has not performed any
operations likely to have a material adverse impact on the Company's financial
or accounting position or its business, regarding INTER ALIA its assets, results
and relations with its customers and suppliers (an "ADVERSE EFFECT");
(b) the Company has not contracted any financial debts or made any
financial commitments;
(c) the Company has not taken any equity interests in, or made any
loans to, any companies, associations or other legal entities;
(d) the Company has not issued or authorized for issuance any shares,
convertible or exchangeable shares, bonds or any other securities and has not
made any early repayments for any of its debts, nor granted any statutory or
contractual guarantees in connection with the sale of any equity interests;
(e) the Company has not distributed or decided to distribute any
interim dividends, dividends or reserves, nor made or decided to make any
payments on this account, whether in cash or in kind, other than as specified in
ARTICLE 2.6(b)
(f) the Company has not mortgaged, pledged or otherwise encumbered,
voluntarily or involuntarily, any of its assets, nor made any commitment of
similar consequence, other
<PAGE>
than in accordance with its prior practice and for amounts similar to those
granted in the past and in the ordinary and usual course of its business;
(g) the Company has not entered into any agreement, contract, lease,
or license involving a commitment amounting to more than two hundred and fifty
thousand French francs (FF. 250,000) or containing provisions which depart from
the ordinary rules of law or fall outside the ordinary course of business and
prior practice;
(h) there has been no termination of or amendment to any agreement to
which the Company is party that is likely to have an Adverse Effect on the
Company's business or results;
(i) the Company has not suffered any loss, destruction or damage to
any of its property, whether or not insured, and the Company has taken all
reasonable measures necessary to protect its assets, and, in particular, the
Company has not modified or terminated the insurance policies covering the
Company's assets and operations, nor made any commitment to such ends;
(j) the Company has not purchased or made any promise to purchase any
assets of any other Person, except in the ordinary and usual course of its
business; all assets sold have been sold under ordinary conditions and no assets
vital for Company business have been sold, mortgaged, pledged or leased and no
limitations placed upon the rights of ownership and enjoyment thereof;
(k) the Company has not requested of any of its creditors the
remission or forgiveness of any debt;
(l) the Company has not granted any license or sublicense of any
rights under or with respect to any Intellectual Property (as defined below);
(m) there have been no strikes, work stoppages or material changes in
the Company's staff, nor any important changes in the terms and conditions of
its employment contracts with its employees;
(n) there have been no changes to any agreements or contracts between
the Company and its managers, officers, Stockholders, agents or any third
parties, and no commitment has been made to make any such change;
(o) the Company has not entered into any cooperation, partnership,
joint venture or similar agreements.
2.8 COMPLIANCE WITH APPLICABLE REGULATIONS
Except as set forth on Schedule 2.8:
<PAGE>
(a) the Company has complied with the statutes, orders, regulations
and decisions to which it is or has been subject and, to the Stockholders'
knowledge, there is no reason to fear any change in such statutes, orders,
regulations and decisions likely to have an Adverse Effect on the transaction
covered by this Agreement;
(b) the Company has not received any communication from any Public
Authority that alleges that it is not in compliance with any statutes, orders,
rules, orders or relevant decisions, and/or which threaten it with legal
proceedings. At the present time, there are no enquiries or proceedings in
progress against the Company, at the request of any Public Authority, regarding,
INTER ALIA, safety or compliance of any of its products with applicable
standards;
(c) the approvals, permits, licenses and authorization required for
the Company to own and possess its property and carry on its business have been
duly obtained and are in force, and the Stockholders are not aware of any
possible changes. The Company has not been denied any permits or licenses
required for it to possess its property and carry on its business. The Company
has received satisfactory approvals in all inspection reports by external
monitoring and certification agencies.
2.9 LITIGATION
(a) Except as disclosed in SCHEDULE 2.9, the Company is not currently
involved in any way whatsoever in any governmental, judicial or arbitration or
conciliation proceedings, or any suits or claims, any enquiries, offenses or any
other disputes whatsoever. The Company has not received any correspondence
informing it of an inquiry or an inspection or threatening it with legal
proceedings in connection with a dispute which, if the Company were
unsuccessful, would have an Adverse Effect.
(b) The Company is not and shall not be held liable for payment of any
damages, for an amount greater than that for which provision has been made in
the Final Balance Sheet, to compensate any Person for damages caused by products
manufactured before the date of sale and marketed by the Company.
2.10 MATERIAL CONTRACTS
SCHEDULE 2.10 lists:
(a) agreements (or groups of agreements) relating to loans, guarantees
or similar agreements, amounting in any fiscal year to more than one hundred
French francs (FF. 100,000) or the equivalent thereof in any other currency, or
under which the Company has imposed a security interest or any other Lien on any
of its assets, tangible or intangible;
<PAGE>
(b) agreements providing for exclusivity or relating to distribution
or commercial representation or preventing the Company from engaging in any
competing activity for a period of greater than six (6) months or concerning an
obligation of confidentiality;
(c) cooperation, partnership, joint venture and similar agreements;
(d) agreements covering arrangements for holding the capital or
control of any company or business with one or more third parties, and
arrangements for managing said company or business;
(e) agreements (or groups of agreements) for the lease of personal
property to or from any person or entity providing for lease payments in excess
of one hundred thousand French francs (FF. 100,000) per annum;
(f) agreements (or groups of agreements) for the sale or purchase of
raw materials, commodities, supplies and other personal property, or for the
furnishing or purchase of services, which (i) are to be performed over periods
of more than one year, (ii) result in a loss to the Company, or (iii) involve
total consideration in excess of two hundred thousand French francs (FF.
200,000); (g) license, franchise, distribution and commercial representation
agreements, written or verbal, which the Company has entered into and which
depart from ordinary trade practices, involve exclusivity, or require more than
three (3) months' notice or the payment of compensation in the event of
termination;
(h) agreements for which the outstanding term of performance exceeds
twelve (12) months and which do not contain clauses for early termination
without payment of indemnities.
(i) agreements which cannot be terminated unless more than three (3)
months' notice is given, or, as far as employment contracts are concerned, which
require notice in excess of that provided by statute and applicable collective
bargaining agreements or the payment of indemnities greater than those provided
by statute and applicable collective bargaining agreements;
(j) agreements setting forth the conditions which the Company must
fulfill in order to receive any aid or any subsidies from any Public Authority;
(k) agreements entered into outside the Company's ordinary course of
business or contrary to its customary practice in the past for similar amounts.
The foregoing agreements (whether written or verbal) are referred to herein
as "COMPANY MATERIAL CONTRACTS". Except as set forth in SCHEDULE 2.10, on the
date hereof (i) none of the
<PAGE>
Company Material Contracts may be terminated by the counter party as a result of
the change in control of the Company, (ii) none of the Company Material
Contracts violates any mandatory provisions of any statutes or regulations, and
(iii) no correspondence has been exchanged in connection with discussions for
purposes of amending any of the Company Material Contracts, and the Company is
in a position to demand that such Company Material Contracts be performed in
accordance with the terms and conditions thereof.
Each Company Material Contract is valid, and in full force and effect on
the date hereof.
2.11 GUARANTEES AND OFF-BALANCE-SHEET COMMITMENTS
Except as disclosed in SCHEDULE 2.11, or in the Final Balance Sheet, the
Company is not bound by any off-balance-sheet commitments and has not given any
guarantees, endorsements, or comfort letters or any other security guaranteeing
third party commitments.
2.12 EMPLOYEES
(a) SCHEDULE 2.12(a) sets forth (i) an accurate and complete list of
the "key employees" identified by the Company prior to the date hereof, and (ii)
an accurate and complete list of the collective bargaining agreements
(CONVENTIONS COLLECTIVES) applicable to the Company's employees. Except as
otherwise set forth in SCHEDULE 2.12(a), none of the employment contracts signed
by such "key employees" contains any non-competition clause.
(b) SCHEDULE 2.12(B) sets forth (i) the number of Company employees,
and (ii) a complete list of all employees of the Company and the Subsidiaries
entitled to a gross annual salary or other compensation in excess of FF. 200,000
(the "LISTED EMPLOYEES"). The employment and employment contracts of all the
Company's Employees comply in all respects with the regulations in force and,
except as set forth in SCHEDULE 2.12(b), no employment contract or agreement
relating to Employees departs from the collective bargaining agreements in
force, including on the basis of any agreement or commitment covering
individuals only, and in particular concerning length of notice and the amount
of indemnities payable upon dismissal or departure.
(c) Since April 1, 1998, except to the extent set forth in SCHEDULE
2.12(c), the Company has not (i) hired any additional employees, (ii) paid or
agreed to pay any bonuses (except with respect to bonuses as set forth in
SCHEDULE 2.12(b)(II)), or any indemnities for severance of contract, retirement
or ceasing work, or any stock options or other kinds of benefits, nor made or
agreed to make any pay increases, nor changed or agreed to change the terms of
the employment contracts of any of its directors, officers or Employees, or
(iii) changed its hiring or dismissal policies or practices in any material
respect.
<PAGE>
(d) The Company has complied with all statutory and regulatory
provisions with regard to the setting up and operation of staff representative
bodies and labor unions. There are no negotiations pending with representatives
of the labor union of the Company regarding the implementation of a "CONVENTION
D'ENTREPRISE".
(e) The Company is in compliance with all legislation relating to the
implementation and organization of profit sharing agreements and schemes and
collective savings schemes. There are no profit sharing schemes or agreements
other than those shown in SCHEDULE 2.12 (e).
(f) Except as shown in SCHEDULE 2.12(f), no contracts or agreements
relating to Company officers, managers or employees contains any provisions to
the effect that a change in the control of the Company would cause them to
terminate or the terms thereof to be modified.
(g) The Company has organized elections to staff representative bodies
within the time-limits and in the manner set by statute. Where the Company had
no candidates for such elections, minutes attesting to such deficiency have been
recorded, duly posted and forwarded to the employment authorities.
2.13 TAX, SOCIAL SECURITY AND CUSTOMS
(a) The Company has filed on a timely basis all tax, social security
and customs returns and reports for which there is a statutory or regulatory
filing requirement. Such returns were correct and complete on the dates they
were made. The results of the URSSAF audit in 1997 and the customs audit in 1998
are set forth in SCHEDULE 2.13(a).
(b) All taxes, contributions and other duties of any nature
whatsoever, imposed by or owed to a Public Authority, including social security
organizations and any other bodies responsible for collecting social security
contributions, whether it be by roll call, by withholding or any other system
(hereafter the "TAXES"), have been either timely and fully paid or fully
provided for in the Company's accounts. The provisions for taxes shown in the
Final Balance Sheet should suffice to entirely cover all Taxes due or likely to
become due, as the case may be, for each prior fiscal year.
(c) The Company has not received notice of any tax or social security
adjustments, reassessments or proceedings relating to the Company and, to the
Stockholders' knowledge, there are no facts existing which may constitute the
basis for any such adjustments, reassessments or proceedings.
(d) SCHEDULE 2.13(d) sets forth the list of all the tax, social
security and customs benefits received by the Company. The sale of the Shares
will not result in the loss of any such tax, social security and customs
benefits.
<PAGE>
(e) The Company has not entered into any agreements setting dates for
payment of any taxes, contributions or any other charges.
(f) The Company has never been a party to any agreement with any
Person with respect to tax consolidation. The Company does not benefit from any
favorable tax treatment in return for commitments by which it is still bound. In
particular, the Company has not agreed to hold the securities of another
Company, or any other assets, for any duration. In the event of a sale of the
Shares of the Company or any other assets, the capital gain resulting therefrom
shall be calculated according to the value appearing in the financial statements
of the Company on the basis of which the Final Balance Sheet has been prepared.
2.14 INTELLECTUAL PROPERTY
(a) SCHEDULE 2.14 sets forth an accurate and complete list of:
(i) all trademarks owned by the Company as a result of their
having been correctly registered or acquired, and all names and logos
representing the Company's activities, mentioning the origin and value thereof,
and all registrations or applications for registration in any country where they
are used ("TRADEMARKS");
(ii) all patentable inventions, discoveries, improvements,
ideas, know-how, processes, technology, computer programs and all patents
resulting therefrom ("PATENTS");
(iii) trade secrets, including confidential and other
non-public information, and the right to limit the use or disclosure thereof
("TRADE SECRETS");
(iv) designs, models and software programs which have been
registered or for which registration is in progress and all rights connected
thereto ("DESIGNS AND MODELS");
(v) databases (including a list of customers and/or
suppliers) and all rights in the databases ("DATABASES");
(vi) intellectual property licenses, approvals and
authorization which the Company requires for carrying on its business
("LICENSES");
(the Trademarks, Patents, Trade Secrets, Designs and Models,
Databases and Licenses being referred to hereinafter collectively as
"INTELLECTUAL PROPERTY").
(b) Within the Company there is no infringement of any patents,
trademarks, designs or copyrights held by third parties. There are no
proceedings, actions or claims
<PAGE>
concerning infringement which have already been brought or risk being brought
which involve or could involve the Company.
(c) Except as specified in SCHEDULE 2.14(c), the Company is not
currently obligated or under any existing liability to make royalty or other
payments to any owner of, licensor of, or other claimant to, any Intellectual
Property, for using such Intellectual Property in connection with its business.
No director, officer, employee, contractor, consultant, agent or other
representative of the Company has violated any employment agreement,
confidentiality clause or agreement or obligation (contractual or otherwise)
which he or she had with a previous employer with respect to the intellectual
property of such employer, and is not involved in, or likely to become involved
in, a dispute relating to Intellectual Property.
(d) Except as specified in SCHEDULE 2.14(d), no former or present
directors, officers, employees, contractors, consultants, agents or other
representatives of the Company holds any rights, title or interest, directly or
indirectly, in whole or in part, in or to any Intellectual Property and the
agreements made with Company employees provide that the Company shall have full
ownership of any Intellectual Property developed by any employees, contractors
or agents.
(e) The Company has duly maintained the registration of its
Intellectual Property and this property is free and clear of all Liens. None of
the Company's Intellectual Property has been the subject of any claims or
applications for cancellation or withdrawal for lack of use. All Taxes required
to be paid in order for registrations to be maintained, have been duly and
timely paid. No third party or parties have been granted any license(s),
sub-license(s), usage right(s) or any other right(s) in any Intellectual
Property owned by the Company under the terms hereof.
(f) No industrial property other than the Intellectual Property is
necessary for the conduct of the business of the Company, as conducted as of the
date hereof.
2.15 REAL PROPERTY AND LEASES
2.15.1 REAL PROPERTY.
(a) The Company owns real property located at Saint Aubin-Le-Monial,
03160 Bourbon L'Archambault. The Company has good, proper and unchallenged title
to the real property. Copies of the title deeds of all real property owned by
the Company, duly registered, are provided in SCHEDULE 2.15.1(a).
(b) None of the Company's real property is subject to any compulsory
purchase order, easements, mortgages, registrations or other rights in favor of
third parties, as shown in a certificate issued by the relevant mortgage
registry (CONSERVATION DES HYPOTHEQUES) dated December 1, 1998, to be found in
SCHEDULE 2.15.1.(b), and except as set
<PAGE>
forth in such SCHEDULE. There are no measures, regulations or agreements which
prevent the Company from disposing of or selling the real property or limiting
its rights to do so.
(c) All governmental permits and authorizations necessary for the
occupancy and usage of said real property have been obtained. All occupation and
usage of the real property owned and/or used by the Company complies with
applicable customs, statutes and regulations, including health and safety
regulations.
(d) Such real property is not subject to any order of condemnation nor
have the occupants been required to vacate the premises.
(e) There are no zoning laws or other regulations which could
significantly affect the overall market value of the real property owned by the
Company.
(f) Except as set forth in SCHEDULE 2.15.1(f), all necessary
authorization and, as the case may be, compliance certificates and building
permits have been obtained for all work ordered by governmental authorities
and/or carried out in or on the real property. All work on the real property has
been finished and the corresponding certificates of completion issued.
2.15.2 COMMERCIAL LEASES - REAL PROPERTY LEASING AGREEMENTS -
TRADING LEASES
(a) The Company has free use as tenant of all real property required
for its operations. A list of such real property is set forth in SCHEDULE
2.15.2(a).
(b) There are no real estate leasing contracts, building leases or
other agreements entered into by the Company which provide that the Company
could become the owner of, or would have use of, any real property.
(c) Copies of the leases in which the Company is tenant are to be
found in SCHEDULE 2.15.2(c). All of these leases are regulated by the decree of
September 30, 1953.
(i) The Company has not received any notices of increases in rent
or charges other than those increases resulting from indexation to the INSEE
construction index, or of non-renewal or termination of any lease.
(ii) The Company has always complied with the terms and
conditions of the leases and paid on time all rent, charges, local taxes and
other sums owed by it and payable under such leases.
(iii) No consent is required from any of the lessors for the
purpose of the sale of the Shares.
<PAGE>
(d) The Company has not granted any sublet or domiciliation relating
to the premises covered by the leases.
(e) The Company has not assigned any lease held by it and has not made
any commitment to do so.
2.16 TANGIBLE FIXED ASSETS
(a) SCHEDULE 2.16(a) sets forth a true and complete list of the
tangible property and rights necessary for the Company's business as of the date
hereof. These assets are free of all priorities, mortgages, pledges, security,
easements and other rights in favor of third parties. No attachment or
compulsory purchase of such assets has been ordered.
(b) The Company holds, rents or owns all the assets necessary to carry
out its business.
(c) There is no likelihood of any event, in particular a change of
control, undermining the Company's ownership, use and enjoyment of the assets
necessary for its operations, or causing any increase in rents, fees, licenses
or other amounts due by the Company for use of said assets.
2.17 INTANGIBLE PROPERTY
The Company has outright ownership of the business it operates, which is
not subject to any pledges, guarantees or security, except for the pledge
mentioned in Article 1.2(h), the full release of which has been obtained
(subject to the formality of canceling the registration with the clerk's office
at the relevant commercial court (TRIBUNAL DE COMMERCE)). The Company has
neither taken nor granted a manager lease (LOCATION-GERANCE) or free lease
(LOCATION LIBRE) on any business.
2.18 CONDITION OF TANGIBLE FIXED ASSETS
The assets set forth in SCHEDULE 2.16(a) (subject to what is specified in
SCHEDULE 2.20) are in good operating condition and repair, have been
appropriately maintained, are suited for the activity for which they were
acquired, are used in an appropriate way in the course of the Company's
business, and comply with the regulations in force which apply to them.
2.19 STOCKS
(a) The stocks and goods in process shown in the inventory as of
November 30, 1998 attached as SCHEDULE 2.19(a) satisfies, quantitatively and
qualitatively, the Company's ordinary needs as arising from its current
industrial and commercial policy and may be marketed under normal conditions.
Such stocks consist of merchantable products which may be used normally or sold
for a price greater or equal to their value when acquired, subject to the
provisions shown in the Final
<PAGE>
Balance Sheet. The size of such stocks is not excessive in the light of the
Company's current commercial and industrial policy.
(b) Items of stock which are unsaleable, obsolete or, more generally,
for which provisions should have been made in the accounts as of November 30,
1998, have been sufficiently provided for using applicable accounting methods.
More precisely, as of November 30, 1998, no item of stock was obsolete or
unsaleable or should have been the subject of a provision, and as a consequence
no provision has been recorded to this end in the Final Balance Sheet, in
accordance with SCHEDULE 2.19(b).
(c) All stocks have been physically listed using the procedure set
forth in SCHEDULE 2.19(c) and have been valued in the accounts using the same
methods as those applied by the Company in previous fiscal years.
2.20 ENVIRONMENTAL, HEALTH AND SAFETY COMPLIANCE
(a) The Company has obtained all permits, licenses and other
authorizations that are required for the construction, use and operation of its
industrial sites and complies with the terms thereof. Under the conditions in
which production facilities are currently used, which comply with the statutes
and regulations in force, no hazardous substance, hazardous waste, contaminant,
pollutant or toxic substance has been or can be released from any land or
premises which the Company uses or has used or owns or has owned.
(b) The Company has not been the subject of any governmental
proceedings (including any inquiry, notice or report) for violating regulations
currently applicable to the industrial sites it operates concerning the
environment, noise, or protection of water and air. SCHEDULE 2.20(b) contains
copies of all correspondence since January 1, 1998 between the Company and any
Public Authority responsible for ensuring compliance with environmental
regulations.
(c) Except as provided for in SCHEDULE 2.20(b), and subject to the
yearly control of APAVE and the occasional need to change a clicking press, the
Company is not legally required to take any steps or make any investment to
bring its industrial sites into conformity with currently applicable
environmental, health and safety regulations, or with regard to air, water and
noise requirements, other than within the limits of the provisions included for
this purpose in the Final Balance Sheet.
(d) None of the land or premises used by the Company or its
predecessors, or the surface or ground water in such places, has given rise to,
or can give rise to, any release or deposit of hazardous substances, pollutants
or contaminants.
<PAGE>
(e) Other than as provided in SCHEDULE 2.20(e), none of the land or
premises used or owned by the Company contains (a) underground storage tanks,
(b) material containing asbestos in any form, (c) materials or equipment
containing polychlorinated biphenyl, or (d) landfills, waste tips and areas for
storing refuse.
(f) None of the employees or former employees of the Company has been
exposed to hazardous substances within the scope of his or her activity in the
Company, its being said that the polishing and dry grinding activities have been
provided with regularly maintained particle suction facilities at the Company's
instigation.
(g) The Company is validly insured against any risk of accidental
pollution.
2.21 INSURANCE
(a) The Company is duly insured, for sufficient amounts, with
insurance companies having sufficient capital resources, against the
consequences of the deeds of its employees, the risks affecting property it owns
or rents, and the risks arising from its operations (loss of business, physical
or bodily harm) and especially those relating to its status as manufacturer and
distributor. The insurance policies which have been taken out cover the cost of
replacing such property and the financial consequences of the Company's possible
liability and that of its officers, particularly in the case of civil liability
subsequent to delivery (civil liability for products). These policies are in
keeping with those which are customary in the profession.
(b) The Company is up-to-date in the payment of the premiums due for
the corresponding policies and has complied with the declaration requirements of
said policies.
(c) No premium has been increased for the last 3 (three) fiscal years
due to particular incidents or claims.
(d) The Company has performed no actions that could have rendered or
could render any of the insurance policies null or void or allow them to be
terminated. The policies are in force and, except as indicated in SCHEDULE
2.21(d), the insurers have not informed the Company of any intention to
terminate them or amend the amount of the premium or the coverage.
(e) No claims have been brought or are likely to be brought in
connection with said policies. SCHEDULE 2.21(e) gives an exact and complete list
of claims made by the Company to its insurers since January 1, 1998.
2.22 YEAR 2000 INFORMATION TECHNOLOGY COMPLIANCE
All items, products, programs, software, components and systems used by
the Company (the "COMPONENTS") for commercial
<PAGE>
and accounting management which incorporate the processing of dates or
date-related data have been audited by CCMX and an agreement has been drawn up
for bringing them into compliance during the first quarter of 1999. The audit
report and the costs estimate are set forth in SCHEDULE 2.22.
2.23 SERVICES AND PRODUCTS
(a) All services provided and products sold by the Company are of merchantable
quality and fit for the purpose for which they are manufactured and sold.
SCHEDULE 2.23(a) sets forth the standard terms and conditions for production,
manufacture and sale of the Company's products.
(b) Products marketed by the Company which were manufactured before
the date of sale comply with all applicable laws in France and in European Union
territory and in particular with special manufacturing standards. Prior to being
distributed on the market, these products have received the qualifying
certificates and approvals required under statute and regulations applicable in
France and in European Union territory. In particular, the Company has always
complied with the provisions of Article L.665 of the French Public Health Code
(CODE DE LA SANTE PUBLIQUE) and Decree no. 96-32 of January 15, 1996 for
products subject to these regulations. Except as provided in SCHEDULE 2.23(b),
no steps have been taken by the Company or the Stockholders outside European
Union territory for the purpose of complying with local regulations with respect
to sales or imports of the products manufactured by the Company. Notwithstanding
the foregoing, the Stockholders acknowledge that they can be held liable, under
the conditions and in accordance with the terms of Article 5 below, if the
products sold outside European Union territory do not comply with said local
statutes and regulations, provided these products were manufactured prior to the
date hereof.
(c) All products have been manufactured, sold, leased or delivered by
the Company in conformity with the Company's contractual commitments and the
express or legally implied warranties connected therewith. Except as set forth
in SCHEDULE 2.23(a), no product manufactured, sold or delivered by the Company
is accompanied by any warranty of any kind which is broader in scope than
applicable statutory and regulatory warranties.
(d) Other than as set forth in SCHEDULE 2.23(d), the Company has no
knowledge that, nor has it received any claims from clients or distributors
indicating that, such services or products are defective or unfit for normal
use.
2.24 POTENTIAL CONFLICTS OF INTEREST
As of the date hereof, except as disclosed in SCHEDULE 2.24, none of the
Stockholders, nor any of the Company's senior management staff, affiliates or
direct family relatives of any of the aforementioned persons:
<PAGE>
(i) possesses jointly or individually, in full or in part, any of
the property or assets, nor holds any rights, which the Company must use or
exercise in order to carry out its activities in France or other countries;
(ii) is a creditor or debtor of the Company or, more generally, has
the possibility of exercising a right against the Company, or is bound by any
obligation towards it;
(iii) is a party to any contract which is in any way binding upon,
or in any way imposes an obligation upon, the Company or one or more of them;
(iv) has purchased from the Company or sold to it, jointly or
separately, since January 1, 1998, all or part of any property or assets.
The statutory auditors have been informed of decisions which require
authorization or ratification by corporate organs, in particular agreements
coming within the scope of Articles 101 ET SEQ. of the French business companies
Act of July 24, 1966, and such agreements have been authorized or certified in
accordance with the statutes and regulations in force, customs and guidelines
from relevant authorities.
2.25 CUSTOMERS AND SUPPLIERS
SCHEDULE 2.25 sets forth a true and complete list of (i) the twenty (20)
largest customers of the Company in terms of sales for the fiscal year ended
March 31, 1998, and (ii) the twenty (20) largest suppliers and service providers
for the fiscal year ended March 31, 1998, together with a list of the agreements
entered into with such customers, suppliers and service providers. Except as set
forth in SCHEDULE 2.25, none of such customers, suppliers or service providers
has (i) broken off or significantly changed its relations with the Company, or
(ii) notified the Company in writing or verbally that it intends to break off or
significantly change its relations with the Company.
2.26 BANK ACCOUNTS AND POWERS OF ATTORNEY
(a) SCHEDULE 2.26 sets forth a true and complete list of the banks and
financial institutions with which the Company collaborates and with which it has
accounts, plus a list of the persons authorized to operate such accounts.
(b) Other than as mentioned in SCHEDULE 2.26(b), the Company has not
empowered any Person to sign bank documents.
2.27 RECEIVABLES
All receivables originated before November 30, 1998 have, if need be, been
properly provided for in the Final Balance Sheet and, subject to such
provisions, may be
<PAGE>
collected in accordance with the terms thereof within eighteen (18) months of
the date hereof with respect to debts owed by public hospitals, and nine (9)
months with respect to any other debts. All receivables dating from after
November 30, 1998 are legally valid and may be recovered in their entirety from
the original debtors or third parties within the same time-limits as mentioned
above. Except as described in SCHEDULE 2.27, there has been no offsetting or
request for offsetting of such receivables.
From the date hereof, Xomed undertakes that the collection of the
receivables concerned will be followed up actively and on a regular basis.
Should the Xomed Indemnitee (as defined in Article 5.1 hereafter) be
indemnified by the Stockholders on account of failure to collect a receivable
within the above-mentioned time-limits (it being understood that the amount of
the Indemnification may be set after deducting any possible tax reduction or
saving, as the case may be, in accordance with Article 5.3(d)), the Xomed
Indemnitee must in any event repay to the Stockholder the amount of such
Indemnification, to the extent of the amount recovered if less than the
Indemnification and after taking account of the tax borne on the amount
collected, in the event that, after the Indemnification has been paid, the
receivable is finally collected in full or in part, irrespective of the date on
which it is finally collected.
2.28 CHANGEOVER TO EURO
There are no provisions in any agreements according to which any contract
or agreement to which the Company is party will be terminated upon the
implementation of the Euro.
2.29 SUBSIDIES
The Company receives no subsidies other than as mentioned in SCHEDULE
2.10.
2.30 VALIDITY OF REPRESENTATION
Each of the signatories to this Agreement signing in the name and on
behalf of another Person or acting as representative of another Person is fully
empowered to do so, having carefully and scrupulously complied with all
applicable statutory requirements for this purpose.
2.31 FAIRNESS
This Agreement, the schedules provided herewith and the other written
documents delivered to Xomed by or on behalf of the Company, or by the
Stockholders, do not contain any untrue or false statements relating to a
material fact and do not omit to state a material fact which, by not being
revealed, would make the statements contained in this Agreement or the
<PAGE>
Schedules thereto clearly misleading. To the Stockholders' knowledge, this
Agreement does not omit any fact which (i) may materially adversely affect the
business, property, assets or financial position of the Company or (ii) would
have been considered by a reasonable purchaser as pertinent information to be
taken into account in deciding upon this Agreement.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES BY XOMED
Xomed represents, warrants and certifies as follows:
3.1 CORPORATE ORGANIZATION
Xomed is a French SOCIETE EN NOM COLLECTIF, duly and properly formed, and
all legal formalities required for it to continue correctly its existence have
been validly and properly performed within the time-limits set. Xomed is
indirectly controlled by Xomed Surgical Products, Inc.
3.2 AUTHORIZATIONS
The conclusion of this Agreement and fulfillment by Xomed of the
obligations relating thereto have been validly authorized by the relevant bodies
of Xomed and Xomed Surgical Products, Inc. and Mr. Guy K. Williamson is fully
empowered to conclude and sign this Stock Purchase Agreement in the name of and
on behalf of Xomed.
Except as set forth in SCHEDULE 3.2, Xomed does not have to obtain any
authorizations, consent or approval, whether express or tacit, notably from any
Public Authorities, for the purpose of purchasing the Shares or fulfilling its
commitments and obligations arising from this Agreement.
Xomed undertakes to make a declaration to the French Treasury, in
accordance with applicable regulations.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES RELATING TO THE STOCKHOLDERS
Each of the Stockholders represents, warrants and certifies as follows:
4.1 OWNERSHIP OF THE SHARES
Each Stockholder has full and outright ownership of the Shares in the
proportions mentioned in EXHIBIT D. Apart from the obligations arising from the
terms hereof and what is mentioned in EXHIBIT D, there are no options, share
rights, conversion rights, preemptive rights, transfer restrictions or voting
agreements encumbering or relating to the Shares, and the Company has made no
commitment to create any such options, agreements or rights. The Shares may be
freely transferred and are free and clear of any priorities, pledges, Liens and
other rights to the benefit of third parties.
<PAGE>
4.2 CAPACITY, ABSENCE OF CONFLICTS
Each Stockholder has the full right and capacity to sell the Shares to
Xomed. The sale of the Shares to Xomed and all legal operations accomplished for
the purpose of completing such sale do not violate any applicable statutory or
regulatory provisions or any provisions of the Company's By-laws or other
corporate documents or any agreement or deed to which the Stockholders or the
Company are/is parties/y or any governmental or judicial decision of which they
may be the subject. The sale of the Shares to Xomed and all legal operations
accomplished for the purpose of completing such sale have been duly authorized
by all such corporate decisions as are required.
4.3 FEES
The Company does not owe any fees or commission to any brokers or other
intermediaries on account of or in connection with the present Agreement and the
operations contemplated by this Agreement.
ARTICLE 5. INDEMNIFICATION
5.1 INDEMNIFICATION BY THE STOCKHOLDERS
The Stockholders undertake - which is not accompanied by joint and several
liability, except in the case of Mr. Christian Boutmy and Mrs. Simone Boutmy,
who shall be jointly and severally and indivisibly liable for the entire amount
due by the Stockholders - to indemnify Xomed (the "INDEMNIFICATION") or any of
its Subsidiaries (including, upon execution of this Agreement, the Company) and,
if need be, their respective directors, officers, employees and agents
(collectively, the "XOMED INDEMNITEE"), for the entire amount of:
(i) any and all increase in liabilities or decrease in assets of the
Company based on or arising out of an event or circumstance occurring or
existing prior to November 30, 1998 and which has not been addressed or allowed
for, or has been insufficiently addressed or allowed for, in the Final Balance
Sheet, and all loss, damage, tax consequence, claim or expenditure, including
but not limited to procedural costs and reasonable attorneys' fees, resulting
directly or indirectly from said event, circumstance or occurrence, incurred by
the Xomed Indemnitee;
(ii) any and all losses borne or incurred by the Xomed Indemnitee,
including fines, indemnities and interest on late payments, of any nature,
deriving from any request or reassessment concerning tax (general or specific),
customs, social security and, more generally, of a governmental or regulatory
nature, covering any date prior to the date hereof and not provided for, or
insufficiently provided for, in the Final Balance Sheet; and
<PAGE>
(iii) all financial consequences to the Xomed Indemnitee for any
breach of, or omission or inaccuracy in, any of the representations, warranties
and covenants made in this Agreement and not addressed by paragraphs (i) to (ii)
hereinabove.
A "LOSS" shall be and mean any one or more of the events set forth in
paragraphs (i) to (iii) above.
It is expressly agreed that in the event the present guarantee is
implemented, the Stockholders shall not, in any manner or in any way, be
exempted in whole or in part from their indemnification obligations hereunder on
the basis that the Xomed Indemnitee, either through investigations which
he/she/it carried out or had carried out, or through the information that was
communicated to him/her/it prior to the date hereof, was aware or could have
been aware of the items of information or submissions of whatsoever nature
relating to the claim in question.
5.2 INDEMNIFICATION PROCEDURES
(a) In the event that (A) Xomed had been aware of any tax or social
security inspection, any reassessment and/or any claim, of whatsoever nature,
brought by any individual or legal entity, governmental authority or body
who/which presents itself as a creditor of the Company (a "THIRD PARTY Claim"),
which could give rise to a Loss, or (B) Xomed Indemnitee should make a claim,
distinct from a Third Party Claim, to receive repayment of all or part of the
Purchase Price or to be indemnified for the Loss suffered (a "DIRECT CLAIM"),
Xomed shall (x) in the case of a Third Party Claim, within fifteen (15) days of
receipt by the Xomed Indemnitee of such Third Party Claim, and (y) in the case
of a Direct Claim, with reasonable promptness (as from Xomed's becoming aware of
the event or circumstance giving rise thereto), send to Mr. Christian Boutmy on
behalf of the Stockholders (the "STOCKHOLDERS' AGENT") a written notice (the
"CLAIM NOTICE") specifying the nature of such claim or demand, details of the
person making the claim if need be, and the amount of the Loss suffered (stated
in French francs or in euros), allowing the Stockholders to assess the merits of
the claim and the estimated amount of the Loss. Xomed shall submit along with
such Claim Notice all relevant evidence, documentation and information in
support of the Claim Notice in question (such estimate being given subject to
the Xomed Indemnitee's right subsequently to alter the amount of the loss and,
accordingly, the amount of the Claim Notice).
(b) In the event of a Direct Claim, the Stockholders' Agent shall have
forty five (45) days following receipt of the relevant Claim Notice (the "DIRECT
CLAIM REVIEW PERIOD") to carry out, with the assistance of the Company and
Xomed, such investigations as he shall consider necessary. If, prior to the date
of the expiration of the Direct Claim Review Period, the Parties agree upon the
validity and amount of such Direct Claim, the Stockholders' Agent shall pay to
the
<PAGE>
Xomed Indemnitee, within fifteen (15) days following the date of such agreement,
the entire amount indicated in the Direct Claim (or, if such be the case, the
undisputed part of the amount mentioned in such Direct Claim). In the event the
Stockholders' Agent fails to notify the Xomed Indemnitee, before expiry of the
Direct Claim Review Period, that he objects to the Stockholders' liability under
such Direct Claim, the Stockholders shall be deemed to have acknowledged their
liability under such Direct Claim and the Indemnification shall thus be
immediately payable. Payment of the Indemnification is guaranteed by Banque
Nationale de Paris which has given the Indemnification Guarantee on First Demand
under the conditions set forth in Article 5.4 below. If the Parties are unable
to reach an agreement prior to the expiration of the Direct Claim Review Period
or if the Stockholders' Agent notifies the Xomed Indemnitee during the Direct
Claim Review Period that he objects to the Stockholders' liability under such
Direct Claim, the Xomed Indemnitee shall have thirty (30) days as from the date
on which he/she/it receives notice of the above-mentioned objection in which to
serve a notice on the Stockholders' Agent demanding referral to an arbitrator as
provided by Article 6.3 of this Agreement. Failure to serve such notice as
described will result in all Xomed Indemnitee's rights under such Direct Claim
being forfeited.
In the event an objection is to be settled pursuant to Article 6.3
herebelow, the Indemnification shall be payable only after notice has been given
of an enforceable decision (which may be a decision for immediate provisional
enforcement) against the Stockholders or Mr. Christian and Mrs.
Simone Boutmy.
(c) In the event of a Third Party Claim, the Stockholders' Agent
shall have forty-five (45) days following receipt of the Claim Notice (the
"THIRD PARTY CLAIM REVIEW PERIOD") to carry out such investigations as he
considers necessary and, if need be, to notify the Xomed Indemnitee of his
observations or objections, giving the reasons therefor. If, prior to the date
of expiration of the Third Party Claim Review Period, the Parties agree upon the
validity and amount of the Third Party Claim, the Stockholders' Agent shall pay
to the Xomed Indemnitee, within fifteen (15) days following the date of such
agreement, the entire amount indicated in the Third Party Claim (or, if such be
the case, the undisputed part of the amount mentioned in such Third Party
Claim). If the Stockholders' Agent fails to notify the Xomed Indemnitee prior to
the expiry of the Third Party Claim Review Period that he objects to the
Stockholders' liability under
<PAGE>
such Third Party Claim, the Stockholders shall be deemed to have acknowledged
their liability under such Third Party Claim and the Indemnification shall thus
be immediately payable. Payment of the Indemnification is guaranteed by Banque
Nationale de Paris which has given the Indemnification Guarantee on First Demand
under the conditions set forth in Article 5.4 below. In the event the
Stockholders' Agent notifies the Xomed Indemnitee prior to the expiry of the
Third Party Claim Review Period that he objects to the Stockholders' liability
under such Third Party Claim, the Xomed Indemnitee shall have thirty (30) days
after receiving such notification to serve a notice on the Stockholders' Agent
demanding referral to an arbitrator as provided in Article 6.3 of this
Agreement. Failure to serve such notice as described will result in all Xomed
Indemnitee's rights under such Claim Notice being forfeited. In the event of an
objection by the Stockholders' Agent, the Parties shall come together in order
to seek a mutually agreeable solution or a way of proceeding, as appropriate,
concerning such Third Party Claim. The Stockholders shall have the right, if
they so notify the Xomed Indemnitee in writing within ten (10) days of receipt
of the Claim Notice, to attend and participate in, or be represented at, any
meetings or discussions, at their own expense, so as to assert whatever means of
defense they consider appropriate, so long as the Stockholders' requests and
means of defense are not clearly unreasonable or contrary to the interests of
the Company. They shall have access to all documents necessary for defending
their interests which the Company or the Xomed Indemnitee may have and legally
be able to provide. Such access shall be granted during normal working hours and
shall not interfere with conduct of business by Xomed Indemnitee. The
Stockholders and their counsel shall keep confidential all information of which
they may become aware. The three periods of forty-five (45) days, thirty (30)
days and ten (10) days mentioned above shall, as the case may be, be limited to
the time allowed to the Company or the Xomed Indemnitee for responding to the
Third Party Claim.
The indemnification shall become payable only after notice has been given
of an enforceable decision, which may be a decision for immediate provisional
enforcement, against the Company.
In any event:
With respect to Third Party Claims from governmental authorities, the
Company shall, if it considers it to be reasonable and necessary and if the
Stockholders have so requested as a means of defense in connection with the
procedure provided in paragraph (c) above and in accordance with the terms of
said paragraph, endeavor to obtain a suspension of payment. In this case, the
Stockholders shall provide any guarantee and security which may be necessary for
the purpose of obtaining such suspension. If the governmental authority requests
that the guarantee or security be provided by the Company itself, the
Stockholders shall counter-guarantee the latter.
The Xomed Indemnitee may not, in the case of a Third Party Claim, negotiate
a settlement or arrangement or refrain from pursuing legal action or remedies
against a judgment, unless such judgment be final, without the prior consent of
the Stockholders' Agent. Nevertheless, the Stockholders' Agent will be deemed to
have approved the terms of a settlement, arrangement or any other measure which
the Xomed Indemnitee decides to submit to him, if he does not reply in
<PAGE>
writing within 30 Business Days (or a shorter time if required by circumstances)
from the date of receiving the written request from the Xomed Indemnitee. The
sole consequence of entering into or concluding any such arrangement or
settlement, without complying with the provisions of this paragraph, shall be
that the Stockholders' Agent shall not be required to pay Indemnification
amounting to the Loss resulting from such arrangement or settlement. However,
the Stockholders' Agent shall be released from liability for Indemnification for
Loss only if the Xomed Indemnitee, in failing to comply with the provisions of
this paragraph, deprived him of a genuine chance of reducing or altogether
eliminating the amount of such Indemnification. If a settlement offer is
received from the third party from which the Third Party Claim originates and
which the Stockholders' Agent, but not the Xomed Indemnitee, is willing to
accept, it shall be possible for the Xomed Indemnitee to oppose the Third Party
Claim alone, at his/her/its own expense, it being understood that, in this case,
any sums which are to be borne by the Stockholders under such Third Party Claim
shall be limited to the lesser of the following: (i) the amount of Loss
determined as if the Third Party Claim had been settled in accordance with the
terms of the settlement offer or (ii) the amount of Loss actually suffered by
the Party, as resulting from a decision in connection with proceedings relating
to such Third Party Claim.
If the Xomed Indemnitee obtains relief from a governmental authority or a
reimbursement of sums paid to a third party after Indemnification has already
been paid by the Stockholders in connection therewith, the Xomed Indemnitee
shall reimburse the Stockholders for the sums unduly paid hereunder.
(d) In the event any decision, negotiation, or proceedings brought
against the Xomed Indemnitee relating to Loss for which the Stockholders have
already paid Indemnification should result in the cancellation or reduction of
such Loss, the Xomed Indemnitee shall reimburse the Stockholders for the sums
unduly paid by them for such Loss.
5.3 LIMITATIONS
(a) No Indemnification may be claimed unless the aggregate amount
claimed for any Loss is at least seven hundred and fifty thousand French francs
(FF. 750,000) (the "MINIMUM AMOUNT"). This Minimum Amount shall constitute a
deductible. Accordingly, the Stockholders shall be liable for Indemnification
only for the part exceeding seven hundred and fifty thousand French francs (FF.
750,000). The total amount of Indemnification paid under this Agreement may not
exceed an amount equal to 40% of the Purchase Price for claims notified during
the first two years of the present indemnification guarantee. For claims
notified after the aforementioned
<PAGE>
period and up to the expiry of the guarantee period in accordance with the terms
of paragraphs 5.3.c(x) and 5.3.c(y), this Indemnification cap shall be reduced
to 20% of the Purchase Price. Accordingly, the aforementioned cap of 20% of the
Purchase Price shall be reduced by any Indemnification paid for sums claimed
during the first two(2)-year period, and if the Indemnification paid for sums
claimed during the first two-year period is greater than or equal to 20% of the
Purchase Price, no other Indemnification shall be due for claims notified after
the expiry of said two-year period. The provisions of this Article 5.3(a) shall
not apply to any Indemnification request based on the provisions of Article
1.2(l), for which there is no threshold nor any deductible for the Stockholders.
In addition, in deciding whether the Indemnification cap has been reached, no
account shall be taken of any Indemnification paid by the Stockholders on the
basis of the provisions of Article 1.2(l).
(b) Adjustments and back payments called for by tax, customs and
social security authorities which are due simply to the time-lag before Taxes
are paid, notably as a result of applying the principle of symmetric corrections
as affirmed by case law, shall not be deemed to be Loss giving rise to
Indemnification. The same shall apply to adjustments in connection with
amortizations, inventory and provisions. Nevertheless, a mere time-shift shall
give rise to Indemnification for the amount of Loss resulting from (x) a
difference in tax rate, (y) adjustments relating to the opening balance sheet
for the first fiscal year, pursuant to the tax principle of the intangibility of
the opening balance sheet as affirmed by case law, if the time allowed for such
adjustments has not run out, or any other similar provision existing in any
country other than France, or (z) increases in duties, interest on late payments
and penalties, of any nature whatsoever.
(c) The Indemnification commitments made by the Stockholders in this
Agreement may be called into play during a period of two (2) years as from the
date hereof, other than (x) with respect to sums which may be due to tax, social
security and customs authorities, which may be validly claimed up until the
later of (i) the date on which the aforementioned two-year period expires, (ii)
the date on which the relevant statute of limitation expires, and (iii) ninety
(90) days after a final governmental or judicial decision relating to tax,
social security or customs matters; (y) with respect to sums resulting from the
implementation of the guarantee under Article 2.23 hereof, which may be validly
claimed during a period which shall expire on the third anniversary date of this
Agreement; and (z) sums resulting from the implementation of the guarantee under
Article 4.1 hereof, which may be validly claimed during a period which shall
expire on the thirtieth anniversary date of this Agreement.
(d) The amount of any Indemnification shall be reduced by the actual
reduction in taxes due by the Company or any tax saving or tax credit, provided
such tax reduction, saving or credit results directly and undeniably from such
<PAGE>
Loss and the Xomed Indemnitee is not taxed for such Indemnification (it being
understood, however, that if, subsequently, such deduction is rejected by the
authorities or such Indemnification is taxed, the Stockholders shall pay to
Xomed Indemnitee the amount by which the Indemnification has been reduced
pursuant to the present Article).
(e) In addition, the amount of any Indemnification shall, if such be
the case, be reduced by the amount of any full or partial recharge of a
provision recorded in the Final Balance Sheet made during the year the Xomed
Indemnitee sends its Claim Notice, after the date of the Final Balance Sheet and
on the basis of the balance sheet item which was the subject of the
Indemnification Claim.
Where a Loss gives rise to indemnification by an insurance company, the
indemnification that such insurance company has agreed in writing to remit to
the Company shall be taken into account in determining the amount of the
Indemnification to be paid by the Stockholders for a sum amounting to the
indemnification paid by the insurance company, net of tax due by the beneficiary
of such indemnification for such indemnification. However, if the insurance
company does not pay the agreed indemnification within six (6) months of the
date on which the Company informs the insurance company of its claim, the
Stockholders must indemnify the Xomed Indemnitee for the amount of Loss
determined pursuant to the rules set forth in this Article 5. Within ten (10)
Business Days of receipt by the Company of the indemnity from the insurance
company concerned, Xomed Indemnitee shall pay an amount equal to the amount by
which the amount of the Stockholders' indemnity would have been reduced if the
insurance company had paid the indemnification within the aforementioned
six(6)-month period.
(f) Under no circumstances will the Indemnification obligation be
reduced, limited or affected in any way whatsoever by the mere fact that Xomed
or any other person has had any investigation, audit or any other measure
carried out with respect to Company or has approved the Company's accounts or
given full discharge to any of its directors at a meeting or otherwise.
5.4 INDEMNIFICATION GUARANTEE ON FIRST DEMAND
Except for claims made pursuant to Article 4.1 above, all sums due to
Xomed Indemnitee under this Article 5 may be claimed from Banque Nationale de
Paris on the basis of the guarantee on first demand for a maximum amount of
9,200,000 French francs, the text of which is set forth in Exhibit C
(hereinafter, the "INDEMNIFICATION GUARANTEE ON FIRST DEMAND"), insofar as the
Indemnification shall have become payable in accordance with the provisions of
Article 5.3 above. It is agreed among the Parties that all commissions, costs
and fees in connection with the Indemnification Guarantee on
<PAGE>
First Demand shall be borne by the Stockholders. If it is considered that the
Indemnification Guarantee on First Demand has been unduly called by the Xomed
Indemnitee, because the sums called were not due or payable in the meaning of
this Agreement, Xomed Indemnitee shall, as a penalty, be liable for a sum
amounting to 25% of the amount of the sum unduly called. Xomed Indemnitee
undertakes, in the event the Indemnification Guarantee on First Demand is
called, to inform the Stockholders' Agent thereof as soon as the Indemnification
Guarantee on First Demand is called and no later than two (2) Business Days
after it has been called.
5.5 INTEREST PAYMENTS
Interest shall accrue to all sums owed by the Stockholders to the Xomed
Indemnitee for a Loss at a rate of EURIBOR + 100 base points (one percent), as
from (i) the 46th day after notice is given of the Direct Claim as described in
Article 5.2(a) above in the case of Indemnification based on a Direct Claim, and
(ii) the date on which Xomed Indemnitee pays out money or incurs a permanent
debt in the case of Indemnification based on a Third Party Claim, and up until
the date of full and actual payment of the Indemnification.
ARTICLE 6. INTERPRETATION OF THIS AGREEMENT
6.1 DEFINITIONS
Certain frequently used terms herein are defined in this Article 6.1.
References to Articles, paragraphs and Schedules, without any other indication,
are to those of this Agreement. Any term defined through reference to a document
other than this Stock Purchase Agreement shall have the meaning given in such
document. The use of "including", "in particular", "notably", "INTER ALIA",
"especially" implies that the list which follows is by no means exhaustive. In
the formulae defined hereinafter, reference to the excess of one term over
another always implies that such excess, if negative, is considered to be equal
to zero.
1998 FINANCIAL STATEMENTS: is defined in Article 2.6(a).
ACCOUNTING PRINCIPLES: shall mean the accounting rules and
principles defined in SCHEDULE 2.6(a) which comply with the "PLAN COMPTABLE
GENERAL" applicable in France on the date hereof, as applied on a consistent
basis by the Company and its Subsidiaries during the past three fiscal years.
ADVERSE EFFECT: is defined in Article 2.7(a).
AGREEMENT: shall mean this agreement and its Schedules.
BUSINESS DAY: shall mean a day other than a Saturday, Sunday,
public holiday in Paris or other day during all or part of which banks do not
transfer funds to Paris. Any day which is not called a Business Day is a
calendar day.
<PAGE>
BY-LAWS: is defined in Article 2.1(a).
CLAIM NOTICE: is defined in Article 5.2(a).
COMPANY: is defined in the Recitals to this Agreement.
COMPANY MATERIAL CONTRACT: is defined in Article 2.10.
COMPONENT: is defined in Article 2.22.
AGREEMENT: means this stock purchase agreement and its Schedules.
DATABASE: is defined in Article 2.14(a)(v).
DESIGNS AND MODELS: is defined in Article 2.14(a)(iv).
DIRECT CLAIM: is defined in Article 5.2(a).
DIRECT CLAIM REVIEW PERIOD: is defined in Article 5.2(b).
FINAL BALANCE SHEET: shall mean the balance sheet and income
statement of the Company as of November 30, 1998.
INDEMNIFICATION: is defined in Article 5.1.
INDEMNIFICATION GUARANTEE ON FIRST DEMAND: shall mean the
Indemnification First Demand Guarantee the model of which is attached as
Exhibit C.
INTELLECTUAL PROPERTY: is defined in Article 2.14(a).
LICENSE: is defined in Article 2.14(a)(vii).
LIEN: shall mean, for assets, especially a share or equity interest,
any security, claim, priority, pledge, easement, charge or restriction of any
kind whatsoever, promise to sell or buy, option or preemptive right relating
thereto or any other right or obligation of whatsoever nature affecting the
ownership, or transferability thereof, or the exercise of any other right
arising therefrom, excluding however any charges connected with retention of
ownership clauses or charges created directly by statute without any
intervention or deed by anyone for this purpose, such as those resulting from
the priority enjoyed by a transporter.
LISTED EMPLOYEES: is defined in Article 2.12(b).
LOSS: is defined in Article 5.1.
MARK: is defined in Article 2.14(a)(i).
MINIMUM AMOUNT: is defined in Article 5.3(a).
<PAGE>
PARTY: shall mean Xomed or the Stockholders.
PATENTS: is defined in Article 2.14(a)(ii).
PERSON: shall mean any natural person or legal entity of a
private or public nature, including any grouping, company, association,
partnership or trust.
PUBLIC AUTHORITY: shall mean any national or local government
authority, any authority competent on the basis of an international treaty,
especially the Commission of the European Community, courts, validly formed
arbitral colleges and any body, commission, agency, authority or department
which has powers of a public nature.
PURCHASE PRICE: is defined in Article 1.3.
SHARES: is defined in the Recitals to this Agreement.
STOCKHOLDERS: is defined in the preamble to this Agreement.
STOCKHOLDERS' AGENT: is defined in Article 5.2(a).
STOCKHOLDERS' KNOWLEDGE: shall mean the knowledge that any officer
or manager of the Company must have after seeking to inform him or herself,
within the scope of his or her ordinary duties, about the facts relating to the
declaration to which the expression applies.
SUBSIDIARY of a Person shall mean any SOCIETE ANONYME, SOCIETE A
RESPONSABILITE LIMITEE, SOCIETE CIVILE, ASSOCIATION, GIE or any other comparable
entity organized within or outside of France, in which the Person owns, directly
or indirectly, more than 10% of the voting rights in the case of a SOCIETE
ANONYME, or more than 10% of the equity interests, in the case of a SOCIETE A
RESPONSABILITE LIMITEE, SOCIETE CIVILE, ASSOCIATION, GIE, SOCIETE EN
PARTICIPATIONS, SOCIETE EN NOM COLLECTIF, SOCIETE EN COMMANDITE PAR ACTION or
any similar entity. In this meaning, the term PERSON shall mean any natural
person or legal entity, of a private or public kind, including any grouping,
company, association, partnership or conglomerate.
TAXES: shall mean all taxes, contribution and other duties imposed
by or owing to a Public Authority, by way of roll call, deduction at source or
any other manner, including any income tax, value added tax, tax on sales or
wages, registration duties, customs duties, social security contributions on
whatever grounds, including retirement, together with all interest and penalties
for late payment relating thereto.
TRADE SECRETS: is defined in Article 2.14(a)(iii).
<PAGE>
THIRD PARTY CLAIM: is defined in Article 5.2(a).
THIRD PARTY CLAIM REVIEW PERIOD: is defined in Article 5.2(c).
XOMED: is defined in the preamble to this Agreement.
XOMED INDEMNITEE: is defined in Article 5.1.
6.2 APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with the
laws of France.
6.3 ARBITRATION
All disputes relating to the existence, validity, interpretation or
performance of this Agreement which are not resolved by mutual agreement between
the Parties shall be settled by arbitration. The arbitral tribunal shall consist
of three (3) arbitrators. Xomed and the Stockholders' Agent shall each appoint
an arbitrator and shall inform each other, by registered letter with return
receipt requested, of the name of the arbitrator they each choose, together with
the questions which they wish to refer to arbitration. The two thus-appointed
arbitrators shall appoint a third arbitrator to be chairperson of the arbitral
tribunal within fifteen (15) days of the appointment of the second arbitrator.
The arbitral tribunal shall be validly formed as soon as the three arbitrators
accept their terms of reference. In the event the Parties do not appoint their
respective arbitrators or the two arbitrators the third arbitrator within the
aforementioned time-limits, the lacking arbitrator(s) shall be appointed by the
President of the Paris District Court (TRIBUNAL DE GRANDE INSTANCE) in summary
proceedings at the request of the Party or the arbitrator which/who is first to
act and after hearing the Parties. If any of the arbitrators is prevented from
performing his or her duties, abstains therefrom, departs or dies, such
arbitrator shall be replaced in the manner set forth above. The arbitral
tribunal shall sit in Paris. The procedure shall be that provided in Book IV of
the French New Code of Civil Procedure (NOUVEAU CODE DE PROCEDURE CIVILE) and
French law alone shall apply. The award shall be delivered as soon as possible
and no more than three (3) months after the formation of the arbitral tribunal.
The arbitral tribunal's decision shall be final.
<PAGE>
6.4 COMMITMENTS SUBSEQUENT TO THE SALE
The Parties shall be required to sign all documents and carry out all
formalities necessary for fulfilling their respective obligations arising from
this Agreement. In particular, the Stockholders shall refrain from making any
remarks to third parties, in any form whatsoever, which are likely to harm the
Company or Xomed with respect to third parties, with respect to the Company's
customers and its suppliers and, more generally, in its business relations, or
cause such persons to break off or change their relationship with the Company.
6.5 PARAGRAPH AND SECTION HEADINGS
The headings of the sections and subsections of this Agreement are
inserted for convenience only and may under no circumstances be relied upon for
interpreting said Agreement.
6.6 SEVERABILITY
The invalidity, for whatever cause, of any of the obligations arising
herefrom shall not affect the validity of the other obligations arising
herefrom, whatever they may be, provided the overall balance of the Agreement is
maintained.
ARTICLE 7. NON-COMPETITION
It is expressly agreed between the Parties that this obligation not to
engage in competing activities is an essential part of the consideration for the
purchase of the Shares.
As a consequence, Mr. Christian Boutmy and Mrs. Simone Boutmy shall, from
the date this Agreement is signed and until June 30, 2004 (the "RESTRICTED
PERIOD") refrain from carrying on or developing in any way whatsoever, directly
or indirectly, on their own account or that of a company or any other
organization, as consultant, agent, officer, administrator, shareholder,
partner, investor or in any other role, any of the activities carried on by the
Company, Xomed or any other entity affiliated to them, or any other related or
similar activity (the "ACTIVITY") over the entire territory in which the
Activity is carried on.
During the Restricted Period, Mr. Christian Boutmy and Mrs. Simone Boutmy
shall refrain from (i) employing, for their own account or that of any third
party, any officer or employee of the Company, Xomed or any other entity
affiliated to them, even in the event such officer or employee has resigned or
been dismissed; (ii) encouraging such persons to break off or change their
relations with the Company, Xomed or any other entity affiliated to them; and
(iii) both during the Restricted Period and after it has expired, acting in any
form whatsoever which may harm the Company, Xomed or any other entity affiliated
to them with respect to any third parties,
<PAGE>
their customers, suppliers and, more generally, their business relations,
regardless of how their relations were created.
ARTICLE 8. MISCELLANEOUS
8.1 NOTICES AND COMMUNICATIONS
(a) Notices and communications provided in this Agreement shall be
validly sent to their addressee by being delivered by hand in return for an
acknowledgment of receipt dated and signed by the addressee, or sent by
registered mail with return receipt requested, or by overnight courier, or by
fax, to the following addresses:
FOR XOMED:
Xomed Surgical Products, Inc.
6743 Southpoint Drive N.
Jacksonville, Florida 33321-0980
USA
Fax: 1.904.279.7548
Attention: General Counsel
with a copy by fax to:
Willkie Farr & Gallagher
21-23 rue de la Ville l'Eveque
75008 Paris, France
Fax: 01.40.06.96.06
Attention: Maitre Michel Frieh
or at such other address as Xomed may have indicated to the Stockholders in
writing; and
FOR ANY OF THE STOCKHOLDERS OR THE STOCKHOLDERS' AGENT, at the address
given at the headings of this Agreement beside the name of such Stockholder, or
such other address as the Stockholder may have indicated to Xomed in writing,
with a copy by fax to:
Fourmentin, Le Quintrec, Veersamy
22, rue de General Foy
75008 Paris
France
Fax: 01 55 30 10 00
Attention: Maitre Antoine Fourmentin
or at such other address as the Stockholders' Agent may have indicated
to Xomed in writing.
(b) Any notice shall be deemed to have been received: if delivered
by hand, on the date of such delivery; if sent by overnight delivery, on the
second Business Day following the date of such
<PAGE>
mailing; if mailed by registered mail, on the third Business Day after the date
of such mailing; and if sent by fax, on the date on which such fax is sent,
unless such date is not a Business Day, in which case such notice shall be
deemed to have been received on the next succeeding Business Day.
8.2 DUTIES AND TAXES
Each of the Parties shall bear all the costs incurred by it in connection
with this Agreement, including, amongst other things, fees and expenses of
attorneys, investment bankers and other consultants. It is expressly agreed that
Xomed shall under no circumstances be required to pay the costs and fees
incurred by the Company or the Stockholders in connection with this Agreement,
including, amongst other things, fees and commission paid to a broker or other
intermediary in accordance with the provisions of Article 4.3. The provisions of
this Article 8.2 shall prevail over those of any other prior agreements or
contracts relating to the payment of costs and fees arising in connection with
the present transaction.
8.3 DEATH - TRANSMISSION
The successors, heirs and assigns of a Stockholder shall be bound by the
obligations of the latter under this Agreement following the death of such
Stockholder. The rights and obligations arising from this Agreement may not be
transferred by the Stockholders, their successors, heirs or assigns without
Xomed's prior written agreement.
This Agreement shall bind all of Xomed's successors and assigns under the
same conditions as Xomed.
The Stockholders agree here and now that Xomed may transfer the benefit of
this Agreement to any company which is directly or indirectly controlled by, or
which controls, or which is under joint control with, Xomed Surgical Products,
Inc. and to which all or part of the Shares are transferred or contributed.
8.4 ENTIRE AGREEMENT
This Agreement and its Schedules fully reflect the entirety of the
agreements between the Parties concerning the transaction which it covers. It
fully and permanently supersedes all other documents, contracts, agreements,
offers and other written items which may have been prepared, sent or agreed by
and between the Parties or any of their Affiliates, or by and between any other
persons in connection therewith or relating thereto, prior to the signing of
this Agreement, including INTER ALIA the letter dated November 3, 1998 sent by
Xomed to Banexi, the Stockholders' investment advisor. This Agreement may be
amended and a Party thereto may waive any right arising therefrom only if a
written agreement to this effect is signed by the Parties.
<PAGE>
8.5 TIME-LIMITS AND WAIVER
The Parties acknowledge that all time-limits herein have been set after
concerted steps to fix the duration thereof. The Parties accept the consequences
of abiding or not by these time-limits, including when this results in a Party's
being barred from acting in a certain way. Subject to such consideration,
failure to exercise in part or in full any of the rights arising from the
provisions hereof cannot amount to the waiver of such right for the future or of
any other right arising therefrom.
8.6 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. Any signature to this Agreement sent by fax shall have
the same legal force as if inscribed upon an original copy. This Agreement is
signed in three originals: one for Mr. Christian Boutmy and Mrs. Simone Boutmy,
whose interest therein is deemed to be, and acknowledged by them to be, one and
the same, in the meaning of Article 1325 of the French Civil Code; one for the
other Stockholders, whose interest therein is deemed to be, and acknowledged by
them to be, one and the same, in the meaning of Article 1325 of the French Civil
Code; and one for Xomed Holdings France SNC.
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have signed this Agreement in
three originals, to which two sets of Schedules are attached: one for Xomed
Holdings France SNC and one for the Stockholders' Agent.
XOMED FRANCE HOLDINGS, SNC
Name:
---------------
Title:
--------------
THE STOCKHOLDERS:
- -------------------- --------------------
Christian Boutmy Simone Boutmy
- -------------------- --------------------
Anne Boutmy, represented for Rose Marie Bry, represented
the present purpose by Mr. for the present purpose by
Christian Boutmy Mr. Christian Boutmy
- -------------------- --------------------
Albert Duplessis, represented Antonine Duplessis,
for the present purpose by represented for the present
Mr. Christian Boutmy purpose by Mr. Christian
Boutmy
- -------------------- ---------------------
Max Boutmy, represented for Andree Boutmy, represented
the present purpose by for the present purpose by
Mr. Christian Boutmy Mr. Christian Boutmy
- -------------------- ----------------------
Jean-Claude Avenier, represented Jean-Philippe Pinet,
for the present purpose by represented for the present
Mr. Christian Boutmy purpose by Mr. Christian
Boutmy
- -----------------------
Brigitte Pinaut, represented
for the present purpose by Mr.
Christian Boutmy
<PAGE>
SCHEDULE 2.3
- ----------------------------------------------------------------------------
NAME NUMBER OF PERCENTAGE OF THE TOTAL NUMBER
SHARES OF SHARES (%)
- ----------------------------------------------------------------------------
Christian Boutmy 1166 62.18
- ----------------------------------------------------------------------------
Simone Boutmy 605 32.26
- ----------------------------------------------------------------------------
Anne Boutmy 45 2.4
- ----------------------------------------------------------------------------
Rose Marie Bry 45 2.4
- ----------------------------------------------------------------------------
Albert Duplessis 2 0.1067
- ----------------------------------------------------------------------------
Antonine Duplessis 2 0.1067
- ----------------------------------------------------------------------------
Max Boutmy 2 0.1067
- ----------------------------------------------------------------------------
Andree Boutmy 2 0.1067
- ----------------------------------------------------------------------------
Jean-Claude Avenier 2 0.1067
- ----------------------------------------------------------------------------
Brigitte Pinaut 2 0.1067
- ----------------------------------------------------------------------------
Jean-Philippe Pinaut 2 0.1067
- ----------------------------------------------------------------------------
EXHIBIT 3.1
[Composite Certificate of Incorporation
incorporating May 1998 Amendment]
SECOND RESTATED CERTIFICATE OF INCORPORATION
OF
XOMED SURGICAL PRODUCTS, INC.
* * * * *
XOMED SURGICAL PRODUCTS, INC., a Delaware corporation, hereby
certifies as follows:
1. The name of the corporation is Xomed Surgical Products, Inc.
Xomed Surgical Products, Inc. was originally incorporated under the name of
Merocel/Xomed Holdings, Inc., and the original Certificate of Incorporation of
the corporation was filed with the Secretary of State of the State of Delaware
on April 5, 1994.
2. The original Certificate of Incorporation was amended and
restated pursuant to a Restated Certificate of Incorporation which was filed
with the Secretary of State of the State of Delaware on April 14, 1994, which
was further amended pursuant to (i) a Certificate of Amendment to the Restated
Certificate of Incorporation which was filed with the Secretary of State of the
State of Delaware on June 9, 1995 and (ii) a Certificate of Amendment to the
Restated Certificate of Incorporation which was filed with the Secretary of
State of the State of Delaware on April 15, 1996
3. Pursuant to Sections 242 and 245 of the General Corporation Law
of the State of Delaware, this Restated Certificate of Incorporation further
amends, restates and integrates the provisions of the Restated Certificate of
Incorporation of this corporation.
4. This Restated Certificate of Incorporation was duly adopted by
the written consent of the Board of Directors of the corporation and by the
written consent of the stockholders of the corporation in accordance with the
applicable provisions of Sections 228, 242 and 245 of the General Corporation
Law of the State of Delaware.
5. The text of the Restated Certificate of Incorporation of the
corporation is hereby further amended and restated to read in its entirety as
follows:
ARTICLE I
The name of the corporation is:
XOMED SURGICAL PRODUCTS, INC. (the "Corporation").
<PAGE>
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, Inc. (formerly known as "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
(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 Thirty-One
Million (31,000,000) shares consisting of: (i) Thirty Million (30,000,000)
shares of Common Stock of the par value of One Cent ($0.01) per share (the
"Common Stock"); and (ii) One Million (1,000,000) shares of undesignated
Preferred Stock of the par value of One Cent ($0.01) per share (the "Preferred
Stock").
SECTION A: PREFERRED STOCK
The Preferred Stock may be issued from time to time as herein provided in
one or more series. The designations, relative rights, preferences and
limitations of the Preferred Stock, and particularly of the shares of each
series thereof, may, to the extent permitted by law, be similar to or differ
from those of any other series. The Board of Directors of the Corporation is
hereby expressly granted authority, subject to the
2
<PAGE>
provisions of this Article IV, to fix, from time to time before issuance
thereof, the number of shares in each series and all designations, relative
rights, preferences and limitations of the shares in each such series,
including, but without limiting the generality of the foregoing, the following:
(a) the designation of the series and the number of shares to
constitute each series;
(b) the dividend rate on the shares of each series, any conditions on
which and times at which dividends are payable, whether dividends shall be
cumulative, and the preference or relation (if any) with respect to such
dividends (including preferences over dividends on the Common Stock or any other
class or classes);
(c) whether the series will be redeemable (at the option of the
Corporation or the holders of such shares or both, or upon the happening of a
specified event) and, if so, the redemption prices and the conditions and times
upon which redemption may take place and whether for cash, property or rights,
including securities of the Corporation or another Corporation;
(d) the terms and amount of any sinking, retirement or purchase fund;
(e) the conversion or exchange rights (at the option of the Corporation or
the holders of such shares or both, or upon the happening of a specified event),
if any, including the conversion or exchange price and other terms of conversion
or exchange;
(f) the voting rights, if any (other than any voting rights that the
Preferred Stock may have as a matter of law);
(g) any restrictions on the issue or reissue or sale of additional
Preferred Stock;
(h) the rights of the holders upon voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation (including
preferences over the Common Stock or any other class or classes or series of
stock);
(i) the preemptive rights, if any, to subscribe to additional issues of
stock or securities of the Corporation; and
(j) such other special rights and privileges, if any, for the benefit of
the holders of the Preferred Stock, as shall not be inconsistent with provisions
of this Restated Certificate of Incorporation.
All shares of Preferred Stock of the same series shall be identical in all
respects, except that shares of any one series issued at different times may
differ as to dates, if any, from which dividends thereon may accumulate. All
shares of Preferred
3
<PAGE>
Stock of all series shall be of equal rank and shall be identical in all
respects except that any series may differ from any other series with respect to
any one or more of the designations, relative rights, preferences and
limitations described or referred to in subparagraphs (a) to (j) inclusive
above.
SECTION B: COMMON STOCK
(a) DIVIDENDS. Subject to the preferences and other rights of the
Preferred Stock as set out above, the holders of Common Stock shall be entitled
to receive dividends when and as declared by the Board of Directors out of funds
legally available therefor.
(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.
(c) VOTING RIGHTS. Except as otherwise provided herein or by law, each
holder of Common Stock shall be entitled to one vote in respect of each share of
Common Stock held of record on all matters submitted to a vote of stockholders.
(d) 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.
(e) NO PREEMPTIVE RIGHTS. No holder of Common Stock of the Corporation
shall, by virtue of this Restated 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
4
<PAGE>
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.
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.
5
<PAGE>
IN WITNESS WHEREOF, said Corporation has caused this Certificate to
be signed by its Vice President and Chief Financial Officer this 12th day of
September, 1996.
XOMED SURGICAL PRODUCTS, INC.
By: /s/ THOMAS E. TIMBIE
-----------------------------------
Name: Thomas E. Timbie
Title: Vice President and
Chief Financial
Officer
6
EXHIBIT 3.2
XOMED SURGICAL PRODUCTS, INC.
INCORPORATED UNDER THE LAWS OF THE
STATE OF DELAWARE
RESTATED BY-LAWS
ARTICLE I
OFFICES.
Xomed Surgical Products, 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 a date fixed from time to
time by the Board of Directors within the thirty-one day period ending five
months after the end of the Corporation's fiscal year in such City and State and
at such time within such period and such place as may be designated by the Board
of Directors, and set forth in the notice of such meeting. 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 Corporation's Restated 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
<PAGE>
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.
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 Common Stock shall be entitled to one (1) vote in respect
of each share held, and the holders of shares of Series A
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Convertible Preferred Stock shall be entitled to the number of votes equal to
the number of shares of Common 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 Restated
Certificate of Incorporation or in these By-laws, the holders of shares of
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 Restated 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 Restated Certificate of Incorporation or these By-laws, the holders of
Non-Voting 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 seven (7) 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.
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<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.
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
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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 Restated 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.
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
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<PAGE>
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 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.
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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.
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.
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<PAGE>
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.
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.
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<PAGE>
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
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
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<PAGE>
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 Restated 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.
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
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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 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,
that the notice of such meetings shall have been given as provided in these
By-laws,
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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 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 adopted by the Board of Directors may be
amended or repealed by the Stockholders as hereinabove provided.
Dated: February 5, 1997
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EXHIBIT 10.13.1
[Incorporating Amendments
approved at May 21, 1998
Annual Meeting of Stockholders]
THIRD AMENDED AND RESTATED
XOMED SURGICAL PRODUCTS, INC.
1996 STOCK OPTION PLAN
* * *
ARTICLE I
PURPOSE
This Third Amended and Restated 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 Compensation 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 accelerate the exercisability of any
outstanding options; (g) to prescribe the form or forms of the option agreements
under the Plan (which forms shall be consistent with the terms of the Plan but
need not be identical); (h) to adopt, amend and rescind such rules and
regulations as, in its opinion, may be advisable in the administration of the
Plan;
<PAGE>
and (i) 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 Common Stock of the Company, $.01 par value, or
previously issued shares of 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, 1,578,000 shares, except as such number of shares shall be adjusted
in accordance with the provisions of ARTICLE X hereof. The maximum number of
shares of Stock with respect to which options may be granted to any single
optionee during any calendar year shall not exceed 150,000, except as such
number of shares shall be adjusted in accordance with the provisions of ARTICLE
X.
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 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.
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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").
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.
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(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
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.
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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 which have been held by
the optionee for at least six months, 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
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 maximum number of shares which may be granted
to any single optionee during any calendar year, 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.
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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 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.
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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 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.
<PAGE>
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.
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EXHIBIT A
FORM OF
INCENTIVE
STOCK OPTION AGREEMENT
UNDER THE
XOMED SURGICAL PRODUCTS, INC.
1996 STOCK OPTION PLAN
THIS AGREEMENT, made the ___ day of ______, 199_, by and between
XOMED SURGICAL PRODUCTS, INC., a Delaware corporation (the "Company") and
____________ (the "Optionee").
W I T N E S S E T H:
WHEREAS, the Optionee is now employed by the Company in a key
capacity, and the Company desires to have him remain in such employment and to
afford him the opportunity to acquire, or enlarge, his stock ownership in the
Company so that he may have a direct proprietary interest in the Company's
success;
NOW, THEREFORE, in consideration of the covenants and agreements
herein contained, the parties hereto hereby agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions set forth
herein and in the Company's 1996 Stock Option Plan (the "Plan"), the Company
hereby grants to the Optionee, during the period commencing on the date of this
Agreement and ending ten years from the date hereof (the "Termination Date"),
the right and option (the "Option") to purchase from the Company, at a price of
$________ per share, up to, but not exceeding in the aggregate, _________ shares
of the Company's Class A Common Stock, par value $.01 per share (the "Stock").
The Option granted hereunder shall be an "incentive stock option" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
2. LIMITATIONS ON EXERCISE OF OPTION. (a) Subject to the terms and
conditions set forth herein, the Optionee may purchase 25% of the shares of
Stock covered by this Option on and after the first anniversary of the date
hereof, and may purchase an additional 25% of the shares of Stock covered by
this Option on and after each of the second, third and fourth anniversaries of
the date hereof.
(b) Any provision of paragraph 2(a) hereof to the contrary
notwithstanding, but subject to any other terms and conditions set forth herein,
if immediately after any merger, consolidation, sale of the Company's Stock,
sale of all or substantially all of the Company's assets, or other similar event
(a "Sale Event"), the persons or entities who, immediately prior to such Sale
Event, owned 100% of the Company's Stock, no longer continue to own either (i)
at least 50% of the Company's Stock, or (ii) stock of any successor company
(including any company purchasing all or substantially all of the Company's
assets) representing at least 50% of
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the voting power of such successor company's outstanding stock, the Optionee
shall be entitled to purchase 100% of the shares of Stock covered by this
Option.
3. TERMINATION OF EMPLOYMENT. (a) If, prior to the Termination Date,
the Optionee shall cease to be employed by the Company by reason of a disability
within the meaning of Section 105(d)(4) of the Code, the Option shall remain
exercisable for a period of one year from the date of cessation of employment to
the extent it was exercisable at the time of cessation of employment.
(b) If prior to the Termination Date, the Optionee shall cease to
be employed by the Company by reason of death or the Optionee shall die while
entitled to exercise the Option pursuant to paragraph 3(a), the executor or
administrator of the estate of the Optionee or the person or persons to whom the
Option shall have been validly transferred by the executor or administrator
pursuant to will or the laws of descent and distribution shall have the right,
within one year from the date of the Optionee's death, to exercise the Option to
the extent that the Option was exercisable at the date of death, subject to any
other limitation contained herein on the exercise of the Option in effect on the
date of exercise.
(c) If the 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 the Optionee's employment with the Company is terminated
for Cause, as hereinafter defined, unless otherwise provided by the Stock Option
Committee (the "Committee"), this Option, to the extent not 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 an
exercise of this Option 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 the Optionee's employment without Cause, as hereinafter
defined, this Option, to the extent exercisable immediately prior to such
termination, shall continue to be exercisable for a period not extending beyond
three months after the date of such termination.
(d) Any provision of paragraphs 3(a), 3(b) or 3(c) hereof to the
contrary notwithstanding, this Option may not be exercised beyond the
Termination Date.
(e) For purposes of this Agreement, the Company shall have "Cause"
to terminate the 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 Company's Board
of Directors (the "Board") 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'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.
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(f) Except as otherwise specifically provided in paragraph 3(e)
hereof, whether employment has been or could have been terminated for the
purposes of this Agreement, and the reasons therefor, shall be determined by the
Committee, whose determination shall be final, binding and conclusive.
(g) After the expiration of any exercise period described in either
of paragraphs 3(a), 3(b) or 3(c) hereof, this Option shall terminate together
with all of the Optionee's rights hereunder, to the extent not previously
exercised.
4. METHOD OF EXERCISING OPTION. The Optionee may exercise the Option
by delivering to the Company a written notice stating the number of shares that
the Optionee has elected to purchase at that time from the Company and full
payment of the purchase price of the shares then to be purchased. Payment of the
purchase price of the shares may be made (a) by certified or bank cashier's
check payable to the order of the Company or (b) by surrender or delivery to the
Company of shares of its Common Stock which have been held by the Optionee for
at least six months at the time of exercise or (c) by such other means as shall
be designated by the Committee.
5. ISSUANCE OF SHARES. As promptly as practical after receipt of
such written notification and full payment of such purchase price, the Company
shall issue or transfer to the Optionee the number of shares with respect to
which the Option has been so exercised, and shall deliver to the Optionee a
certificate or certificates therefor, registered in the Optionee's name.
6. COMPANY; OPTIONEE. (a) The term "Company" as used in this
Agreement with reference to employment shall include subsidiaries of the
Company. The term "subsidiary" as used in this Agreement shall mean any
subsidiary of the Company as defined in Section 424(f) of the Code.
(b) Whenever the word "Optionee" is used in any provision of this
Agreement under circumstances where the provision should logically be construed
to apply to the executors, the administrators, or the person or persons to whom
the Option may be transferred by will or by the laws of descent and
distribution, the word "Optionee" shall be deemed to include such person or
persons.
7. NON-TRANSFERABILITY. The Option is not transferable by the
Optionee otherwise than by will or the laws of descent and distribution and is
exercisable during the Optionee's lifetime only by him. No assignment or
transfer of the Option, or of the rights represented thereby, whether voluntary
or involuntary, by operation of law or otherwise (except by will or the laws of
descent and distribution), shall vest in the assignee or transferee any interest
or right herein whatsoever, but immediately upon such assignment or transfer the
Option shall terminate and become of no further effect.
8. RIGHTS AS STOCKHOLDER. The Optionee or a transferee of the Option
shall have no rights as a stockholder with respect to any share covered by the
Option until he shall have become the holder of record of such share, and no
adjustment shall be made for dividends or
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distributions or other rights in respect of such share for which the record date
is prior to the date upon which he shall become the holder of record thereof.
9. RECAPITALIZATIONS, REORGANIZATIONS, ETC. (a) The existence of the
Option shall not affect in any way the right or power of the Company or its
stockholders to make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidation of the Company, or any issue of stock
or of options, warrants or rights to purchase stock or of bonds, debentures,
preferred or prior preference stocks ahead of or affecting the Stock or the
rights thereof or convertible into or exchangeable for Stock, or the dissolution
or liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
(b) The shares with respect to which the Option is granted are
shares of Stock of the Company as presently constituted, but if, and whenever,
prior to the delivery by the Company of all of the shares of the Stock with
respect to which the Option is granted, the Company shall effect a subdivision
or consolidation of shares of the Stock outstanding, without receiving
compensation therefor in money, services or property, the number and price of
shares remaining under the Option shall be appropriately adjusted. Such
adjustment shall be made by the Committee, whose determination as to what
adjustment shall be made, and the extent thereof, shall be final, binding and
conclusive. Any such adjustment may provide for the elimination of any
fractional share which might otherwise become subject to the Option.
(c) 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 or shares of Stock or other securities covered by this Option and
the option price thereof. The Committee shall notify the Optionee of any
intended sale of all or substantially all of the Company's assets within a
reasonable time prior to such sale.
(d) Except as hereinbefore expressly provided, the issue by the
Company of shares of stock of any class, or securities convertible into or
exchangeable for shares of stock of any class, for cash or property, or for
labor or services, either upon direct sale or upon the exercise of options,
rights or warrants to subscribe therefor, or to purchase the same, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Stock subject to the
Option.
10. COMPLIANCE WITH LAW. Notwithstanding any of the provisions
hereof, the Optionee hereby agrees that he will not exercise the Option, and
that the Company will not be obligated to issue or transfer any shares to the
Optionee hereunder, if the exercise hereof or the issuance or transfer of such
shares shall constitute a violation by the Optionee or the Company of any
provisions of any law or regulation of any governmental authority. Any
determination in this connection by the Committee shall be final, binding and
conclusive. The Company shall in
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no event be obliged to register any securities pursuant to the Securities Act of
1933 (as now in effect or as hereafter amended) or to take any other affirmative
action in order to cause the exercise of the Option or the issuance or transfer
of shares pursuant thereto to comply with any law or regulation of any
governmental authority.
11. NOTICE. Every notice or other communication relating to this
Agreement shall be in writing, and shall be mailed to or delivered to the party
for whom it is intended at such address as may from time to time be designated
by it in a notice mailed or delivered to the other party as herein provided;
provided that, unless and until some other address be so designated, all notices
or communications by the Optionee to the Company shall be mailed or delivered to
the Company at its office at 6743 South Point Drive North, Jacksonville, Florida
32216, and all notices or communications by the Company to the Optionee may be
given to the Optionee personally or may be mailed to him at the address shown
below his signature to this Agreement.
12. DISPOSITION OF STOCK. The Optionee agrees to notify the Company
in writing, within 30 days of any disposition (whether by sale, exchange, gift
or otherwise) of shares of Stock purchased under this Option, within two years
from the date of the granting of the Option or within one year of the transfer
of such shares of Stock to the Optionee.
13. Notwithstanding anything to the contrary herein, to the degree
that the aggregate fair market value of the Option which becomes exercisable for
the first time in any calendar year (determined as of the time the Option is
granted) of the Stock (when aggregated with stock underlying other incentive
stock options under the Plan and all other stock option plans of the Company or
any parent or subsidiary thereof, which incentive stock options first become
exercisable in the same calendar year) exceeds $100,000, such portion shall not
be treated as an incentive stock option but rather shall be treated as a
non-qualified stock option.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
XOMED SURGICAL PRODUCTS, INC.
By:
-----------------------------------------
[Name:]
[Title:]
OPTIONEE
By:
-----------------------------------------
[Name:]
[Address:]
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EXHIBIT B
FORM OF
NON-QUALIFIED
STOCK OPTION AGREEMENT
FOR DIRECTORS
UNDER THE
XOMED SURGICAL PRODUCTS, INC.
1996 STOCK OPTION PLAN
THIS AGREEMENT, made this _____ day of _________, 199_, by and
between XOMED SURGICAL PRODUCTS, INC., a Delaware corporation (the "Company")
and ____________________ (the "Optionee").
W I T N E S S E T H:
WHEREAS, the Optionee has agreed to serve as a director of the
Company, and the Company, to induce the Optionee to become and remain a
director, desires to afford him the opportunity to acquire, or enlarge, his
stock ownership in the Company so that he may have a direct proprietary interest
in the Company's success;
NOW, THEREFORE, in consideration of the covenants and agreements
herein contained, the parties hereto hereby agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions set forth
herein and in the Company's 1996 Stock Option Plan (the "Plan"), the Company
hereby grants to the Optionee, during the period commencing on the date of this
Agreement and ending ten years from the date hereof (the "Termination Date"),
the right and option (the "Option") to purchase from the Company, at a price of
$____ per share, up to, but not exceeding in the aggregate, _____ shares of the
Company's Common Stock, par value $.01 per share (the "Stock").
2. LIMITATIONS ON EXERCISE OF OPTION. (a) Subject to the terms and
conditions set forth herein, the Optionee may purchase 25% of the shares of
Stock covered by this Option on and after the first anniversary of the date
hereof, and may purchase an additional 25% of the shares of Stock covered by
this Option on and after each of the second, third and fourth anniversaries of
the date hereof.
(b) Any provision of paragraph 2(a) hereof to the contrary
notwithstanding, but subject to any other terms and conditions set forth herein,
if immediately after any merger, consolidation, sale of the Company's Stock,
sale of all or substantially all of the Company's assets, or other similar event
(a "Sale Event"), the persons or entities who, immediately prior to such Sale
Event, owned 100% of the Company's Stock, no longer continue to own either (i)
at least 50% of the Company's Stock, or (ii) stock of any successor company
(including any company purchasing all or substantially all of the Company's
assets) representing at least 50% of
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the voting power of such successor company's outstanding stock, the Optionee
shall be entitled to purchase 100% of the shares of Stock covered by this
Option.
3. TERMINATION OF AFFILIATION. (a) If prior to the Termination Date,
the Optionee shall cease to be a director of the Company by reason of a
disability within the meaning of Section 105(d)(4) of the Internal Revenue Code
of 1986, as amended (the "Code"), the Option shall remain exercisable for a
period of one year from the date of cessation of his duties as a director of the
Company to the extent it was exercisable at the time of cessation of his duties
as a director of the Company.
(b) If prior to the Termination Date, the Optionee shall cease to
be a director of the Company by reason of death or the Optionee shall die while
entitled to exercise the Option pursuant to paragraph 3(a), the executor or
administrator of the estate of the Optionee or the person or persons to whom the
Option shall have been validly transferred by the executor or administrator
pursuant to will or the laws of descent and distribution shall have the right,
within one year from the date of the Optionee's death, to exercise the Option to
the extent that the Option was exercisable at the date of death, subject to any
other limitation contained herein on the exercise of the Option in effect on the
date of exercise.
(c) If the Optionee shall cease to be a director of the Company for
any reason other than death or disability, unless otherwise provided by the
Stock Option Committee (the "Committee"), this Option, to the extent not
exercised prior to such cessation, shall continue to be exercisable for a period
not extending beyond three months after the date of such cessation.
(d) Any provision of paragraphs 3(a), 3(b) or 3(c) hereof to the
contrary notwithstanding, this Option may not be exercised beyond the
Termination Date.
(e) After the expiration of any exercise period described in either
of paragraphs 3(a), 3(b) or 3(c) hereof, this Option shall terminate together
with all of the Optionee's rights hereunder, to the extent not previously
exercised.
4. METHOD OF EXERCISING OPTION. (a) The Optionee may exercise the
Option by delivering to the Company a written notice stating the number of
shares that the Optionee has elected to purchase at that time from the Company
and full payment of the purchase price of the shares then to be purchased.
Payment of the purchase price of the shares may be made (a) by certified or bank
cashier's check payable to the order of the Company, (b) by surrender or
delivery to the Company of shares of its Common Stock which have been held by
the Optionee for at least six months at the time of exercise or (c) by such
other means as shall be designated by the Committee.
(b) At the time of exercise, the Optionee shall pay to the Company
such amount as the Company deems necessary to satisfy its obligation to withhold
Federal, state or local income or other taxes incurred by reason of the exercise
or the transfer of shares thereupon.
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<PAGE>
5. ISSUANCE OF SHARES. As promptly as practical after receipt of
such written notification and full payment of such purchase price and any
required income tax withholding amount, the Company shall issue or transfer to
the Optionee the number of shares with respect to which the Option has been so
exercised, and shall deliver to the Optionee a certificate or certificates
therefor, registered in the Optionee's name.
6. COMPANY; OPTIONEE. (a) The term "Company" as used in this
Agreement with reference to directorship shall include subsidiaries of the
Company. The term "subsidiary" as used in this Agreement shall mean any
subsidiary of the Company as defined in Section 424(f) of the Code.
(b) Whenever the word "Optionee" is used in any provision of this
Agreement under circumstances where the provision should logically be construed
to apply to the executors, the administrators, or the person or persons to whom
the Option may be transferred by will or by the laws of descent and
distribution, the word "Optionee" shall be deemed to include such person or
persons.
7. NON-TRANSFERABILITY. The Option is not transferable by the
Optionee otherwise than by will or the laws of descent and distribution and is
exercisable during the Optionee's lifetime only by him. No assignment or
transfer of the Option, or of the rights represented thereby, whether voluntary
or involuntary, by operation of law or otherwise (except by will or the laws of
descent and distribution), shall vest in the assignee or transferee any interest
or right herein whatsoever, but immediately upon such assignment or transfer the
Option shall terminate and become of no further effect.
8. RIGHTS AS STOCKHOLDER. The Optionee or a transferee of the Option
shall have no rights as a stockholder with respect to any share covered by the
Option until he shall have become the holder of record of such share, and no
adjustment shall be made for dividends or distributions or other rights in
respect of such share for which the record date is prior to the date upon which
he shall become the holder or record thereof.
9. RECAPITALIZATIONS, REORGANIZATIONS, ETC. (a) The existence of the
Option shall not affect in any way the right or power of the Company or its
stockholders to make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidation of the Company, or any issue of stock
or of options, warrants or rights to purchase stock or of bonds, debentures,
preferred or prior preference stocks ahead of or affecting the Stock or the
rights thereof or convertible into or exchangeable for Stock, or the dissolution
or liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
(b) The shares with respect to which the Option is granted are
shares of Stock of the Company as presently constituted, but if, and whenever,
prior to the delivery by the Company of all of the shares of the Stock with
respect to which the Option is granted, the Company shall effect a subdivision
or consolidation of shares of the Stock outstanding, without
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<PAGE>
receiving compensation therefor in money, services or property, the number and
price of shares remaining under the Option shall be appropriately adjusted. Such
adjustment shall be made by the Committee, whose determination as to what
adjustment shall be made, and the extent thereof, shall be final, binding and
conclusive. Any such adjustment may provide for the elimination of any
fractional share which might otherwise become subject to the Option.
(c) 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 or shares of Stock or other securities covered by this Option and
the option price thereof. The Committee shall notify the Optionee of any
intended sale of all or substantially all of the Company's assets within a
reasonable time prior to such sale.
(d) Except as hereinbefore expressly provided, the issue by the
Company of shares of stock of any class, or securities convertible into or
exchangeable for shares of stock of any class, for cash or property, or for
labor or services, either upon direct sale or upon the exercise of options,
rights or warrants to subscribe therefore, or to purchase the same, or upon
conversion of shares or obligation of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Stock subject to the
Option.
10. COMPLIANCE WITH LAW. Notwithstanding any of the provisions
hereof, the Optionee hereby agrees that he will not exercise the Option, and
that the Company will not be obligated to issue or transfer any shares to the
Optionee hereunder, if the exercise hereof or the issuance or transfer of such
shares shall constitute a violation by the Optionee or the Company of any
provisions of any law or regulation of any governmental authority. Any
determination in this connection by the Committee shall be final, binding and
conclusive. The Company shall in no event be obliged to register any securities
pursuant to the Securities Act of 1933 (as now in effect or as hereafter
amended) or to take any other affirmative action in order to cause the exercise
of the Option or the issuance or transfer of shares pursuant thereto to comply
with any law or regulation of any governmental authority.
11. NOTICE. Every notice or other communication relating to this
Agreement shall be in writing, and shall be mailed to or delivered to the party
for whom it is intended at such address as may from time to time be designated
by it in a notice mailed or delivered to the other party as herein provided;
provided that, unless and until some other address be so designated, all notices
or communications by the Optionee to the Company shall be mailed or delivered to
the Company at its office at 6743 South Point Drive North, Jacksonville, Florida
32216, and all notices or communications by the Company to the Optionee may be
given to the Optionee personally or may be mailed to him at the address shown
below his signature to this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
on the day and year first above written.
XOMED SURGICAL PRODUCTS, INC.
By:
-----------------------------------------
[Name:]
[Title:]
OPTIONEE
By:
-----------------------------------------
[Name:]
[Address:]
<PAGE>
EXHIBIT C
FORM OF
NON-QUALIFIED STOCK OPTION AGREEMENT
UNDER THE
XOMED SURGICAL PRODUCTS, INC.
1996 STOCK OPTION PLAN
THIS AGREEMENT, made the ___ day of ______, 199_, by and between
XOMED SURGICAL PRODUCTS, INC., a Delaware corporation (the "Company") and
____________ (the "Optionee").
W I T N E S S E T H:
WHEREAS, the Optionee is now employed by the Company in a key
capacity, and the Company desires to have him remain in such employment and to
afford him the opportunity to acquire, or enlarge, his stock ownership in the
Company so that he may have a direct proprietary interest in the Company's
success;
NOW, THEREFORE, in consideration of the covenants and agreements
herein contained, the parties hereto hereby agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions set forth
herein and in the Company's 1996 Stock Option Plan (the "Plan"), the Company
hereby grants to the Optionee, during the period commencing on the date of this
Agreement and ending ten years from the date hereof (the "Termination Date"),
the right and option (the "Option") to purchase from the Company, at a price of
$________ per share, up to, but not exceeding in the aggregate, _________ shares
of the Company's Class A Common Stock, par value $.01 per share (the "Stock
2. LIMITATIONS ON EXERCISE OF OPTION. (a) Subject to the terms and
conditions set forth herein, the Optionee may purchase 25% of the shares of
Stock covered by this Option on and after the first anniversary of the date
hereof, and may purchase an additional 25% of the shares of Stock covered by
this Option on and after each of the second, third and fourth anniversaries of
the date hereof.
(b) Any provision of paragraph 2(a) hereof to the contrary
notwithstanding, but subject to any other terms and conditions set forth herein,
if immediately after any merger, consolidation, sale of the Company's Stock,
sale of all or substantially all of the Company's assets, or other similar event
(a "Sale Event"), the persons or entities who, immediately prior to such Sale
Event, owned 100% of the Company's Stock, no longer continue to own either (i)
at least 50% of the Company's Stock, or (ii) stock of any successor company
(including any company purchasing all or substantially all of the Company's
assets) representing at least 50% of the voting power of such successor
company's outstanding stock, the Optionee shall be entitled to purchase 100% of
the shares of Stock covered by this Option.
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<PAGE>
3. TERMINATION OF EMPLOYMENT. (a) If, prior to the Termination Date,
the Optionee shall cease to be employed by the Company by reason of a disability
within the meaning of Section 105(d)(4) of the Code, the Option shall remain
exercisable for a period of one year from the date of cessation of employment to
the extent it was exercisable at the time of cessation of employment.
(b) If prior to the Termination Date, the Optionee shall cease to
be employed by the Company by reason of death or the Optionee shall die while
entitled to exercise the Option pursuant to paragraph 3(a), the executor or
administrator of the estate of the Optionee or the person or persons to whom the
Option shall have been validly transferred by the executor or administrator
pursuant to will or the laws of descent and distribution shall have the right,
within one year from the date of the Optionee's death, to exercise the Option to
the extent that the Option was exercisable at the date of death, subject to any
other limitation contained herein on the exercise of the Option in effect on the
date of exercise.
(c) If the 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 the Optionee's employment with the Company is terminated
for Cause, as hereinafter defined, unless otherwise provided by the Stock Option
Committee (the "Committee"), this Option, to the extent not 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 an
exercise of this Option 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 the Optionee's employment without Cause, as hereinafter
defined, this Option, to the extent exercisable immediately prior to such
termination, shall continue to be exercisable for a period not extending beyond
three months after the date of such termination.
(d) Any provision of paragraphs 3(a), 3(b) or 3(c) hereof to the
contrary notwithstanding, this Option may not be exercised beyond the
Termination Date.
(e) For purposes of this Agreement, the Company shall have "Cause"
to terminate the 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 Company's Board
of Directors (the "Board") 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'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.
(f) Except as otherwise specifically provided in paragraph 3(e)
hereof, whether employment has been or could have been terminated for the
purposes of this Agreement, and the
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<PAGE>
reasons therefor, shall be determined by the Committee, whose determination
shall be final, binding and conclusive.
(g) After the expiration of any exercise period described in either
of paragraphs 3(a), 3(b) or 3(c) hereof, this Option shall terminate together
with all of the Optionee's rights hereunder, to the extent not previously
exercised.
4. METHOD OF EXERCISING OPTION. The Optionee may exercise the Option
by delivering to the Company a written notice stating the number of shares that
the Optionee has elected to purchase at that time from the Company and full
payment of the purchase price of the shares then to be purchased. Payment of the
purchase price of the shares may be made (a) by certified or bank cashier's
check payable to the order of the Company or (b) by surrender or delivery to the
Company of shares of its Common Stock which have been held by the Optionee for
at least six months at the time of exercise or (c) by such other means as shall
be designated by the Committee.
5. ISSUANCE OF SHARES. As promptly as practical after receipt of
such written notification and full payment of such purchase price, the Company
shall issue or transfer to the Optionee the number of shares with respect to
which the Option has been so exercised, and shall deliver to the Optionee a
certificate or certificates therefor, registered in the Optionee's name.
6. COMPANY; OPTIONEE. (a) The term "Company" as used in this
Agreement with reference to employment shall include subsidiaries of the
Company. The term "subsidiary" as used in this Agreement shall mean any
subsidiary of the Company as defined in Section 424(f) of the Internal Revenue
Code of 1986, as amended.
(b) Whenever the word "Optionee" is used in any provision of this
Agreement under circumstances where the provision should logically be construed
to apply to the executors, the administrators, or the person or persons to whom
the Option may be transferred by will or by the laws of descent and
distribution, the word "Optionee" shall be deemed to include such person or
persons.
7. NON-TRANSFERABILITY. The Option is not transferable by the
Optionee otherwise than by will or the laws of descent and distribution and is
exercisable during the Optionee's lifetime only by him. No assignment or
transfer of the Option, or of the rights represented thereby, whether voluntary
or involuntary, by operation of law or otherwise (except by will or the laws of
descent and distribution), shall vest in the assignee or transferee any interest
or right herein whatsoever, but immediately upon such assignment or transfer the
Option shall terminate and become of no further effect.
8. RIGHTS AS STOCKHOLDER. The Optionee or a transferee of the Option
shall have no rights as a stockholder with respect to any share covered by the
Option until he shall have become the holder of record of such share, and no
adjustment shall be made for dividends or distributions or other rights in
respect of such share for which the record date is prior to the date upon which
he shall become the holder of record thereof.
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<PAGE>
9. RECAPITALIZATIONS, REORGANIZATIONS, ETC. (a) The existence of the
Option shall not affect in any way the right or power of the Company or its
stockholders to make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidation of the Company, or any issue of stock
or of options, warrants or rights to purchase stock or of bonds, debentures,
preferred or prior preference stocks ahead of or affecting the Stock or the
rights thereof or convertible into or exchangeable for Stock, or the dissolution
or liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
(b) The shares with respect to which the Option is granted are
shares of Stock of the Company as presently constituted, but if, and whenever,
prior to the delivery by the Company of all of the shares of the Stock with
respect to which the Option is granted, the Company shall effect a subdivision
or consolidation of shares of the Stock outstanding, without receiving
compensation therefor in money, services or property, the number and price of
shares remaining under the Option shall be appropriately adjusted. Such
adjustment shall be made by the Committee, whose determination as to what
adjustment shall be made, and the extent thereof, shall be final, binding and
conclusive. Any such adjustment may provide for the elimination of any
fractional share which might otherwise become subject to the Option.
(c) 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 or shares of Stock or other securities covered by this Option and
the option price thereof. The Committee shall notify the Optionee of any
intended sale of all or substantially all of the Company's assets within a
reasonable time prior to such sale.
(d) Except as hereinbefore expressly provided, the issue by the
Company of shares of stock of any class, or securities convertible into or
exchangeable for shares of stock of any class, for cash or property, or for
labor or services, either upon direct sale or upon the exercise of options,
rights or warrants to subscribe therefor, or to purchase the same, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Stock subject to the
Option.
10. COMPLIANCE WITH LAW. Notwithstanding any of the provisions
hereof, the Optionee hereby agrees that he will not exercise the Option, and
that the Company will not be obligated to issue or transfer any shares to the
Optionee hereunder, if the exercise hereof or the issuance or transfer of such
shares shall constitute a violation by the Optionee or the Company of any
provisions of any law or regulation of any governmental authority. Any
determination in this connection by the Committee shall be final, binding and
conclusive. The Company shall in no event be obliged to register any securities
pursuant to the Securities Act of 1933 (as now in effect or as hereafter
amended) or to take any other affirmative action in order to cause the
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<PAGE>
exercise of the Option or the issuance or transfer of shares pursuant thereto to
comply with any law or regulation of any governmental authority.
11. NOTICE. Every notice or other communication relating to this
Agreement shall be in writing, and shall be mailed to or delivered to the party
for whom it is intended at such address as may from time to time be designated
by it in a notice mailed or delivered to the other party as herein provided;
provided that, unless and until some other address be so designated, all notices
or communications by the Optionee to the Company shall be mailed or delivered to
the Company at its office at 6743 South Point Drive North, Jacksonville, Florida
32216, and all notices or communications by the Company to the Optionee may be
given to the Optionee personally or may be mailed to him at the address shown
below his signature to this Agreement.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
XOMED SURGICAL PRODUCTS, INC.
By:
-----------------------------------------
[Name:]
[Title:]
OPTIONEE
By:
-----------------------------------------
[Name:]
[Address:]
EXHIBIT 10.15
EXECUTION COPY
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated as of February 24, 1999, 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, President 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. Nothing in this paragraph 3 shall prevent
the Employee from serving on the Board of Directors of any other company, so
long as the Board of Directors of the Company shall approve each position so
held by the Employee.
4. COMPENSATION.
(a) For services rendered under this Agreement, the Company
shall pay the Employee an aggregate salary of $270,000 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 Management Incentive
Compensation Plan (MIC) 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
<PAGE>
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 options to purchase 100,000 shares of the Company's Common Stock under
the Company's Third Amended and Restated 1996 Stock Option Plan (the "Stock
Option Plan"), at a price per share equal to $36.93, the fair market value of
such share on the date of grant as determined by the Compensation Committee of
the Board of Directors in accordance with the terms of the Stock Option Plan,
such options to terminate on the tenth anniversary of the date hereof and to
vest in equal installments on each of the first four anniversaries of the date
hereof. Such options will be evidenced by a stock option agreement to be entered
into by the Company and the Employee.
(d) In addition to the options granted pursuant to paragraph
4(c) above, during the term of this Agreement, the Employee shall be eligible
for participation in the Stock Option Plan and any other stock option plan
administered by the Compensation Committee of the Board of Directors. In
addition to the options granted pursuant to paragraph 4(c) above, the Company
will grant to the Employee during the term of this Agreement options to purchase
the Company's Common Stock at the times, in the amounts and under the
circumstances described in Schedule A attached hereto, at a price per share
equal to the fair market value of such share on the date of grant as determined
by the Compensation Committee of the Board of Directors in accordance with the
terms of the appropriate stock option plan. Any such options granted pursuant to
this paragraph 4(d) will terminate on the tenth anniversary of the date of
grant, will vest in equal installments on each of the first four anniversaries
of such date and will be evidenced by a stock option agreement to be entered
into by the Company and the Employee in substantially the form of the option
agreement referred to in paragraph 4(c). The aggregate number of shares of the
Company's Common Stock set forth on Schedule A will be appropriately adjusted
for any increase or decrease in the number of outstanding shares of the
Company's Common Stock resulting from a stock split or other subdivision or
consolidation of shares of the Company's Common Stock during the term of this
Agreement or for other capital adjustments or payments of stock dividends or
distributions or other increases or decreases in the outstanding shares of the
Company's Common Stock without receipt of consideration by the Company during
the term of this Agreement.
(e) The options granted pursuant to paragraphs 4(c) and 4(d)
above shall be collectively referred to herein as the "New Options."
(f) The Compensation Committee of the Board of Directors 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.
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<PAGE>
5. SICK LEAVE AND VACATION. During the term of this Agreement, the
Employee shall be entitled to annual vacation of at least five (5) 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 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 100% 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.
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<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 twenty-four (24) 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. During the Salary Continuation Period, the Employee shall also
be eligible to receive continued coverage under all of the Company's current
health benefit and life insurance programs at the same rates that were
applicable to the Employee prior to the commencement of the Salary Continuation
Period. At the commencement of the Salary Continuation Period, all of the
Employee's unexercised New Options shall automatically vest and be fully
exercisable and the Employee shall have one (1) year from such date to exercise
all unexercised New Options. This provision will not affect the terms of any
options granted to the Employee prior to the date of this Agreement.
(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, 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
-4-
<PAGE>
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
twenty-four (24) 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 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
-5-
<PAGE>
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. CHANGE OF CONTROL. Upon the occurrence of a Change of Control (as
defined below), all of the Employee's unexercised New Options shall
automatically vest and be fully exercisable and shall remain so exercisable in
accordance with the respective terms of such options. This provision shall apply
without regard to whether the plan under which such New Options are granted
specifically provides for accelerated vesting upon a Change in Control. For
purposes of this Agreement, "Change of Control" shall mean the occurrence of any
of the following events: (i) the approval by the stockholders of the Company of
a merger or consolidation of the Company with any other corporation, other than
a merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; (ii) any approval by
the stockholders of the Company of a plan of complete liquidation of the Company
or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets; or (iii) any "person" (as such term
is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934)
becoming the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 50% or more of
the total voting power represented by the Company's then outstanding voting
securities.
14. CAR ALLOWANCE. The Employee shall be entitled to a monthly
allowance of $850.00, which the Employee may utilize to cover expenses relating
to the use of his personal automobile. The Company shall pay for all regularly
scheduled maintenance, insurance, repairs and registration fees for such
automobile. The Company shall not be responsible for any costs, expenses or
other obligations related to such automobile other than regularly scheduled
maintenance costs, insurance, repairs, registration fees and the monthly
allowance payable hereunder.
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.
-6-
<PAGE>
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
12892 Fernbank Lane, Jacksonville, Florida 32223, 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 with respect to the subject matter referred
to herein, including, without limitation, the Employment Agreement, dated as of
April 16, 1996, between the Company and the Employee. 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.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day first hereinabove written.
XOMED SURGICAL PRODUCTS, INC.
By:
-------------------------------
Name:
Title:
EMPLOYEE
---------------------------------
James T. Treace
EXHIBIT 10.16
EXECUTION COPY
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated as of February 24, 1999, 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. Nothing in this paragraph 3 shall prevent
the Employee from serving on the Board of Directors of any other company, so
long as the Board of Directors of the Company shall approve each position so
held by the Employee.
4. COMPENSATION.
(a) For services rendered under this Agreement, the Company shall
pay the Employee an aggregate salary of $213,000 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 Management Incentive
Compensation Plan (MIC) 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
<PAGE>
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 options to purchase 60,000 shares of the Company's Common Stock under
the Company's Third Amended and Restated 1996 Stock Option Plan (the "Stock
Option Plan"), at a price per share equal to $36.93, the fair market value of
such share on the date of grant as determined by the Compensation Committee of
the Board of Directors in accordance with the terms of the Stock Option Plan,
such options to terminate on the tenth anniversary of the date hereof and to
vest in equal installments on each of the first four anniversaries of the date
hereof. Such options will be evidenced by a stock option agreement to be entered
into by the Company and the Employee.
(d) In addition to the options granted pursuant to paragraph 4(c)
above, during the term of this Agreement, the Employee shall be eligible for
participation in the Stock Option Plan and any other stock option plan
administered by the Compensation Committee of the Board of Directors. In
addition to the options granted pursuant to paragraph 4(c) above, the Company
will grant to the Employee during the term of this Agreement options to purchase
the Company's Common Stock at the times, in the amounts and under the
circumstances described in Schedule A attached hereto, at a price per share
equal to the fair market value of such share on the date of grant as determined
by the Compensation Committee of the Board of Directors in accordance with the
terms of the appropriate stock option plan. Any such options granted pursuant to
this paragraph 4(d) will terminate on the tenth anniversary of the date of
grant, will vest in equal installments on each of the first four anniversaries
of such date and will be evidenced by a stock option agreement to be entered
into by the Company and the Employee in substantially the form of the option
agreement referred to in paragraph 4(c). The aggregate number of shares of the
Company's Common Stock set forth on Schedule A will be appropriately adjusted
for any increase or decrease in the number of outstanding shares of the
Company's Common Stock resulting from a stock split or other subdivision or
consolidation of shares of the Company's Common Stock during the term of this
Agreement or for other capital adjustments or payments of stock dividends or
distributions or other increases or decreases in the outstanding shares of the
Company's Common Stock without receipt of consideration by the Company during
the term of this Agreement.
(e) The options granted pursuant to paragraphs 4(c) and 4(d) above
shall be collectively referred to herein as the "New Options."
(f) The Compensation Committee of the Board of Directors 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 five (5) weeks in
length each year, or such greater time
-2-
<PAGE>
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 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 100% 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.
(ii) If this Agreement is terminated pursuant to paragraph
7(a)(ii) above, the Employee shall receive no salary continuation pay or
severance pay.
-3-
<PAGE>
(iii) If this Agreement is terminated pursuant to paragraph
7(a)(iii) above, the Employee shall receive salary continuation pay for a period
of twenty-four (24) 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.
During the Salary Continuation Period, the Employee shall also be eligible to
receive continued coverage under all of the Company's current health benefit and
life insurance programs at the same rates that were applicable to the Employee
prior to the commencement of the Salary Continuation Period. At the commencement
of the Salary Continuation Period, all of the Employee's unexercised New Options
shall automatically vest and be fully exercisable and the Employee shall have
one (1) year from such date to exercise all unexercised New Options. This
provision will not affect the terms of any options granted to the Employee prior
to the date of this Agreement.
(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, 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
-4-
<PAGE>
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 twenty-four
(24) 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 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
-5-
<PAGE>
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. CHANGE OF CONTROL. Upon the occurrence of a Change of Control (as
defined below), all of the Employee's unexercised New Options shall
automatically vest and be fully exercisable and shall remain so exercisable in
accordance with the respective terms of such options. This provision shall apply
without regard to whether the plan under which such New Options are granted
specifically provides for accelerated vesting upon a Change in Control. For
purposes of this Agreement, "Change of Control" shall mean the occurrence of any
of the following events: (i) the approval by the stockholders of the Company of
a merger or consolidation of the Company with any other corporation, other than
a merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; (ii) any approval by
the stockholders of the Company of a plan of complete liquidation of the Company
or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets; or (iii) any "person" (as such term
is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934)
becoming the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 50% or more of
the total voting power represented by the Company's then outstanding voting
securities.
14. CAR ALLOWANCE. The Employee shall be entitled to a monthly allowance
of $850.00, which the Employee may utilize to cover expenses relating to the use
of his personal automobile. The Company shall pay for all regularly scheduled
maintenance, insurance, repairs and registration fees for such automobile. The
Company shall not be responsible for any costs, expenses or other obligations
related to such automobile other than regularly scheduled maintenance costs,
insurance, repairs, registration fees and the monthly allowance payable
hereunder.
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
7839 James Island Way, Jacksonville, Florida 32256, 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.
-6-
<PAGE>
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 with respect to the subject matter referred
to herein, including, without limitation, the Employment Agreement, dated as of
April 16, 1996, between the Company and the Employee. 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.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
first hereinabove written.
XOMED SURGICAL PRODUCTS, INC.
By:
-------------------------------
Name:
Title:
EMPLOYEE
----------------------------------
F. Barry Bays
EXHIBIT 21
SUBSIDIARIES
STATE OR OTHER JURISIDICTION OF
SUBSIDIARY 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. (4) France
9. Xomed France Holdings I, LLC (2) Delaware
10. Xomed France Holdings II, LLC (2) Delaware
11. Xomed France Holdings, SNC (3) France
12. Etablissements Boutmy, S.A. France
13. Xomed Deutschland, GmbH (2) Germany
14. Xomed - Treace, P.R. Inc. Delaware
15. FESSCo., Inc. Delaware
16. TreBay Medical Corporaton Delaware
(1) A subsidiary of Merocel Corporation.
(2) A subsidiary of Xomed International, Inc.
(3) A subsidiary of Xomed France Holdings I, LLC and Xomed France Holdings II,
LLC
(4) A subsidiary of Xomed France Holdings, SNC
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-70629) pertaining to the Xomed Surgical Products, Inc. 401(k)
and Profit Sharing Plan and in the Registration Statement (Form S-8
No. 333-35541) pertaining to the Third Amended and Restated 1996 Stock Option
Plan of Xomed Surgical Products, Inc. of our report dated February 22, 1999 with
respect to the consolidated financial statements of Xomed Surgical Products,
Inc. included in the Annual Report (Form 10-K) for the year ended December 31,
1998.
Ernst & Young LLP
March 22, 1999
Jacksonville, Florida
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