<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 25, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
BIONX IMPLANTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3841 22-3458598
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NO.)
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
279B GREAT VALLEY PARKWAY
MALVERN, PENNSYLVANIA 19355
(610) 296-0919
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------
DAVID W. ANDERSON
279B GREAT VALLEY PARKWAY
MALVERN, PENNSYLVANIA 19355
(610) 296-0919
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
WITH COPIES TO
PETER H. EHRENBERG, ESQ. ALEXANDER D. LYNCH, ESQ.
LOWENSTEIN, SANDLER, KOHL, FISHER & BROBECK, PHLEGER & HARRISON LLP
BOYLAN, P.A. 1633 BROADWAY, 47TH FLOOR
65 LIVINGSTON AVENUE NEW YORK, NEW YORK 10019
ROSELAND, NEW JERSEY 07068 (212) 581-1600
(201) 992-8700
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As promptly
as practicable after this Registration Statement is declared effective.
------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, par value
$.0019 per share...... 2,300,000 shs. $14.00 $32,200,000 $9,758
</TABLE>
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(1) Includes 300,000 shares which may be purchased by the Underwriters to
cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject To Completion, Dated February 26, 1997
PROSPECTUS
2,000,000 SHARES
LOGO
COMMON STOCK
------------
All of the 2,000,000 shares of Common Stock offered hereby are being sold by
Bionx Implants, Inc. (the "Company"). Prior to this offering, there has been no
public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $12.00 and $14.00 per
share. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. Application has been made for
quotation of the Common Stock on the Nasdaq National Market under the symbol
"BINX."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE""RISK
FACTORS" COMMENCING ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions[1] Company[2]
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<S> <C> <C> <C>
Per Share.................................. $ $ $
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Total[3]................................... $ $ $
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</TABLE>
1. For information regarding indemnification of the Underwriters, see
"Underwriting."
2. Before deducting expenses of the offering payable by the Company, estimated
at $985,000.
3. The Company has granted the Underwriters an option, exercisable within 30
days from the date hereof, to purchase up to 300,000 additional shares of
Common Stock on the same terms as set forth above, solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
Public will be $ , the Underwriting Discounts and Commissions will be
$ and the Proceeds to the Company will be $ . See "Underwriting."
------------
The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and to certain other
conditions. It is expected that delivery of such shares will be made through
the offices of UBS Securities LLC, 299 Park Avenue, New York, New York on or
about , 1997.
------------
UBS SECURITIES
HAMBRECHT & QUIST
VOLPE, WELTY & COMPANY LLC
, 1997
<PAGE>
BIONX IMPLANTS INC.
(LOGO)
TWO PAGE GATEFOLD
PAGE 1
Marketing a broad line of proprietary, Self-Reinforced resorbable products
that solve medical needs in a variety of specialties.
Picture of the Bionx technology applied to a resorbable polymer showing self-
reinforcing fibrils in the matrix.
Since 1995, Bionx Implants has marketed its products into the worldwide
Orthopaedic market: providing the surgical users with the first broad range of
resorbable products that meet their clinical needs.
For fracture management Bionx markets 4 full lines of resorbable pins and
screws with over 100 specific product sizes applicable to the majority of
orthopaedic procedures involving fracture management.
Picture display of the Bionx Implant Product lines for Fracture Fixation
including PLLA SmartScrews, PLLA SmartPins, PGA Screws and Pins in a variety
of lengths and diameters.
Picture of football player with arrows detailing usage points in current
practice with emphasis on ankles, wrists, elbows, knees and feet.
Bionx has used this broad base to create, with input from leading
orthopaedists, new products that address other critical unmet needs.
In February 1996 the Company introduced its SmartTack product, its first
product dedicated to serving the clinical needs of the hand surgeon.
Photograph of skier with demonstrating approved indication for SmartTack in
the thumb
PAGE 2
In the second quarter of 1996, Bionx Implants introduced its patented Meniscus
Arrow to provide the arthroscopist with a rapid and effective means of
repairing meniscal tears, a procedure that prior to the introduction of the
Meniscus Arrow required the surgeon to perform complex and demanding
arthroscopic surgical procedures.
Picture of a basketball player on dribble with a blow-up schematic of the knee
showing the Meniscus Arrow in place repairing a meniscus tear.
The Meniscus Arrow:
Shortens operative time
Simplifies meniscal repair procedures
Reduces the potential for complications
Bionx Implants: working today to create the next generation of proprietary
Self-Reinforced resorbable implants for the orthopaedic surgeon.
<PAGE>
------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The following summary is qualified in its entirety by the more
detailed information and the Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Prospectus, including the information under
"Risk Factors."
THE COMPANY
Bionx Implants, Inc. (the "Company") is a leading developer, manufacturer and
marketer of Self-Reinforced, resorbable polymer implants, including screws,
pins, arrows and stents, for use in a variety of applications which include
orthopaedic surgery, urology, dentistry and maxillo-facial surgery. The
Company's proprietary manufacturing processes self-reinforce a resorbable
polymer, modifying the gel-like or brittle polymer structure into a
physiologically strong structure with controlled, variable strength retention
(ranging from three weeks to six months depending upon the medical indication).
The Company currently markets its products through managed networks of
independent sales agents in the U.S. and independent distributors and dealers
in markets outside of the U.S. The Company's nine product lines, representing
more than 100 distinct products, were designed to address recognized clinical
needs. The Company estimates that its products have been used in over 150,000
surgeries. The Company has received 510(k) clearance from the Food and Drug
Administration ("FDA") for the six product lines that it currently markets in
the U.S. The Company has also received regulatory approvals for its product
lines in certain European and Asian markets.
The Company uses several proprietary manufacturing and processing
technologies to modify well characterized resorbable polymers (e.g., poly-l-
lactic acid ("PLLA") and polyglycolic acid ("PGA")) into appropriately
designed, Self-Reinforced, resorbable implants which can be used safely and
reliably in surgical applications. In addition to providing the strength
necessary for these applications, the Company's Self-Reinforcing technology
also imparts to the resorbable polymer a number of characteristics which
enhance the manufacturability of the implants and broaden their potential
clinical applications. For example, the Self-Reinforced polymers can be
machined (e.g., lathed, heat-treated and forged) into clinically appropriate
sizes and modified using custom metal forming techniques to incorporate
features, such as ridges and barbs, for improved fixation.
The human skeletal system is comprised of bone, connective tissue (ligaments
and tendons) and cartilage, all of which may be damaged as a result of trauma,
degenerative disease or surgical intervention. For more than four decades,
orthopaedic surgeons have used implantable metal devices, including screws,
pins and tacks, to repair skeletal tissue and to facilitate healing. While
metal implants have been recognized as the standard of care for fixation of
skeletal tissue due to their high strength and low complication rates, these
devices have several limitations, including reduction of healed bone strength
due to stress shielding (prevention of the transfer of weight-bearing load from
the implant to the bone) and the need to remove the implants. First generation
resorbable implants were developed in response to the limitations of metal
fixation devices. These implants do not require removal following surgery, but
are either brittle or overly flexible due to the processes, such as injection
molding, which are used in their manufacture. As a result of their low
strength, these implants had to be produced in large sizes which limited their
clinical utility.
To address the limitations of metal implants and first generation resorbable
implants, the Company developed Self-Reinforced, resorbable polymer implants,
including pins, screws and other profiled (nonsmooth-surfaced) implants, of
clinically appropriate sizes. The Company believes that the principal
advantages of its Self-Reinforced, resorbable polymer implants include:
. Improved Bone Healing. As a result of the controlled degradation of the
Company's Self-Reinforced, resorbable implants in bone, there is a
gradual transfer of the weight-bearing load from the fixation
3
<PAGE>
device to the bone, which the Company believes promotes more effective
bone healing than can occur with metal implants.
. Improved Soft Tissue Healing. Fractures and soft tissue injuries that
involve the articulating surfaces of joints have been difficult to
address with metal implants due to the potential for erosion of these
delicate surfaces. In a clinical study of 34 patients who received the
Company's Meniscus Arrow, no such erosion occurred.
. Lower Implant Failure Rate. The Company believes, based on clinical
experience and feedback that it has received from the medical community,
that its Self-Reinforced, resorbable implants have a significantly lower
rate of failure upon insertion than the 7-10% failure rate of
competitors' first generation unreinforced, resorbable implants.
. Reduced Need for Repeat Surgery. The Company's implants are resorbed by
the body over a controlled period of time, based on the indicated use,
which allows the patient to avoid the cost, trauma and inconvenience of
follow-up surgery to remove an implant after healing is complete.
The Company has leveraged its Self-Reinforcing platform technology to develop
and introduce high quality, clinically proven, resorbable implants into major
segments of the medical device industry. The Company's Self-Reinforced,
resorbable implants include pins and screws for repair of fractures of the
ankle, hand, knee, elbow, wrist and foot, resorbable stents for use in
urological procedures, and the Meniscus Arrow, the first resorbable,
arthroscopically administered fixation device designed for use in the repair of
longitudinal, vertical tears of the medial and lateral meniscus of the knee.
Prior to the introduction of the Meniscus Arrow, damaged menisci could only be
treated through complex suturing techniques or removal of the torn section. The
Meniscus Arrow has demonstrated the ability to reduce operating room time by
approximately 50% and to decrease the risk of arterial and nervous system
complications which may occur with suturing techniques.
The Company is also developing more than ten additional Self-Reinforced,
resorbable polymer implants for approximately 18 different applications.
Products under development include PLLA plates and anchors, intramedullary
nails, resorbable joint prostheses, and ultra-high strength resorbable
composites, all of which are planned for commercial introduction within the
next several years.
The Company's use of well known and well characterized polymers has, to date,
allowed for clearance of the Company's orthopaedic products by 510(k)
submissions. The FDA is familiar with the toxicological properties of these
polymers, and has not required extensive preclinical or clinical tests prior to
granting marketing clearance. In certain recent cases, clearances have been
obtained within 90 days after submission. The Company believes that many of its
products under development for orthopaedic and related applications will be
subject to clearance by 510(k) submissions, while certain of its other
products, including urology stents, may be subject to a more extensive
regulatory approval process.
THE OFFERING
Common Stock Offered................ 2,000,000 shares
Common Stock Outstanding after this
Offering............................ 8,607,513 shares(1)
Use of Proceeds..................... To establish a manufacturing capability
in the U.S. and expand manufacturing
capacity in Finland, to fund increased
research and development, to expand sales
and marketing, to fund working capital
and for other general corporate purposes,
including repayment of certain long-term
debt.
Proposed Nasdaq National Market
Symbol.............................. BINX
- --------
(1) Excludes 424,382 shares of Common Stock reserved for issuance pursuant to
stock options outstanding as of December 31, 1996. Also excludes an
aggregate of 425,618 shares of Common Stock reserved for future issuance
under the Company's Stock Option/Stock Issuance Plan as of December 31,
1996. See "Management -- Stock Option/Stock Issuance Plan" and "Description
of Capital Stock" and Note 11 of Notes to Consolidated Financial
Statements.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1992(1) 1993(1) 1994 1995 1996
---------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Product sales............. $ 1,522 $ 1,177 $ 1,265 $ 1,355 $ 5,034
Gross profit.............. 951 831 788 817 2,929
Operating expenses........ 1,668 1,135 883 2,439 4,905
Operating loss............ (717) (304) (95) (1,622) (1,976)
Net loss.................. (651) (219) (162) (1,478) (1,969)
Pro forma net loss per
share(2)................. (0.31)
Shares used in computing
pro forma net loss per
share(2)................. 6,370
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(3)(4)
------ ------------ -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................ $2,046 $2,046 $25,241
Total assets........................... 5,284 5,284 28,479
Long-term debt less current portion.... 590 590 590
Mandatorily redeemable convertible
preferred stock....................... 5,000 -- --
Accumulated deficit.................... (4,663) (4,663) (4,663)
Total stockholders' equity (deficit)... (3,063) 1,937 25,132
</TABLE>
- --------
(1) Consolidated Statement of Operations data for the years ended December 31,
1992 and 1993 have been derived from unaudited financial statements of the
Company.
(2) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net loss per share.
(3) Gives effect to the automatic conversion of all outstanding shares of
Preferred Stock of the Company into 1,052,638 shares of Common Stock and
the assumed cashless exercise of all outstanding warrants into 236,451
shares of Common Stock, calculated based on an assumed initial public
offering price of $13.00 per share.
(4) Adjusted to give effect to the receipt of the net proceeds from the sale of
the 2,000,000 shares of Common Stock offered hereby (at an assumed initial
public offering price of $13.00 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses
payable by the Company).
----------------
Unless otherwise indicated, all information in this Prospectus (i) assumes
the Underwriters' over-allotment option is not exercised, (ii) reflects a 1 for
1.9 reverse stock split of the Common Stock effected on February 24, 1997 (the
"Reverse Stock Split"), (iii) gives effect to the conversion of all outstanding
shares of Preferred Stock into 1,052,638 shares of Common Stock which will
occur upon the closing of this Offering (the "Preferred Stock Conversion") and
(iv) assumes the cashless exercise of all outstanding warrants into 236,451
shares of Common Stock upon the closing of this Offering, calculated based on
an assumed initial public offering price of $13.00 per share (the "Warrant
Exercise"). See "Description of Capital Stock," "Capitalization" and
"Underwriting."
The Company's logo is a trademark of the Company. This Prospectus also
includes trademarks and trade names of companies other than the Company.
5
<PAGE>
RISK FACTORS
Prospective investors in the shares offered hereby should carefully consider
the following risk factors, in addition to the other information contained in
this Prospectus. This Prospectus contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors and elsewhere in this Prospectus.
History of Operating Losses; Accumulated Deficit; Uncertainty of Future
Profitability; Fluctuating Results of Operations. The Company has incurred
substantial operating losses since its inception and, at December 31, 1996,
had an accumulated deficit of approximately $4.7 million. Such losses have
resulted principally from expenses associated with the development and
patenting of the Company's Self-Reinforcing technologies and resorbable
implant designs, preclinical and clinical studies, preparation of submissions
to the U.S. Food and Drug Administration (the "FDA") and foreign regulatory
bodies, the development of sales, marketing and distribution channels and the
development of manufacturing capabilities. Although the Company's revenues
grew significantly during 1996, no assurance can be given that this trend will
continue or that revenues will exceed expenses incurred in anticipation of
future revenue growth. Accordingly, the Company may incur significant
operating losses in the future as the Company continues its product
development efforts, expands its marketing, sales and distribution activities
and scales up its manufacturing capabilities. There can be no assurance that
the Company will be able to successfully commercialize its products or that
profitability will be achieved. The Company's results of operations have
fluctuated in the past on an annual and quarterly basis and may fluctuate
significantly from period to period in the future, depending upon a number of
factors, many of which are outside of the Company's control. Such factors
include the timing of government approvals, the medical community's acceptance
of the Company's products, the success of competitive products, the ability of
the Company to enter into strategic alliances with corporate partners,
expenses associated with patent matters, and the timing of expenses related to
product launches. Due to one or more of these factors, in one or more future
quarters the Company's results of operations may fall below the expectations
of securities analysts and investors. In that event, the market price of the
Company's Common Stock could be materially and adversely affected. See
"Selected Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."
Uncertainty of Market Acceptance. The Company's success will depend in part
upon the acceptance of the Company's Self-Reinforced, resorbable implants by
the medical community, including health care providers, such as hospitals and
physicians, and third-party payors. Such acceptance may depend upon the extent
to which the medical community perceives the Company's products as a safe,
reliable and cost-effective alternative to non-resorbable products, which are
widely accepted, have a long history of use and are generally sold at prices
lower than the prices of the Company's products. Such acceptance may also
depend upon the extent to which the medical community believes that the
Company's Self-Reinforced, resorbable implants have overcome the strength and
composition difficulties experienced with first generation resorbable
implants. Ultimately, for the Company's products to gain wide market
acceptance, it will also be necessary for the Company to convince surgeons
that the benefits associated with the Company's products justify the
modification of standard surgical techniques in order to use the Company's
implants safely and effectively. There can be no assurance that the Company's
products will achieve significant market acceptance on a timely basis, or at
all. Failure of some or all of the Company's products to achieve significant
market acceptance could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Competition."
Uncertainties Relating to Licenses, Trade Secrets, Patents and Proprietary
Rights. The Company's success will depend in part upon its ability to preserve
its trade secrets, obtain and maintain patent protection for its technologies,
products and processes, and operate without infringing the proprietary rights
of other parties. As a result of the substantial length of time and expense
associated with developing and commercializing new medical devices, the
medical device industry places considerable importance on obtaining and
maintaining trade secret and patent protection for new technologies, products
and processes.
6
<PAGE>
The Company owns or has licenses to patents issued in the United States and
various foreign countries and has patent applications pending at the U.S.
Patent and Trademark Office ("U.S. PTO") and in patent offices of various
foreign countries. Provided that all requisite maintenance fees are paid, the
Company's four principal U.S. patents (two of which are owned by the Company
and two of which are licensed to the Company on an exclusive basis) will
expire between 2004 and 2008. The two principal U.S. patents owned by the
Company relate to the Company's Self-Reinforced resorbable polymer products,
the Company's sintering process, and resorbable polymer products produced from
the Company's controlled drawing process. European counterparts to the two
principal U.S. patents that are owned by the Company and the Japanese
counterpart to one such patent are currently the subject of opposition
proceedings. One of these European patents has been revoked by the European
Patent Office for lack of novelty based on an earlier publication. The Company
has filed an appeal of the European Patent Office's revocation decision. The
other European patent and the Japanese patent application are being challenged
on lack of novelty and inventiveness grounds on the basis of disclosures made
in patent and other publications. The Company is vigorously defending its
European and Japanese patent positions in these proceedings. No assurance can
be given as to whether such appeal in Europe will be successful or as to the
outcome of the pending opposition proceedings. In order to clarify and confirm
its U.S. patent position, the Company intends in the first quarter of 1997 to
request reexamination by the U.S. PTO of the two principal U.S. patents owned
by the Company. No assurance can be given as to whether the issues raised in
the reexamination proceedings will be resolved in the Company's favor.
The reexamination process is expected to take up to twelve months or longer.
Such reexamination could result in some or all of the patent claims set forth
in these two U.S. patents being altered to provide narrower coverage or being
determined to be unpatentable. No assurance can be given as to the outcome of
the reexamination process. Narrowing of the coverage or a holding of
unpatentability in relation to one or both of these two principal U.S. patents
may significantly ease entry to the U.S. market for the products of the
Company's competitors and could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company also relies upon trade secret protection for certain unpatented
aspects of its proprietary technology, including its Self-Reinforcing
technology. Although the Company has taken steps to protect its trade secrets
and know-how, through the use of confidentiality agreements with its employees
and certain of its business partners and suppliers, there can be no assurance
that these agreements will not be breached, that the Company would have
adequate remedies for any breach, that others will not independently develop
or otherwise acquire substantially equivalent proprietary technology,
information or techniques, that others will not otherwise gain access to the
Company's proprietary technologies, or that any particular proprietary
technology will be regarded as a trade secret under applicable law. There can
also be no assurance that the steps taken by the Company will prevent
misappropriation of its trade secrets. As a result of the reliance that the
Company places on its trade secrets, loss of the Company's trade secret
protection would have a material adverse effect on the Company's business,
financial condition and results of operations.
Additionally, the Company is licensed under two principal U.S. patents.
Pursuant to this license agreement, the Company has the exclusive right in the
U.S. to manufacture, use and sell certain devices for fixation of meniscus
lesions. This license agreement, which requires the Company to pay periodic
royalties, has a term expiring in 2006, unless terminated earlier by the
licensor for breach by the Company. There can be no assurance that these
patents licensed to the Company are valid and enforceable, and, if
enforceable, that they cannot be circumvented or avoided by competitors.
There can be no assurance that patent applications to which the Company
holds rights will result in the issuance of patents, that any patents issued
or licensed to the Company will not be challenged and held to be invalid or
narrow in scope, or that the Company's present or future patents will provide
significant coverage for or protection to the Company's present or future
technologies, products or processes. Since patent applications are secret
until patents are issued in the U.S., or corresponding applications are
published in foreign countries, and since publication of discoveries in the
scientific or patent literature often lags behind actual discoveries, the
Company cannot be certain that it was the first to make its inventions, or
that it was the first to file patent applications for such inventions. In the
event that a third party has also filed a patent
7
<PAGE>
application relating to an invention claimed in a Company patent application,
the Company may be required to participate in an interference proceeding
declared by the U.S. PTO to determine priority of invention, which could
result in substantial uncertainties and cost for the Company, even if the
eventual outcome is favorable to the Company. In addition, there can be no
assurance that others will not obtain access to the Company's know-how or that
others will not be, or have not been, issued patents that may prevent the sale
of one or more of the Company's products or the practice of one or more of the
Company's processes, or require licensing and the payment of significant fees
or royalties by the Company to third parties in order to enable the Company to
conduct its business. There can be no assurance that the Company would be able
to obtain a license on terms acceptable to the Company or that the Company
would be able to successfully redesign its products or processes to avoid such
patents. In either such case, such inability could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Legal standards relating to the scope of claims and the validity of patents
in the medical device field are still evolving, and no assurance can be given
as to the degree of protection any patents issued to or licensed to the
Company would provide. The medical device industry has been characterized by
extensive litigation regarding patents and other intellectual property rights,
and companies in the medical device industry have employed intellectual
property litigation to gain competitive advantage. The Company has initiated
an opposition in the European Patent Office challenging the grant of a third
party's European patent relating to a drawing process for manufacturing
resorbable polymer products. Subsequently, another company has instituted its
own opposition against that patent. No assurance can be given that these
oppositions will result in either the revocation of that patent or the
narrowing of its claims. If neither opposition is successful, then no
assurance can be given that the third party will not assert that its European
patent is infringed by sales of one or more of the Company's products or by
the practice of one or more of the Company's processes in any of the eight
countries identified in the European patent. Moreover, there can be no
assurance that the Company will not be subject to claims that one or more of
its products or processes infringe other patents or violate the proprietary
rights of third parties. Defense and prosecution of patent claims can be
expensive and time consuming, regardless of whether the outcome is favorable
to the Company, and can result in the diversion of substantial financial,
management and other resources from the Company's other activities. An adverse
outcome could subject the Company to significant liability to third parties,
require the Company to obtain licenses from third parties, or require the
Company to cease any related product development activities or product sales.
In addition, the laws of certain countries may not protect the Company's
patent rights, trade secrets, inventions, products or processes to the same
extent as in the U.S. See "Business -- Licenses, Trade Secrets, Patents and
Proprietary Rights."
Uncertainties Relating to Product Development. Product development involves
a high degree of risk. There can be no assurance that the Company's products
under development will prove to be safe and effective, will receive the
necessary regulatory approvals or will ultimately be commercially successful.
These products will require substantial additional investment, laboratory
development, clinical testing and regulatory approvals prior to their
commercialization. There can be no assurance that the Company will not
experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products. The Company's
inability to successfully develop and introduce products under development on
a timely basis or at all, or achieve market acceptance of such products, could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Product Development."
Estimates of Procedures Uncertain; Regulatory Submission Dates Subject to
Change. To assist investors in evaluating the Company, this Prospectus
contains certain estimates of procedures performed in the U.S. on an annual
basis. These estimates have been derived by the Company on the basis of its
analysis of market research reports compiled by independent third-party
sources which the Company believes to be reliable. However, all such estimates
are inherently subject to uncertainties, and the Company is unable to
determine with any degree of certainty the number of potential patients for
any indication or the number of patients who are suitable for treatment using
any of the Company's products.
This Prospectus also reflects the Company's estimates regarding future
regulatory submission dates. Regulatory submissions can be delayed, or plans
to submit proposed products can be canceled, for a number
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of reasons, including the receipt of unanticipated preclinical or clinical
study reports, a determination by the FDA that PMA approval (as defined
herein) rather than 510(k) clearance is required with respect to a particular
submission, changes in regulations, adoption of new, or unanticipated
enforcement of existing, regulations, technological developments and
competitive developments. Accordingly, no assurances can be given that the
Company's anticipated submissions will be made on their target dates, or at
all. Delays in such submissions could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Government Regulation."
Dependence on Key Personnel and Relationship with the Technical University
at Tampere. The Company's ability to operate successfully depends in part upon
the continued service of certain key scientific, technical, managerial and
finance personnel, and its continuing ability to attract and retain additional
highly qualified scientific, technical, managerial and finance personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to retain existing personnel and attract or retain
additional highly qualified employees in the future. At present, the Company
does not maintain key man life insurance on any of its employees and only has
individual employment agreements with two of its employees. The loss of key
personnel and the inability to hire and retain qualified personnel in key
positions could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's product development efforts are dependent upon Pertti Tormala,
Ph.D. and the Technical University in Tampere, Finland. Dr. Tormala, a
founder, director and executive officer of the Company, is currently an
Academy Professor at the Technical University and has been permitted by the
University to devote his efforts to developing new products for the Company.
Dr. Tormala utilizes a group of senior researchers, graduate students and
faculty at the Technical University to perform research and development
projects involving resorbable polymers and other topics relating to the
Company's technologies and manufacturing processes. This arrangement,
permitted in Finland as a means of encouraging the commercialization of
technological development, has resulted in substantial cost savings to the
Company while greatly expanding its product development efforts. There can be
no assurance that the University will allow Dr. Tormala to continue to devote
his efforts and University resources to the Company's product development
efforts. Any failure by the Company to obtain the continued services of Dr.
Tormala, or any requirement that the Company fund research at the Technical
University at a substantially increased level, could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview," "Management" and "Certain
Transactions."
Government Regulation. The Company's products are subject to extensive
regulation by the FDA and certain foreign regulatory agencies. Pursuant to the
Federal Food, Drug, and Cosmetic Act, as amended, and the regulations
promulgated thereunder (the "FDC Act"), the FDA regulates the preclinical and
clinical testing, manufacture, labeling, distribution and promotion of medical
devices. Noncompliance with applicable requirements can result in, among other
things, warning letters, fines, injunctions, civil penalties, recalls or
seizures of products, total or partial suspension of production, failure of
the government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing clearances or approvals and criminal prosecution. The
FDA also has the authority to request repair, replacement or refund of the
cost of any device manufactured or distributed by the Company.
The Company is prohibited from marketing new devices in the U.S. until it
obtains clearance from the FDA under the premarket notification provisions of
Section 510(k) of the FDC Act ("510(k)") or approval of a Premarket Approval
Application ("PMA") from the FDA. A 510(k) submission generally requires
supporting data, which may include clinical data. The process of obtaining PMA
approval is much more costly, lengthy and uncertain. A PMA application
requires extensive clinical data and other supporting information. When
clinical data is required for either a 510(k) submission or a PMA application,
the process of compiling the data can be expensive and time-consuming, and
there can be no assurance that any clinical study proposed by the Company will
be permitted by the FDA, will be completed, or, if completed, will provide
data and information that will support clearance or approval. The Company
believes that it usually takes from four to
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twelve months from submission to obtain 510(k) clearance, although it can take
longer, and that the FDA's review of a PMA application after it is accepted
for filing can last from one to three years, or even longer. In all cases,
there can be no assurance that 510(k) clearance or PMA approval will ever be
obtained. Moreover, regulatory clearances or approvals, if granted, may
include significant limitations on the indicated uses for which a product may
be marketed.
To date, all of the Company's products sold in the U.S. have received 510(k)
clearance. There can be no assurance that the FDA will not determine that the
Company's urology stents, certain products currently in development by the
Company or future products must undergo the more costly, lengthy and uncertain
PMA approval process. It is likely that the FDA will require the Company to
seek PMA approval for its urological stents.
Current FDA enforcement policy prohibits the marketing of approved medical
devices for unapproved uses. The Company's PGA pins have received 510(k)
clearance for the general intended use of "maintenance of alignment of small
fragments of fractured non-load bearing bones in the presence of appropriate
immobilization." The Company has promoted this product for numerous specific
indications within the general framework of the language quoted above.
Although the Company believes that these specific indications are covered by
the 510(k) clearance already received for its PGA pins, there can be no
assurance that the FDA would not consider promotion of this product for the
specific indications to be a change to the intended use of the device
requiring a new 510(k) submission.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA. Changes in existing requirements or adoption of new requirements
could adversely affect the ability of the Company to be in regulatory
compliance. Failure to comply with regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will not be
required to incur significant costs to comply with laws and regulations in the
future or that laws or regulations will not have a material adverse effect
upon the Company's business, financial condition and results of operations.
The FDC Act requires devices to be manufactured in accordance with good
manufacturing practices ("GMPs") which impose certain procedural and
documentation requirements upon the Company with respect to manufacturing,
quality assurance and other matters. Enforcement of GMP regulations has
increased significantly in the last several years, and the FDA has publicly
stated that compliance will be more strictly scrutinized. The FDA has recently
finalized changes to the GMP regulations, including design controls, which
will likely increase the cost of compliance with GMP requirements.
In October 1994, the Company's facility in Finland was inspected by the FDA.
The inspector made several observations related to GMPs, which resulted in a
Warning Letter being issued to the Company on February 23, 1995. The Company
then began an exchange of correspondence with the FDA, which concluded with an
October 10, 1995 letter from the FDA stating, among other things, that the
Company's responses to the Warning Letter were "adequate" and that during the
next inspection, the FDA would "verify that the corrections have been
implemented." Such an inspection is expected to occur in the near future.
In addition, international regulatory bodies often establish regulations
governing product standards, packaging requirements, labeling requirements,
import restrictions, tariff regulations, duties and tax requirements. As a
result of the Company's sales in Europe, the Company is required to receive a
"CE" marking certification, an international symbol of quality and compliance
with the applicable European medical device directive. In January 1997, the
Company received an EC Design Examination and an EC Quality System Certificate
from a European Notified Body, which entitles the Company to affix a CE
marking on all of its currently marketed orthopaedic, dental and maxillo-
facial products. Submission of the required design dossier for the Company's
stent products is scheduled for late 1997. Failure to obtain CE marking for
the Company's stent products by June 14, 1998 would prohibit the Company from
selling such
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products in the European Economic Area unless and until compliance is
achieved. There can be no assurance that the Company will be able to achieve
and/or maintain compliance required for CE marking for any or all of its
products or that it will be able to produce its products in a timely and
profitable manner while complying with applicable requirements.
The Company is also subject to numerous environmental and safety laws and
regulations, including those governing use of hazardous materials. Any
violation of, and the cost of compliance with, these regulations could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Government Regulation."
Competition. The medical device industry is subject to intense competition
both in the U.S. and abroad. The Company's products compete against metal
implants and other resorbable products for orthopaedic surgery, urology,
dentistry, and maxillo-facial surgery applications. Potential competitors may
be able to develop technologies that are as effective as, or more effective or
easier to use than, those offered by the Company, which could render the
Company's products noncompetitive or obsolete. Moreover, many of the Company's
existing and potential competitors have substantially greater financial,
marketing, sales, distribution and technological resources than the Company.
Such existing and potential competitors may be
in the process of seeking FDA approval for their respective products or may
possess substantial advantages over the Company in terms of research and
development expertise, experience in conducting clinical trials, experience in
regulatory matters, manufacturing efficiency, name recognition, sales and
marketing expertise or distribution channels. There can be no assurance that
the Company will be able to compete successfully against current or future
competitors or that competition will not have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Competition."
Dependence Upon Independent Sales Agents, Distributors and Dealers. The
Company markets and sells its products through managed networks of independent
sales agents in the U.S. and independent distributors and dealers in foreign
countries. As a result, a substantial portion of the Company's revenues are
dependent upon the sales efforts of such sales agents, distributors and
dealers. The Company may also rely on its distributors to assist it in
obtaining reimbursement and regulatory approvals in certain international
markets. There can be no assurance that the Company's sales agents,
distributors and dealers, certain of which operate relatively small
businesses, have the financial stability to assure their continuing presence
in their markets. The inability of a sales agent, distributor or dealer to
perform its obligations, or the cessation of business by a sales agent,
distributor or dealer, could materially and adversely affect the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will be able to engage or retain qualified sales
agents, distributors or dealers in each territory targeted by the Company. The
failure to engage such entities in such territories would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Sales, Marketing and Distribution."
Risks Relating to International Operations. Approximately 32% of the
Company's product sales during 1996 were generated in international markets. A
number of risks are inherent in international operations. International sales
and operations may be limited or disrupted by the imposition of government
controls, export license requirements, political instability, trade
restrictions, changes in tariffs, difficulties in managing international
operations, import restrictions and fluctuations in foreign currency exchange
rates. The international nature of the Company's business subjects it and its
representatives, agents and distributors to the laws and regulations of the
foreign jurisdictions in which they operate, and in which the Company's
products are sold. The regulation of medical devices in a number of such
jurisdictions, particularly in the European Union, continues to develop and
there can be no assurance that new laws or regulations will not have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Business -- Government Regulation" and
Note 14 of Notes to Consolidated Financial Statements.
Product Liability Risks; Limited Insurance Coverage. The Company's business
is subject to product liability risks in the testing, manufacturing and
marketing of its products. There can be no assurance that product
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liability claims will not be asserted against the Company, its strategic
partners or its licensees. While the Company maintains product liability
insurance, there can be no assurance that this coverage will be adequate to
protect the Company against future product liability claims. In addition,
product liability insurance is expensive and there can be no assurance that,
in the future, product liability insurance will be available to the Company on
terms satisfactory to the Company, if at all. A successful product liability
claim or series of claims brought against the Company in excess of its
coverage could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Product
Liability and Insurance."
No Assurance of Ability to Manage Growth. The Company experienced
substantial growth in product sales during the second half of 1996. Although
there can be no assurance that such growth can be sustained, products in
development may potentially lead to further growth. There can be no assurance
that the Company will be able to (i) develop the necessary manufacturing
capabilities, (ii) manage an expanded sales and marketing network, (iii)
attract, retain and integrate the required key personnel, or (iv) implement
the financial, accounting and management systems to meet growing demand for
its products should it occur. Failure of the Company to successfully manage
its growth could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business --
Manufacturing," "-- Sales, Marketing and Distribution," "-- Facilities" and
"Management."
Uncertainties Regarding Manufacturing. The Company currently manufactures
its implant products solely in Finland. The Company intends to develop a
manufacturing capability in the U.S. in order to increase its manufacturing
capacity for its existing and new implant products. The Company anticipates
that it will establish this capability either by (i) equipping and operating a
leased facility in the eastern U.S. or (ii) contracting with a third party to
provide a manufacturing capability to the Company. The Company presently is
exploring both of these alternatives. If the Company pursues contract
manufacturing, it will solicit bids from reliable medical device
manufacturers, including a subsidiary of Vital Signs, Inc. ("Vital Signs").
Certain of the directors and principal stockholders of the Company are
directors, officers and stockholders of Vital Signs. If the Company uses a
contract manufacturer, the Company would equip the manufacturer's facility,
with the objective of ultimately transitioning to a neighboring Company-owned
or Company-leased facility. There can be no assurance that the Company will be
able to enter into a contract manufacturing agreement or otherwise secure the
use of suitable facilities in the U.S. on commercially reasonable terms, or at
all. Furthermore, regardless of the alternative selected, the integration of
the Company's existing operations with the U.S. facility may result in
inefficiencies and delays, especially as a result of the technical
requirements necessary to produce products in accordance with the Company's
specifications. There can be no assurance that the Company will not encounter
difficulties in scaling up production, including problems involving production
yield, quality control and assurance, and shortages of qualified personnel. In
addition, the U.S. facility will be subject to GMP regulations, international
quality control standards and other regulatory requirements. Difficulties
encountered by the Company in manufacturing scale-up, or the failure by the
Company to establish and maintain the U.S. facility in accordance with such
regulations, standards or other regulatory requirements, could have a material
adverse effect on the Company's business, financial condition and results of
operations. During 1995 and 1996, the Company experienced occasional periods
of delay in filling product orders due to increases in demand beyond
forecasted levels. The Company is currently upgrading its production machinery
and processes to address this increased demand. No assurance can be given that
the integration of these machines into the production process will occur
within the scheduled time frame or will not result in difficulties in scale-up
that could lead to further delays in filling orders in the future.
Difficulties experienced in integrating such machinery on a timely basis could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Manufacturing" and "-- Facilities"
and "Certain Transactions."
Limited Sources of Supply; Lack of Contractual Arrangements. The raw
materials for the Company's PLLA products are currently available to the
Company from three qualified sources, while the Company's PGA raw materials
are available from two qualified sources. The Company's raw materials have
been utilized in
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products cleared by the FDA and the Company's suppliers maintain Device Master
Files at the FDA that contain basic toxicology and manufacturing information.
The Company does not have long-term supply contracts with any of its
suppliers, although it is currently negotiating a supply agreement with its
principal PLLA supplier. In the event that the Company is unable to obtain
sufficient quantities of raw materials on commercially reasonable terms, or in
a timely manner, the Company would not be able to manufacture its products on
a timely and cost-competitive basis which, in turn, would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, if any of the raw materials for the Company's PGA and
PLLA products are no longer available in the marketplace, the Company would be
forced to further modify its Self-Reinforcing processes to incorporate
alternate raw materials. The incorporation of new raw materials into the
Company's existing products would likely require the Company to seek clearance
or approval from the FDA. There can be no assurance that such development
would be successful or that, if developed by the Company or licensed from
third parties, products containing such alternative materials would receive
regulatory approvals on a timely basis, or at all. See "Business --
Manufacturing" and "-- Government Regulation."
Ability to Maintain Third-Party Reimbursement. In the U.S. and other
markets, health care providers such as hospitals and physicians, that purchase
medical devices, such as the Company's products, generally rely on third-party
payors including Medicare, Medicaid and private health insurance plans, to
reimburse all or part of the cost of the procedures in which the medical
devices are being used. The Company believes that, to date, U.S. health care
providers have been reimbursed in full for the cost of procedures which
utilize the Company's products. However, there can be no assurance that third-
party reimbursement for such procedures will be consistently available for the
Company's products or that such third-party reimbursement will be adequate.
There is significant uncertainty concerning third-party reimbursement for
procedures which utilize any medical device incorporating new technology.
Reimbursement by a third-party payor may depend on a number of factors,
including the payor's determination that the use of the Company's products is
clinically useful and cost-effective, medically necessary and not experimental
or investigational. Since reimbursement approval is required from each payor
individually, seeking such approvals can be a time consuming and costly
process which, in the future, could require the Company to provide supporting
scientific, clinical and cost-effectiveness data for the use of the Company's
products to each payor separately. Federal and state government agencies are
increasingly considering limiting health care expenditures. For example, the
U.S. Congress is currently considering various proposals to significantly
reduce Medicaid and Medicare expenditures. Such proposals, if enacted, could
have a material adverse effect on the Company's business, financial condition
and results of operations. Outside the U.S., the Company relies on
distributors to establish reimbursement from third-party payors in their
respective territories. Health care reimbursement systems vary from country to
country and, accordingly, there can be no assurance that third-party
reimbursement available under any one system will be available for procedures
utilizing the Company's products under any other reimbursement system. Lack of
or inadequate reimbursement by government and other third-party payors for
procedures utilizing the Company's products would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business -- Third-Party Reimbursement."
Possible Future Capital Needs; Uncertainty of Additional Financing. The
Company has experienced negative operating cash flows since its inception. The
Company has expended, and expects to continue to expend in the future,
substantial funds to pursue product development efforts, expand its sales and
marketing activities and expand its manufacturing capabilities. The Company
expects that its existing capital resources, together with the net proceeds of
this Offering, the interest earned thereon and the cash flow from operations,
will be adequate to fund the Company's operations through 1998. However, the
Company's future capital requirements and the adequacy of available funds will
depend on numerous factors, including market acceptance of its existing and
future products, the successful commercialization of products in development,
progress in its product development efforts, the magnitude and scope of such
efforts, progress with preclinical studies, clinical trials and product
clearances by the FDA and other agencies, the cost and timing of its efforts
to expand its manufacturing capabilities, the cost of filing, prosecuting,
defending and enforcing patent claims
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and other intellectual property rights, competing technological and market
developments, and the development of strategic alliances for the marketing of
certain of its products. To the extent that funds generated from the Company's
operations, together with its existing capital resources, the proceeds of this
Offering and the interest earned thereon, are insufficient to meet current or
planned operating requirements, the Company will be required to obtain
additional funds through equity or debt financings, strategic alliances with
corporate partners and others, or through other sources. The terms of any
equity financings may be dilutive to stockholders and the terms of any debt
financings may contain restrictive covenants which limit the Company's ability
to pursue certain courses of action. Principal stockholders of the Company who
previously provided funding to the Company and provided guarantees to sources
of credit have indicated that they do not intend to continue furnishing such
assistance. The Company does not have any committed sources of additional
financing, and there can be no assurance that additional funding, if
necessary, will be available on acceptable terms, if at all. If adequate funds
are not available, the Company may be required to delay, scale-back or
eliminate certain aspects of its operations or attempt to obtain funds through
arrangements with strategic partners or others that may require the Company to
relinquish rights to certain of its technologies, product candidates, products
or potential markets, which could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
Uncertainties Relating to Strategic Partners. The Company anticipates that
it may be necessary to enter into arrangements with corporate partners,
licensees or others, in order to efficiently market, sell and distribute
certain of its products. Such strategic partners may also be called upon to
assist in the support of such products, including support of certain product
development functions. As a result, the success of such products may be
dependent in part upon the efforts of such third parties. The Company has
negotiated one such agreement with Ethicon GmbH, a subsidiary of Johnson &
Johnson, pursuant to which Ethicon GmbH has the right to market and sell in
Europe certain products, based upon the Company's membrane patent, in
dentistry and two other unrelated fields of use. There can be no assurance
that the Company will be able to negotiate additional acceptable arrangements
with strategic partners or that the Company will realize any meaningful
revenues pursuant to such arrangements.
Control by Directors, Executive Officers and Affiliated Entities. The
Company's directors, executive officers and entities affiliated with them
will, in the aggregate, beneficially own approximately 63% of the Company's
outstanding shares of Common Stock following the completion of this Offering
(or approximately 61% if the Underwriters exercise their over-allotment
options in full), assuming that all Warrants are exercised by payment of the
full exercise price. These stockholders, if acting together, would be able to
significantly influence all matters requiring approval by the stockholders of
the Company, including the election of directors and the approval of mergers
or other business combination transactions. See "Certain Transactions" and
"Principal Stockholders."
Potential Anti-Takeover Effects of Delaware Law and the Company's
Certificate of Incorporation and Bylaws. The Company's Board of Directors has
the authority, without further action by the stockholders, to issue from time
to time, up to 8,000,000 shares of Preferred Stock in one or more classes or
series, and to fix the rights and preferences of such Preferred Stock. The
Company's Certificate of Incorporation provides for staggered terms for
members of the Board of Directors and does not permit stockholders to act
without a meeting. The Company is also subject to provisions of Delaware
corporate law which, subject to certain exceptions, will prohibit the Company
from engaging in any "business combination" with a person who, together with
affiliates and associates, owns 15% or more of the Company's Common Stock (an
"Interested Stockholder") for a period of three years following the date that
such person became an Interested Stockholder, unless the business combination
is approved in a prescribed manner. Additionally, the bylaws of the Company
establish an advance notice procedure for stockholder proposals and for
nominating candidates for election as directors. These provisions of Delaware
law and of the Company's Certificate of Incorporation and bylaws may have the
effect of delaying, deterring or preventing a change in control of the
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Company, may discourage bids for the Common Stock at a premium over the
prevailing market price, and may adversely affect the market price, and the
voting and other rights of the holders, of the Common Stock. See "Description
of Capital Stock."
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock (including shares issued upon the exercise of outstanding options and
warrants) in the public market after this Offering or the prospect of such
sales could materially and adversely affect the market price of the Common
Stock and may have a material adverse effect on the Company's ability to raise
any necessary capital to fund its future operations. Upon completion of this
Offering, the Company will have 8,607,513 shares of Common Stock outstanding.
The 2,000,000 shares offered hereby will be freely tradeable without
restrictions or further registration under the Securities Act of 1933, as
amended (the "Securities Act"), except that any shares held by "affiliates" of
the Company within the meaning of the Securities Act will be subject to the
resale limitations of Rule 144 promulgated under the Securities Act ("Rule
144"). The remaining 6,607,513 outstanding shares are "restricted" securities
that may be sold only if registered under the Securities Act, or sold in
accordance with an applicable exemption from registration, such as Rule 144.
Rule 144 imposes a holding period with respect to securities purchased
directly from an issuer. The Securities and Exchange Commission has amended
Rule 144, effective in April 1997, to reduce the holding period for sales
subject to certain resale restrictions from two years to one year and to
reduce the holding period applicable to non-affiliates for non-restricted
sales from three years to two years.
The officers and directors of the Company and other holders of Common Stock
who together hold 6,607,513 shares of Common Stock and options to purchase an
additional 395,431 shares of Common Stock (of which, options to purchase
98,894 shares are currently exercisable), have agreed not to sell, directly or
indirectly, any Common Stock without the prior written consent of UBS
Securities LLC for a period of 180 days from the date of this Prospectus (the
"Lock-up Agreements"). However, UBS Securities LLC may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to such Lock-up Agreements. Approximately 90 days after the completion
of this Offering, the Company intends to file a registration statement on Form
S-8 under the Securities Act to register the future issuance of all shares of
Common Stock reserved for issuance under the Company's Stock Option/Stock
Issuance Plan. As of December 31, 1996, 424,382 shares of Common Stock were
reserved for issuance pursuant to outstanding options and 425,618 shares of
Common Stock were reserved for future issuance under the Company's Stock
Option/Stock Issuance Plan. Such registration statement will automatically
become effective upon filing. Accordingly, shares registered thereunder will,
subject to Rule 144 limitations applicable to affiliates, be available for
sale in the public market, except to the extent that such shares are subject
to vesting restrictions with the Company or certain contractual restrictions
on sale or transfer (including options covering 395,431 shares which are
subject to Lock-up Agreements). After this Offering, the holders of
approximately 1,290,000 shares of Common Stock will be entitled to certain
demand and piggyback rights with respect to the registration of such shares
under the Securities Act. If such holders, by exercising their demand
registration rights, cause a large number of securities to be registered and
sold in the public market, such sales could have an adverse effect on the
market price of the Company's Common Stock. If the Company, either on its own
behalf or on behalf of certain stockholders, were to initiate a registration
and include shares held by such holders pursuant to the exercise of their
piggyback registration rights, such sales could have a material adverse effect
on the Company's ability to raise needed capital. See "Certain Transactions,"
"Shares Eligible for Future Sale," "Description of Capital Stock--Registration
Rights of Certain Holders" and "Underwriting."
No Prior Public Market For Common Stock; Possible Volatility of Stock
Price. Prior to this Offering, there has been no public market for the
Company's Common Stock and there can be no assurance that an active public
market for the Common Stock will develop or be sustained after this Offering
or that the market price of the Common Stock will not decline below the
initial public offering price. The initial public offering price has been
determined by negotiations between the Company and the Underwriters and is not
necessarily indicative of the market price at which the Common Stock of the
Company will trade after this Offering. Among the factors considered in such
negotiations were prevailing market conditions, certain financial
15
<PAGE>
information of the Company, market valuations of other companies that the
Company and the representatives of the Underwriters believe to be comparable
to the Company, estimates of the business potential of the Company, the
present state of the Company's development and other factors deemed relevant.
The stock markets have experienced price and volume fluctuations that have
particularly affected medical technology companies, resulting in changes in
the market prices of the stocks of many companies that may not have been
directly related to the operating performance of those companies. Such broad
market fluctuations may materially and adversely affect the market price of
the Common Stock following this Offering. Factors such as variations in the
Company's results of operations, comments by securities analysts,
underperformance against analysts' estimates, announcements of technological
innovations or new products by the Company or its competitors, changing
government regulations and developments with respect to FDA or foreign
regulatory submissions, patents, proprietary rights or litigation may have a
material adverse effect on the market price of the Common Stock.
Dilution; No Dividends. Purchasers of the Common Stock offered hereby will
suffer immediate and substantial dilution in the net tangible book value per
share from the initial public offering price. The Company has not paid cash
dividends since its inception and does not intend to pay any dividends on its
Common Stock in the foreseeable future. See "Dilution" and "Dividend Policy."
16
<PAGE>
THE COMPANY
Bionx Implants, Inc. (the "Company") was incorporated in Delaware in October
1995 to coordinate the businesses of four related companies controlled by U.S.
and Finnish investors. In September 1996, the Company consummated a
reorganization pursuant to which it acquired all of the capital stock of the
four existing companies and issued in exchange a total of 5,263,160 shares of
its Common Stock (the "Reorganization"). The four existing companies were
Bioscience, Ltd. (which has been engaged in the development of resorbable
polymer products since 1984), Biocon, Ltd. (which holds most of the Company's
patents and patent applications) and two companies organized in the U.S. to
further sales, marketing and development efforts. Of the 5,263,160 shares
issued by the Company in the Reorganization, 2,578,949 shares were issued to
the former U.S. stockholders of the four existing companies and 2,684,211
shares were issued to a Dutch company controlled by such stockholders and
owned by such stockholders and the former Finnish stockholders of Bioscience,
Ltd. and Biocon, Ltd. Unless otherwise indicated, all references herein to the
business of the Company include Bionx Implants, Inc. and the four entities
acquired by Bionx Implants, Inc. in connection with the Reorganization.
The Company's principal executive offices are located at 279B Great Valley
Parkway, Malvern, Pennsylvania 19355. Its telephone number at that address is
(610) 296-0919.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$23,195,000 ($26,822,000 if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $13.00 per
share, after deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by the Company.
The Company estimates that approximately $4-5 million of the net proceeds
will be used to purchase equipment for, and to otherwise establish, a
manufacturing capability in the U.S. and to expand manufacturing capacity in
Finland, approximately $3-4 million will be used to develop maxillo-facial
products and to establish a sales and marketing infrastructure for such
products, approximately $6-8 million will be used for the development of new
resorbable polymers, the development of additional product applications in the
fields of urology and spinal fixation, and related clinical and regulatory
support, and the balance will be used for working capital and other general
corporate purposes, including the repayment of certain long-term debt. The
foregoing represents estimates only; the actual amounts expended by the
Company for these purposes and the timing of such expenditures will depend on
numerous factors, including the status of the Company's development efforts,
actions relating to patent and regulatory matters, the extent to which the
Company's products gain market acceptance and competition. The long-term debt
to be repaid consists of approximately $440,000 in loans from Finnish
financial institutions maturing from 1997 to 2000 at interest rates ranging
from 6% to 13% per annum. The Company may use a portion of the net proceeds to
acquire complementary businesses, products or technologies, although the
Company currently has no agreements and is not involved in any negotiations
with respect to any such transactions. Pending use of the net proceeds of this
Offering, the Company plans to invest the net proceeds in interest-bearing,
investment grade securities. The Company intends to invest in liquid assets in
a manner that will not subject it to regulation under the Investment Company
Act of 1940. Although the Company believes that the net proceeds from this
Offering, together with cash flows from operations and existing cash and cash
equivalents, will be sufficient to maintain its current and planned operations
through 1998, there can be no assurance that the Company will not require
additional financing within two years. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings for funding
growth and, therefore, does not anticipate paying any cash dividends in the
foreseeable future.
17
<PAGE>
CAPITALIZATION
The following table sets forth, at December 31, 1996, (i) the actual
capitalization of the Company, assuming completion of the Reverse Stock Split,
(ii) the pro forma capitalization of the Company, giving effect to the
Preferred Stock Conversion and the Warrant Exercise upon the closing of this
Offering, and (iii) the pro forma capitalization of the Company as adjusted to
reflect the receipt of the estimated net proceeds from the sale of 2,000,000
shares of Common Stock in this Offering at an assumed initial public offering
price of $13.00 per share, after deducting the estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company. This table should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(2)
------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt less current portion....... $ 590 $ 590 $ 590
Mandatorily redeemable convertible
preferred stock.......................... 5,000 -- --
Stockholders' equity:
Preferred Stock: $.001 par value;
8,000,000 shares authorized, no shares
issued and outstanding on an actual,
pro forma or pro forma as adjusted
basis.................................. -- -- --
Common Stock: $.0019 par value;
31,600,000 shares authorized; 5,318,424
shares issued and outstanding on an
actual basis;
6,607,513 shares issued and outstanding
on a pro forma basis;
8,607,513 shares issued and outstanding
on a pro forma as
adjusted basis(1)...................... 10 13 16
Additional paid-in capital................ 1,859 6,856 30,048
Accumulated deficit....................... (4,663) (4,663) (4,663)
Foreign currency translation adjustment... (269) (269) (269)
------- ------- -------
Total common stockholders' equity
(deficit)............................. (3,063) 1,937 25,132
------- ------- -------
Total capitalization................... $ 2,527 $ 2,527 $25,722
======= ======= =======
</TABLE>
- --------
(1) Excludes 424,382 shares of Common Stock reserved for issuance pursuant to
stock options outstanding as of December 31, 1996 at a weighted average
exercise price of $3.23 per share. Also excludes an additional 425,618
shares of Common Stock reserved for future grant under the Company's Stock
Option/Stock Issuance Plan as of December 31, 1996. See "Management --
Stock Option/Stock Issuance Plan," "Description of Capital Stock" and
Note 11 of Notes to Consolidated Financial Statements.
(2) Prior to this Offering, the Company had outstanding 2,000,000 shares of
Preferred Stock and warrants entitling the holders to purchase a total of
421,065 shares of Common Stock at an exercise price of $5.70 per share
(the "Warrants"). Concurrently with the closing of this Offering, all of
the outstanding shares of Preferred Stock will be converted into 1,052,638
shares of Common Stock after giving effect to the Reverse Stock Split. The
Company has the right, and intends, to call the Warrants upon the closing
of this Offering. See "Description of Capital Stock -- Warrants."
18
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock as of December 31,
1996 was $1,936,708, or $0.29 per share. The net tangible book value per share
of Common Stock represents the amount of the Company's tangible assets less
total liabilities, divided by the 6,607,513 shares of Common Stock outstanding
(after giving effect to the Preferred Stock Conversion and the Warrant
Exercise). Net tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in this Offering and the pro forma net tangible book value per share of
Common Stock immediately after completion of this Offering. After giving
effect to the Preferred Stock Conversion, the Warrant Exercise and the sale by
the Company of the 2,000,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $13.00 per share (after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses payable by the Company), the pro forma net tangible book value of the
Company as of December 31, 1996 would have been $25,131,708, or $2.92 per
share. This represents an immediate increase in net tangible book value of
$2.63 per share to existing stockholders and an immediate dilution in net
tangible book value of $10.08 per share to new investors of Common Stock in
this Offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $13.00
------
Net tangible book value per share before the Offering......... $0.29
Increase per share attributable to new investors.............. 2.63
-----
Pro forma net tangible book value per share after the Offer-
ing.......................................................... 2.92
------
Dilution per share to new investors........................... $10.08
======
</TABLE>
The following table sets forth, on a pro forma basis as of December 31,
1996, the difference between the number of shares of Common Stock purchased
from the Company, the total consideration paid and the average price per share
paid by the existing holders of Common Stock and by the new investors, after
giving effect to the Warrant Exercise and Preferred Stock Conversion and
before deducting the estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company, at an assumed initial
public offering price of $13.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 6,607,513 76.8 $ 7,064,080 21.4 $ 1.07
New investors................ 2,000,000 23.2 26,000,000 78.6 13.00
--------- ----- ----------- -----
Total...................... 8,607,513 100.0% $33,064,080 100.0%
========= ===== =========== =====
</TABLE>
The foregoing tables (i) assume the conversion of all Preferred Stock into
Common Stock and the cashless exercise of all 421,065 Warrants upon the
closing of this Offering, (ii) assume no exercise of the Underwriters' over-
allotment option, (iii) exclude 424,382 shares of Common Stock reserved for
issuance pursuant to stock options outstanding as of December 31, 1996, and
(iv) exclude an additional 425,618 shares of Common Stock reserved for future
grant under the Company's Stock Option/Stock Issuance Plan as of December 31,
1996. See "Management -- Stock Option/Stock Issuance Plan," "Description of
Capital Stock" and Note 11 of Notes to Consolidated Financial Statements.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following consolidated selected financial data is qualified in its
entirety by, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and the related Notes thereto included
elsewhere in this Prospectus. The Consolidated Statement of Operations data
for the years ended December 31, 1994, 1995 and 1996 and the Company's
Consolidated Balance Sheet data at December 31, 1995 and 1996 are derived from
audited Consolidated Financial Statements of the Company included elsewhere in
this Prospectus. The Consolidated Statement of Operations data with respect to
the years ended December 31, 1992 and 1993 and the Consolidated Balance Sheet
data at December 31, 1992, 1993 and 1994 are derived from unaudited
consolidated financial statements not included in this Prospectus. Such
unaudited consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the Company's financial position and the results of its
operations for those years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERA-
TIONS DATA:
Product sales................... $ 1,522 $ 1,177 $ 1,265 $ 1,355 $ 5,034
Gross profit.................... 951 831 788 817 2,929
Operating expenses.............. 1,668 1,135 883 2,439 4,905
Operating loss.................. (717) (304) (95) (1,622) (1,976)
Other income and expense, net... 66 85 (67) 144 215
Net loss........................ (651) (219) (162) (1,478) (1,969)
Pro forma net loss per
share(1)....................... (0.31)
Shares used in computing pro
forma net loss per share(1).... 6,370
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------- ------- ---------------------
ACTUAL PRO FORMA(2)
------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Working capital
(deficit).............. $ (364) $ (224) $ (164) $ (576) $ 2,046 $ 2,046
Total assets............ 2,855 2,551 2,029 1,794 5,284 5,284
Long-term debt less
current portion........ 763 890 301 896 590 590
Mandatorily redeemable
convertible preferred
stock.................. -- -- -- -- 5,000 --
Accumulated deficit..... (819) (956) (1,215) (2,693) (4,663) (4,663)
Total stockholders'
equity (deficit)....... 606 333 1,159 (1,036) (3,063) 1,937
</TABLE>
- --------
(1) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net loss per share.
(2) Gives effect to the Preferred Stock Conversion and the Warrant Exercise.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto presented elsewhere herein.
The discussion in this Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include, without
limitation, those discussed in the sections entitled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as those discussed elsewhere in this
Prospectus.
OVERVIEW
The Company was founded in 1984 to develop certain resorbable polymers for
orthopaedic uses. The Company has incurred substantial operating losses since
its inception and, at December 31, 1996, had an accumulated deficit of
approximately $4.7 million. Such losses have resulted principally from
expenses associated with the development and patenting of the Company's Self-
Reinforcing technologies and resorbable implant designs, preclinical and
clinical studies, preparation of submissions to the FDA and foreign regulatory
agencies, the development of sales, marketing and distribution channels and
the development of its manufacturing capabilities. Although the Company's
revenues grew significantly in 1996, no assurance can be given that this trend
will continue or that revenues of any magnitude will exceed expenses incurred
in anticipation of future growth. Accordingly, the Company may incur
significant operating losses in the future as it continues its product
development efforts, expands its marketing, sales and distribution activities
and scales up its manufacturing capabilities. There can be no assurance that
the Company will be able to successfully commercialize its products or that
profitability will be achieved.
The Company first introduced its PGA pins in 1984 and its PGA screws in
1986. In 1987, the Company introduced its first PLLA products, PLLA pins. PLLA
screws were introduced in 1989. Since the introduction of these products, the
Company has expanded its PGA and PLLA pin and screw product lines to address
additional clinical indications. The Company's PGA membrane product was
introduced in 1992, and, in 1995, the Company launched its Meniscus Arrow,
PLLA tacks, and PGA and PLLA urology stents. Prior to 1996, the Company
derived substantially all of its revenue from sales of its PLLA and PGA screws
and pins. A substantial portion of the Company's revenues and revenue growth
in the second half of 1996 resulted from sales of the Meniscus Arrow, which
received FDA clearance in March 1996. To date, all products sold by the
Company have been launched first in international markets. During 1994, 1995
and 1996, international product sales represented 65%, 65% and 32%,
respectively, of the Company's total product sales.
The Company typically sells implant grade, stainless steel surgical
instruments for use with each of its Self-Reinforced, resorbable products. The
margins for these instruments are typically lower than the margins applicable
to the Company's implant products. However, since orthopaedic companies have
traditionally loaned rather than sold instruments to their customers, the
Company anticipates that in the future, it will be necessary for the Company
to provide an increasing proportion of its instrumentation in the U.S. on a
loan basis. Similar practices are not common in international markets. For
financial statement purposes, revenues from the sale of instrumentation
systems are included within product sales and costs associated with the
Company's procurement of such systems are included within cost of goods sold.
The Company's instrumentation systems are reusable. Accordingly, sales and
loans of such systems are likely to be most pronounced in periods shortly
after product launches and likely to be less prevalent as penetration of the
market increases over the long term. Thus, the negative impact on the
Company's gross profit margins associated with sales and loans of a particular
instrument system is expected to decrease after a substantial market
penetration has been achieved. Similarly, such impact is likely to lessen to
the extent that sales and loans of instrument systems decrease as a percentage
of total product sales. However, no assurance can be given as to the extent to
which instrumentation sales will depress the Company's gross profit margins in
the future.
21
<PAGE>
The Company sells its products through managed networks of independent sales
agents, distributors and dealers. In the U.S., the Company handles all
shipping and invoicing functions directly and pays commissions to its sales
agents. Outside the U.S., the Company sells its products directly to
distributors and dealers at discounts that vary by product and by market.
Accordingly, the Company's U.S. sales result in higher gross margins than
international sales. The Company anticipates that during the next few years,
the relative percentage of its U.S. product sales to total product sales is
likely to continue to increase. Since the Company pays commissions on sales
made through its U.S. network, an increased percentage of U.S. sales in the
future will likely result in an increase in the percentage of selling, general
and administrative expenses to total sales. This increase will be partially
offset by the higher gross margins received on products sold in the U.S.
Outside of the orthopaedic market, the Company may seek to establish
licensing or distribution agreements with strategic partners to develop
certain products and to market and distribute products that the Company elects
not to distribute through its managed networks of independent sales agents,
distributors and dealers. The Company has licensed its membrane patent for use
in dental and two other applications in Europe to Ethicon GmbH, a subsidiary
of Johnson & Johnson. During 1995 and 1996, Ethicon GmbH paid the Company
approximately $200,000 and $201,000, respectively, in licensing fees. Ethicon
GmbH has agreed to pay royalties to the Company upon the initiation of
commercial sales of its membrane products, which are targeted for commercial
release in the second quarter of 1997. No assurance can be given that the
Company will be able to enter into other license arrangements on satisfactory
terms.
The Company has entered into agreements pursuant to which the Company is
obligated to pay royalties based on net sales of certain of the Company's
products, including the Meniscus Arrow. To the extent that sales of the
Meniscus Arrow products and other licensed products increase in future
periods, the Company's license obligations are expected to increase.
The Company has benefited from the research and development activities of
Dr. Pertti Tormala, the founder of the Company, at the Technical University in
Tampere, Finland. Dr. Tormala is currently an Academy Professor at the
Technical University and is permitted by the University to devote his efforts
to developing products for the Company. Dr. Tormala utilizes a group of senior
researchers, graduate students and faculty at the Technical University to
perform research and development projects involving resorbable polymers and
other topics relating to the Company's technology and manufacturing processes.
This arrangement, permitted in Finland as a means of encouraging the
commercialization of technological development, has resulted in substantial
cost savings to the Company while greatly expanding its product development
efforts. Any failure by the Company to obtain the continued services of Dr.
Tormala, or any requirement that the Company fund research at a substantially
increased level, could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has hired
certain senior researchers from the University program and anticipates that,
in the future, more of its product development work will be performed and
funded directly by the Company, thereby increasing the Company's research and
development expenses.
The Company currently manufactures its implant products solely at its
Tampere, Finland plant. The Company intends to use a portion of the proceeds
of this Offering to establish a manufacturing capability in the U.S. The
Company plans to establish this capability either by equipping and operating a
leased facility or contracting with a third party to provide a manufacturing
capability to the Company. The Company believes that on an interim basis,
contract manufacturing may enable the Company to save certain staffing costs
and enable senior management to focus on other aspects of its business.
However, if the Company arranges for a third party to provide contract
manufacturing in the U.S., fees payable to such manufacturer may exceed any
savings in staffing costs and result in higher costs of goods sold and lower
gross profit. Ultimately, in operating a U.S. facility, the Company will incur
certain duplicative manufacturing costs which could result in higher costs of
goods sold and lower gross profit margins.
22
<PAGE>
While the Company's operating losses have resulted in net operating loss
carryforwards of approximately $2.1 million for income tax reporting purposes,
the extent to which such carryforwards are available to offset future U.S. and
Finnish taxable income is significantly limited as a result of various
ownership changes that have occurred in recent years. Additionally, because
U.S. tax laws limit the time during which these carryforwards may be applied
against future taxes, the Company may not be able to take full advantage of
the U.S. portion of these carryforwards for federal income tax purposes.
Furthermore, income earned by a foreign subsidiary may not be offset against
operating losses of Bionx Implants, Inc. or its U.S. subsidiaries. As a
result, the Company may incur tax obligations (as it has incurred during 1996)
during periods when it reflects a consolidated net operating loss. The
statutory tax rates applicable to the Company and its foreign subsidiaries
vary substantially, presently ranging from approximately 40% in the U.S. to
28% in Finland. Tax rates have fluctuated in the past and may do so in the
future. See Note 12 of Notes to Consolidated Financial Statements.
The Company's results of operations have fluctuated in the past on an annual
and quarterly basis and may fluctuate significantly from period to period in
the future, depending on many factors, many of which are outside of the
Company's control. Such factors include the timing of government approvals,
the medical community's acceptance of the Company's products, the success of
competitive products, the ability of the Company to enter into strategic
alliances with corporate partners, expenses associated with patent matters,
and the timing of expenses related to product launches.
RESULTS OF OPERATIONS
Product sales. The Company's product sales increased by 7.1% from $1.3
million in 1994 to $1.4 million in 1995 and by 271.6% to $5.0 million in 1996.
The increase in 1995 reflected the commencement of sales through the Company's
managed network of independent sales agents in the U.S. and volume increases
in certain orthopaedic product lines. The substantial increase in product
sales during 1996 primarily resulted from the U.S. introduction of the
Company's Meniscus Arrow products in the second quarter of 1996. In addition,
the 1996 sales increase reflects increased utilization of the Company's
managed network of independent sales agents in the U.S., increased sales of
the Company's existing products in international markets and increased
instrumentation sales. Revenues generated from the sale of instrumentation
sets and related loaner fees represented 8%, 15% and 20% of total sales in
1994, 1995 and 1996, respectively, increasing from approximately $100,000 in
1994 and $200,000 in 1995 to approximately $1.0 million in 1996. The 1996
increase is attributable primarily to the U.S. introduction of the Meniscus
Arrow during the second quarter of 1996.
Gross profit; gross profit margins. The Company's gross profit increased by
3.6% from $788,000 in 1994 to $817,000 in 1995 and by 258.6% to $2.9 million
in 1996. The substantial increase in the Company's gross profit during 1996
primarily reflected the increased sales of Meniscus Arrow products after their
introduction in the U.S. in the second quarter of 1996. Overall, the Company's
gross profit margin declined from 62.3% in 1994 to 60.3% in 1995 and to 58.2%
in 1996. Substantially all of this decline is attributable to the inclusion
within products sales and cost of goods sold of revenues and expenses
associated with instrumentation. The Company's gross profit margin applicable
to implant sales, representing implant revenues less related raw materials,
direct labor and overhead and associated variable expenses, increased from
65.1% in 1994 to 66.1% in 1995 and to 66.7% in 1996. The improvement in this
portion of the Company's gross profit margin in 1995 was attributable in large
part to a change in the Company's product mix from primarily PGA products to
primarily PLLA products. In general, the costs associated with manufacturing
PLLA products are substantially less than comparable costs for PGA products.
The improvement in this portion of the Company's gross profit margin in 1996
resulted primarily from increased sales of higher margin Meniscus Arrow
products, increased sales of higher margin PLLA products and the leveraging of
certain fixed manufacturing costs over the Company's expanded revenue base.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 212.2% from $693,000 in 1994 to $2.2
million in 1995 and by 105.4% to $4.4 million in 1996. Such expenses
23
<PAGE>
were 54.8% of product sales in 1994, 159.8% of product sales in 1995 and 88.3%
of product sales in 1996. Selling, general and administrative expenses consist
primarily of commissions paid on product sales in the U.S., patent and license
related expenses, costs incurred in connection with the regulatory process and
expenses associated with supporting the Company's managed networks of
independent sales agents, distributors and dealers. The increases in the
dollar amount of selling, general and administrative expenses during these
periods were primarily attributable to increased commission payment
obligations reflecting the Company's increased product sales in the U.S. and
increased expenses associated with establishing and supporting a managed
network of independent sales agents in the U.S. The substantial increase in
the percentage relationship of such expenses to product sales in 1995 reflects
the investment made by the Company in 1995 in establishing and supporting its
U.S. managed network of independent sales agents. Such expenses were incurred
in anticipation of the product sales growth which the Company experienced in
1996.
Research and development. Research and development expenses increased by
44.7% from $190,000 in 1994 to $274,000 in 1995 and by 67.6% to $460,000 in
1996. These increases reflected an increased volume of product development
work being performed by the Company and increased staffing levels.
Other income and expense. Other income and expense consists of licensing
fees from third parties, grant revenues from Finnish government agencies,
interest expense and other miscellaneous income and expense items. Interest
expense has remained relatively constant over the past three years. License
and grant revenues were negligible in 1994, increased to $267,000 in 1995 and
increased by 29.3% to $345,000 in 1996. Royalty payments based upon actual
sales are expected to commence in the second quarter of 1997, although no
assurances can be given with respect to the timing or amount of such payments.
Upon the commencement of such sales by Ethicon GmbH, the Company will be
required to cease its dental membrane sales in Europe.
Income taxes. Due to operating losses in Finland and in the U.S., the
Company did not incur any tax obligations during 1994 or 1995. In 1996, one of
the Company's Finnish subsidiaries recorded a profit, which resulted in a
Finnish tax liability of $208,000.
QUARTERLY PRODUCT SALES
The following table presents unaudited product sales information for the
last eight quarters through December 31, 1996. In the opinion of management,
this information has been prepared on the same basis as the product sales data
included in the Consolidated Financial Statements appearing elsewhere in this
Prospectus. Product sales for any period are not necessarily indicative of
product sales to be expected for any future period.
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1995:
Quarter ended March 31........... $ 225
Quarter ended June 30............ 378
Quarter ended September 30....... 335
Quarter ended December 31........ 417
1996:
Quarter ended March 31........... 716
Quarter ended June 30............ 750
Quarter ended September 30....... 1,160
Quarter ended December 31........ 2,408
</TABLE>
The quarterly increases in product sales principally reflect the continuing
development of the Company's managed network of independent sales agents in
the U.S., the introduction in the U.S. of the Company's PLLA screw products
during the fourth quarter of 1995 and the U.S. introduction of the Meniscus
Arrow products during the second quarter of 1996. The increase in product
sales from the first quarter of 1995 to the second quarter of 1995 also
reflects the commencement of sales in the U.S. through the Company's managed
network of independent sales agents during the second quarter. Minimal sales
of the Company's products were made in the U.S. during the first quarter of
1995 while the Company was establishing its U.S.
24
<PAGE>
managed network of independent sales agents. The Company anticipates that in
future periods, third quarter revenues may be adversely impacted due to
relatively lower European sales activity during the summer months.
Revenue trends will depend upon many factors, including demand and market
acceptance for the Company's existing and future products, the timing of
regulatory approvals, the timing and results of clinical trials, the timing of
the introduction of new products by the Company and by competing companies,
the ability of the Company to enter into strategic alliances with corporate
partners and the Company's ability to attract and retain highly qualified
technical, sales and marketing personnel. Accordingly, there can be no
assurance that future revenues will not vary significantly from quarter to
quarter.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has relied upon bank loans (guaranteed in certain
instances by the Company's principal stockholders), capital contributions by
its principal stockholders and government grants to fund its operations. In
September 1996, the Company completed a private placement of preferred stock
and warrants in which it received net proceeds of approximately $4.9 million.
These net proceeds were used to repay bank debt, to pay down trade debt, to
fund manufacturing and product development efforts and for other working
capital purposes.
The Company's cash and cash equivalents increased by $1.5 million from
December 31, 1995 to December 31, 1996 as a result of the Company's September
1996 private placement. The infusion of cash from that transaction was offset
in part by the Company's net loss for the year, a $1.3 million increase in
accounts receivable and a $299,000 increase in inventory.
As of December 31, 1996, the Company had working capital of $2.0 million. At
that date, the Company had outstanding approximately $800,000 of long-term
debt (including the current portion of such indebtedness); the Company expects
to repay a portion of such long-term debt out of the proceeds of this
Offering.
The Company believes that existing capital resources from its September 1996
private placement, cash flow from operations and the anticipated net proceeds
from this Offering will be sufficient to fund its operations through 1998.
However, the Company's future capital requirements and the adequacy of
available funds will depend on numerous factors, including market acceptance
of its existing and future products, the successful commercialization of
products in development, progress in its product development efforts, the
magnitude and scope of such efforts, progress with preclinical studies,
clinical trials and product clearances by the FDA and other agencies, the cost
and timing of its efforts to expand its manufacturing capabilities, the cost
of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
and the development of strategic alliances for the marketing of certain of its
products. To the extent that funds generated from the Company's operations,
together with its existing capital resources, the proceeds of this Offering
and the interest earned thereon, are insufficient to meet current or planned
operating requirements, the Company will be required to obtain additional
funds through equity or debt financings, strategic alliances with corporate
partners and others, or through other sources. The terms of any equity
financings may be dilutive to stockholders and the terms of any debt
financings may contain restrictive covenants which limit the Company's ability
to pursue certain courses of action. Principal stockholders of the Company who
previously provided funding to the Company and provided guarantees to sources
of credit have indicated that they do not intend to continue furnishing such
assistance. The Company does not have any committed sources of additional
financing, and there can be no assurance that additional funding, if
necessary, will be available on acceptable terms, if at all. If adequate funds
are not available, the Company may be required to delay, scale-back or
eliminate certain aspects of its operations or attempt to obtain funds through
arrangements with strategic partners or others that may require the Company to
relinquish rights to certain of its technologies, product candidates, products
or potential markets. If adequate funds are not available, the Company's
business, financial condition and results of operations could be materially
and adversely affected.
25
<PAGE>
BUSINESS
OVERVIEW
Bionx Implants, Inc. (the "Company") is a leading developer, manufacturer
and marketer of Self-Reinforced, resorbable polymer implants, including
screws, pins, arrows and stents, for use in a variety of applications which
include orthopaedic surgery, urology, dentistry and maxillo-facial surgery.
The Company's proprietary manufacturing processes self-reinforce a resorbable
polymer, modifying the gel-like or brittle polymer structure into a
physiologically strong structure with controlled, variable strength retention
(ranging from three weeks to six months depending upon the medical
indication). The Company currently markets its products through managed
networks of independent sales agents in the U.S. and independent distributors
and dealers in markets outside of the U.S. The Company's nine product lines,
representing more than 100 distinct products, were designed to address
recognized clinical needs. The Company estimates that its products have been
used in over 150,000 surgeries. The Company has received 510(k) clearance from
the FDA for the six product lines that it currently markets in the U.S. The
Company has also received regulatory approvals for its product lines in
certain European and Asian markets.
BACKGROUND
The human skeletal system is comprised of bone, connective tissue (ligaments
and tendons) and cartilage. Bone, which provides the basic support for the
body, may sustain damage by traumatic incident, degenerative disease or
surgical procedures designed to repair or correct skeletal abnormalities
(osteotomy). As a result of the high vascularity of bone, the healing of bone
requires only that the fractured sections be in close proximity to each other.
Bone heals through a process that involves structural stress, either through
load-bearing or use, resulting in the replacement of old, damaged bone with
new healthy tissue. Healing of bone in healthy individuals generally requires
three to 20 weeks, with the fastest healing occurring in children.
Connective tissue, which attaches bones and/or attaches bone to muscle, can
either be torn or forcibly pulled from its point of attachment to bone or
muscle as a result of either trauma or surgical procedures. Ligaments and, to
a lesser degree, tendons are vascular structures that have the capacity to
heal and recreate their healthy structure. A critical factor in the proper
healing of connective tissue is its reconnection or reattachment at the
anatomically correct position to assure the return of functionality to the
connection between bones and/or between bone and muscle. Connective tissue
heals by creating a scar at the point of injury and then gradually replacing
the scar tissue with healthy connective tissue. The more vascular the tissue
involved, the faster the healing process. The healing of connective tissue
generally occurs over a six to 24 week period that requires rest and
immobilization of the tissue.
Cartilage and cartilage-like (cartilaginous) soft tissue, such as the
meniscus of the knee, provide cushion and articulating surfaces upon which
bones impact during normal activity. These tissues can be damaged through
either traumatic injury, long-term physical stress and/or degenerative
disease. Since cartilaginous tissue is less vascular than either bone or
connective tissue, or is avascular, the healing process in this tissue
requires an extremely long time (and may never occur). Unlike bone and
connective tissue, damaged cartilaginous tissue must be surgically assisted in
the healing process. While damaged articulating cartilage has the potential to
partially heal itself by generating replacement tissue, this process can leave
a permanent defect or rupture in the cartilage since the substitute tissue
does not possess the same functional properties as the pre-injury tissue.
Injuries involving skeletal tissue will heal more rapidly when supplemented
by physical manipulation and anatomical realignment. When attempting to repair
skeletal tissue, orthopaedic surgeons perform surgical procedures to recreate
anatomically correct positions and to maintain these positions. The techniques
and tools used by surgeons differ according to the skeletal tissue involved
and the location in the body. However, the objective in each instance is
identical: to reposition the tissue in its correct anatomical position and
provide fixation systems to maintain that position during healing.
TRADITIONAL APPROACHES TO FIXATION
To achieve proper skeletal tissue healing, orthopaedic surgeons either (i)
use implantable devices, including screws, pins, tacks, plates and nails, to
perform various internal fixation and repair techniques and/or (ii) apply
external fixators and immobilization systems, such as casts. These techniques
are designed
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<PAGE>
to ensure appropriate reduction (close approximation of the separated tissues)
and compression (pressure applied to the reduced tissues to assure maintenance
of the reduction) during the healing process.
Rigid Internal Fixation
Rigid internal fixation (fracture fixation) procedures are performed to
repair bone fractures. These procedures, performed either through an open
incision or through percutaneous, minimally invasive techniques, are designed
to produce correct realignment of bones, to create appropriate reduction and
to fix bones in the anatomically correct position to maximize the potential
for healing. Since the 1950's, rigid internal fixation techniques involving
the internal placement of metal implants have been the standard of care for
fracture management and have resulted in improved healing of fractures. Rigid
internal fixation is intended as a temporary measure to allow for the
initiation of the healing process by creating appropriate reduction. In
practice, most metal implants utilized in rigid internal fixation are not
removed and become a substitute for the strength and functionality of bone.
Such strength and functionality would return to the bone if the fixation
device were removed. Annually, approximately 735,000 rigid internal fixation
procedures are performed in the U.S.
Connective Tissue Fixation
Connective tissue fixation may involve the reattachment of ligaments or
tendons that have been torn at the point of attachment. Alternatively,
ligaments or tendons may tear at a point other than the point of attachment,
requiring reconnection to return functionality. Connective tissue fixation
techniques are performed either through open incisions or through minimally
invasive techniques, and involve the use of tacks, screws, nails or sutures to
effect the anatomical reattachment as close to the original point of
attachment as possible. The same repair options are available to the surgeon
when ligaments are torn in areas other than at their point of attachment. In
both fracture fixation and connective tissue repair, the affected joint or
limb is immobilized for a period of time to promote healing. While connective
tissue fixation techniques have resulted in adequate repairs, metal fixation
devices or suture systems can cause long-term problems and complications,
including local pain and limited joint functionality, since the attachment
site will not heal completely while the device remains in place. Annually,
approximately 360,000 soft tissue fixation procedures are performed in the
U.S.
Cartilage and Cartilaginous Tissue Repair
Repairs to cartilagenous tissue typically involve removal of the torn tissue
or difficult and demanding surgical techniques. Removal of tissue can have
long-term consequences for the patient and may lead to subsequent surgeries.
Since cartilage has minimal vascularity, or is avascular, the healing of
injuries to these tissues must be surgically assisted through complex
arthroscopic or open surgical techniques. For example, suturing torn menisci
is one of the most technically demanding skills in arthroscopic surgery and
may result in surgical complications, including damage to the vascular and
neural system. Annually, approximately 940,000 cartilage repairs and
replacements are performed in the U.S.
LIMITATIONS OF TRADITIONAL APPROACHES
Metal Implants
For more than 30 years, stainless steel, titanium and metal alloy screws,
tacks, pins and plates have been recognized as the standard of care for the
fixation of bone and connective tissue as a result of the implants' strength
and their relatively low reactivity rates. The use of metal implants as the
standard of care has been reinforced through the application of Association
for the Study of Internal Fixation ("ASIF") techniques and the training
received by most orthopaedic surgeons. As a result, the Company believes that
metal fixation devices are currently used in the vast majority of the repairs
of skeletal tissue requiring internal fixation.
Despite the nearly universal acceptance of metal fixation devices, the
medical community has recognized several important limitations associated with
these products. Most importantly, bone repaired with and supported by metal
devices relies upon the implant to perform the load-bearing functions
previously
27
<PAGE>
performed by bone. Physicians refer to this as stress shielding of the healing
bone. Since bones grow and repair in response to stress, bones which are not
called upon to perform their natural load-bearing functions tend to weaken in
the fractured areas. For example, in a study of 17 patients with ankle
fractures fixed with metal screws, bone mineral density decreased on average
by 18.6% as compared to the non-operated ankle. Although it is recommended
that metal implants be removed to deter stress shielding, frequently they are
not removed. Furthermore, motion at the fracture site can cause metal implants
to loosen and to create hollow areas in cancellous (spongy) bone. Connective
tissue fixation techniques using metal implants can cause long-term problems,
including local pain and loss of functionality due to abrasion of the
surrounding tissue by the metal implant. In addition, some patients experience
allergic reactions to certain metal fixation devices which remain implanted
for extended periods of time.
First Generation Resorbable Implants
Resorbable fixation devices were developed in response to the limitations of
metal fixation devices. The first generation of these devices was introduced
in Europe in the mid-1980s and in the U.S. in the late 1980s. The majority of
these devices are either brittle or overly flexible as a result of the
processes, such as injection molding, which are used in their manufacture. The
low strength of these implants has led designers to create overly large
implants with extremely high molecular weights, which, in certain instances,
may have caused local inflammation and irritation at the implant site. In
addition, due to their large size, these implant configurations could be
applied in only certain anatomical areas, which may limit their clinical
utility. For screw-shaped implants, the application of torque to effect a
successful implantation often results in the breaking of the implant and the
release of relatively large particles into joints or soft tissues. Implants
that do not have a discernible strength are limited in their application
because surgeons are familiar with metal implants and demand similar strength
from resorbable implants. Surgeons have reported that certain of the first
generation resorbable implants resorb too quickly and do not provide fixation
for the period required for proper bone or tissue healing. The combination of
these factors has led most surgeons to reject the first generation of
resorbable implants, leaving metal implants as the standard of care.
SELF-REINFORCED, RESORBABLE IMPLANTS
The Company has developed nine proprietary resorbable polymer fixation
implant product lines, including screws, pins, tacks, arrows, membranes and
urology stents, which provide an alternative to metal implants and overcome
the limitations of first generation resorbable fixation devices. By modifying
well-characterized resorbable polymers (e.g., PLLA and PGA) through the use of
several proprietary manufacturing and processing techniques, the Company is
able to create Self-Reinforced, resorbable implants. The Company's Self-
Reinforcing technologies modify a resorbable polymer's properties from a gel-
like or brittle structure into a physiologically strong polymer implant with
controlled, variable strength retention (ranging from three weeks to six
months, depending upon the medical indication) which can be used safely and
reliably in a variety of applications, including orthopaedic surgery, urology,
dentistry and maxillo-facial surgery.
The Company's Self-Reinforcing technology also imparts to the processed
polymer a number of critical characteristics which enhance the
manufacturability of the implants and broaden the clinical applications for
these devices. For example, the polymers can be machined (e.g. lathed, heat-
treated and forged) and modified using custom metal forming techniques. As a
result, the Company has designed and developed a variety of resorbable implant
devices, including pins, screws and other profiled (nonsmooth-surfaced)
implants of clinically appropriate sizes that incorporate machined features,
such as ridges and barbs, for improved fixation.
The resorption of PLLA and PGA occurs in a predictable three step process.
The first two steps are initiated by hydrolysis, which breaks down the polymer
molecules into smaller chains, resulting in an initial reduction in molecular
weight and a slight swelling of the implant, causing it to lock in place. The
third step involves degradation. Unlike first generation unreinforced
resorbable polymers which degraded rapidly into large particles (greater than
1mm) in an uncontrolled process, the Company's Self-Reinforced, resorbable
polymers degrade in a slow controlled fashion into small particles. Only when
the Self-Reinforced, resorbable implant has degraded into small particles will
they be released into the surrounding tissue for final
28
<PAGE>
degradation through cellular absorption. The slow and controlled degradation
of Self-Reinforced, resorbable polymer implants causes the gradual transfer
(ranging from three weeks to six months depending upon the medical indication)
of the weight-bearing load from the implant to the bone.
The Company believes that the principal advantages of its Self-Reinforced,
resorbable implants include:
. Improved Bone Healing. The controlled degradation of the Company's Self-
Reinforced, resorbable implants in bone results in a gradual transfer of
the weight-bearing load from the fixation device to the bone, eliminating
stress shielding. In a trial involving 39 patients with ankle fractures,
bone mineral density decreased on average by 6.4% in those patients in
which the Company's PLLA screws were used, as compared to an 18.6%
average decrease for those patients receiving metal screws. As a result,
the Company believes that its implants promote more effective bone
healing than metal implants.
. Improved Soft Tissue Healing. Fractures and soft tissue injuries that
involve the articulating surfaces of joints have been difficult to
address with metal implants due to the potential for erosion of these
delicate surfaces. In a clinical study of 34 patients who received the
Company's Meniscus Arrow, no such erosion occurred.
. Lower Implant Failure Rate. Competitors' first generation unreinforced,
resorbable implants have a reported failure rate of 7-10% on insertion.
The Company believes, based on clinical experience with its self-
reinforced, resorbable implants and feedback from the medical community,
that the Company's implants have a significantly lower rate of failure.
. Reduced Need for Repeat Surgery. The Company's implants are absorbed by
the body over a controlled period of time, which is based on their
indicated use. This controlled resorption allows the patient to avoid the
cost, trauma and inconvenience of follow-up surgery to remove the
implant. These advantages may be especially beneficial in the treatment
of ankle fractures, which typically involves the removal of the metal
implant. The potential for re-fracture of the site upon removal, which
exists whenever metal implants are removed, is also eliminated.
The Company's use of well known and well characterized polymers has, to
date, allowed for clearance of the Company's orthopaedic products through
510(k) submissions. The FDA is familiar with the toxicological properties of
these polymers, and has not required extensive preclinical or clinical tests
prior to granting marketing clearance. In certain recent cases, clearances
have been obtained within 90 days after submission.
BUSINESS STRATEGY
The Company's goal is to leverage its Self-Reinforcing technology as a
platform for the development and sale of resorbable polymer implants across a
wide range of medical/surgical applications. The key elements of the Company's
business strategy include:
. Develop Proprietary Products by Leveraging the Company's Platform
Technology. The Company intends to leverage its core technology as a
platform for developing new Self-Reinforced, resorbable implants which
allow surgeons to effectively treat specific medical needs where current
treatment modalities are not optimal. For example, the Company has
developed its Meniscus Arrow for use in the repair of tears of the medial
and lateral meniscus and has developed resorbable, self-expanding stents
for use in the urinary tract and for prostate related disease, two
indications in which current therapies have clinical limitations.
. Enhance Core Technology Platform. The Company is developing next
generation polymers and high strength resorbable composites, which are
designed to further enhance the Company's core technology and expand the
applications for its products. The technologies which the Company has
developed to produce Self-Reinforced polymers are applicable to any
resorbable polymer, and may be applied to the development of new, more
durable, stronger, profiled (nonsmooth-surfaced) implants. In addition,
the Company may work with universities and other polymer developers to
expand its proprietary polymer base.
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<PAGE>
. Leverage Existing Customer Base. Over 1,000 orthopaedic surgeons
worldwide have used the Company's Self-Reinforced, resorbable implants.
Substantially all of these surgeons are repeat customers. The Company
believes that it has developed a reputation for producing high quality,
safe and reliable resorbable implants. The Company intends to leverage
its reputation with its customers to build new markets for its products,
to increase acceptance of its existing products and to accelerate
adoption of products currently under development.
. Maintain Focused Sales and Marketing Efforts. The Company intends to
continue to focus its sales and marketing efforts initially on the
estimated $595 million annual orthopaedic resorbable biomaterial and
meniscal preservation markets. Accordingly, outside the orthopaedic
market, the Company may seek to establish licensing or distribution
agreements with strategic partners to develop certain products and to
market and distribute products that the Company elects not to distribute
through its managed networks of independent sales agents, distributors
and dealers.
. Expand the Company's Manufacturing Capabilities. The Company manufactures
its implant products in Finland. Through the establishment of its managed
network of independent sales agents in the U.S., the Company has
substantially increased its presence in the U.S. With this increased
presence, the Company believes that it will be able to more effectively
support U.S. selling efforts by establishing a manufacturing capability
in the U.S. to supplement its Finnish manufacturing capacity. Management
may seek to arrange for a contract manufacturer to provide this
capability to the Company.
PRODUCTS
The Company currently markets nine product lines representing more than 100
distinct products. The Company also provides specially designed instruments
for use with each of its products. The Company's product lines are described
below:
<TABLE>
<CAPTION>
ANNUAL POTENTIAL
PRODUCT LINES TARGETED INDICATIONS(1) REGULATORY STATUS U.S. PROCEDURES(1)
------------- ------------------------ ---------------------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Fracture
Fixation:
SR-PLLA Fractures/Osteotomies Marketed Worldwide 100
Pins
SR-PLLA Fractures/Osteotomies Marketed Worldwide 125
Screws
SR-PGA Fractures/Osteotomies Marketed Worldwide 400
Pins
SR-PGA Fractures/Osteotomies Marketed Worldwide 125
Screws
Tissue
Repair:
Meniscus Meniscus Repair Marketed Worldwide 138
Arrows
SR-PLLA Ligament Attachment Marketed Worldwide 15
Tacks
SR-PGA Alveolar Ridge Marketed Outside of the U.S. NA
Membrane
Urology
Stents:
SR-PGA Post Benign Prostatic Marketed Outside of the U.S. NA
Stents Hyperplasia Swelling FDA Submission in 1997(2)
SR-PLLA Benign Prostatic Marketed Outside of the U.S. NA
Stents Hyperplasia Prophylaxis FDA Submission in 1998(2)
</TABLE>
--------
(1) As described herein, FDA clearances for certain of the Company's
products are limited to specific indications. The Company's estimates
for the number of potential annual procedures in the U.S. have been
derived by the Company on the basis of its analysis of market research
reports compiled by independent third-party sources which the Company
believes to be reliable. Such market research reports contain
approximate total procedure amounts from which the Company has
estimated the number of potential procedures eligible for the targeted
indication. "NA" denotes that data is not available. See "Risk
Factors - Estimates of Procedures Uncertain; Regulatory Submission
Data Subject to Change."
(2) FDA submission dates reflect the Company's current plans and are
subject to delay or cancellation depending upon contingencies that may
arise in the development process. These submission dates could be
delayed if the FDA requires PMA approval rather than 510(k) clearance
for the urology stents. See "Risk Factors -- Estimates of Procedures
Uncertain; Regulatory Submission Dates Subject to Change" and " --
Government Regulation."
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<PAGE>
PLLA and PGA Pins
Fracture fixation pins are indicated for the management of cancellous bone
fractures and osteotomies in the non-loadbearing areas of the skeletal system,
including fractures of the ankle, knee, wrist, elbow, hand and foot. Fractures
in these anatomical areas are most commonly the result of trauma. Osteotomies
in these areas are normally used to correct congenital or induced bone
malformation. The use of metal pins often results in pins protruding from the
body to allow for their removal. This is especially true in certain pediatric
fractures where the current technique is to leave the metal pins protruding
from the joint or bone, with the limb awkwardly positioned, to facilitate the
removal of the pins. This technique is inconvenient to the patient, is
associated with increased levels of infection and results in additional trauma
and expense when the pins are removed.
The Company's resorbable pins, which range in diameter from 1.1mm to 4.5mm
and in length from 10mm to 70mm, can be cut by the surgeon to the precise
length required for an individual patient, thereby reducing the risk of
discomfort and infection. The pins are designed to improve the fixation of
fractures through two design innovations: (i) the pins are slightly oversized
as compared to the drill channel and slightly oval in shape, providing an
improved friction fit as compared with round metal pins; and (ii) the pins
swell slightly when exposed to the moisture in the surgical site, locking the
pin in the drill channel within hours after implantation. The Company's pins
can be used in open surgical procedures and percutaneous and endoscopic
techniques. In the U.S., while the Company's PLLA pins currently are cleared
only for use in bunionectomies, the Company's PGA pins may be used in a
variety of cancellous bone fixations.
PLLA and PGA Screws
Although management of fractures in the cancellous areas of bones with metal
screws and plates is the standard of care, the procedures present orthopaedic
surgeons with several problems. The inherent difference in stiffness between
the metal screw and the bone can cause complications, including inducement of
relative motion at the fracture site. Such motion can cause screws to loosen
and can result in local bone degradation. Metal screws can also protrude from
the bone surface after implantation or break under the healing stresses of
bone and cause irritation in areas of the body where the skin and muscle
covering of the fracture site is thin or contains high concentrations of
nerves.
The Company's screws range in diameter from 2.0mm for delicate hand and foot
procedures to 4.5mm for use in ankle fractures. The Company's screw threads
were specifically designed for use in cancellous fractures. The Company's
screws are designed to take advantage of the swelling properties of Self-
Reinforced materials to achieve optimum fixation with minimal bone damage. In
areas where skin is thin, surgeons may shape the head of the Company's screw
to conform to the bone contour in order to prevent irritation. In anatomical
situations where breakage will occur after healing, the use of the Company's
screws avoids the complications that result from the removal of broken metal
implants. In the U.S., the Company's screws currently are cleared only for use
in treating ankle fractures.
Meniscus Arrows
Tears of the cartilage pads in the knee, known as the menisci, are the most
common knee injuries treated by orthopaedic surgeons in the U.S. Prior to the
introduction of the Company's Meniscus Arrow, the treatment options available
to surgeons were limited to either the removal of the damaged section
(meniscectomy) or surgical repair using a variety of complex suturing
techniques. The efficacy of meniscectomy, historically the preferred approach
given the complex and lengthy nature of the suture repair procedure, has
recently been questioned in peer-reviewed and published studies. These studies
have shown that meniscus removal may be detrimental to the long-term outcome
of the surgery and may lead to complications requiring further, more invasive,
surgeries. The suturing alternative requires surgeons to tie knots
arthroscopically, which is one of the most technically demanding skills in
arthroscopic surgery. Surgical
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<PAGE>
complications, including damage to the vascular and neural system, can arise
during this time-consuming suturing process, due in part to the necessity of
creating a small opening at the back of the knee to allow for the passing of
sutures and the tying of knots.
The Meniscus Arrow, commercially introduced by the Company in the U.S.
during the second quarter of 1996, is the first resorbable, arthroscopically
implanted fixation device designed for use in the repair of longitudinal,
vertical ("bucket handle") tears of the medial and lateral meniscus. The
Meniscus Arrow is a thin, pointed, barbed shaft with a t-shaped head that is
driven across the meniscal tear, fixing the torn pieces of the meniscus
together. The Meniscus Arrow may be implanted in a straightforward procedure
that has been demonstrated to reduce operating room time by approximately 50%
as compared with suturing and does not require substantial additional training
for its use. This resorbable implant avoids both the long-term consequences of
meniscus removal and complications to the arterial and nervous system that can
arise from the suturing approach. The Company believes that surgeons who were
unwilling to perform meniscus repairs in the past may now attempt such
repairs, thereby potentially increasing the available market.
PLLA Tacks
Management of ruptures of the ligaments of the thumb, including ulnar
collateral ligaments ("skier's thumb" or "gamekeeper's thumb"), is typically
performed using either bone to ligament suturing techniques or metal anchors
designed for use in small bones. These techniques are dependent upon the
surgeon's skill at achieving good fixation and approximation of the torn
section of the ligament without damaging the affected ligament in the suturing
process. Even when suturing is successful, damage to the repaired ligament may
occur at the site of the repair, since the sutures remain in place after the
healing process is complete. Since suturing is performed without direct
visualization of both sides of the wound, damage to nerves and vessels may
also occur.
The Company developed its PLLA tack to provide the surgeon with an easy to
use implant designed to reduce the risk of long-term and intra-operative
tissue damage that may occur in traditional suturing techniques. The insertion
procedure for the Company's tack involves the use of standard surgical
techniques to first create a channel in the ligament and a small drill hole in
the bone, and then attaching the ligament with manual pressure. The Company's
tack is designed to swell in the drill hole in order to provide immediate
fixation and to withstand stresses in the thumb. The degradation of the tack
after healing of the reattachment site reduces the risk of long-term tissue
damage. In the U.S., the Company's PLLA tacks currently are cleared only for
use in repairing ligaments of the thumb.
PGA Membrane
Repair of defects in the gum or jaw to facilitate the use of dental implants
requires the use of membranes to support and contain materials that are
implanted at these sites to assist the body in growing new bone. Current
membranes, made from either non-resorbable materials or collagen sponges, may
limit the surgeon's capabilities to effect good repairs because they either
must be removed in a second surgery or may not provide support for a period
sufficient to complete the healing process. The Company's membrane is a
resorbable sheet of self-reinforced polymer that degrades over a clinically
appropriate period to allow for bone growth and does not require removal in a
second surgery.
The Company has licensed Johnson & Johnson's Ethicon GmbH subsidiary to sell
products based on the Company's membrane patent for use in dental and two
other applications in Europe. Ethicon GmbH has advised the Company that it
expects to commence commercial sales of such products during the second
quarter of 1997. In the U.S., the Company is assessing whether the orthopaedic
market for the membrane product is sufficient for the Company to incur the
expense of pursuing FDA clearance on its own. For the dental surgery market in
the U.S., the Company presently intends to pursue a strategic alliance with a
corporate partner, although no assurance can be given that an arrangement
satisfactory to the Company will
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be negotiated. The Company's membrane products cannot be marketed or sold in
the U.S. until clearance or approval is obtained from the FDA. See "Risk
Factors -- Government Regulation."
PGA Urology Stents
Benign prostatic hyperplasia ("BPH"), a common condition in older men, is
characterized by the enlargement of the prostate gland, which can block the
normal flow of urine. Conventional treatment of BPH typically involves a
number of invasive surgical techniques and/or drug therapies. Such techniques,
including the use of lasers, RF energy and other cutting mechanisms to open an
enlarged prostate to allow for free urine flow, have the side effect of
rebound due to edema after surgery. In order to respond to this problem,
surgeons either catheterize their patients with a catheter for a period of
time after surgery or insert a temporary stent. Both approaches have
drawbacks. Removal of a Foley catheter requires a return to the hospital or
surgical center and may cause significant discomfort for the patient. Also,
the infection rate for patients with Foley catheters has historically been
high. Experience with conventional metal and non-resorbable polymer urology
stents demonstrates that tissue begins to grow over these implants shortly
after surgery is completed. As a result, removal of temporary stents can be
difficult and painful.
The Company has developed the first resorbable, self-expanding stent for use
in urological procedures. The Company's resorbable urinary tract stents are
used to prevent postsurgical urine retention after thermal treatment for BPH.
The design of the Company's stent allows it to be easily inserted under direct
vision with a cystoscope and to have its location checked by the use of
ultrasound. The self-expanding property of the Company's stent allows the
urologist to place a stent of reasonable diameter into the prostatic urethra
and then to have the stent swell and lock itself into position without the
application of other devices, such as a balloon catheter.
In studies conducted by the Company, the Company's PGA stent enabled a
substantial percentage of patients to void on the first or second day after
implantation following laser treatment of BPH. In contrast, the study data
indicated that indwelling catheters do not enable patients to void on their
own for an average of six days after such surgery is performed. The Company
believes that its stent provides the patient with immediate relief of post-
operative edema, avoids the necessity for return to the clinic for catheter
removal, avoids the potential inconvenience associated with the use of an
indwelling system and reduces the potential for infection associated with use
of a catheter in a sensitive area of the body. The Company's stents cannot be
marketed or sold in the U.S. until clearance or approval is obtained from the
FDA. See "Risk Factors --Government Regulation."
Instrumentation
The Company, with the assistance of certain contract manufacturers, has
developed a series of instrumentation systems designed for use with each of
the Company's product lines. The Company distributes its instruments both on
an instrument-by-instrument basis or in kits. The implant grade stainless
steel instruments are manufactured by third-parties and are designed
specifically to enable implantation of a particular product manufactured by
the Company. All of the Company's currently distributed instrumentation
systems are reusable. Accordingly, instrumentation sales are directed to new
customers and to existing customers who are planning to initiate usage of one
or more of the Company's new or existing products.
PRODUCT DEVELOPMENT
The Company's product development efforts focus upon expanding the use of
the Company's platform technology to address the limitations of traditional
surgical techniques and existing implants. The Company currently has ten
products for 18 different indications in various stages of development. To
date, all of the Company's implants sold in the U.S. have been cleared through
the 510(k) pre-market notification process. However, lengthier and more costly
PMA submissions may be required in order to obtain approval to sell urological
stents and other new products in the U.S.
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The Company is engaged in a number of studies designed to enable the Company
to increase the applications of existing products and to introduce new
products. The following table summarizes recently completed, ongoing and
planned clinical trials for key products currently marketed or in development.
<TABLE>
<CAPTION>
CLINICAL ESTIMATED ANNUAL POTENTIAL
PRODUCT INDICATION PATIENTS DURATION CLINICAL/REGULATORY STATUS(1) U.S. PROCEDURES(2)
------- ---------------------------------- -------- ----------- ----------------------------- ------------------
(IN MONTHS) (IN THOUSANDS)
<C> <S> <C> <C> <C> <C>
ORTHOPAEDICS
PLLA Screw Colles fracture (wrist) 28 12-18 Enrollment complete 16
Endo-brow lifts (face) 50 6-12 Enrollment complete 15
Acetabular cup fixation (hip) 25 18-30 First patients enrolled 7/96 180
Femoral neck fixation (leg) 40 24-36 FDA submission in 1997 165
PGA Screw Salter osteotomies (pediatric hip) 25 36-48 To commence in 1997 NA
PLLA Nail Osteochondritis dessicans (knee) 25 6-12 Enrollment commenced 10/96 9
PLLA Tack Bankhart tears (shoulder) 20 24-36 FDA submission in 1997 87
PLLA Wedge High tibial osteotomy (leg) 25 12-24 To commence in 1997 NA
ACL fixation (knee) 20 18-30 To commence in 1997 149
PLLA Screw/Washer Rotator cuff repair (shoulder) 25 12-30 To commence in 1997 87
UROLOGY
PGA Stent Lumen support post BPH treatment 96 36-48 FDA submission in 1997 300
PLLA Stent Urethral stricture 60 24-36 Enrollment commenced pre-1996 100
PLLA Stent Use with finasteride 60 TBD Enrollment commenced 9/96 NA
GENERAL SURGERY
PLLA Stent Bile duct blockage 10 18-30 Enrollment commenced 1/96 NA
Pancreatic duct blockage 10 18-30 Enrollment commenced pre-1996 NA
MAXILLO-FACIAL SURGERY
PLLA Screw Sagittal split osteotomy (jaw) 47 24-30 FDA submission in 1997 25
PDLA Screw
and Plate Mid-face corrections 50 12-24 First patients enrolled 11/96 110
PLLA Plate Cranial-facial fractures 26 12-24 Enrollment commenced 15
</TABLE>
-------
(1) Regulatory submission dates reflect the Company's plans and are subject
to delay or cancellation depending upon contingencies that may arise in
the development process. The submission data for the PGA urology stent
could be delayed if the FDA requires PMA approval rather than 510(k)
approval. See "Risk Factors -- Estimates of Procedures Uncertain;
Regulatory Submission Dates Subject to Change" and "-- Government
Regulation."
(2) The Company's estimates for the number of potential annual procedures
in the U.S. have been derived by the Company on the basis of its
analysis of market research reports compiled by independent third-party
sources which the Company believes to be reliable. Such market research
reports contain approximate total procedure amounts from which the
Company has estimated the number of potential procedures eligible for
the targeted indication. "NA" denotes that data is not available. See
"Risk Factors - Estimates of Procedures Uncertain; Regulatory
Submission Dates Subject to Change."
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The Company is also actively involved in other development projects that
have not yet entered into full human clinical trials. These projects include
the following:
PLLA Anchors. Commercially available bone anchors are designed to be
deployed into the bone and to secure soft tissue, such as ligaments and
tendons, to the bone. While a majority of bone anchors used today are
sufficiently strong to reattach torn ligaments, most are difficult to remove
as a result of permanently deployed barbs or self-tapping screw threads. If
removal is not possible, the presence of the first implanted anchor makes it
difficult to deploy revision bone anchors or sequential devices in close
proximity to the first device. As a result, surgeons may be unable to achieve
precise reattachment of the tissue to locations in the bone which are critical
for effective repair. In addition, certain metal anchors do not fit in the
drill hole flush with the surface of the bone and leave a metal surface upon
which the ligament is sutured. Long term contact between the metal anchor
surface and the ligament reduces the area available for reattachment on the
bone surface, creates an area of potential local irritation and, because the
anchor is not at the same level as the surrounding bone, may create an area of
raised tissue that can be felt post-operatively by the patient. Furthermore,
existing anchors hold the tied sutures extremely tightly against the bone,
which may result in long-term tissue damage.
The Company has designed a resorbable anchor to address the principal
shortcomings of existing metal anchors. The design of the Company's anchor
enables it to be inserted without the use of a bone tap, to be easily removed
if misplaced or if the suture breaks, and to accommodate any type of suture.
Since there have been at least five predecessor devices and because the
product design is a modification of the Company's PLLA screw, the Company
believes that the FDA will not require clinical verification of the anchor's
efficacy, although no assurance can be given in this regard. Biomechanical
tests have demonstrated the pull-out (the force necessary to remove the anchor
from the bone) of the Company's anchor to be equal to or greater than that of
certain currently approved products. The Company plans to seek 510(k)
clearance for this product in 1997. See "-- Government Regulation."
Intramedullary Nails. To treat fractures of the forearm and humerus in
children, pediatric surgeons currently use flexible stainless steel wire as a
substitute for nails in order to avoid damaging the growth plates in either
bone of the forearm. While these wires are less invasive and do not stress-
shield growing bones as do metal plates and screws, they may be difficult for
the pediatric surgeon to manipulate in the small bones of a child and may
require removal in the future. To respond to the needs of pediatric surgeons
for a fast, easy to use and safe procedure to manage forearm and humeral
fractures in children while avoiding the need to remove metal implants, the
Company has developed and tested in preclinical studies a resorbable
intramedullary nail made of poly-dl-lactic acid ("PDLA"). The Company believes
that PDLA implants have greater initial strength, higher flexibility and
faster absorption rates than PLLA implants. These performance characteristics,
particularly rapid, safe absorption, are important in children because of
their rapid growth and the traumatic impact on children of surgically removing
permanent implants. Based on the elimination of the need for removal surgery,
the Company believes that its intramedullary nails are a superior alternative
to current techniques for the fixation of displaced fractures in the pediatric
forearm. Preclinical studies have demonstrated that the use of the Company's
resorbable implants in the intramedullary canal do not create local
inflammation or interfere with the normal healing process. The Company plans
to commence a multi-center clinical trial of its intramedullary nails in
children in 1997.
Small Joint Prostheses. There is a growing need for the replacement of
arthritic joints in the fingers and toes. The only current options for the
surgeon are silicone implants which have begun to show long-term problems,
including degradation of silicone, and fusion of the joint, which eliminates
the pain but also limits the functional use of the particular digit. Utilizing
its membrane and screw technologies, the Company has created a new system for
the repair of joints in the fingers and toes. The Company's small joint
replacement prosthesis consists of a flexible pin that penetrates a mesh of
reinforced PDLA. The prosthesis is used as a system to reconnect finger and/or
toe joints after the removal of a diseased joint. The mesh provides the
patient with a temporary, flexible joint that does not interfere with the
natural healing process. Fixed in place
35
<PAGE>
with a pin, the joint is designed to be functional and load-bearing at an
earlier stage than has been demonstrated with silicone implants and to create
a pseudo-joint after resorption.
Product development involves a high degree of risk. There can be no
assurance that the Company's new product candidates in various early stages of
development will prove to be safe and effective, will receive the necessary
regulatory approvals or will ultimately be commercially successful. These
product candidates will require substantial additional investment, laboratory
development, clinical testing and FDA or other agency approval prior to their
commercialization. The Company's inability to successfully develop and
introduce these product candidates on a timely basis or at all, or achieve
market acceptance of such products, could have a material adverse effect on
the Company's business, financial condition and results of operations.
SALES, MARKETING AND DISTRIBUTION
The Company sells its products through managed networks of independent sales
agents in the U.S. and independent distributors and dealers in markets outside
of the U.S. In the U.S., the Company manages a network of agents who are
responsible for particular orthopaedic products and territories. In managing
its U.S. network, the Company maintains a direct relationship with its medical
community customers by handling all shipping and invoicing functions directly
and paying commissions to its sales agents. The Company supports its U.S.
managed network of sales agents with product specialists who supplement the
work of the sales agents, providing training to orthopaedic surgeons with
respect to the features and modalities applicable to particular resorbable
implant products. In Europe, the Company sells its products through networks
of independent distributors and dealers that purchase products from the
Company at discounts that vary by product and by market. These international
distributors and dealers have the primary relationships with the physicians
and hospitals that are using the Company's products. The Company typically
operates under written agreements with its domestic and international sales
agents, distributors and dealers. These agreements grant the dealers the right
to sell the Company's products within a defined territory and permit the
distributors to sell other medical products.
The Company has licensed Johnson & Johnson's Ethicon GmbH subsidiary to sell
in Europe certain products, based on the Company's membrane patent, in
dentistry and two other unrelated fields of use. Under that arrangement, the
Company received license fees in 1995 and 1996 and will be entitled to receive
royalty payments once the licensee commences sales.
MANUFACTURING
The Company currently manufactures all of its products in its Tampere,
Finland facility. All finished goods production, packaging and testing are
conducted in a validated 1,000 square foot clean room with physically separate
areas of varying types of air quality designed specifically for the production
of resorbable polymeric materials and products. Substantially all aspects of
the manufacturing process are subject to, and are designed to comply with, the
FDA's GMP regulations. The facility is subject to inspection by the FDA and
European regulatory agencies. The Company has received an EC Design
Examination and an EC quality system Certificate and is entitled to affix a CE
marking on all of its currently marketed orthopaedic, dental and maxillo-
facial products. See "-- Government Regulation."
The Company employs two separate processes to produce its Self-Reinforced
polymers. The sintering process, used only for PGA products, involves the
compression of polymer threads laid in molds to permit the bonding of such
threads without melting the materials. The die drawing process, used for PLLA,
PGA and PDLA products, runs polymers through a die in order to create
reinforcing elements or fibrils. Both processes are supervised by experienced
personnel and are subjected to quality control checks until final sterility
testing and batch control paperwork have been completed. Microbial testing of
the final product is contracted to an FDA-registered facility in the U.S. Much
of the machinery utilized by the Company in the manufacturing process was
either created by the Company's technical team or has been modified by that
team to meet the Company's requirements.
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<PAGE>
The raw materials for the Company's PLLA materials are currently available
from three qualified sources. The raw materials for the Company's PGA products
are currently provided to the Company by two qualified sources. These raw
materials have been utilized in products cleared by the FDA and the Company's
suppliers maintain Device Master Files at the FDA that contain basic
toxicology and manufacturing information accessible to the FDA. The Company
does not have long-term supply contracts with any of such suppliers, although
it is currently negotiating a supply agreement with its principal PLLA
supplier. In the event that the Company is unable to obtain sufficient
quantities of such raw materials on commercially reasonable terms, or in a
timely manner, the Company would not be able to manufacture its products on a
timely and cost-competitive basis which, in turn, would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, if any of the raw materials for the Company's PLLA
and PGA products are no longer available in the marketplace, the Company would
be forced to further develop its technology to incorporate alternate
components. The incorporation of new raw materials into the Company's existing
products would likely require clearance or approval from the FDA. There can be
no assurance that such development would be successful or that, if developed
by the Company or licensed from third parties, devices containing such
alternative materials would receive FDA clearance on a timely basis, or at
all.
The Company intends to establish manufacturing capabilities in the U.S. in
order to increase its manufacturing capacity for its existing and new
products. The Company anticipates that it will either (i) equip and operate a
leased facility in the eastern U.S. or (ii) contract with a third party to
provide a manufacturing capability to the Company. The Company presently is
exploring both of these alternatives. If the Company chooses to use a contract
manufacturer, the Company would likely equip the manufacturer's facility, with
the objective of ultimately transitioning to a neighboring Company-owned or
Company-leased facility. The Company believes that on an interim basis,
contract manufacturing may enable the Company to save certain staffing costs
and enable senior management to focus on other aspects of its business;
however, savings in staffing costs may be outweighed by fees payable to the
contract manufacturer. Regardless of the approach to be utilized, the Company
currently plans to commence packaging and sterilization functions in the U.S.
by late 1997 and to commence the balance of the manufacturing process in the
U.S. by 1999. While the Company's plans may change, the Company anticipates
that once full manufacturing commences in the U.S. facility, the Company will
seek to manufacture the Company's entire product line both domestically and
abroad. There can be no assurance that the Company will not encounter
difficulties in scaling up production in the U.S., including problems
involving production yield, quality control and assurance, and shortage of
qualified personnel. In addition, the U.S. facility will be subject to GMP
regulations, international quality control standards and other regulatory
requirements. Difficulties encountered by the Company in manufacturing scale-
up or the failure by the Company to establish and maintain the U.S. facility
in accordance with such regulations, standards or other regulatory
requirements could entail a delay or termination of production, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. During 1995 and 1996, the Company experienced
occasional periods of delay in filling product orders due to increases in
demand beyond forecasted levels. The Company is currently upgrading its
production machinery and processes to address this increased demand. No
assurance can be given that the integration of these machines into the
production process will occur within the scheduled time frame or will not
result in difficulties in scale-up that could lead to further delays in
filling orders in the future. See "Certain Transactions."
LICENSES, TRADE SECRETS, PATENTS AND PROPRIETARY RIGHTS
The Company believes that its success is dependent in part upon its ability
to preserve its trade secrets, obtain and maintain patent protection for its
technologies, products and processes, and operate without infringing the
proprietary rights of other parties. As a result of the substantial length of
time and expense associated with developing and commercializing new medical
devices, the medical device industry places considerable importance on
obtaining and maintaining trade secret and patent protection for new
technologies, products and processes.
37
<PAGE>
The Company's patent strategy has been to seek patent protection for the
technologies that produce the Company's Self-Reinforced resorbable polymer
products and, in certain instances, for the products themselves. The Company
owns or has licenses to patents issued in the United States and in various
foreign countries and has patent applications pending at the U.S. PTO and in
the patent offices of various foreign countries. Provided that all requisite
maintenance fees are paid, the Company's four principal U.S. patents (two of
which are owned by the Company and two of which are licensed to the Company on
an exclusive basis) will expire between 2004 and 2008. The two principal U.S.
patents owned by the Company relate to the Company's Self-Reinforced
resorbable polymer products, the Company's sintering process, and resorbable
polymer products produced from the Company's controlled drawing process. The
Company also has pending two principal U.S. patent applications that relate to
the Company's resorbable stent technology. The Company's other patents and
patent applications relate to various uses for Self-Reinforced resorbable
polymers, either alone or in combination with other resorbable polymers or
biocompatible materials, and generally involve specific applications or
improvements of the technologies disclosed in the Company's principal patents
and patent applications. European counterparts to the two principal U.S.
patents that are owned by the Company and the Japanese counterpart to one such
patent are currently the subject of opposition proceedings. One of these
European patents has been revoked by the European Patent Office for lack of
novelty based on an earlier publication. The Company has filed an appeal of
the European Patent Office's revocation decision. The other European patent
and the Japanese patent application are being challenged on lack of novelty
and inventiveness grounds on the basis of disclosures made in patent and other
publications. The Company is vigorously defending its European and Japanese
patent positions in these proceedings. No assurance can be given as to whether
such appeal in Europe will be successful or as to the outcome of the pending
opposition proceedings. In order to clarify and confirm its U.S. patent
position, the Company intends in the first quarter of 1997 to request
reexamination by the U.S. PTO of the two principal U.S. patents owned by the
Company. No assurance can be given as to whether the issues raised in the
reexamination proceedings will be resolved in the Company's favor. The
reexamination process is expected to take up to twelve months or longer. Such
reexamination could result in some or all of the patent claims set forth in
these two U.S. patents being altered to provide narrower coverage or
determined to be unpatentable. No assurance can be given as to the outcome of
the reexamination process. Narrowing of the coverage or a holding of
unpatentability in relation to one or both of these two principal U.S. patents
may significantly ease entry to the U.S. market for the products of the
Company's competitors and could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company also relies upon trade secret protection for certain unpatented
aspects of its proprietary technology, including its Self-Reinforcing
technology. Although the Company has taken steps to protect its trade secrets
and know-how, through the use of confidentiality agreements with its employees
and certain of its business partners and suppliers, there can be no assurance
that these agreements will not be breached, that the Company would have
adequate remedies for any breach, that others will not independently develop
or otherwise acquire substantially equivalent proprietary technology,
information or techniques, that others will not otherwise gain access to or
disclose the Company's proprietary technologies or that any particular
proprietary technology will be regarded as a trade secret under applicable
law. There can also be no assurance that the steps taken by the Company will
prevent misappropriation of its trade secrets. As a result of the reliance
that the Company places on its trade secrets, loss of the Company's trade
secret protection in this area would have a material adverse effect on the
Company's business, financial condition and results of operations.
Additionally, the Company is licensed under two principal U.S. patents.
Pursuant to this license agreement, the Company has the exclusive right in the
U.S. to manufacture, use and sell certain devices for fixation of meniscus
lesions. This license agreement, which requires the Company to pay periodic
royalties, has a term expiring in 2006, unless terminated earlier by the
licensor for breach by the Company. There can be no assurance that these
patents licensed to the Company are valid and enforceable, and, if
enforceable, that they cannot be circumvented or avoided by competitors.
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<PAGE>
There can be no assurance that patent applications to which the Company
holds rights will result in the issuance of patents, that any patents issued
or licensed to the Company will not be challenged and held to be invalid or
narrow in scope, or that the Company's present or future patents will provide
significant coverage for or protection to the Company's present or future
technologies, products or processes. Since patent applications are secret
until patents are issued in the U.S., or corresponding applications are
published in foreign countries, and since publication of discoveries in the
scientific or patent literature often lags behind actual discoveries, the
Company cannot be certain that it was the first to make its inventions, or
that it was the first to file patent applications for such inventions.
In the event that a third party has also filed a patent application relating
to an invention claimed in a Company patent application, the Company may be
required to participate in an interference proceeding declared by the U.S. PTO
to determine priority of invention, which could result in substantial
uncertainties and cost for the Company, even if the eventual outcome is
favorable to the Company. In addition, there can be no assurance that others
will not obtain access to the Company's know-how or that others will not be,
or have not been, issued patents that may prevent the sale of one or more of
the Company's products or the practice of one or more of the Company's
processes, or require licensing and the payment of significant fees or
royalties by the Company to third parties in order to enable the Company to
conduct its business. There can be no assurance that the Company would be able
to obtain a license on terms acceptable to the Company or that the Company
would be able to successfully redesign its products or processes to avoid such
patents. In either such case, such inability could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Legal standards relating to the scope of claims and the validity of patents
in the medical device field are still evolving, and no assurance can be given
as to the degree of protection any patents issued to or licensed to the
Company would provide. The medical device industry has been characterized by
extensive litigation regarding patents and other intellectual property rights,
and companies in the medical device industry have employed intellectual
property litigation to gain competitive advantage. The Company has initiated
an opposition in the European Patent Office challenging the grant of a third
party's European patent relating to a drawing process for manufacturing
resorbable polymer products. Subsequently, another company has instituted its
own opposition against that patent. No assurance can be given that these
oppositions will result in either the revocation of that patent or the
narrowing of its claims. If neither opposition is successful, then no
assurance can be given that the third party will not assert that its European
patent is intringed by sales of one or more of the Company's products or by
the practice of one or more of the Company's processes in any of the eight
countries identified in the European patent. Moreover, there can be no
assurance that the Company will not be subject to claims that one or more of
its products or processes infringe other patents or violate the proprietary
rights of third parties. Defense and prosecution of patent claims can be
expensive and time consuming, regardless of whether the outcome is favorable
to the Company, and can result in the diversion of substantial financial,
management and other resources from the Company's other activities. An adverse
outcome could subject the Company to significant liability to third parties,
require the Company to obtain licenses from third parties, or require the
Company to cease any related product development activities or product sales.
In addition, the laws of certain countries may not protect the Company's
patent rights, trade secrets, inventions, products or processes to the same
extent as in the U.S.
The Company has certain trademark registrations and pending trademark
applications in the U.S. and in various countries. The Company's U.S. and
foreign trademark registrations have 5-20 year terms and are renewable for
additional terms for as long as the Company uses the registered trademark in
the manner recited in the registration and makes the appropriate filings to
maintain and renew registrations. There can be no assurance that any
particular registration, or the mark that is the subject of that registration
will not be held to be invalid, narrow in scope or not owned exclusively by
the Company. In the past, the Company has agreed with third-parties that it
will not use certain trademarks in connection with certain devices. There can
be no assurance that the Company will not enter into other arrangements to
avoid or terminate infringement, opposition, cancellation or other
proceedings, or to induce third-parties to give up or limit the use of their
trademarks, trade names or other designations.
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<PAGE>
COMPETITION
Competition in the medical device industry is intense both in the U.S. and
abroad. In orthopaedics, the Company's principal competitors are the numerous
companies that sell metal implants. The Company competes with the
manufacturers and marketers of metal implants by emphasizing the ease of
implantation of the Company's Self-Reinforced, resorbable implants, the cost
effectiveness of such products and the elimination of risks associated with
the failure to perform removal surgeries. Within the resorbable implant
market, Johnson & Johnson sells an FDA-cleared resorbable product for use in
the fracture fixation market. Smith & Nephew, U.S. Surgical, Zimmer (a
subsidiary of Bristol Myers-Squibb), Howmedica (a division of Pfizer) and
Synthes have reported that they are developing resorbable products for
internal fixation. The Company is competing with Johnson & Johnson and expects
to compete with other manufacturers of resorbable internal fixation devices
primarily on the basis of the physiological strength of the Company's polymers
and the length of the strength retention time demonstrated by the Company's
products.
In knee arthroscopy for meniscal repair, the Company's Meniscus Arrow
products compete with a non-resorbable product marketed by Smith & Nephew and
with a series of suturing techniques developed by orthopaedic surgeons for the
repair of the meniscus. The Company is aware that several companies, including
U.S. Surgical and Innovasive Devices, are developing and testing products with
approaches to meniscus repair similar to the Company's approach.
In urology, several companies have developed temporary metal or non-
resorbable polymer stents for use in the ureter or urethra or for use in the
treatment of prostate disease. The Company is not presently aware of any
substantial development of resorbable stents for this application outside of
the Company's efforts in Europe. The Company believes that the difficulty and
discomfort associated with the subsequent removal of temporary non-resorbable
stents should provide the Company's Self-Reinforced, resorbable urology stents
with a potential competitive advantage.
Overall, the Company believes that the primary competitive factors in the
markets for its products are safety and efficacy, ease of implantation,
quality and reliability, pricing and the cost effectiveness of resorbable
products as compared with non-resorbable products. In addition, the length of
time required for products to be developed and to receive regulatory approval
is an important competitive factor. The Company believes that it competes
favorably with respect to these factors, although there can be no assurance
that it will continue to do so.
The medical device industry is characterized by rapid product development
and technological advancement. The Company's products could be rendered
noncompetitive or obsolete by technological advancements made by the Company's
current or potential competitors. There can be no assurance that the Company
will be able to respond to technological advancements through the development
and introduction of new products. Moreover, many of the Company's existing and
potential competitors have substantially greater financial, marketing, sales,
distribution and technological resources than the Company. Such existing and
potential competitors may be in the process of seeking FDA or other regulatory
approvals, or patent protection, for their respective products or may also
enjoy substantial advantages over the Company in terms of research and
development expertise, experience in conducting clinical trials, experience in
regulatory matters, manufacturing efficiency, name recognition, sales and
marketing expertise or the development of distribution channels. Since the
Company's products compete with procedures that have, over the years, become
standard within the medical community, there also can be no assurance that the
procedures underlying the Company's resorbable products will be able to
replace more established procedures and products. There can be no assurance
that the Company will be able to compete successfully against current or
future competitors or that competition will not have a material adverse effect
on the Company's business, financial condition and results of operations.
GOVERNMENT REGULATION
United States. Products manufactured or marketed by the Company in the U.S.
are subject to extensive regulation by the FDA. Pursuant to the Federal Food,
Drug and Cosmetic Act, as amended, and the
40
<PAGE>
regulations promulgated thereunder (the "FDC Act"), the FDA regulates the
clinical testing, manufacture, labeling, distribution and promotion of medical
devices. Noncompliance with applicable requirements can result in, among other
things, warning letters, import detentions, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or
premarket approval for devices, withdrawal of marketing approvals and criminal
prosecution. The FDA also has the authority to request repair, replacement or
refund of the cost of any device manufactured or distributed by the Company.
Under the FDC Act, medical devices are classified into three classes (class
I, II or III), on the basis of the controls deemed necessary by the FDA to
reasonably assure their safety and efficacy. Under the FDA's regulations,
class I devices are subject to general controls (for example, labeling,
premarket notification and adherence to GMPs) and class II devices are subject
to general and special controls (for example, performance standards,
postmarket surveillance, patient registries and FDA guidelines). Generally,
class III devices are those which must receive premarket approval by the FDA
to ensure their safety and efficacy (for example, life-sustaining, life-
supporting and certain implantable devices, or new devices which have not been
found substantially equivalent to legally marketed devices). The Company
believes that its products are class II or class III devices.
Before a new device can be introduced into the market in the U.S., the
manufacturer or distributor generally must obtain FDA marketing clearance
through either a 510(k) premarket notification or a PMA application. The
Company believes that it usually takes from four to twelve months from
submission to obtain 510(k) clearance, although it can take longer, and that
the FDA's review of a PMA application after it is accepted for filing can last
from one to three years, or even longer. If a medical device manufacturer or
distributor can establish, among other things, that a device is "substantially
equivalent" in intended use and technological characteristics to a class I or
class II medical device or a pre-amendment class III medical device for which
the FDA has not called for PMAs, the manufacturer or distributor may seek
clearance from the FDA to market the device by filing a 510(k). The 510(k)
must be supported by appropriate information establishing to the satisfaction
of the FDA the claim of substantial equivalence to a legally marketed
predicate device. In recent years, the FDA has been requiring a more rigorous
demonstration of substantial equivalence, including more frequent requests for
clinical data in 510(k) submissions.
If clinical testing of a device is required and if the device presents a
"significant risk", an Investigational Device Exemption ("IDE") application
must be approved prior to commencing clinical trials. The IDE application must
be supported by data, typically including the results of laboratory and animal
testing. If the IDE application is approved by the FDA and one or more
appropriate Institutional Review Boards ("IRBs"), clinical trials may begin at
a specific number of investigational sites with a maximum number of patients,
as approved by the agency. If the device presents a "nonsignificant risk" to
the patient, a sponsor may begin the clinical trial after obtaining approval
for the study by one or more appropriate IRBs without the need for FDA
approval. In all cases, the clinical trials must be conducted under the
auspices of an IRB pursuant to FDA regulations. The Company's failure to
adhere to regulatory requirements generally applicable to clinical trials and
to the conditions of an IDE approval could result in a material adverse effect
on the Company, including an inability to obtain marketing clearance or
approval for its products. There can be no assurance that any clinical study
proposed by the Company will be permitted by the FDA, will be completed or, if
completed, will provide data and information that supports FDA clearance or
approval.
Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution unless and
until an order is issued by the FDA finding the product to be substantially
equivalent. In response to a 510(k), the FDA may declare that the device is
substantially equivalent to another legally marketed device and allow the
proposed device to be marketed in the U.S. The FDA, however, may require
further information, including clinical data, to make a determination
regarding substantial equivalence, or may determine that the proposed device
is not substantially equivalent and require a PMA. Such a request for
additional information or determination that the device is not substantially
equivalent would delay market introduction of the product. There can be no
assurance that the Company
41
<PAGE>
will obtain 510(k) premarket clearance within satisfactory time frames, if at
all, for any of the devices for which it may file a 510(k).
For any medical device cleared through the 510(k) process, modifications or
enhancements that could significantly affect the safety or effectiveness of
the device or that constitute a major change to the intended use of the device
will require a new 510(k) submission.
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent to a legally marketed device, the
manufacturer or distributor must seek premarket approval of the proposed
device through submission of a PMA. A PMA must be supported by extensive data,
including laboratory, preclinical and clinical trial data to prove the safety
and effectiveness of the device and extensive manufacturing information.
Following receipt of a PMA, if the FDA determines that the application is
sufficiently complete to permit a substantive review, the FDA will "file" the
application. The PMA approval process can be lengthy, expensive and uncertain.
If granted, the approval of the PMA may include significant limitations on the
indicated uses for which a product may be marketed.
To date, all of the Company's products sold in the U.S. have received 510(k)
clearance. There can be no assurance that the FDA will not determine that the
Company's urology stents, certain products currently in development or future
products must undergo the more costly, lengthy and uncertain PMA approval
process. It is likely that the FDA will require the Company to seek PMA
approval for its urological stents.
There can be no assurance that the Company will be able to obtain further
510(k) clearances or PMA approvals, if required, to market its products for
their intended uses on a timely basis, if at all. Moreover, regulatory
approvals, if granted, may include significant limitations on the indicated
uses for which a product may be marketed. Delays in the receipt of or the
failure to obtain such clearances or approvals, the need for additional
clearances or approvals, the loss of previously received clearances or
approvals, unfavorable limitations or conditions of approval, or the failure
to comply with existing or future regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Current FDA enforcement policy prohibits the marketing of approved medical
devices for unapproved uses. The Company's PGA pins have received 510(k)
clearance for the general intended use of "maintenance of alignment of small
fragments of fractured non-load bearing bones in the presence of appropriate
immobilization." The Company has promoted this product for numerous specific
indications within the general framework of the language quoted above.
Although the Company believes that these specific indications are covered by
the 510(k) clearance already received for its PGA pins, there can be no
assurance that the FDA would not consider promotion of this product for the
specific indications to be a change to the intended use of the device
requiring a new 510(k) submission.
Manufacturers of medical devices for marketing in the U.S. are required to
adhere to applicable regulations setting forth detailed GMP requirements,
which include testing, control and documentation requirements. Enforcement of
GMP regulations has increased significantly in the last several years, and the
FDA publicly stated that compliance would be more strictly scrutinized.
Manufacturers must also comply with Medical Device Reporting ("MDR")
requirements that a company report to the FDA any incident in which its
product may have caused or contributed to a death or serious injury, or in
which its product malfunctioned and, if the malfunction were to recur, it
would be likely to cause or contribute to a death or serious injury. Delays in
the receipt of, or the failure to obtain, regulatory clearances and approvals,
the restriction, suspension or revocation of regulatory clearances and
approvals, if obtained, or any failure to comply with regulatory requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's facilities and manufacturing processes, as well as those of
any suppliers, are subject to periodic inspection by the FDA and other
agencies. In October 1994, the Company's facility in Finland was inspected by
the FDA. The inspector made several observations related to GMPs, which
resulted in a Warning
42
<PAGE>
Letter being issued to the Company on February 23, 1995. The Company then
began an exchange of correspondence with the FDA, which concluded with an
October 10, 1995 letter from the FDA stating, among other things, that the
Company's responses to the Warning Letter were "adequate" and that during the
next inspection, the FDA would "verify that the corrections have been
implemented." Such an inspection is expected to occur in the near future.
The FDA has recently finalized changes to the GMP regulations, including
design controls, which will likely increase the cost of compliance with GMP
requirements. Changes in existing requirements or adoption of new requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the
Company will not incur significant costs to comply with such laws and
regulations in the future or that such laws and regulations will not have a
material adverse effect upon the Company's business, financial condition and
results of operations.
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, environmental protection,
and fire hazard control. 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 business, financial condition and
results of operations.
Regulations regarding the development, manufacture and sale of the Company's
products are subject to change. The Company cannot predict the impact, if any,
that such changes might have on its business, financial condition and results
of operations.
International. Sales of medical devices outside the U.S. are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain clearance required by foreign countries may be longer
or shorter than that required for FDA clearance or approval, and the
requirements may differ. In most instances, the Company currently relies on
its distributors for the receipt of premarket approvals and compliance with
clinical trial requirements in those foreign countries that require them. Many
countries in which the Company intends to operate either do not currently
regulate medical devices or have minimal registration requirements; however,
these countries may develop more extensive regulations in the future that
could adversely affect the Company's ability to market its products. Other
countries have requirements similar to those of the U.S. The disparity in the
regulation of medical devices among foreign countries may result in more rapid
product clearance in certain countries than in others. The products sold by
the Company are subject to premarket approval as well as other regulatory
requirements in many countries.
In order to continue selling its products within the European Economic Area
following June 14, 1998, the Company is required to achieve compliance with
the requirements of the Medical Devices Directive (the "MDD") and affix CE
marking on its products to attest such compliance. To achieve this, the
Company's products must meet the Essential Requirements as defined under the
MDD relating to safety and performance of its products and the Company must
successfully undergo verification of its regulatory compliance ("conformity
assessment") by a Notified Body selected by the Company. The nature of such
assessment will depend on the regulatory class of the Company's products.
Under European law, the Company's products are likely to be in class III. In
the case of class III products, the Company must (as a result of the
regulatory structure which the Company has elected to follow) establish and
maintain a complete quality system for design and manufacture as described in
Annex II of the MDD (this corresponds to a quality system for design described
in ISO 9001 and EN 46001 standards). The Notified Body must audit this quality
system and determine if it meets the requirements of the MDD. In addition, the
Notified Body must approve the specific design of each device in class III.
The Company received an EC Design Examination and an EC quality system
Certificate from a Notified Body on January 23, 1997. As part of the design
approval process, the Notified Body must also verify that the products comply
with the Essential Requirements of the MDD. In order to comply with these
requirements, the Company must, among other things, complete a risk analysis
and present sufficient clinical data. The clinical data presented by the
Company must provide evidence that the products meet the performance
specifications claimed by the Company, provide sufficient evidence of
43
<PAGE>
adequate assessment of unwanted side-effects and demonstrate that the benefits
to the patient outweigh the risks associated with the device. The Company will
be subject to continued supervision by the Notified Body and will be required
to report any serious adverse incidents to the appropriate authorities. The
Company also will be required to comply with additional national requirements
that are beyond the scope of the MDD. The Company is entitled to affix a CE
marking on all of its currently marketed orthopaedic, dental and maxillo-facial
products. Submission of the required design dossier for the Company's stent
products is scheduled for late 1997. Failure to obtain a CE marking for the
Company's stent products by June 14, 1998 would mean that the Company would be
unable to sell such products in the European Economic Area unless and until
compliance was achieved. There can be no assurance that the Company will be
able to achieve and/or maintain compliance required for CE marking for any or
all of its products or that it will be able to produce its products in a timely
and profitable manner while complying with the requirements of the MDD and
other regulatory requirements.
THIRD-PARTY REIMBURSEMENT
In the U.S. and other markets, health care providers such as hospitals and
physicians, that purchase medical devices, such as the Company's products,
generally rely on third-party payors, including Medicare, Medicaid and other
health insurance plans, to reimburse all or part of the cost of the procedure
in which the medical device is being used. The Company believes that, to date,
domestic health care providers have been reimbursed in full for the cost of
procedures which utilize the Company's products. However, there can be no
assurance that third-party reimbursement for such procedures will be
consistently available or that such third-party reimbursement will be adequate.
There is significant uncertainty concerning third-party reimbursement for the
procedures which utilize any medical device incorporating new technology.
Reimbursement by a third-party payor may depend on a number of factors,
including the payor's determination that the use of the Company's products are
clinically useful and cost-effective, medically necessary and not experimental
or investigational. Since reimbursement approval is required from each payor
individually, seeking such approvals can be a time consuming and costly process
which, in the future, could require the Company to provide supporting
scientific, clinical and cost-effectiveness data for the use of the Company's
products to each payor separately. Congress and certain state legislatures have
considered reforms in the health care industry that may affect current
reimbursement practices, including controls on health care spending through
limitations on the growth of Medicare and Medicaid spending. The development of
managed care programs in which the providers contract to provide comprehensive
health care to a patient population at a fixed cost per person has also given
rise to substantial pressure on health care providers to lower costs.
Outside the U.S., the success of the Company's products is also dependent in
part upon the availability of reimbursement and health care payment systems.
These reimbursement and health care payment systems vary significantly by
country, and include both government sponsored health care and private
insurance plans. Accordingly, there can be no assurance that third-party
reimbursement available under any one system will be available for procedures
utilizing the Company's products under any other reimbursement system. Several
governments have recently attempted to dramatically reshape reimbursement
policies affecting medical devices. Typically, the Company's international
independent distributors have obtained any necessary reimbursement approvals.
The ability of hospitals and physicians to obtain appropriate reimbursement
from government and private third-party payors for procedures in which the
Company's products are used is critical to the success of the Company. Failure
by such users of the Company's products to obtain sufficient reimbursement from
third-party payors for procedures in which the Company's products are used or
adverse changes in government and private payors' policies toward reimbursement
for such procedures would have a material adverse effect on the Company's
business, financial condition and results of operations.
PRODUCT LIABILITY AND INSURANCE
The Company's business is subject to product liability risks inherent in the
testing, manufacturing and marketing of the Company's products. There can be no
assurance that product liability claims will not be
44
<PAGE>
asserted against the Company or its licensees. While the Company maintains
product liability insurance, there can be no assurance that this coverage will
be adequate to protect the Company against future product liability claims. In
addition, product liability insurance is expensive and there can be no
assurance that product liability insurance will be available to the Company in
the future, on terms satisfactory to the Company, if at all. A successful
product liability claim or series of such claims brought against the Company
in excess of its coverage could have a material adverse effect on the
Company's business, financial condition and results of operations.
EMPLOYEES
As of December 31, 1996, the Company employed 14 full-time employees in the
U.S. and 33 full-time employees in Finland. Of its full-time employees, at
that date 14 were engaged in sales and marketing, six were engaged in
research, development, regulatory and quality assurance matters, 24 were
engaged in manufacturing and three were engaged in financial and
administrative services. The Company also contracts with independent
consultants from time to time. The Company's Finnish production and office
employees are members of a union and the terms of their employment are
governed in part by a collective bargaining agreement. The Company believes
that it maintains satisfactory relations with its employees.
FACILITIES
The Company currently operates two facilities, a central manufacturing
facility in Tampere, Finland that is part owned and part leased by the Company
and office space in Malvern, Pennsylvania that is leased by the Company on a
month-to-month basis. The Finnish facility, comprising approximately 10,000
square feet, is located in an industrial science park adjacent to the
Technical University at Tampere. Currently, that facility houses the Company's
manufacturing, quality control and product development functions and serves as
the Company's European customer service and central shipping location. The
Company operates its corporate headquarters, its executive offices and its
worldwide marketing and sales operations from its 2,500 square foot office
space in Pennsylvania.
The Company intends to relocate from its existing facility in Malvern,
Pennsylvania in 1997. The Company anticipates that it will either (i) equip
and operate a leased facility in the eastern U.S. or (ii) relocate its
headquarters and contract with a third party to provide a manufacturing
capability to the Company. No specific site has been selected. See "--
Manufacturing" and "Certain Transactions."
45
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information with respect to the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
President, Chief Executive Officer and
David W. Anderson................ 44 Director
Executive Vice President, Research and
Pertti Tormala................... 51 Director
Michael J. O'Brien............... 36 Vice President, Finance and Administration
and Chief Financial Officer
Pertti Viitanen.................. 46 Managing Director of the Company's Finnish
subsidiaries
Stephen A. Lubischer............. 34 Vice President, U.S. Sales
Terry D. Wall(1)................. 55 Chairman of the Board
David J. Bershad(1).............. 57 Director
Anthony J. Dimun(2).............. 53 Director
David H. MacCallum(2)............ 59 Director
</TABLE>
- --------
(1) Member of Compensation Committee
(2) Member of Audit Committee
DAVID W. ANDERSON has been the President and Chief Executive Officer and a
member of the Board of Directors of Bionx Implants, Inc. since its inception
in 1995. He has served as the Chief Executive Officer of the Company's
operating subsidiaries since December 1994. Prior to joining the Company, he
was the President and Chief Executive Officer of Kensey Nash Corporation, a
developer of cardiology products, from 1992 to 1994. From 1989 to 1992, Mr.
Anderson was a Vice President of LFC Financial Corp., a private investment and
venture capital company, with responsibility for healthcare. From 1986 to
1989, he was a founder and Executive Vice President of Osteotech, Inc., a high
technology orthopaedic company. Mr. Anderson also served in a number of
operations and general management positions with Schering Plough Corporation,
a pharmaceutical and health care products manufacturer, from 1978 to 1986.
PERTTI TORMALA is a founder of the Company's Finnish subsidiaries and has
directed the Company's research and development work since the mid 1980's. He
has been a director of Bionx Implants, Inc. since its inception. Professor
Tormala is the Chairman of the Institute of Biomaterials at the Technical
University at Tampere and is an international lecturer on the science and
application of bioabsorbable Self-Reinforced polymers in medicine. In 1995,
Professor Tormala was elected to an Academy Professor Chair by the Finnish
Academy. He has written and published a substantial number of peer reviewed
articles, many on resorbable polymers. Professor Tormala received a Masters
Degree and Ph.D. in Polymer Chemistry from the University of Helsinki.
MICHAEL J. O'BRIEN joined the Company in November 1996 as Vice President,
Finance and Administration, and Chief Financial Officer. From January 1996 to
October 1996, Mr. O'Brien served as a financial consultant to Biocyte
Corporation and Immunotherapy, Inc. From July 1993 to January 1996,
Mr. O'Brien was the Chief Financial Officer, and from December 1994 to January
1996 Mr. O'Brien was the President and acting Chief Executive Officer, of
Biocyte Corporation, a biopharmaceutical company engaged in stem cell
transplantation. From September 1986 to February 1993, he held senior finance
and operations positions at international sites with The Ultimate Corporation,
a computer hardware reseller, and from February 1993 to July 1993, he served
as a consultant to The Ultimate Corporation. He began his career as an auditor
with the accounting firm of Deloitte & Touche.
46
<PAGE>
PERTTI VIITANEN has been the Managing Director of the Company's Finnish
operations since 1990. Prior to joining the Company, he was the production and
export manager for a major Finnish plastics manufacturer from 1981 to 1990.
From 1968 to 1981, Mr. Viitanen held positions of increasing responsibility in
sales and operations at companies in the paper and machine tool industries.
Mr. Viitanen received a Masters in Science Degree in Plastics Technology from
the Technical University at Tampere.
STEPHEN A. LUBISCHER joined the Company in April 1996 as Vice President,
U.S. Sales. Prior to joining the Company, Mr. Lubischer held positions in
sales and distribution management at Interpore International, a manufacturer
and marketer of bone substitute materials, from 1990 to April 1996. He also
held sales positions with the Criticon subsidiary of Johnson & Johnson from
1987 to April 1990.
TERRY D. WALL has been a director of Bionx Implants, Inc. since its
inception and a director of the Company's operating subsidiaries since 1992.
He has served as the President and Chief Executive of Vital Signs, Inc.
("Vital Signs"), a manufacturer of disposable anesthesia and respiratory
devices, since he founded that company in 1972. Prior to establishing Vital
Signs, he held various sales and marketing positions with The Foregger Co.,
the medical division of Westinghouse Corp., and the medical division of
American Optical Corp. Mr. Wall is also a director of EchoCath, Inc.
("EchoCath") and Exogen, Inc.
DAVID J. BERSHAD has been a director of Bionx Implants, Inc. since its
inception and a director of the Company's operating subsidiaries since 1992.
Mr. Bershad is, and has been for more than the past five years, a senior
partner with the New York law firm of Milberg Weiss Bershad Hynes & Lerach,
LLP. Mr. Bershad is also a director of Vital Signs.
ANTHONY J. DIMUN has been a director of Bionx Implants, Inc. since its
inception and a director of the Company's operating subsidiaries since 1992.
For more than the past five years, he has served as Executive Vice President
and Chief Financial Officer of Vital Signs. Prior to joining Vital Signs on a
permanent basis in 1991, he served as a Senior Vice President of First
Atlantic Capital Ltd., a U.S. affiliate of an international merchant banking
group, from 1989 to 1991, a financial consultant during 1988, a partner in the
accounting firm of Goldstein Golub and Kessler (from 1978 to 1987) and a
senior audit manager in the accounting firm of Ernst & Young LLP. He is also a
director of Vital Signs and EchoCath.
DAVID H. MACCALLUM has been a director of Bionx Implants, Inc. since its
inception and a director of the Company's operating subsidiaries since 1992.
Since May 1994, Mr. MacCallum has been the Managing Director for Life Sciences
Investment Banking at UBS Securities LLC. Prior to commencing his association
with UBS Securities LLC, Mr. MacCallum served from 1983 to May 1994 as the Co-
Head, Investment Banking for Hambrecht & Quist LLC. Mr. MacCallum is also a
director of MiniMed, Inc.
BOARD OF DIRECTORS AND OFFICERS
In accordance with the terms of the Company's Certificate of Incorporation
to be effective upon the completion of this Offering, the Board of Directors
of the Company (the "Board") will be divided into three classes, denominated
Class I, Class II and Class III, with members of each class holding office for
staggered three-year terms. Messrs. Anderson and Wall will be Class I
directors whose terms will expire at the 1998 annual meeting of stockholders,
Messrs. Bershad and Tormala will be Class II directors whose terms will expire
at the 1999 annual meeting of stockholders and Messrs. Dimun and MacCallum
will be Class III directors whose terms will expire at the 2000 annual meeting
of stockholders (in all cases subject to the election and qualification of
their successors or to their earlier death, resignation or removal). At each
annual stockholder meeting commencing with the 1998 annual meeting, the
successors to the directors whose terms expire will be elected to serve from
the time of their election and qualification until the third annual meeting of
stockholders following their election or until a successor has been duly
elected and qualified. Officers serve at the discretion of the Board.
47
<PAGE>
The Audit Committee of the Board was established in February 1997 to review,
act on and report to the Board with respect to various auditing and accounting
matters, including the selection of the Company's auditors, the scope of the
annual audits, the fees to be paid to the auditors, the performance of the
Company's independent auditors and the accounting practices of the Company.
The Compensation Committee of the Board was established in February 1997 to
determine the salaries and incentive compensation of the employee-officers of
the Company and to provide recommendations for the salaries and incentive
compensation of the other employees and the consultants of the Company. The
Compensation Committee will also administer the Company's benefit plans.
EXECUTIVE COMPENSATION
During 1996, the only executive officer of the Company who received in
excess of $100,000 in compensation from the Company was David W. Anderson, the
Company's Chief Executive Officer. The following table sets forth the
compensation paid by the Company during 1996 to the Chief Executive Officer
and to the Company's four other most highly compensated executive officers
(the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ---------------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) UNDERLYING OPTIONS(#) COMPENSATION
--------------------------- -------- ------- --------------- --------------------- ------------
<S> <C> <C> <C> <C> <C>
David W. Anderson....... $151,600 $40,000 -- -- $7,708(2)
President and Chief
Executive Officer
Stephen A.
Lubischer(3)........... 74,622 -- -- 52,632(4) 7,462(2)
Vice President, U.S.
Sales
Michael J. O'Brien(5)... 9,167 -- -- 65,790(6) 917(2)
Vice President, Finance
and Administration,
and Chief Financial
Officer
Pertti Tormala.......... 84,680 -- -- -- 26,400(7)
Executive Vice
President, Research
Pertti Viitanen......... 80,725 -- -- -- --
Managing Director of
the Company's Finnish
subsidiaries
</TABLE>
- --------
(1) Perquisites and other personal benefits do not exceed ten percent of
salary plus bonus for any of the Named Executive Officers.
(2) Represents amounts paid on behalf of the Named Executive Officer for
various employee benefits selected by such individual pursuant to a
cafeteria plan.
(3) Mr. Lubischer joined the Company as its Vice President, U.S. Sales in
April 1996. He is currently paid an annual salary of $100,000.
(4) In September 1996, Mr. Lubischer was granted options covering 39,474
shares of Common Stock, of which options covering 15,790 shares are vested
and options covering 23,684 shares will vest in three equal annual
installments on December 31, 1997, 1998 and 1999. In November 1996, Mr.
Lubischer was granted options covering an additional 13,158 shares vesting
ratably over a five year period.
(5) Mr. O'Brien joined the Company as its Vice President, Finance and
Administration, and Chief Financial Officer in November 1996. He is
currently paid an annual salary of $110,000.
(6) Mr. O'Brien was granted his options upon commencement of employment. Of
the shares covered by his options, 15,790 shares vest on each of November
24, 1997 and 1998, 13,158 shares vest on November 24, 1999 and 10,526
shares vest on each of November 24, 2000 and 2001.
(7) Represents royalty payments due to Professor Tormala under a now
superceded employment agreement with respect to 1996 product sales.
48
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement, with David W.
Anderson, its President and Chief Executive Officer. The term of the agreement
will expire on December 31, 1998. Pursuant to the agreement, Mr. Anderson
receives minimum annual compensation of $160,000 and is entitled to receive a
performance based bonus. Mr. Anderson is also entitled to receive all health
insurance benefits generally made available to the Company's employees as well
as a monthly car allowance of $500. The agreement further provides that if Mr.
Anderson's employment is terminated without cause by the Company prior to the
expiration of the initial term, or if Mr. Anderson terminates the agreement
for good reason prior to the expiration of the initial term, Mr. Anderson will
be entitled to base salary and health insurance benefits continuation for a
period of one year after the date of termination.
The Company has also entered into a new employment agreement with Pertti
Tormala effective December 1996. The agreement provides for a term expiring in
2002. Pursuant to the agreement, Professor Tormala will receive a base salary
of 540,000 FIM (approximately $120,000) and is eligible to receive cash
bonuses granted by the Company's Board of Directors. Professor Tormala is also
entitled to a car, certain pension benefits and reimbursement of all
reasonable travel and entertainment expenses. Under the agreement, all
patents, patent applications and other industrial property rights developed by
Professor Tormala relating to the Company's research and development
activities are the sole property of the Company. The agreement permits
Professor Tormala to spend up to 16 hours per month working on a business to
be spun-off from the Company prior to the consummation of this Offering. See
"Certain Transactions."
STOCK OPTION INFORMATION
The following table sets forth certain information concerning stock options
granted during the year ended December 31, 1996 to the Named Executive
Officers who received stock options during that year. In accordance with the
rules of the Securities and Exchange Commission (the "Commission"), the
following table also sets forth the potential realizable value over the term
of the options (the period from the grant date to the expiration date) based
on assumed rates of stock price appreciation of 5% and 10% compounded
annually. These amounts do not represent the Company's estimate of future
stock price performance. Actual realizable values, if any, of stock options
will depend on the future performance of the Common Stock. No stock
appreciation rights were granted during the fiscal year ended December 31,
1996.
OPTION GRANTS IN THE FISCAL YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(3)
OPTIONS EMPLOYEES IN EXERCISE PRICE PER EXPIRATION -----------------------
NAME GRANTED (#)(1) 1996 SHARE ($/SHARE)(2) DATE 5% 10%
---- -------------- ------------- ------------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Stephen A. Lubischer.... 39,474 26.8% $4.75 9/2/06 $ 118,126 298,128
13,158 8.9 9.50 11/23/06 78,751 198,752
Michael J. O'Brien...... 65,790 44.6 9.50 11/23/06 393,754 993,758
</TABLE>
- --------
(1) These options were granted under the Company's Stock Option/Stock Issuance
Plan. For information regarding the vesting of these options, see the
notes to the Summary Compensation Table.
(2) The exercise price per share of the options was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board.
(3) The potential realizable value is calculated based on the term of the
option at the date of grant (10 years). It is calculated assuming that the
fair market value of the Company's Common Stock on the date of grant
appreciates at the indicated annual rate compounded annually for the
entire term of the options and that the options are exercised and sold on
the last day of their term for the appreciated stock price.
49
<PAGE>
No stock options or stock appreciation rights were exercised by the Named
Executive Officers during 1996 and no stock appreciation rights were
outstanding as of December 31, 1996. The following table sets forth certain
information with respect to the value of stock options held by the Named
Executive Officers as of December 31, 1996.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1996(#) DECEMBER 31, 1996(1)($)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David W. Anderson........... 83,104 193,905 $1,005,351 $2,345,766
Stephen A. Lubischer........ 15,790 36,842 130,268 241,446
Michael J. O'Brien.......... -- 65,790 -- 230,265
</TABLE>
- --------
(1) Based on a value equal to an assumed initial public offering price of
$13.00 per share, minus the per share exercise price, multiplied by the
number of shares underlying the options.
STOCK OPTION/STOCK ISSUANCE PLAN
The Company's Stock Option/Stock Issuance Plan (the "Plan") was adopted by
the Company's Board of Directors and stockholders in September 1996. A total
of 850,000 shares of Common Stock have been authorized for issuance under the
Plan. In no event may any one person participating in the Plan receive
options, separately exercisable stock appreciation rights and direct stock
issuances for more than 278,947 shares in any calendar year.
The Plan is divided into four separate components: (i) the Discretionary
Option Grant Program under which employees, consultants and other independent
advisors who provide services to the Company may, at the discretion of the
plan administrator, be granted options to purchase shares of Common Stock;
(ii) the Stock Issuance Program under which such persons may, in the plan
administrator's discretion, be issued shares of Common Stock directly, either
through the immediate purchase of such shares at a price not less than the
fair market value of the Common Stock on the date of issuance or as a bonus
for services rendered to the Company; (iii) the Salary Investment Option Grant
Program under which employees designated by the plan administrator may elect
to have a portion of their base salary invested each year in options to
purchase shares of Common Stock at an exercise price equal to thirty-three and
one-third percent (33 1/3%) of the fair market value of the Common Stock on
the grant date; and (iv) the Automatic Option Grant Program under which
eligible non-employee directors shall automatically, at periodic intervals,
receive option grants to purchase shares of Common Stock at an exercise price
equal to one hundred percent (100%) of the fair market value of the Common
Stock on the grant date.
The Discretionary Option Grant, the Salary Investment Option Grant and the
Stock Issuance Programs will be administered by the Compensation Committee of
the Company's Board of Directors. The Compensation Committee, as plan
administrator, has full authority to determine which eligible persons are to
receive option grants or stock issuances, the time or times when such option
grants or stock issuances are to be made, the number of shares subject to each
such grant or issuance, the status of any granted option as either an
incentive option or a non-statutory option under the Federal tax laws, the
vesting schedule (if any) applicable to the option grant or stock issuance and
the maximum term for which any granted option is to remain outstanding. The
Automatic Option Grant Program is self-executing, with all grants thereunder
being made in strict compliance with the express terms of that program, and no
administrative discretion will be exercised by the Board of Directors or any
committees with respect to those grants.
50
<PAGE>
Prior to the adoption of the Plan, the Company committed itself to grant
options to certain employees at specified option exercise prices which, at the
time such commitments were made, were intended to represent the fair market
value of the Common Stock. Options granted under these commitments will be
governed by the Discretionary Option Grant Program, subject to the commitments
made with respect to the exercise price and the term of such options.
Should the Company's stockholders approve a merger or consolidation of the
Company with or into another corporation, or the sale of all or substantially
all of the assets of the Company, in which the stockholders of the Company
before the transaction own less than 50% of the voting securities of the
surviving or successor corporation following the transaction (a "Corporate
Transaction"), each outstanding option under the Discretionary Option Grant
Program will automatically vest in full, unless such option will be assumed or
replaced with an equivalent incentive program by the successor corporation.
Any options so assumed or replaced, and in the event of a change in control of
the ownership of the Company each outstanding option under this program, will
automatically vest in full if the optionee's service with the Company is
involuntary terminated within 18 months following the effective date of the
Corporate Transaction or the change in control.
In the event of any Corporate Transaction or change in control while the
optionee remains in service to the Company, each outstanding option under the
Salary Investment Option Grant Program will automatically vest in full and
will remain exercisable until the earlier of the expiration of the option term
or the expiration of the two year period from the optionee's cessation of
service with the Company.
Upon any Corporate Transaction, all the shares of Common Stock subject to
repurchase rights under the Stock Issuance Program will immediately vest in
full, unless those repurchase rights are assigned to the successor
corporation. Any shares under repurchase rights so assigned, and in the event
of a change in control all shares subject to repurchase rights under the Stock
Issuance Program, will immediately vest in full if the optionee's service with
the Company is involuntary terminated within 18 months following the effective
date of the Corporate Transaction or the change in control.
Tandem stock appreciation rights may be issued under the Plan which will
allow optionees to surrender their outstanding options in exchange for an
appreciation distribution from the Company equal to the excess of (i) the fair
market value of the vested shares of Common Stock subject to the surrendered
option over (ii) the aggregate exercise price payable for such shares. Such
appreciation distribution may be made in cash or in shares of Common Stock.
Furthermore, limited stock appreciation rights may be issued to officers and
directors of the Company under the Plan which, upon the occurrence of a
hostile take-over, permit such individuals holding options with such limited
stock appreciation rights in effect for at least six months the unconditional
right to surrender such options in return for a cash distribution from the
Company in an amount equal to the excess of (i) the take-over price of the
vested shares surrendered under the option over (ii) the aggregate exercise
price payable for such shares.
The plan administrator has the authority to effect, with the consent of the
affected option holders, the cancellation of outstanding options under the
Discretionary Option Grant Program in return for new options covering the same
or a different number of shares with an exercise price based on the fair
market value of the Common Stock on the new grant date.
Under the Automatic Option Grant Program, each non-employee director first
elected or appointed to the Board of Directors after the date of this
Offering, will automatically be granted a non-statutory option for shares of
Common Stock equal to the greater of (i) 3,000 or (ii) the number equal to
$30,000 divided by the price at which the Common Stock is offered in this
Offering, provided such individual has not been in the prior employ of the
Company. In addition, at each annual stockholders meeting after this Offering,
each individual with at least six months service on the Board of Directors as
a non-employee director and who will continue to serve as a non-employee
director following the meeting will automatically be granted a non-statutory
option for 3,000 shares of Common Stock, provided such individual has
continued his or her service
51
<PAGE>
as a non-employee director for a period of at least one year after he or she
ceases serving as an employee of the Company.
Each automatic grant will have a term of ten years, subject to earlier
termination following the optionee's cessation of service on the Board of
Directors as provided in the Plan. Fifty percent of the shares subject to an
automatic grant will vest on the date of grant, 25% one year after the date of
grant, and the remaining 25% two years after the date of grant.
In the event of a Corporate Transaction or change in control, the shares of
Common Stock under the Automatic Option Grant Program will automatically vest
in full. Upon the occurrence of a hostile take-over, the optionee will have a
30 day period in which to surrender to the Company each automatic option held
by him or her in exchange for a cash distribution from the Company equal to
the excess of the take-over price of the shares subject to the surrendered
option over the aggregate exercise price payable for such shares.
The Plan will terminate on September 3, 2006, unless sooner terminated
pursuant to its terms.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for (i)
any breach of their duty of loyalty to the corporation or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) unlawful payments of dividends
or unlawful stock repurchases or redemptions, or (iv) any transaction from
which the director derived an improper personal benefit. Such limitation of
liability does not apply to liabilities arising under the federal and state
securities and environmental laws and does not affect the availability of
equitable remedies such as injunctive relief or rescission.
The Company's by-laws also provide that the Company shall indemnify, to the
fullest extent permitted by law, all present and former directors and
officers, and any such person serving or agreeing to serve as an officer or
director with any other enterprise at the Company's request, in connection
with any proceeding threatened, pending or instituted against such party by
reason of their serving or agreeing to serve in such capacity.
Section 145 of the Delaware General Corporation Law generally allows the
Company to indemnify the parties described in the preceding paragraph for all
expenses (including attorneys' fees), judgments, fines, and amounts in
settlement actually paid and reasonably incurred in connection with any
proceedings so long as such party acted in good faith and in a manner
reasonably believed to be in or not opposed to the Company's best interests
and, with respect to any criminal proceedings, if such party had no reasonable
cause to believe his or her conduct to be unlawful. Indemnification may be
provided by the Company only if the applicable standard of conduct set forth
in Section 145 has been met by the indemnified party upon a determination made
(i) by a majority vote of directors who are not parties to such proceedings,
even though less than a quorum, or (ii) if there are no such directors, or if
the directors so direct, by independent legal counsel in a written opinion, or
(iii) by the stockholders.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company in which indemnification is required or
permitted.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, the Board of Directors performed all of the responsibilities of
the Compensation Committee. Mr. Wall, who is the Chairman of the Board of the
Company, Mr. Anderson, who is the President and Chief Executive Officer of the
Company, and Professor Tormala, who is an Executive Vice President of the
Company, participated in all discussions and decisions regarding salaries and
incentive compensation for all employees of the Company, except that Mr.
Anderson and Professor Tormala were excluded from discussions regarding their
own salary and incentive compensation. Mr. Wall has not received any salary or
incentive compensation from the Company.
52
<PAGE>
CERTAIN TRANSACTIONS
In September 1996, the Company consummated its Reorganization. Pursuant to
the Reorganization, (i) the U.S. and Finnish stockholders of the Company's
four operating subsidiaries contributed the capital stock of those entities to
Bionix, B.V. (the "Dutch Company") and Bionx Implants, Inc. (the "Parent
Company"), (ii) the Dutch Company contributed to the Parent Company the
capital stock of the operating companies that it received from such
stockholders, (iii) the Parent Company issued 2,684,211 shares of Common Stock
to the Dutch Company, (iv) the Company's four operating entities became
wholly-owned subsidiaries of the Parent Company, (v) each of the Company's
Finnish stockholders received capital stock of the Dutch Company and (vi) each
of the Company's U.S. investors received capital stock of both the Dutch
Company and the Parent Company. The shares issued to the Company's directors
and executive officers or their affiliated entities pursuant to the
Reorganization were as follows: (i) David Anderson: 131,222 shares of the
Company's Common Stock and shares representing 1.3% of the equity and 3.3% of
the voting power of the Dutch Company's capital stock; (ii) David J. Bershad:
254,732 shares of the Company's Common Stock and shares representing 1.9% of
the equity and 4.9% of the voting power of the Dutch Company's capital stock;
(iii) Anthony J. Dimun: 129,416 shares of the Company's Common Stock and
shares representing 1.3% of the equity and 3.3% of the voting power of the
Dutch Company's capital stock; (iv) David H. MacCallum: 97,179 shares of the
Company's Common Stock and shares representing 1.0% of the equity and 2.6% of
the voting power of the Dutch Company's capital stock; (v) Pertti Tormala:
shares representing 41.9% of the equity and 21.6% of the voting power of the
Dutch Company's capital stock; (vi) Pertti Viitanen: shares representing 5.4%
of the equity and 2.8% of the voting power of the Dutch Company's capital
stock; and (vii) Terry D. Wall: 1,966,400 shares of the Company's Common Stock
and shares representing 18.0% of the equity and 46.5% of the voting power of
the Dutch Company's capital stock.
Promptly after the Reorganization was consummated, the Company issued a
total of 2,000,000 shares of its Preferred Stock (convertible into a total of
1,052,638 shares of Common Stock) and Warrants covering 421,065 shares of
Common Stock to several U.S. investors in exchange for an aggregate capital
contribution of $5,000,000. In this round of financing, T. Rowe Price
Threshold Fund III, L.P. ("Threshold") acquired 1,200,000 shares of Preferred
Stock and Warrants covering 252,632 shares for an aggregate purchase price of
$3,000,000, David J. Bershad acquired 120,000 shares of Preferred Stock and
Warrants covering 25,264 shares for an aggregate purchase price of $300,000,
Anthony J. Dimun (through an affiliated entity) acquired 40,000 shares of
Preferred Stock and Warrants covering 8,422 shares for an aggregate purchase
price of $100,000, David H. MacCallum (through an affiliated entity) acquired
20,000 shares of Preferred Stock and Warrants covering 4,211 shares for an
aggregate purchase price of $50,000 and Terry D. Wall (through an affiliated
entity) acquired 160,000 shares of Preferred Stock and Warrants covering
33,685 shares for an aggregate purchase price of $400,000. Each share of
Preferred Stock will convert into approximately 0.526 of a share of Common
Stock upon consummation of this Offering. Messrs. Bershad, Dimun, MacCallum
and Wall were directors of the Company at the time of this financing.
As stated elsewhere herein, the Company's Preferred Stock will be
automatically converted into Common Stock, and the Warrants will be called,
upon closing of this Offering. Holders of the Preferred Stock and Warrants
(including Threshold and Messrs. Bershad, Dimun, MacCallum and Wall or their
affiliated entities) have rights to demand registration under the Securities
Act of shares of Common Stock issuable pursuant to the conversion of the
Preferred Stock and pursuant to the exercise of the Warrants on two occasions
beginning six months after the closing of this Offering. Such investors also
have the right to cause the Company to register such shares under the
Securities Act pursuant to a "shelf" registration statement commencing one
year after this Offering. In addition, in the event that the Company proposes
to register any of its securities or the securities of any other shareholder
under the Securities Act, the current holders of the Preferred Stock and
Warrants will have rights, subject to certain exceptions and limitations, to
have shares of Common Stock issuable upon conversion of the Preferred Stock or
upon exercise of the Warrants included in such registration statement. See
"Description of Capital Stock --Registration Rights of Certain Holders."
From October 1994 through April 1995, the Company was a party to a
distribution agreement with a subsidiary of Vital Signs which entitled that
subsidiary to distribute the Company's products in the U.S. on a
53
<PAGE>
non-exclusive basis. During the term of that agreement, the Vital Signs
subsidiary paid the Company approximately $105,000 for products purchased for
distribution by such subsidiary. Pursuant to that relationship, the Company
borrowed $100,000 from Vital Signs at an interest rate of nine percent per
annum. In addition, upon termination of the distribution agreement, the
Company agreed to pay the Vital Signs subsidiary $87,000 upon return of
certain inventory. That amount, as well as all principal and interest due on
such borrowing, was paid by the Company in 1996. Terry D. Wall, the Chairman
of the Board of the Company, is the principal stockholder and Chief Executive
Officer of Vital Signs and he, Anthony J. Dimun and David J. Bershad are
directors of Vital Signs. The Company believes that the terms of these
transactions were no less favorable to the Company than terms that would be
available from similarly situated unrelated parties.
During the three years ended December 31, 1996, Professor Tormala (an
officer, director and principal beneficial stockholder of the Company) earned
royalty payments totaling approximately $182,000 from the Company pursuant to
the terms of an employment agreement that was terminated as of December, 1996
and license agreements covering certain of the Company's products. In lieu of
continuing royalty payments under the employment agreement, Professor
Tormala's new employment agreement provides for an increase in his base
salary.
Pentti Rokkanen, M.D., who beneficially owns 7.0% of the Company's
outstanding Common Stock, provides consulting services to the Company. During
the three years ended December 31, 1996, a total of approximately $95,000 of
consulting fees were accrued and ultimately paid to Professor Rokkanen.
As described elsewhere herein, the Company presently is considering the
possibility of contracting with a third party to provide a manufacturing
operation to the Company in the eastern U.S. If the Company pursues such an
arrangement, it will solicit bids from reliable medical device manufacturers,
including Thomas Medical Products, Inc. ("Thomas"), a wholly-owned subsidiary
of Vital Signs. Messrs. Wall, Dimun and Bershad, each of whom are directors of
Vital Signs, will not participate in any such determination pertaining to
Thomas.
Terry Wall, Pertti Tormala and the Company are each one-third equity owners
in a business organized to engage in developing, manufacturing and selling
polymer-based advanced drug delivery systems (the "Business"). The Company
acquired its interest in the Business from an unrelated individual in 1996 in
exchange for a payment of $65,000 and has not incurred any expenses relating
to the Business since that time. The Business has no tangible assets and is
expected to be in the development stage for a period of at least four years.
The Board of Directors has concluded that in light of the substantial
expenditures that would be required in order to bring any of the Business'
products to market, it is in the best interests of the Company and its
stockholders for the Company to forego its development of the Business and to
spin-off the Business. The Company intends to distribute its interest in the
Business to stockholders of record of the Company as of a date prior to the
effective date of this Offering. Accordingly, investors in this Offering will
not have an ownership interest in the Business. Professor Tormala's employment
agreement with the Company enables him to dedicate certain of his services to
the Business, but provides that he may not work more than 16 hours per month
during business hours on matters pertaining to the Business. See "Management -
Employment Agreements."
During 1994 and 1995, Messrs. Wall, Anderson, Bershad, Dimun and MacCallum
contributed $494,000, $150,000, $61,000, $33,333 and $11,667, respectively, to
subsidiaries of the Company in exchange for shares of capital stock of such
subsidiaries. Such shares were exchanged for shares of Common Stock and shares
of the Dutch company's capital stock pursuant to the Reorganization.
Through December 31, 1996, the Company granted executive officers and
directors options to purchase a total of 395,431 shares of Common Stock with
exercise prices ranging from $0.9025 to $9.50 per share. For information
regarding employment agreements with executive officers, see "Management -
Employment Agreements."
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to the Company with respect
to the beneficial ownership of its Common Stock as of December 31, 1996, and
as adjusted to reflect the sale of Common Stock offered by the Company hereby,
for (i) each person who is known by the Company to own beneficially more than
5% of the Company's Common Stock, (ii) each of the Company's directors, (iii)
each Named Executive Officer and (iv) all directors and Named Executive
Officers as a group.
<TABLE>
<CAPTION>
PERCENT OF TOTAL(1)
--------------------
SHARES PERCENT PERCENT
BENEFICIALLY BEFORE AFTER
NAMES OF BENEFICIAL OWNER(2) OWNED(1) OFFERING OFFERING(3)
- ---------------------------- ------------ -------- -----------
<S> <C> <C> <C>
Bionix, B.V.(4).............................. 2,684,211 42.1 30.1
Terry D. Wall(5)............................. 2,568,715 40.1 29.2
T. Rowe Price Threshold Fund III, L.P.(6) ... 884,211 13.3 10.1
David W. Anderson(7)......................... 249,167 3.9 2.8
David J. Bershad(8).......................... 393,886 6.2 4.5
Anthony J. Dimun(9).......................... 193,571 3.0 2.2
Stephen A. Lubischer(10)..................... 15,790 * *
Michael J. O'Brien........................... -- -- --
David H. MacCallum(11)....................... 138,813 2.2 1.6
Pentti Rokkanen(12).......................... 443,217 7.0 5.0
Pertti Tormala(13)........................... 1,124,818 17.7 12.8
Pertti Viitanen(14).......................... 144,840 2.3 1.6
All directors and Named Executive Officers
as a group (nine persons)(15)............... 4,829,600 73.8 54.3
</TABLE>
- --------
(*) Less than 1%.
(1) Applicable percentage ownership is based on 6,371,062 shares of Common
Stock outstanding as of December 31, 1996 (giving pro forma effect to the
Preferred Stock Conversion) together with applicable stock options and
Warrants for such stockholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission, based
on factors including voting and investment power with respect to shares.
Shares of Common Stock subject to the Warrants and shares of Common Stock
subject to stock options currently exercisable, or exercisable within 60
days after December 31, 1996, are deemed outstanding for computing the
percentage ownership of the person holding such stock options or Warrants,
but are not deemed outstanding for computing the percentage ownership of
any other person. In light of the Commission's rules regarding the
calculation of beneficial ownership with respect to exercisable Warrants,
each holder of Warrants is deemed to be the beneficial owner of all shares
covered by such holder's Warrants. Each owner of an equity interest in the
Dutch Company is deemed to beneficially own a percentage of the shares of
the Common Stock owned by the Dutch Company equal to such owner's
proportionate equity interest in the Dutch Company.
(2) Except as otherwise indicated in the footnotes to this table and pursuant
to applicable community property laws, persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock. Unless otherwise indicated, the address of all 5% shareholders is
c/o the Company, 279B Great Valley Parkway, Malvern, Pennsylvania 19355.
The address of T. Rowe Price Threshold Fund III, L.P. is 100 E. Pratt
Street, Baltimore, Maryland 21202.
(3) In calculating the percentage ownership after this Offering, this table
assumes that no holders of Warrants utilize a cashless exercise approach
and that, as a result, a total of 421,065 shares of Common Stock are
issued upon the closing of this Offering pursuant to the exercise of
Warrants.
(4) The capital stock of the Dutch Company is owned by the former stockholders
of the Company's operating subsidiaries. The Board of Directors of the
Dutch Company consists of David W. Anderson (who is also the chief
executive officer of the Dutch Company), David J. Bershad, Anthony J.
Dimun, David H. MacCallum, Pertti Tormala, Pertti Viitanen, Terry D. Wall
and Pentti Rokkanen, all but the last of whom are directors or executive
officers of the Company. Messrs. Anderson, Bershad, Dimun, MacCallum and
Wall beneficially own capital stock of the Dutch Company representing, in
the aggregate, approximately 23.5% of the equity and 60.6% of the voting
power of the Dutch Company's capital stock. Messrs. Tormala, Viitanen and
Rokkanen own capital stock of the Dutch Company representing, in the
aggregate, approximately 63.8% of the equity and 32.9% of the voting power
of the Dutch Company's capital stock. The remaining equity and voting
power of the Dutch Company's capital stock is allocated among several
other Finnish investors.
(5) Mr. Wall's shares include 33,685 shares of Common Stock issuable upon the
exercise of Warrants and 484,419 shares of Common Stock owned by the Dutch
Company, representing Mr. Wall's proportionate equity interest in the
2,684,211 shares of Common Stock owned by the Dutch Company. Mr. Wall has
the right to cause the Dutch Company to transfer such 484,419 shares to
him
55
<PAGE>
pursuant to an agreement with the Dutch Company. All of Mr. Wall's shares
of Common Stock and of the Dutch Company's capital stock are held in an
investment partnership which he controls.
(6) Such Fund's shares include 252,632 shares of Common Stock issuable upon
the exercise of Warrants.
(7) Mr. Anderson's shares include 83,104 shares of Common Stock issuable upon
the exercise of vested stock options and 34,841 shares of Common Stock
owned by the Dutch Company, representing Mr. Anderson's proportionate
equity interest in the 2,684,211 shares of Common Stock owned by the
Dutch Company. Mr. Anderson has the right to cause the Dutch Company to
transfer such 34,841 shares to him pursuant to an agreement with the
Dutch Company.
(8) Mr. Bershad's shares include 25,264 shares of Common Stock issuable upon
the exercise of Warrants and 50,732 shares of Common Stock owned by the
Dutch Company, representing Mr. Bershad's proportionate equity interest
in the 2,684,211 shares of Common Stock owned by the Dutch Company. Mr.
Bershad has the right to cause the Dutch Company to transfer such shares
to him pursuant to an agreement with the Dutch Company. A total of
254,732 of Mr. Bershad's shares of Common Stock and all of Mr. Bershad's
shares of the Dutch Company's capital stock are held in an investment
partnership which he controls.
(9) Mr. Dimun's shares include 8,422 shares of Common Stock issuable upon the
exercise of Warrants and 34,680 shares of Common Stock owned by the Dutch
Company, representing Mr. Dimun's proportionate equity interest in the
2,684,211 shares of Common Stock owned by the Dutch Company. Mr. Dimun
has the right to cause the Dutch Company to transfer such 34,680 shares
to him pursuant to an agreement with the Dutch Company. All of
Mr. Dimun's shares of Common Stock and of the Dutch Company's capital
stock and all of his Warrants are held in entities which he controls.
(10) Mr. Lubischer's shares represent shares of Common Stock issuable upon the
exercise of vested options.
(11) Mr. MacCallum's shares include 4,211 shares of Common Stock issuable upon
the exercise of Warrants and 26,896 shares of Common Stock owned by the
Dutch Company, representing Mr. MacCallum's proportionate equity interest
in the 2,684,211 shares of Common Stock owned by the Dutch Company. Mr.
MacCallum has the right to cause the Dutch Company to transfer such
shares to him pursuant to an agreement with the Dutch Company. A total of
10,527 of Mr. MacCallum's shares of Common Stock and all of his Warrants
are held in an entity which he controls.
(12) Represents Professor Rokkanen's proportionate equity interest in the
2,684,211 shares of Common Stock owned by the Dutch Company. Professor
Rokkanen has the right to cause the Dutch Company to transfer such
443,217 shares to him pursuant to an agreement with the Dutch Company.
(13) Represents Professor Tormala's proportionate equity interest in the
2,684,211 shares of Common Stock owned by the Dutch Company. Professor
Tormala has the right to cause the Dutch Company to transfer such
1,124,818 shares to him pursuant to an agreement with the Dutch Company.
That agreement enables Professor Tormala to direct the voting by the
Dutch Company of a specified number of shares of the Company's Common
Stock held by the Dutch Company. As of December 31, 1996, that specified
number equals 2,052,643, representing Professor Tormala's proportionate
equity interest in the 2,684,211 shares of Common Stock owned by the
Dutch Company (1,124,818 shares) and the proportionate equity interest of
all other Finnish investors in such 2,684,211 shares (927,825 shares).
The table above excludes from Professor Tormala's beneficial ownership
the 927,825 shares attributable to the equity interests of such other
Finnish investors.
(14) Represents Mr. Viitanen's proportionate equity interest in the 2,684,211
shares of Common Stock owned by the Dutch Company. Mr. Viitanen has the
right to cause the Dutch Company to transfer such 144,840 shares to him
pursuant to an agreement with the Dutch Company.
(15) Includes 71,582 shares of Common Stock issuable upon the exercise of
Warrants, 98,894 shares of Common Stock issuable upon the exercise of
vested stock options, and 1,901,226 shares of Common Stock owned by the
Dutch Company, representing the directors' and Named Executive Officers'
proportionate equity interest in the 2,684,211 shares of Common Stock
owned by the Dutch Company. The directors and Named Executive Officers as
a group beneficially own approximately 70.8% of the equity and
approximately 85.0% of the voting power associated with the capital stock
of the Dutch Company. The directors and Named Executive Officers of the
Company as a group have a right to vote all of the 2,684,211 shares of
Common Stock owned by the Dutch Company. If all such 2,684,211 shares
were deemed to be beneficially owned by the Company's directors and Named
Executive Officers, such persons as a group would be deemed to be the
beneficial owners of 5,612,585 shares of Common Stock, representing 85.8%
of the shares outstanding before this Offering and 63.1% of the shares
outstanding after this Offering.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 31,600,000 shares of
Common Stock and 8,000,000 shares of Preferred Stock (after giving effect to a
reduction in the authorized shares of Preferred Stock which will result from
the mandatory conversion of the outstanding shares of Preferred Stock upon the
closing of this Offering). The following summaries of certain provisions of
the Common Stock and Preferred Stock do not purport to be complete and are
subject to, and qualified in their entirety by, the provisions of the
Company's Certificate of Incorporation, which is included as an exhibit to the
Registration Statement of which this Prospectus forms a part, and by
applicable law.
COMMON STOCK
As of January 31, 1997, there were 6,607,513 shares of Common Stock
outstanding, as adjusted to reflect the conversion of all outstanding shares
of Preferred Stock and the assumed cashless exercise of all outstanding
Warrants upon the closing of this Offering. Such shares were held of record by
21 stockholders.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding Preferred Stock, the holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available for
that purpose. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of Preferred Stock, if any,
then outstanding. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are
fully paid and nonassessable, and the shares of Common Stock to be issued upon
the closing of this Offering will be fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without action by the
stockholders, to designate and issue Preferred Stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of the Common Stock. It is not
possible to state the actual effect of the issuance of any shares of Preferred
Stock upon the rights of holders of the Common Stock until the Board of
Directors determines the specific rights of the holders of such Preferred
Stock. However, the effects might include, among other things, restricting
dividends on the Common Stock, diluting the voting power of the Common Stock,
impairing the liquidation rights of the Common Stock and delaying or
preventing a change in control of the Company without further action by the
stockholders. The Company has no present plans to issue any shares of
Preferred Stock.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of 1,289,089 shares of Common Stock (the "Registrable
Securities"), after giving effect to the mandatory conversion of the
outstanding shares of Preferred Stock and the assumed cashless exercise of the
Warrants upon the closing of this Offering, or their transferees are entitled
to certain rights with respect to the registration of such shares under the
Securities Act. These rights are provided under the terms of an agreement
between the Company and the holders of Registrable Securities. Subject to
certain limitations in that agreement, the holders of a majority of the
Registrable Securities may require, on two occasions beginning six months
following the date of this Prospectus, that the Company register the
Registrable Securities for public resale. If the Company registers any of its
Common Stock either for its own account or for the account of other security
holders, the holders of Registrable Securities are entitled to include their
shares of Common Stock in the registration statement, subject to the ability
of the underwriters to limit the number of shares included in the offering
(but to not less than 30% of the offering). The holders of Registrable
Securities may also require the Company to register all or a portion of their
Registrable Securities
57
<PAGE>
on Form S-3 when use of such form becomes available to the Company, provided,
among other things limitations, that the proposed aggregate selling price (net
of any underwriters' discounts or commissions) is at least $1 million. All
registration expenses must be borne by the Company and all selling expenses
relating to Registrable Securities must be borne by the holders of the
securities being registered.
WARRANTS
Prior to this Offering, the Company had outstanding Warrants entitling the
holders to purchase a total of 421,065 shares of Common Stock at an exercise
price of $5.70 per share. The Company, will call the Warrants upon the closing
of this Offering. To avoid forfeiture of the Warrants upon such call, the
holders of the Warrants must then either pay the exercise price in cash or
arrange for a cashless exercise in which the Company will issue to each holder
a number of shares of Common Stock having a fair market value equal to (x) the
amount by which the fair market value of one share of Common Stock exceeds
$5.70 multiplied by (y) the number of Warrants exercised. Except as otherwise
indicated herein, this Prospectus assumes that each Warrant holder will
exercise such holder's Warrants by means of a cashless exercise and that,
based upon an assumed initial public offering price of $13.00 per share, a
total of 236,451 shares of Common Stock will be issued upon the exercise of
the Warrants.
CERTAIN CHANGE OF CONTROL PROVISIONS
Bionx Implants, Inc. is a Delaware corporation and is subject to Section 203
of the Delaware General Corporation Law, an anti-takeover law. In general,
Section 203 prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years following the date the person became an interested stockholder, unless
(with certain exceptions) the "business combination" or the transaction in
which the person became an interested stockholder is approved in a prescribed
manner. Generally, a "business combination" includes a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years prior to the
determination of interested stockholder status, did own) 15% or more of a
corporation's voting stock.
The authorization of undesignated Preferred Stock makes it possible for the
Board of Directors to issue Preferred Stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
the Company. Upon consummation of this Offering, the Company's Certificate of
Incorporation will provide for staggered terms for members of the Board of
Directors and will eliminate the right of stockholders to act without a
meeting. The amendment of the staggered term and stockholder meeting
provisions would require approval of at least two-thirds of the outstanding
Common Stock. Additionally, the Bylaws of the Company will, upon consummation
of this Offering, establish an advance notice procedure for stockholder
proposals and for nominating candidates for election as directors.
The above-mentioned provisions of Delaware law and of the Company's
Certificate of Incorporation and Bylaws may have the effect of delaying,
deterring or preventing a change in control of the Company, may discourage
bids for the Common Stock at a premium over the prevailing market price, and
may adversely affect the market price, and the voting and other rights of the
holders, of the Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Stocktrans, Inc.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could materially and adversely affect the market prices of the Common
Stock prevailing from time to time. Sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions described
below lapse could also materially and adversely affect the prevailing market
price of the Common Stock and the ability of the Company to raise equity
capital in the future.
Upon completion of this Offering, the Company will have 8,607,513 shares of
Common Stock outstanding, assuming no exercise of options after December 31,
1996 and after giving effect to the Preferred Stock Conversion and the Warrant
Exercise. Of these shares, the 2,000,000 shares sold in this Offering will be
freely tradable without restriction under the Securities Act, unless held by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. The remaining 6,607,513 shares of Common Stock held by
existing stockholders were issued and sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act. These
shares may be sold in the public market only if registered, or pursuant to an
exemption from registration such as Rule 144 or Rule 144(k) under the
Securities Act. The Company's directors, executive officers and certain other
stockholders of the Company that beneficially own or have dispositive power
over substantially all of the shares of Common Stock outstanding prior to this
Offering, including Common Stock to be issued upon the closing of this
Offering pursuant to the conversion of the Company's Preferred Stock and
pursuant to the exercise of all outstanding Warrants, have entered into lock-
up agreements under which they have agreed not to sell, offer, make any short
sale or otherwise dispose of or enter into any contract, arrangement or
commitment to sell or otherwise dispose of any shares of Common Stock or
securities convertible or exchangeable or exercisable for any rights to
purchase or acquire Common Stock owned by them for a period of 180 days after
the date of this Prospectus, without the prior written consent of UBS
Securities LLC. The Company has entered into a similar agreement, except that
the Company may grant options and issue stock under its current stock option
and stock purchase plans, and pursuant to other currently outstanding options.
Approximately 90 days after the completion of this Offering, the Company
intends to file a registration statement on Form S-8 under the Securities Act
to register the future issuance of all shares of Common Stock reserved for
issuance under the Company's Stock Option/Stock Issuance Plan. As of December
31, 1996, an aggregate of 424,382 shares of Common Stock were reserved for
issuance pursuant to outstanding options and 425,618 shares of Common Stock
have been reserved for future grant under the Company's Stock Option/Stock
Issuance Plan. Such registration statement will automatically become effective
upon filing. Accordingly, shares registered thereunder will, subject to Rule
144 limitations applicable to affiliates, be available for sale in the public
market, except to the extent that such shares are subject to vesting
restrictions with the Company or certain contractual restrictions on sale or
transfer (including options covering 395,431 shares which are subject to Lock-
up Agreements).
No shares of Common Stock, other than the 2,000,000 shares offered hereby
and 3,846 shares subject to options which will be vested on or after the
effective date of such Registration Statement on Form S-8 and which are held
by persons who have not executed lock-up agreements, will be available for
immediate sale prior to the expiration of the lock-up agreements. The
6,607,513 shares held by existing stockholders will become eligible for public
resale upon expiration of the lock-up agreements, subject in some cases to
volume limitations imposed by Rule 144 and subject to the Company's ability or
obligation to register any of these shares for resale at any time after the
lock-up agreements expire.
After this Offering, the holders of 1,289,089 shares of Common Stock (after
giving effect to the Preferred Stock Conversion and the Warrant Exercise) will
be entitled to certain demand and piggyback rights with respect to the
registration of such shares under the Securities Act. If such holders, by
exercising their demand registration rights, cause a large number of
securities to be registered and sold in the public market, such sales could
have an adverse effect on the market price of the Company's Common Stock. If
the Company, either on its own behalf or on behalf of certain shareholders,
were to initiate a registration and include shares held
59
<PAGE>
by such holders pursuant to the exercise of their piggyback registration
rights, such sales could have an adverse effect on the Company's ability to
raise needed capital. See "Certain Transactions" and "Description of Capital
Stock - Registration Rights of Certain Holders."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for a minimum
holding period (which the Securities and Exchange Commission has reduced from
two years to one year, effective in April 1997), including the holding period
of any prior owner, except an affiliate, is entitled to sell in "broker's
transactions" or to market makers, within any three month period commencing
90 days after the date of this Prospectus, a number of shares that does not
exceed the greater of (i) one percent of the number of shares of Common Stock
then outstanding (approximately 86,000 shares immediately after this Offering)
or (ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the required filing of a Form 144 with respect to
such sale. Sales under Rule 144 are generally subject to certain manner of
sale provisions and notice requirements and to the availability of current
public information about the Company. Under Rule 144(k), a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be
sold for a minimum holding period (reduced from three years to two years,
effective in April 1997), is entitled to sell such shares without being
required to comply with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Under Rule 701 under the
Securities Act, persons who purchase shares upon exercise of options granted
prior to the effective date of this Offering are entitled to sell such shares
90 days after the effective date of this Offering in reliance on Rule 144,
without having to comply with the holding period requirements of Rule 144 and,
in the case of non-affiliates, without having to comply with the public
information, volume limitation or notice provisions of Rule 144.
60
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom UBS Securities LLC,
Hambrecht & Quist LLC and Volpe, Welty & Company L.L.C. are acting as
representatives (the "Representatives"), have agreed to purchase from the
Company the following respective number of shares of Common Stock:
<TABLE>
<CAPTION>
UNDERWRITERS SHARES
------------ ---------
<S> <C>
UBS Securities LLC.................................................
Hambrecht & Quist LLC..............................................
Volpe, Welty & Company L.L.C.......................................
---------
Total.......................................................... 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The
nature of the Underwriters' obligation is such that they are committed to
purchase all shares of Common Stock offered hereby if any of such shares are
purchased. The Underwriting Agreement contains certain provisions whereby if
any Underwriter defaults in its obligations to purchase shares, and the
aggregate obligations of the Underwriters so defaulting do not exceed ten
percent of the shares offered hereby, the remaining Underwriters, or some of
them, must assume such obligations.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the offering
price set forth on the cover of this Prospectus, and to certain dealers at
such price less a concession not in excess of $ per share. The Underwriters
may allow and such dealers may reallow a concession not in excess of $ per
share to certain other dealers. After the public offering of the shares of
Common Stock, the Offering price and other selling terms may be changed by the
Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock to cover over allotments, if any, at the
public offering price set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions. To the extent that the Underwriters
exercise this option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof which the number of shares
of Common Stock to be purchased by it shown in the above table bears to the
total number of shares of Common Stock offered hereby. The Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The executive officers, directors, employees and certain other stockholders
of the Company who beneficially own or have dispositive power over
substantially all of the shares of Common Stock outstanding prior to this
Offering, including Common Stock to be issued upon the closing of this
Offering pursuant to the conversion of the Company's Preferred Stock and
pursuant to the exercise of Warrants, have agreed that they will not, without
the prior written consent of UBS Securities LLC, offer, sell or otherwise
dispose of any shares of securities exchangeable for or convertible into
shares of Common Stock owned by them for a period of 180 days after the date
of this Prospectus. The Company has agreed that it will not, without the prior
61
<PAGE>
written consent of UBS Securities LLC, offer, sell or otherwise dispose of any
shares of Common Stock for a period of 180 days after the date of this
Prospectus, except that the Company may grant options and issue shares under
its current Stock Option/Stock Issuance Plan and may issue shares pursuant to
other currently outstanding options.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority in excess of five percent of the number of shares of Common Stock
offered hereby.
An entity affiliated with Hambrecht & Quist LLC beneficially owns 147,370
shares (assuming exercise in full of the Warrants owned by such entity) of the
Company's Common Stock. Certain individuals affiliated with UBS Securities LLC
beneficially own, in the aggregate, 153,554 shares (assuming exercise in full
of the Warrants owned by such individuals) of the Company's Common Stock.
Prior to this Offering, there has been no public market for the Common Stock
of the Company. The initial public offering price was determined through
negotiations among the Company and the Representatives. Among the factors
considered in such negotiations were prevailing market conditions, certain
financial information of the Company, market valuations of other companies
that the Company and the representatives of the Underwriters believe to be
comparable to the Company, estimates of the business potential of the Company,
the present state of the Company's development and other factors deemed
relevant. The initial public offering price set forth on the cover page of
this Prospectus should not, however, be considered an indication of the actual
value of the Common Stock. Such price is subject to change as a result of
market conditions and other factors. There can be no assurance that an active
trading market will develop for the Common Stock or that the Common Stock will
trade in the public market subsequent to this Offering at or above the initial
offering price.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A., Roseland, New
Jersey. Certain legal matters will be passed upon for the Underwriters by
Brobeck, Phleger & Harrison LLP, New York, New York.
EXPERTS
The consolidated financial statements of Bionx Implants, Inc. as of December
31, 1995 and 1996, and for each of the years in the three-year period ended
December 31, 1996, have been included herein and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent Certified
Public Accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
The statements in this Prospectus under the captions "Risk Factors --
Uncertainties Relating to Licenses, Trade Secrets, Patents and Proprietary
Rights" and "Business -- Licenses, Trade Secrets, Patents and Proprietary
Rights" on matters of U.S. intellectual property law have been reviewed and
approved by Kenyon & Kenyon, New York, New York, U.S. intellectual property
counsel for the Company, as experts in U.S. intellectual property law, and are
included herein in reliance upon such review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 29549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
62
<PAGE>
the Registration Statement and the exhibits and schedules thereto. To the
extent that statements contained in this Prospectus as to the contents of any
contract or any other document relate to a contract or document that is filed
as an exhibit to the Registration Statement, reference is made to the copy of
such contract or document. For further information with respect to the Company
and such Common Stock, reference is made to the Registration Statement and to
the exhibits and schedules filed therewith. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. A copy of the Registration Statement may be inspected by
anyone without charge at the Commission's principal office in Washington, D.C.
and copies of all or any part of the Registration Statement may be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of certain fees prescribed by the
Commission. The Commission also maintains a site on the World Wide Web that
will contain reports, proxy and information statements and other information
regarding the Company. The address for such site is http://www.sec.gov.
63
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. F-2
Financial Statements:
Consolidated Balance Sheets at December 31, 1995 and 1996................ F-3
Consolidated Statements of Operations for the Years ended December 31,
1994, 1995, and 1996 ................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
ended December 31, 1994, 1995, and 1996................................. F-5
Consolidated Statements of Cash Flows for the Years ended December 31,
1994, 1995, and 1996.................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Bionx Implants, Inc.:
We have audited the accompanying consolidated balance sheets of Bionx
Implants, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the years in the three-year period ended December
31, 1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated 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 financial position of Bionx
Implants, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
January 24, 1997, except
for the first paragraph of
Note 15 which is as of February 24, 1997
F-2
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
PRO FORMA
DECEMBER 31, 1996
1995 1996 (NOTE 2)
----------- ---------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 50,662 1,593,131 1,593,131
Inventory, net (note 3).......... 731,644 1,030,809 1,030,809
Trade accounts receivable, net of
allowance of $97,325 as of
December 31, 1996............... 398,168 1,708,432 1,708,432
Grants receivable................ 7,730 122,711 122,711
Deferred offering costs (note
15)............................. -- 194,981 194,981
Prepaid expenses and other
current assets.................. 170,065 153,005 153,005
----------- ---------- ----------
Total current assets............... 1,358,269 4,803,069 4,803,069
Investments........................ 104,161 100,334 100,334
Deposits........................... -- 43,964 43,964
Plant and equipment, net (note 4).. 331,808 336,286 336,286
----------- ---------- ----------
Total assets....................... $ 1,794,238 5,283,653 5,283,653
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQ-
UITY (DEFICIT)
Current liabilities:
Trade accounts payable........... $ 908,695 848,127 848,127
Long-term debt, current portion
(note 7)........................ 363,293 223,037 223,037
Related party (note 5)........... 198,096 163,184 163,184
Current income tax liability..... -- 205,065 205,065
Accrued and other current liabil-
ities (note 6).................. 464,225 1,317,196 1,317,196
----------- ---------- ----------
Total current liabilities.......... 1,934,309 2,756,609 2,756,609
----------- ---------- ----------
Long-term debt (note 7)............ 896,204 590,336 590,336
----------- ---------- ----------
Series A mandatorily redeemable
convertible preferred stock, par
value $0.001 per share;
2,000,000 shares authorized,
none issued and outstanding at
December 31, 1995 and 2,000,000
shares issued and outstanding as
of December 31, 1996 (converts
into 1,052,638 pro forma common
shares as of December 31, 1996
upon consummation of the
offering contemplated herein)
(note 8)........................ -- 5,000,000 --
----------- ---------- ----------
Stockholders' equity (deficit)
(notes 8,9,15):
Preferred stock, par value $0.001
per share, 8,000,000 shares
authorized and none issued and
outstanding................... -- -- --
Common stock, par value $0.0019
per share, 31,600,000 shares
authorized and 5,318,424 shares
issued and outstanding as of
December 31, 1996 (6,607,513 pro
forma common shares as of
December 31, 1996 upon
conversion of the Series A
preferred stock in conjunction
with the Offering contemplated
herein)......................... 1,343,316 10,105 12,554
Additional paid-in capital....... 580,998 1,858,870 6,856,421
Accumulated deficit.............. (2,693,442) (4,662,690) (4,662,690)
Foreign currency translation
adjustment...................... (267,147) (269,577) (269,577)
----------- ---------- ----------
Total stockholders' equity (defi-
cit).............................. (1,036,275) (3,063,292) 1,936,708
----------- ---------- ----------
Commitments and contingencies
(note 10)
Total liabilities and stockholders'
equity (deficit).................. $ 1,794,238 5,283,653 5,283,653
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------------
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Product sales............................ $1,264,733 1,354,719 5,033,952
Cost of goods sold....................... 476,447 538,013 2,105,128
---------- ---------- -----------
Gross profit............................. 788,286 816,706 2,928,824
---------- ---------- -----------
Selling, general and administrative...... 693,159 2,164,340 4,445,362
Research and development................. 189,530 274,213 459,666
---------- ---------- -----------
Total operating expenses................. 882,689 2,438,553 4,905,028
---------- ---------- -----------
Operating loss........................... (94,403) (1,621,847) (1,976,204)
---------- ---------- -----------
Other income and expenses:
License and grant revenue (note 13).... 15,682 266,887 345,203
Interest expense....................... (93,250) (98,021) (86,906)
Other, net............................. 10,208 (25,035) (42,951)
---------- ---------- -----------
Total other income (expense), net........ (67,360) 143,831 215,346
---------- ---------- -----------
Loss before provision for income taxes... (161,763) (1,478,016) (1,760,858)
Provision for income taxes (note 12)..... -- -- (208,390)
---------- ---------- -----------
Net loss................................. $ (161,763) (1,478,016) (1,969,248)
========== ========== ===========
Pro forma net loss per share (note 2).... $ (0.31)
===========
Shares used in computing pro forma net
loss per share (note 2)................. 6,369,655
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
COMMON
STOCK FOREIGN TOTAL
PAR VALUE ADDITIONAL CURRENCY STOCKHOLDERS'
PREFERRED OR STATED PAID-IN ACCUMULATED TRANSLATION EQUITY
STOCK VALUE CAPITAL DEFICIT ADJUSTMENT (DEFICIT)
--------- ----------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994
(unaudited)............ $-- 494,406 299,998 (1,053,663) (188,529) (447,788)
Proceeds from the
issuance of common
stock................ -- 269,577 95,000 -- -- 364,577
Foreign currency
translation
adjustment........... -- -- -- -- (35,210) (35,210)
Net loss.............. -- -- -- (161,763) -- (161,763)
---- ----------- --------- ---------- -------- ----------
Balance, December 31,
1994................... -- 763,983 394,998 (1,215,426) (223,739) (280,184)
Proceeds from the
issuance of common
stock................ -- 579,333 186,000 -- -- 765,333
Foreign currency
translation
adjustment........... -- -- -- -- (43,408) (43,408)
Net loss.............. -- -- -- (1,478,016) (1,478,016)
---- ----------- --------- ---------- -------- ----------
Balance, December 31,
1995................... -- 1,343,316 580,998 (2,693,442) (267,147) (1,036,275)
Effect of
reorganization
(note 1)............. -- (1,333,266) 1,333,266 -- -- --
Proceeds from the
issuance of common
stock................ -- 55 49,820 -- -- 49,875
Issuance costs--Series
A mandatorily
redeemable
convertible preferred
stock................ -- -- (105,214) -- -- (105,214)
Foreign currency
translation
adjustment........... -- -- -- -- (2,430) (2,430)
Net loss.............. -- -- -- (1,969,248) -- (1,969,248)
---- ----------- --------- ---------- -------- ----------
Balance, December 31,
1996................... $-- 10,105 1,858,870 (4,662,690) (269,577) (3,063,292)
==== =========== ========= ========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------------------
1994 1995 1996
--------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $(161,763) (1,478,016) (1,969,248)
--------- ---------- ----------
Adjustments to reconcile net loss to
net cash
used in operating activities:
Depreciation......................... 61,432 71,194 76,042
Change in assets and liabilities:
(Increase) decrease in accounts re-
ceivable........................... 12,785 19,772 (1,310,264)
Increase in inventory............... (82,196) (150,547) (299,165)
Increase in grants receivable....... -- -- (114,981)
Increase in deferred insuance
costs.............................. -- -- (194,981)
(Increase) decrease in prepaid ex-
pense and other assets............. (3,000) (54,589) 17,060
Increase in deposits................ -- -- (43,964)
Increase (decrease) in accounts pay-
able............................... 10,721 79,047 (60,568)
Increase (decrease) in related par-
ty................................. -- 198,096 (34,912)
Increase in current tax liability... -- -- 205,065
Increase (decrease) in accrued and
other liabilities.................. 133,682 (240,309) 852,971
--------- ---------- ----------
133,424 (77,336) (907,697)
--------- ---------- ----------
Net cash used in operating activities... (28,339) (1,555,352) (2,876,945)
--------- ---------- ----------
Cash flows from investing activities:
Purchases of plant and equipment...... (3,008) (37,316) (80,520)
Purchases of investments.............. -- (2,056) --
Proceeds from sale of investments..... -- -- 3,827
--------- ---------- ----------
Net cash used in investing activities... (3,008) (39,372) (76,693)
--------- ---------- ----------
Cash flow from financing activities:
Proceeds from long-term debt.......... -- 484,139 --
Repayment of long-term debt........... (196,445) -- (446,124)
Net proceeds from the issuance of pre-
ferred stock......................... -- -- 4,894,786
Proceeds from the issuance of common
stock................................ 364,577 765,333 49,875
--------- ---------- ----------
Net cash provided by financing activi-
ties................................... 168,132 1,249,472 4,498,537
--------- ---------- ----------
Net effects of foreign exchange rate
differences............................ (35,210) (43,408) (2,430)
--------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents............................ 101,575 (388,660) 1,542,469
Cash and cash equivalents at beginning
of period.............................. 337,747 439,322 50,662
--------- ---------- ----------
Cash and cash equivalents at end of pe-
riod................................... $ 439,322 50,662 1,593,131
========= ========== ==========
Supplemental disclosure of cash flow in-
formation:
Cash paid for interest................. $ -- 54,213 195,035
Cash paid for taxes.................... -- -- 3,325
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) ORGANIZATION
Basis of Presentation
Bionx Implants, Inc. (the Company) was incorporated in October, 1995 as a
Delaware corporation. In 1996, the Company entered into a reorganization,
described more fully below, whereby four corporate entities that separately
controlled the business activities of the Company were reorganized into Bionx
Implants, Inc. The shareholders of the four separate corporations who were
shareholders having a common interest in the combined activities of the
business exchanged their shares pro-rata, directly or indirectly, for the
shares of Bionx Implants, Inc. All stockholders of the four entities
substantially retained their respective pro-rata equity stake ownership
subsequent to the reorganization of the Company.
Given the ownership relationship of the four predecessor corporations and
the subsequent reorganization into the Company described below, the
accompanying consolidated financial statements include the four predecessor
corporations' financial statements as of December 31, 1995 and 1996 and for
each of the years ended December 31, 1994, 1995 and 1996. All financial
information contained herein is presented in U.S. dollars.
Reorganization
In September 1996, the Company consummated its reorganization. Pursuant to
the reorganization, (i) the Company's four operating entities became wholly-
owned subsidiaries of the Company, (ii) each of the Company's Finnish
shareholders received capital stock of a Dutch company, and (iii) each of the
Company's United States investors received capital stock of both a Dutch
company and the Company. Upon consummation of the reorganization, the sole
assets of such Dutch company were shares of the Company's common stock.
Shortly after the reorganization was consummated, the Company issued a total
of 2,000,000 shares of its Series A mandatorily redeemable convertible
preferred stock ("Series A") and 421,065 common stock warrants to certain
accredited investors in exchange for an aggregate capital contribution of
$5,000,000.
Accordingly, at present the Company has four wholly-owned subsidiaries--
OrthoSorb, Inc., Biostent, Inc., Bioscience, Ltd., and Biocon, Ltd.--each of
which are wholly-owned by the Company.
Business Purpose
The Company is a leading developer, manufacturer and marketer of self-
reinforced, resorbable polymer implants, including screws, pins, arrows and
stents, for use in a variety of applications which include orthopaedic
surgery, urology, dentistry and maxillo-facial surgery. The Company's
proprietary manufacturing processes self-reinforce a resorbable polymer,
modifying the gel-like or brittle polymer structure into a physiologically
strong structure with controlled, variable strength retention (ranging from
three weeks to six months depending upon the medical indication). The Company
currently markets its nine product lines through managed networks of
independent agents, distributors and dealers.
Since inception, the Company has sustained operating losses and has not
generated positive cash flow from operations. The Company plans to continue to
finance its future operations with proceeds from the sale of capital stock,
such as the proposed initial public offering contemplated by the prospectus
("Offering"), and revenues from future product sales, royalty payments and
license and government grant payments, if any. The Company's future operations
are dependent upon the successful execution of planned financings, such as the
Offering, and ultimately, upon achieving profitable operations, if ever. If
the Offering contemplated herein is not consummated, it will be necessary for
the Company to seek other sources of capital or adjust its proposed future
operating plans.
F-7
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the financial statements of
the Company and its four wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. Cash
and cash equivalents include cash on hand and in the bank as well as short-
term securities. The carrying amount of cash and cash equivalents approximates
its fair value due to its short-term nature.
Inventory
Inventory is valued at the lower of cost or market, with cost being
determined under a first-in, first-out (FIFO) method.
Investments
Investments consist of certain real property interests in Finland. The
Company can classify its equity securities in one of three categories:
trading, available-for-sale, or held-to-maturity. Trading securities are
bought and held principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities in which the Company has the
ability and intent to hold the security until maturity. All of the Company's
investments are classified as held-to-maturity and are recorded at amortized
cost, adjusted for the amortization or accretion of premiums or discounts. All
other investments would be classified as available-for-sale.
A decline in the market value below cost that is deemed to be other than
temporary results in a reduction in carrying amount to fair value. The
impairment is charged to earnings and a new cost basis for the security is
established. Dividend and interest income are recognized when earned. The
amortized cost approximates market value as of December 31, 1995 and 1996.
Plant and Equipment
Major additions and replacements of assets are capitalized at cost.
Maintenance, repairs, and minor replacements are expensed as incurred.
Machinery and equipment are depreciated using the straight-line method over a
five to fifteen-year period. Leasehold improvements and equipment acquired
under capital lease are amortized using the straight-line method over the
estimated useful life of the asset or the lease term, whichever is shorter.
Upon retirement or sale, the cost of the asset disposed of and the related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is credited or charged to operations.
Certain Risks and Concentrations
The Company extends unsecured trade credit in connection with its commercial
sales to a diversified customer base comprised of both foreign and domestic
entities, most of which are concentrated in the healthcare industry.
F-8
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company invests its excess cash in deposits with major U.S. financial
institutions and money market funds. To date, the Company has not experienced
any losses on its cash equivalents and money market funds.
The Company's products require approvals or clearances from the U.S. Food
and Drug Administration (FDA) and international regulatory agencies prior to
commercialized sales. There can be no assurance that the Company's products
will receive any of the required approvals or clearances. If the Company were
denied such approvals or clearances, or such approvals or clearances were
delayed, it would have a material adverse impact on the results of operations
and financial position of the Company.
Fair Value of Financial Instruments
Financial Accounting Standards Board Statement No. 107, Disclosures About
Fair Value of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. Cash, trade accounts receivable,
prepaid expenses and other current assets, trade accounts payable and accrued
expenses reported in the combined balance sheets equal or approximate fair
value due to their short maturities. Based on the borrowing rates currently
available to the Company, the fair value of the Company's various loans is
approximately $700,000.
Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise price.
Effective January 1, 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosures
required by SFAS No. 123.
Revenue Recognition
Revenue from product sales is recognized upon shipment and passage of title
to the customer. Revenue from license fees is recognized when the required
milestones are met. Revenue from grant agreements is recognized in the period
in which the related expenses are incurred and in accordance with the
Company's obligations under the terms of the respective grants.
Research and Development
All research and development costs are expensed as incurred.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, Foreign Currency Translation.
Substantially all assets and liabilities of the foreign subsidiaries are
translated at year-end exchange rates and
F-9
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
income and expense items are translated at an average exchange rate for the
year. Exchange adjustments resulting from foreign currency transactions are
generally recognized in operations, while adjustments resulting from the
translation of financial statements are reflected as a separate component of
stockholders' equity (deficit). The Company does not hedge its currency
translation exposure.
Accounting for Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No.109, Accounting for Income Taxes.
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that will be in effect when
such differences are expected to reverse. The measurement of deferred tax
assets is reduced, if necessary, by a valuation allowance for any tax benefits
which are not expected to be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that such tax
rate change is enacted.
Pro Forma Net Loss Per Share (Unaudited)
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding giving effect to certain adjustments described
below. Common equivalent shares from stock options are excluded from the
computation of pro forma net loss per share as their effect is anti-dilutive,
except that, pursuant to Securities and Exchange Commission (SEC) Staff
Accounting Bulletins and SEC staff policy, common stock and common stock
equivalent shares issued at prices below the anticipated initial public
offering price during the preceding twelve months of the offering have been
included in the computation as if they were outstanding for all periods
presented (using the treasury stock method and the anticipated offering
price).
Pursuant to SEC staff policy, the calculation of shares used in computing
pro forma net loss per share also includes the weighted average number of
common equivalent shares of Series A preferred stock and warrants that will
automatically convert into shares of common stock upon completion of the
Offering (using the if-converted method) from their respective original dates
of issuance.
The following table sets forth the calculation of the total number of shares
used in the computation of pro forma net loss per common share:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Weighted average common shares outstanding....................... 5,281,020
Weighted average of incremental shares assumed to be outstanding
related to common stock options and warrants granted and
convertible preferred stock based on the treasury stock method.. 748,335
Weighted average convertible preferred stock (if converted
method)......................................................... 340,300
---------
Weighted average common and common equivalent shares used in
computation of pro forma net loss per common share.............. 6,369,655
=========
</TABLE>
F-10
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pro Forma Balance Sheet (Unaudited)
The unaudited pro forma balance sheet as of December 31, 1996 reflects the
conversion of the existing 2,000,000 shares of Series A mandatorily redeemable
convertible preferred stock into 1,052,638 shares of common stock (adjusted
for the common stock reverse split), which conversion is contingent upon the
closing of the Offering. In addition, the unaudited pro forma balance sheet as
of December 31, 1996 reflects the assumed cashless exercise of the warrants
covering 421,065 shares of common stock into 236,451 shares of common stock
(adjusted for the common stock reverse split).
(3) INVENTORY
Inventory consists of the following components as of December 31, 1995 and
1996:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Raw materials............................................. $ 80,108 101,122
Finished goods............................................ 812,557 1,210,033
--------- ---------
892,665 1,311,155
Less reserves............................................. (161,021) (280,346)
--------- ---------
$ 731,644 1,030,809
========= =========
</TABLE>
(4) PLANT AND EQUIPMENT
Plant and equipment consist of the following components as of December 31,
1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
--------- --------
<S> <C> <C>
Machinery and production equipment......................... $ 658,711 731,015
Computer equipment......................................... 13,829 14,613
--------- --------
672,540 745,628
Less accumulated depreciation.............................. (340,732) (409,342)
--------- --------
$ 331,808 336,286
========= ========
</TABLE>
(5) RELATED PARTY TRANSACTIONS
Under an employment agreement dated August 21, 1992, the Company was
obligated to pay an executive a 2 percent royalty on sales of certain products
for which the Company received a patent after August 1992. This agreement also
required that the Company pay a minimum royalty of approximately $2,200 per
month. The same executive and another employee are parties to an additional
agreement that provides royalties on sales of a specific product patented
prior to 1992, again subject to certain annual minimums. The aggregate amount
of all royalties due to employees related to these agreements was $98,096 and
$163,184 as of December 31, 1995 and 1996, respectively.
The December 31, 1995 related party balance also included a $100,000
interest-bearing loan from Vital Signs, Inc., a company for which the Chairman
of the Board and another director of the Company are executives. This loan was
repaid in 1996.
The Company's product development efforts are dependent upon one employee
who is a founder, director, and executive officer of the Company and is
currently an Academy Professor at the Technical University in Tampere, Finland
and as such is permitted by the University to devote his efforts to
F-11
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
developing new products for the Company. This executive utilizes a group of
senior researchers, graduate students, and faculty at the Technical University
to perform research and development projects involving resorbable polymers and
other topics impacting the Company's technology and processes. This
arrangement, partially funded by the Company and permitted in Finland as a
means of encouraging the commercialization of technological development, has
resulted in substantial cost savings to the Company while substantially
expanding its product development effort.
(6) ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist of the following components as
of December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
-------- ---------
<S> <C> <C>
Commissions and royalties.................................... $ 21,948 359,687
Wages........................................................ 133,495 184,920
Withholding tax and social security.......................... 177,940 157,325
Interest..................................................... 130,842 77,252
Inventory purchases.......................................... -- 23,002
Professional fees............................................ -- 305,492
Value-added and other taxes.................................. -- 78,981
Other........................................................ -- 130,537
-------- ---------
$464,225 1,317,196
======== =========
</TABLE>
(7) LONG-TERM DEBT
Long-term debt consists of the following components as of December 31, 1995
and 1996:
<TABLE>
<CAPTION>
1995 1996
---------- --------
<S> <C> <C>
Loans from financial institutions......................... $ 595,134 546,930
Loans from Finnish government............................. 352,911 226,483
Bank note payable......................................... 300,000 --
Other debt................................................ 11,452 39,960
---------- --------
1,259,497 813,373
Less current portion...................................... (363,293) (223,037)
---------- --------
$ 896,204 590,336
========== ========
</TABLE>
The loans from the financial institutions are payable in semi-annual and
annual installments with interest rates ranging from 3.7 to 13.0 percent. The
loans from the Finnish government are payable in annual installments with an
interest rate of 1 percent. The bank note payable was a demand bank note which
accrued interest at the prime rate. The bank note was repaid with the proceeds
of the Series A mandatorily convertible preferred stock offering.
The loans are secured by all of the assets of the Finnish subsidiaries.
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1996 are as follows: 1997, $223,037; 1998,
$238,153; 1999, $242,830; 2000, $60,856 and 2001, $48,497.
(8) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company issued 2,000,000 shares of its Series A mandatorily redeemable
convertible preferred stock (Series A Preferred), and warrants to purchase
421,065 shares of common stock (at an exercise price of $5.70 per share) in
September 1996. Net proceeds to the Company were $4,894,786.
F-12
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The holders of Series A Preferred are not entitled to dividends, unless
declared by the Company. Dividends, if any, are non-cumulative. As of December
31, 1996, no such dividends have been declared on the Series A.
The holders of Series A Preferred are entitled to a liquidation preference
over all other types of capital stock. The preference equals $2.50 per share
together with all accrued and unpaid dividends plus an amount equal to the
Series A Preferred pro rata share of all remaining Company assets available
for distribution. In addition, each share of Series A Preferred is convertible
into common stock at a conversion ratio of 1 for 1.9. Further, such conversion
becomes automatic immediately prior to the closing of an initial public
offering for the sale of the Company's common stock at an aggregate gross
sales proceeds of not less than $10,000,000 at a price of $9.50 per share or
more.
In connection with the Series A Preferred offering, the Company issued
warrants covering 421,065 shares. The warrants entitle the holders to purchase
from the Company a total of 421,065 shares of common stock at an exercise
price of $5.70 per share, subject to adjustment as defined. Until such time as
the warrants are exercised in full or expire, the purchase price and the
number of shares of common stock (or other securities) issuable upon exercise
of the warrants are subject to adjustment for dilution, as defined. The
warrants expire on September 5, 2001. The Company may require the exercise of
the warrants upon the occurrence and satisfaction of certain conditions
applicable to the closing of the Company's proposed Offering.
The Company is obligated to redeem the Series A Preferred at its redemption
value, at any time after August 2001, upon the written request of a majority
of the Series A Preferred stockholders.
(9) COMMON STOCKHOLDERS' EQUITY
Common stockholders' equity consists of the following as of December 31,
1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---------------------------- ----------------------------
ADDITIONAL ADDITIONAL
COMMON PAID-IN COMMON PAID-IN
SHARES STOCK CAPITAL SHARES STOCK CAPITAL
------ ---------- ---------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Biocon, Ltd.:
Class A, at stated
value................ 10,647 $ 240,101 $ -- -- $ -- $ --
Class B, at stated
value................ 3,587 80,033 -- -- -- --
Bioscience, Ltd., at
stated value........... 4,050 1,023,180 -- -- -- --
Biostent, Inc., at
stated value........... 1,031 1 9,999 -- -- --
OrthoSorb, Inc., at
stated value........... 1,031 1 570,999 -- -- --
Bionx Implants, Inc. ... -- -- -- 5,318,424 10,105 1,858,870
---------- -------- --------- ------- ----------
$1,343,316 $580,998 5,318,424 $10,105 $1,858,870
========== ======== ========= ======= ==========
</TABLE>
In September 1996, 55,264 shares of common stock were issued to a former
employee, in accordance with the terms of his employment, at a price of $.9025
per share, the estimated fair market value of such stock on the date that such
commitment was made, as determined by the Board of Directors. See note 1 for a
discussion of the reorganization in September 1996.
F-13
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) COMMITMENTS AND CONTINGENCIES
The Company leases offices and laboratory facilities, equipment, and
vehicles under various noncancelable operating lease arrangements. Future
minimum rental commitments required by such leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1997 ........................................................ $137,739
1998 ........................................................ 111,902
1999 ........................................................ 109,890
2000 ........................................................ 99,231
2001......................................................... 99,231
</TABLE>
Rental expense for the years ended December 31, 1994, 1995 and 1996
aggregated $105,041, $90,815 and $98,755, respectively.
(11) STOCK OPTION PLANS
In September 1996, the Board of Directors adopted a stock option plan (the
1996 Option Plan) under which the number of common shares which may be granted
under the Option Plan, as amended, cannot exceed 850,000 shares. The 1996
Option Plan permits the granting of both incentive stock options and non-
qualified options. Options are exercisable over a period determined by the
Board of Directors, but no longer than ten years after the grant date.
At December 31, 1996, there were 425,618 additional shares available for
grant under the 1996 Option Plan. The per share weighted-average fair value of
stock options granted during 1995 and 1996 was $0.46 and $5.86 on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1995--expected dividend yield 0%, risk-free
interest rate of 7.06%, and an expected life of 10 years; 1996--expected
dividend yield 0%, risk-free interest rate of 6.50%, and an expected life of
10 years.
The Company applies APB Opinion No. 25 in accounting for its 1996 Option
Plan and, accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
SFAS No. 123, the Company's net loss would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Net loss:
As reported......................................... $(1,478,016) $(1,969,248)
Pro forma (unaudited) .............................. (1,530,121) (2,051,242)
</TABLE>
Since no stock options or warrants were granted prior to January 1, 1995,
the pro forma net loss reflects the full impact of calculating compensation
cost for stock options under SFAS No. 123.
F-14
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of activity under the 1996 Option Plan from January 1, 1994 to
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
RANGE OF EXERCISE
SHARES PRICES PER SHARE
------- -----------------
<S> <C> <C>
Balance, January 1, 1994.............................. -- $ --
Granted............................................. -- --
------- ------------
Balance, December 31, 1994............................ -- --
Granted............................................. 277,009 0.9025
------- ------------
Balance, December 31, 1995............................ 277,009 0.9025
Granted............................................. 147,373 4.75-9.50
------- ------------
Balance, December 31, 1996............................ 424,382 $0.9025-9.50
======= ============
Shares exercisable at December 31, 1996............... 102,740 $0.9025-4.75
======= ============
</TABLE>
As part of an employment agreement, an officer and stockholder of the
Company was granted an option in 1995 to purchase an equivalent of 277,009
common shares at an exercise price of $.9025 per share, the deemed fair market
value at the grant date as determined by the Board of Directors. These options
vest 30% on each of the first and second and 20% on each of the third and
fourth anniversaries of the grant date and are exercisable over a period no
longer than ten years after the grant date.
On September 2, 1996, the Company granted various employees options to
acquire 58,686 shares of common stock at $4.75 per share, the deemed fair
value at the date of grant as determined by the Board of Directors. A total of
19,635 shares vested during 1996 and the balance substantially vest 20% per
year on each of the next four years at December 31.
On November 24, 1996, the Company granted various employees options to
acquire 88,687 shares of common stock at $9.50 per share, the deemed fair
value at the grant date as determined by the Board of Directors. A grant of
options covering 65,790 shares vests as follows: 15,790 on each of the first
and second anniversaries of the date of grant, 13,158 on the third anniversary
of the date of grant, and 10,526 on the fourth and fifth anniversaries of the
date of grant. The remaining options covering 22,897 shares vest 20% per year
on each of the next five anniversaries of the date of grant.
(12) INCOME TAXES
At December 31, 1996, the Company and its subsidiaries had available U.S.
and Finnish net operating loss carryforwards ("NOL") of approximately $2.1
million for income tax reporting purposes, which are available to offset
future taxable income, if any, through 2011.
The Tax Reform Act of 1986 (the "Act") provides for a limitation on the
annual use of U.S. NOL carryforwards (following certain ownership changes, as
defined by the Act) that could significantly limit the Company's ability to
utilize certain carryforwards. The Company has experienced various ownership
changes, as defined by the Act, as a result of past financings as well as the
proposed Offering. Accordingly, the Company's ability to utilize the
aforementioned carryforwards may be limited. Additionally, because tax law
limits the time during which these carryforwards may be applied against future
taxes, the Company may not be able to take full advantage of these
carryforwards for income tax purposes.
F-15
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income tax expense attributable to the loss before provision for taxes was
$208,390 for the year ended December 31, 1996 and differed from the amounts
computed by applying the U.S. federal income tax rate of 35 percent to pretax
loss as a result of the following:
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Computed "expected" tax benefit..................................... $(616,300)
Increase (reduction) in income taxes resulting from:
Difference in the foreign tax rates............................... (47,430)
Change in the valuation allowance for Federal deferred tax
assets........................................................... 896,930
Other, net........................................................ (24,810)
---------
Income tax expense.................................................. $ 208,390
=========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the Federal, foreign and state deferred tax assets at December 31,
1995 and 1996 are presented below:
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 350,893 787,485
Research and development costs........................ 177,537 184,125
Depreciation adjustments.............................. 55,661 60,937
Inventory-related items............................... 93,761 615,638
Recognition of accrued expenses or reserves for
financial statement reporting purposes but not for
income tax reporting purposes........................ 64,408 128,844
--------- ----------
Total gross deferred tax assets....................... 742,260 1,777,029
Less valuation allowance.............................. (742,260) (1,777,029)
--------- ----------
Net deferred tax assets................................. $ -- --
========= ==========
</TABLE>
The net change in the total valuation allowance for the years ended December
31, 1994, 1995, and 1996 were increases of approximately $79,195, $155,140 and
$1,034,769, respectively.
(13) LICENSE AND GRANT REVENUE
In May 1995, the Company entered into an exclusive license agreement with
Ethicon GmbH (a wholly-owned subsidiary of Johnson & Johnson) to market a
product based on the Company's patents for bioresorbable membranes. As part of
this agreement, Ethicon GmbH paid the Company nonrefundable license fees and
milestone revenue of $199,904 and $201,287 for the years ended December 31,
1995 and 1996, respectively. The license agreement requires Ethicon GmbH to
pay royalties based upon net sales of these products. This license agreement
terminates upon the later of the expiration of all of the Company's patent
rights covering its membrane technology or 20 years.
In addition, the Company has applied for grants from the Finnish government
to conduct research on resorbable polymers. The revenue from such grants was
$15,682, $66,983 and $143,916 for the years ended December 31, 1994, 1995 and
1996, respectively.
F-16
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) GEOGRAPHIC INFORMATION
Information about the Company's operations by geographic area is as follows:
<TABLE>
<CAPTION>
UNITED
STATES EUROPE CONSOLIDATED
----------- ---------- ------------
<S> <C> <C> <C>
Year ended
December 31, 1994
Total net sales.......................... $ 440,348 $ 824,385 $ 1,264,733
Net loss................................. (15,200) (146,563) (161,763)
Identifiable assets...................... 340,191 1,689,167 2,029,358
Year ended
December 31, 1995
Total net sales.......................... $ 477,952 $ 876,767 $ 1,354,719
Net loss................................. (1,323,214) (154,802) (1,478,016)
Identifiable assets...................... 745,329 1,048,909 1,794,238
Year ended
December 31, 1996
Total net sales.......................... $ 3,412,204 $1,621,748 $ 5,033,952
Net income (loss)........................ (2,269,215) 299,967 (1,969,248)
Identifiable assets...................... 5,061,627 222,026 5,283,653
</TABLE>
(15) SUBSEQUENT EVENTS
Reverse Stock Split
On February 24, 1997, the Company effected a 1 for 1.9 reverse stock split.
All common shares, per share and pro forma amounts in the accompanying
consolidated financial statements have been retroactively adjusted for all
periods presented to reflect this common stock reverse split for all periods
presented. Preferred stock amounts, other than the shares of common stock into
which the Series A Preferred is convertible, have not been retroactively
adjusted to reflect the reverse stock split.
Initial Public Offering (Unaudited)
On February 14, 1997, the Board of Directors authorized the filing of a
registration statement for the Offering with the Securities and Exchange
Commission for the sale of 2,000,000 shares of common stock. If the Offering
is consummated under the terms presently anticipated, all 2,000,000 shares of
the Series A Preferred outstanding as of the closing date of the Offering will
be automatically converted into 1,052,638 shares of common stock on a 1 for
1.9 basis and the Company will have the right to require the exercise of
warrants to purchase 421,065 shares of common stock. No dividends will be
payable with respect to such preferred stock. The deferred offering costs
associated with the Offering will be recorded as a reduction of stockholders'
equity (deficit) if the Offering is consummated. If the Offering is not
consummated, the deferred offering costs will be charged to operations.
Spin-Off (Unaudited)
Two of the Company's shareholders and the Company are each one third equity
owners in a business organized to engage in developing, manufacturing and
selling polymer-based advanced drug delivery systems (the "Business"). On
February 14, 1997, the Board of Directors concluded that in light of the
substantial expenditures that would be required in order to bring any of the
Business' products to market, it is in the best interests of the Company and
its shareholders for the Company to forego its development of the Business and
to spin-off the Business. The Company intends to distribute its interest in
the Business to shareholders of record of the Company as of a date prior to
the effective date of the Offering.
F-17
<PAGE>
No person is authorized in connection with any offering made hereby to give
any information or to make any representation not contained herein and, if
given or made, such information or representation must not be relied upon as
having been authorized by the Company or the Underwriters. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
security other than the Common Stock offered hereby, nor does it constitute an
offer to sell or a solicitation of an offer to buy any of the securities
offered hereby to any person in any jurisdiction in which it is unlawful to
make such an offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall under any circumstances create any implication
that there has been no change in the affairs of the Company since the date
hereof or that the information contained herein is correct as of any date
subsequent to the date hereof.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Company.............................................................. 17
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 21
Business................................................................. 26
Management............................................................... 46
Certain Transactions..................................................... 53
Principal Stockholders................................................... 55
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 59
Underwriting............................................................. 61
Legal Matters............................................................ 62
Experts.................................................................. 62
Additional Information................................................... 62
Financial Statements..................................................... F-1
</TABLE>
-----------------
Until , 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
2,000,000 Shares
[LOGO OF BIONX IMPLANTS INC. APPEARS HERE]
Common Stock
-----------------
PROSPECTUS
, 1997
-----------------
UBS Securities
Hambrecht & Quist
VOLPE, WELTY & COMPANY LLC
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates
except the SEC registration fee, the NASD filing fee and the Nasdaq National
Market application and listing fee.
<TABLE>
<S> <C>
SEC registration fee............................................... $ 9,758
NASD filing fee.................................................... 3,720
Nasdaq National Market application and listing fee................. 40,019
Printing and engraving costs....................................... 100,000
Legal fees and expenses............................................ 500,000
Accounting fees and expenses....................................... 160,000
Blue Sky fees and expenses......................................... 20,000
Directors' and officers' liability insurance....................... 135,000
Transfer Agent..................................................... 5,000
Miscellaneous expenses............................................. 11,503
--------
Total.......................................................... $985,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation
and its directions and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
The Company's Certificate of Incorporation provides that the Company shall
indemnify to the fullest extent permitted by Section 145 of the Delaware
General Corporation Law, and the Company's by-laws provide that the Company
shall indemnify to the fullest extent permitted by law, all present and former
directors and officers, and any such person serving or agreeing to serve as an
officer or director (or, in the case of the Certificate of Incorporation in
any other capacity), with any other enterprise at the Company's request, in
connection with any proceeding threatened, pending or instituted against such
party by reason of their serving or agreeing to serve in such capacity. The
Company's Certificate of Incorporation also permits indemnification of the
Company's agents extending to the limits created by Delaware law. The
Company's By-Laws describe certain procedures applicable to indemnification
rights.
The Underwriting Agreement to be filed as Exhibit 1.1 to this Registration
Statement will provide for indemnification by the Underwriters of the
Registrant and its officers and directors for certain liabilities arising
under the Securities Act of 1933, as amended (the "Securities Act"), or
otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since the Registrant's incorporation in October 1995, the Registrant has
issued and sold the following unregistered securities.
1. In September 1996, the Registrant issued and sold 5,263,160 shares of
Common Stock pursuant to the Reorganization upon the transfer to the
Registrant of all of the capital stock of four operating subsidiaries.
2. In September 1996, the Registrant issued and sold 2,000,000 shares of
Preferred Stock and warrants to purchase 421,065 shares of Common Stock (at an
exercise price of $5.70 per share) to investors at an aggregate price of
$5,000,000.
II-1
<PAGE>
3. In September 1996, the Registrant issued and sold 55,264 shares of its
Common Stock to a former employee at an aggregate price of approximately
$50,000. Such sale was made to honor a pre-existing commitment to the former
employee.
The Registrant from time to time has granted stock options to purchase
shares of Common Stock to certain officers and employees. The following table
sets forth certain information regarding such grants:
<TABLE>
<CAPTION>
RANGE OF
NO. OF SHARES EXERCISE PRICES
------------- ---------------
<S> <C> <C>
1995........................................... 277,009 $ .9025
1996........................................... 147,373 $4.75-$9.50
</TABLE>
The above securities were offered and sold by the Registrant in reliance
upon an exemption from registration under either (i) Section 4(2) of the
Securities Act as transactions not involving any public offering or (ii) Rule
701 under the Securities Act. No underwriters were involved in connection with
the sales of securities referred to in this Item 15.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant and amendments thereto
as currently in effect.
3.2 Form of Restated Certificate of Incorporation to be filed after the
closing of the Offering made under this Registration Statement.
3.3 Bylaws of the Registrant, as currently in effect.
4.1* Specimen Common Stock Certificate.
5.1* Opinion of Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A.
10.1 Reorganization Agreement dated as of September 5, 1996.
10.2* Registrant's 1996 Stock Option/Stock Issuance Plan and form of option
granted thereunder.
10.3 Form of Amended and Restated Employment Agreement between the
Registrant and David W. Anderson.
10.4 Form of Employment Agreement between the Registrant's Subsidiary and
Pertti Tormala.
10.5 Form of Proprietary Information and Inventions Agreement.
10.6 Investors' Rights Agreement, dated as of September 6, 1996, between the
Registrant and certain holders of the Registrant's securities.
10.7 Stock Purchase Agreement between the Registrant and Purchasers of the
Company's Preferred Stock and Warrants.
10.8+ License Agreements between the Registrant's Subsidiary and Saul N.
Schreiber.
10.9+ License Agreement among the Registrant's Subsidiary, Pertti Tormala,
Markku Tamminmaki and Menifix I/S.
10.10+ Licensing, Manufacturing and Distribution Agreement among the
Registrant's Subsidiary, Pertti Tormala and various Danish and Finnish
inventors.
10.11 Shareholders' Agreement among Bionix, B.V. and certain shareholders of
the Company.
21.1 List of Subsidiaries.
23.1 Consent of KPMG Peat Marwick LLP (including a report regarding the
financial statement schedule).
23.2 Consent of Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A. (to be
included in Exhibit 5.1).
23.3 Consent of Kenyon & Kenyon.
24.1 Power of Attorney (see page II-4).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
+ Confidential treatment requested.
II-2
<PAGE>
(b) Financial Statement Schedules
This Registration Statement includes the following financial statement
schedule:
(a) Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted because the information required to be
set forth therein is not applicable or is shown in the financial statements or
notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act,
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWN OF MALVERN,
STATE OF PENNSYLVANIA, ON THE 25TH DAY OF FEBRUARY, 1997.
BIONX IMPLANTS, INC.
By: /s/ David W. Anderson
---------------------------------
David W. Anderson
(President and Chief Executive
Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David W. Anderson and Michael J. O'Brien and
each of them, his attorneys-in-fact, each with the power of substitution, for
him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering
covered by this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as
amended, and all post-effective amendments thereto, and to file the same, with
all exhibits thereto and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that such attorneys-in-fact and
agents or any of them, or his or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ David W. Anderson President, Chief February 25, 1997
- ------------------------------------- Executive Officer
DAVID W. ANDERSON and Director
(Principal
Executive Officer)
/s/ David J. Bershad Director February 25, 1997
- -------------------------------------
DAVID J. BERSHAD
/s/ Anthony J. Dimun Director February 25, 1997
- -------------------------------------
ANTHONY J. DIMUN
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Director February , 1997
- -------------------------------------
DAVID H. MACCALLUM
/s/ Pertti Tormala Director February 25, 1997
- -------------------------------------
PERTTI TORMALA
/s/ Terry D. Wall Director February 25, 1997
- -------------------------------------
TERRY D. WALL
/s/ Michael J. O'Brien Vice President, February 25, 1997
- ------------------------------------- Finance and
MICHAEL J. O'BRIEN Administration,
Chief Financial
Officer, Treasurer
and Secretary
(Principal
Financial and
Accounting Officer)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ----------- -----
<C> <S> <C>
1.1* Form of Underwriting Agreement.
Certificate of Incorporation of the Registrant and amendments
3.1 thereto as currently in effect.
3.2 Form of Restated Certificate of Incorporation to be filed
after the closing of the Offering made under this Registration
Statement.
3.3 Bylaws of the Registrant, as currently in effect.
4.1* Specimen Common Stock Certificate.
5.1* Opinion of Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A.
10.1 Reorganization Agreement dated as of September 5, 1996.
Registrant's 1996 Stock Option/Stock Issuance Plan and form of
10.2* option granted thereunder.
10.3 Form of Amended and Restated Employment Agreement between the
Registrant and David W. Anderson.
Form of Employment Agreement between the Registrant's
10.4 Subsidiary and Pertti Tormala.
10.5 Form of Proprietary Information and Inventions Agreement.
10.6 Investors' Rights Agreement, dated as of September 6, 1996,
between the Registrant and certain holders of the Registrant's
securities.
10.7 Stock Purchase Agreement between the Registrant and Purchasers
of the Company's Preferred Stock and Warrants.
License Agreements between the Registrant's Subsidiary and
10.8+ Saul N. Schreiber.
10.9+ License Agreement among the Registrant's Subsidiary, Pertti
Tormala, Markku Tamminmaki and Menifix I/S.
10.10+ Licensing, Manufacturing and Distribution Agreement among the
Registrant's Subsidiary, Pertti Tormala and various Danish and
Finnish inventors.
Shareholders' Agreement among Bionix, B.V. and certain
10.11 shareholders of the Company.
21.1 List of Subsidiaries.
Consent of KPMG Peat Marwick LLP (including a report regarding
23.1 the financial schedule).
23.2 Consent of Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A.
(to be included in Exhibit 5.1).
23.3 Consent of Kenyon & Kenyon.
24.1 Power of Attorney (see page II-4).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
+ Confidential treatment requested.
<PAGE>
SCHEDULE II
BIONX IMPLANTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
CHARGED CHARGED CHARGED
BALANCE TO BALANCE TO BALANCE TO BALANCE
AT COSTS AND AT COSTS AND AT COSTS AND AT
CLASSIFICATION 12/31/93 EXPENSES DEDUCTIONS 12/31/94 EXPENSES DEDUCTIONS 12/31/95 EXPENSES DEDUCTIONS 12/31/96
- -------------- -------- --------- ---------- -------- --------- ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Inventory Reserves.. $-- -- -- -- 161,021 -- 161,021 119,325 -- 280,346
==== === === === ======= === ======= ======= === =======
Accounts Receivable
Reserves........... $-- -- -- -- -- -- -- 97,325 -- 97,325
==== === === === ======= === ======= ======= === =======
</TABLE>
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
BIONIX, INC.
* * * * *
1. The name of the corporation is Bionix, Inc.
2. The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
3. The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of Delaware.
4. The total number of shares of stock which the corporation shall,
have authority to issue is Thirteen Million (13,000,000) of which stock Ten
Million (10,000,000) shares of the par value of One One Thousandth of a Dollar
($.001) each, amounting in the aggregate to Ten Thousand Dollars ($10,000.00)
shall be common stock and of which Three Million (3,000,000) shares of the par
value of One One Thousandth of a Dollar ($.001) each, amounting in the aggregate
to Three Thousand Dollars ($3,000.00) shall be Convertible Preferred stock.
The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof are as follows:
Holders of the Company's Convertible Preferred shares of any series
will be granted the voting rights of the equivalent number of common shares in
all issues requiring shareholder votes.
At all elections of directors of the corporation, each stockholder
shall be entitled to as many votes as shall equal the number of votes which
(except for such provision as to cumulative voting) he would be entitled to cast
for the election of directors with respect to his shares of stock multiplied by
the number of directors to be elected by him, and he may cast all of such votes
for a single director or may distribute them among the number to be voted for,
or for any two or more of them as he may see fit.
The number of authorized shares of any class or classes of stock may
be increased or decreased by the affirmative vote of the holders of a majority
of the stock of the corporation entitled to vote.
5. The name and mailing address of each incorporator is as follows:
<PAGE>
NAME MAILING ADDRESS
---- ---------------
L. J. Vitalo Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
K. A. Widdoes Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
D. M. Dembkowski Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
6. The corporation is to have perpetual existence.
7. In furtherance and not in limitation of the powers conferred by
statute, the board of directors is expressly authorized:
To make, alter or repeal the by-laws of the corporation.
To authorize and cause to be executed mortgages and liens upon the
real and personal property of the corporation.
To set apart out of any of the funds of the corporation available for
dividends a reserve or reserves for any proper purpose and to abolish any such
reserve in the manner in which it was created.
By a majority of the whole board, to designate one or more committees,
each committee to consist of one or more of the directors of the corporation.
The board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. The by-laws may provide that in the absence or disqualification
of a member of a committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a quorum,
may unanimously appoint another member of the board of directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the board of directors,
or in the by-laws of the corporation, shall have and may exercise all the powers
and authority of the board of directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to amending the Certificate of Incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
by-laws of the
-2-
<PAGE>
corporation; and, unless the resolution or by-laws, expressly so
provide, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock.
When and as authorized by the stockholders in accordance with law, to
sell, lease or exchange all or substantially all of the property and assets of
the corporation, including its good will and its corporate franchises, upon such
terms and conditions and for such consideration, which may consist in whole or
in part of money or property including shares of stock in, and/or other
securities of, any other corporation or corporations, as its board of directors
shall deem expedient and for the best interests of the corporation.
8. Elections of directors need not be by written ballot unless the
by-laws of the corporation shall so provide.
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.
9. The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
10. 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.
11. This certificate of incorporation shall be effective upon filing.
WE, THE UNDERSIGNED, being each of the incorporators hereinbefore
named, for the purpose of forming a corporation pursuant to the General
Corporation Law of the State of Delaware, do make this certificate, hereby
declaring and certifying that this is our act and deed and the facts herein
stated are true, and accordingly have hereunto set our hands this 11th day of
October, 1995.
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<PAGE>
/s/ L.J. Vitalo
-------------------------------------
L.J. Vitalo
/s/ K.A. Widdoes
-------------------------------------
K.A. Widdoes
/s/ D.M. Dembkowski
-------------------------------------
D.M. Dembkowski
-4-
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
BIONIX, INC.
(Pursuant to Section 241 of the
General Corporation Law of the State of Delaware)
It is hereby certified that:
1. The name of the corporation is Bionix, Inc.
2. The Board of Directors of the corporation has duly adopted certain
amendments to its Certificate of Incorporation in accordance with the
provisions of Section 241 of the General Corporation Law of Delaware.
3. The corporation has not received any payment for its stock.
4. The amendments adopted by the Board are as follows:
a. Article 4 shall be deleted in its entirety and a new Article
4 added as follows:
"4. The aggregate number of shares which the Corporation shall
have authority to issue is seventy million (70,000,000), divided into sixty
million (60,000,000) shares of common stock with par value of $.001 per
share and ten million (10,000,000) shares of preferred stock with par value
of $.001 per share."
The preferred stock may be issued from time to time in one or more
series. The Board of Directors of the corporation is hereby expressly
authorized to provide, by resolution or resolutions duly adopted by it prior to
issuance, for the creation of each such series and to fix the designation and
the powers, preferences, rights, qualifications, limitations and restrictions
relating to the shares of each such series. The authority of the Board of
Directors with respect to each series of Preferred Stock shall include, but not
be limited to, determining the following:
(a) the designation of such series, the number of shares to
constitute such series and the stated value if different from the par value
thereof;
<PAGE>
(b) whether the shares of such series shall have voting rights,
in addition to any voting rights provided by law, and, if so, the terms of
such voting rights, which may be general or limited;
(c) the dividends, if any, payable on such series, whether any
such dividends shall be cumulative, and, if so, from what dates, the
conditions and dates upon which such dividends shall be payable, and the
preference or relation which such dividends shall bear to the dividends
payable on any shares of stock of any other class or any other series of
preferred stock;
(d) whether the shares of such series shall be subject to
redemption either by the corporation or the holders thereof, and, if so,
the times, prices and other conditions of such redemption;
(e) the amount or amounts payable upon shares of such series
upon, and the rights of the holders of such series in, the voluntary or
involuntary liquidation, dissolution or winding up, or upon any
distribution of the assets, of the corporation;
(f) whether the shares of such series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to and the
manner in which any such retirement or sinking fund shall be applied to the
purchase or redemption of the shares of such series for retirement or other
corporate purposes and the terms and provisions relating to the operation
thereof;
(g) whether the shares of such series shall be convertible into,
or exchangeable for, shares of stock of any other class or any other series
of Preferred Stock or any other securities and, if so, the price or prices
or the rate or rates of conversion or exchange and the method, if any, of
adjusting the same, and any other terms and conditions of conversion or
exchange;
(h) the limitations and restrictions, if any, to be effective
while any shares of such series are outstanding upon the payment of
dividends or the making of other distributions on, and upon the purchase,
redemption or other acquisition by the corporation of, the common stock or
shares of stock of any other class or any other series of preferred stock;
(i) the conditions or restrictions, if any, upon the creation of
indebtedness of the corporation or upon the issue of any additional stock,
including additional shares of such series or of any other series of
preferred stock or of any other class; and
(j) any other powers, preferences and relative, participating,
optional and other specific rights, and any qualifications, limitations and
restrictions, thereof.
-2-
<PAGE>
The powers, preferences and relative, participating, optional and
other special rights of each series of preferred stock, and the qualifications,
limitations or restrictions thereof, if any, may differ from those of any and
all other series at any time outstanding. All shares of any one series of
preferred stock shall be identical in all respects with all other shares of such
series, except that shares of any one series issued at different times may
differ as to the dates from which dividends thereof shall be cumulative.
b. A new Article 12 is added to the Certificate of
Incorporation.
12. (a) Every person who is or was a director or officer of the
corporation shall be indemnified by the corporation to the fullest extent
allowed by Section 145 of the Delaware General Corporation Law against all
liabilities and expenses imposed upon or incurred by that person in
connection with any proceeding in which that person may be made, or
threatened to be made, a party, or in which that person may become involved
by reason of that person being or having been a director or officer or of
serving or having served in any capacity with any other enterprise at the
request of the corporation, whether or not that person is a director or
officer or continues to serve the other enterprise at the time the
liabilities or expenses are imposed or incurred.
(b) To the fullest extent permitted by applicable law, the
corporation is authorized to provide indemnification of (and advancement of
expenses to) agents of the corporation (and any other persons to which
Delaware law permits the corporation to provide indemnification) through
bylaw provisions, agreements with such agents or other persons, votes of
stockholders or disinterested directors or otherwise, in excess of the
indemnification and advancement otherwise permitted by Section 145 of the
Delaware General Corporation Law, subject only to limits created by
applicable Delaware law (statutory or non-statutory), with respect to
actions for breach of duty to the corporation, its stockholders and others.
IN WITNESS WHEREOF, this Certificate of Amendment of the corporation's
Certificate of Incorporation has been signed by a majority of the directors of
the corporation this 3rd day of September, 1996.
/s/ David W. Anderson
--------------------------------
David W. Anderson
/s/ David J. Bershad
--------------------------------
David J. Bershad
/s/ Terence D. Wall
--------------------------------
Terence D. Wall
/s/ Anthony J. Dimun
--------------------------------
Anthony J. Dimun
-3-
<PAGE>
Certificate of Designations, Preferences and Rights of
Series A Convertible Participating Preferred Stock
of
Bionix, Inc.
Pursuant to Section 151 of the general corporation law of the State of
Delaware,
Bionix, Inc., a Delaware corporation (the "Corporation"), certifies that
pursuant to the authority contained in its Certificate of Incorporation, as
amended, and in accordance with the provisions of Section 151 of the general
corporation law of the State of Delaware, its board of directors has adopted the
following resolution creating a series of preferred stock designated as Series A
Convertible Participating Preferred Stock:
RESOLVED, that a series of the class of preferred stock of the
Corporation be hereby created, and that the designation and amount thereof and
the voting powers, preferences and relative, participating, optional and other
special rights of the shares of such series, and the qualifications, limitations
or restrictions thereof are as follows:
1. Number of Shares. The series of Preferred Stock, par value $.001
----------------
per share, authorized and designated as "Series A Convertible Participating
Preferred Stock" shall consist of 2,000,000 shares (the "Series A Preferred
Stock").
2. Dividends. The holders of Series A Preferred Stock shall be
---------
entitled to receive dividends, separate and apart from any other class or series
of capital stock of the Corporation, at such time and in such amounts per share
of Series A Preferred Stock as the Board of Directors may declare from time to
time, whether in cash, in kind or in shares of capital stock of the Corporation,
payable out of any assets legally available therefor (the "Preferred Dividend").
In addition to any Preferred Dividends, the holders of the Series A Preferred
Stock shall be entitled to receive, out of any assets legally available
therefor, dividends at the same rate as any dividends (other than dividends paid
in additional shares of Common Stock, provided that the adjustments called for
in Section 6F below are effected) are paid with respect to the Common Stock,
treating each share of Series A Preferred Stock as being equal to the number of
shares of Common Stock (including fractions of a share and rounded up to the
nearest whole number) into which each share of Series A Preferred Stock is then
convertible. No dividend shall be declared or payable in cash or other property
of the Corporation with respect to the Common Stock other than in the form of
shares of Common Stock. The Preferred Dividend described in this Section 2
shall not be cumulative.
3. Liquidation; Stated Preference. Upon any liquidation, dissolution
------------------------------
or winding up of the Corporation, whether voluntary or involuntary, the holders
of the shares of Series A
<PAGE>
-2-
Preferred Stock shall be entitled to be paid and receive the full amount of
their Stated Preference per share of Series A Preferred Stock, before any
distribution or payment is made upon any stock ranking on liquidation junior to
the Series A Preferred Stock. For purposes hereof, the Common Stock shall rank
on liquidation junior to the Series A Preferred Stock.
3A. For purposes hereof the "Stated Preference" for each share of Series
A Preferred Stock shall be an amount equal to (i) $2.50 per share together with
all dividends declared but unpaid thereon and any outstanding Redemption
Interest amounts (referred to in Section 7D below), computed to the date payment
is made available, plus (ii) an amount equal to the Series A Preferred Stock pro
rata share of all remaining assets available for distribution to stockholders of
the Corporation, being deemed for such purpose to be determined by the number of
shares of Common Stock (including fractions of a share rounded up to the nearest
whole number) into which the shares of Series A Preferred Stock are then
convertible relative to the total number of shares of Common Stock then
outstanding; provided, however, that in the event of any "Qualifying Liquidation
-------- -------
Event" (as defined below) the holders of Series A Preferred Stock shall be
entitled to receive a Stated Preference in an amount equal to the Series A
Preferred Stock pro rata share in all of the Corporation's assets available for
distribution to stockholders, being deemed for such purpose to be determined by
the number of shares of Common Stock (including fractions of a share rounded up
to the next whole share) into which the shares of Series A Preferred Stock are
then convertible relative to the total number of shares of Common Stock then
outstanding. For purposes of this Section 3, "Qualifying Liquidation Event"
means any liquidation (or event deemed to constitute a liquidation under this
Section 3) as to which the total value of net assets, proceeds or consideration
available and payable currently (without contingency or escrow and subject to no
other offset or liabilities) to all stockholders of the Corporation, assuming
the conversion to Common Stock of the Series A Preferred Stock and of all
outstanding securities, options, warrants and other rights issued or issuable by
the Corporation, is equal to at least $3.00 per share.
3B. After the Corporation has distributed the full amount of the Stated
Preference to the holders of Series A Preferred Stock, the remainder of the
Corporation's assets legally available to the Stockholders shall be distributed
to the holders of capital stock ranking junior to the Series A Preferred Stock
in accordance with their respective terms. If upon such liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the assets to be distributed among the holders of Series A Preferred Stock shall
be insufficient to permit payment in full to the holders of Series A Preferred
Stock of the Stated Preference amounts, then the entire assets of the
Corporation available to be so distributed shall be distributed ratably among
the holders of Series A Preferred Stock.
3C. The following events shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of the
provisions of this Section 3: (i) any consolidation or merger of the
Corporation into or with any other entity or entities which results in the
exchange of 40% or more of the outstanding shares of the Corporation's voting
securities (in a single transaction or a series of related transactions) for
securities or other consideration issued or paid or caused to be issued or paid
by any such entity or affiliate thereof (other than a merger to reincorporate
the Corporation in a different jurisdiction) upon consummation of which
<PAGE>
-3-
the holders of the Corporation's outstanding voting securities immediately prior
to such transaction hold less than 55% of the voting securities of the resulting
or surviving corporation; and (ii) the sale, lease, abandonment, transfer or
other disposition by the Corporation of 40% or more of its assets (in a single
transaction or a series of related transactions).
3D. In the event of such liquidation event, if the consideration
received by the Corporation is other than cash, its value will be deemed its
fair market value. For this purpose, any securities shall be valued as follows:
(i) Securities not subject to investment letter or other similar
restrictions on free marketability covered by (ii) below:
(a) If traded on a securities exchange or through the Nasdaq
National Market, the value shall be deemed to be the average of the closing
prices of the securities on such exchange over the thirty (30) day period ending
three (3) days prior to the closing;
(b) If actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid or sale prices (whichever is
applicable) over the thirty (30) day period ending three (3) days prior to the
closing; and
(c) If there is no active public market, the value shall be the
fair market value thereof, as mutually determined by the Corporation and the
holders of at least a majority of the voting power of all then outstanding
shares of Series A Preferred Stock.
(ii) The method of valuation of securities subject to investment
letter or other restrictions on free marketability (other than restrictions
arising solely by virtue of a stockholder's status as an affiliate or former
affiliate) shall be to make an appropriate discount from the market value
determined as above under Section 3D(i) to reflect the approximate fair market
value thereof, as mutually determined by the Corporation and the holders of at
least a majority of the voting power of all then outstanding shares of such
Series A Preferred Stock.
In the event the requirements of this Section 3 are not complied with, the
Corporation shall forthwith either: cause such closing to be postponed until
such time as the requirements of this Section 3 have been complied with; or
cancel such transaction, in which event the rights, preferences and privileges
of the holders of the Series A Preferred Stock shall revert to and be the same
as such rights, preferences and privileges existing immediately prior to the
date of the first notice referred to in Section 3F hereof.
3E. Each holder of Series A Preferred Stock shall have the right at any
time to convert all or any amount of Series A Preferred Stock into shares of
Common Stock in accordance with the terms hereof, or in the case of any such
liquidation which constitutes a reorganization or reclassification, any holder
of Series A Preferred Stock may elect to receive the benefits of the provisions
of Section 6G below.
<PAGE>
-4-
3F. The Corporation shall give to each holder of record of Series A
Preferred Stock written notice of such liquidation, dissolution or winding up,
stating a payment date, the amount of the Stated Preference and the place where
said stated payments shall be payable, with such notice to be delivered in
person, mailed by certified or registered mail, return receipt requested, or
sent by telecopier or telex, not less than twenty (20) days prior to the payment
date stated therein, to the holders of record of Series A Preferred Stock, such
notice to be addressed to each such holder at its address as shown by the
records of the Corporation.
4. Voting. The holder of each share of Series A Preferred Stock shall
------
have the right to one vote for each share of Common Stock into which such
Preferred Stock could then be converted and with respect to such vote, such
holder shall have full voting rights and powers equal to the voting rights and
powers of the holders of Common Stock, and shall be entitled, notwithstanding
any provision hereof, to notice of any stockholders' meeting in accordance with
the bylaws of this Corporation, and shall be entitled to vote, together with
holders of Common Stock, with respect to any question upon which holders of
Common Stock have the right to vote. Fractional votes shall not, however, be
permitted and any fractional voting rights available on an as converted basis
(after aggregating all shares into which shares of Series A Preferred Stock held
by each holder could be converted) shall be rounded up to the nearest whole
number.
4A. General. Except as may be provided otherwise in these terms
-------
of the Series A Preferred Stock or required by law, the Series A Preferred Stock
shall vote together with all other voting classes and series of stock of the
Corporation as a single class on all actions to be taken by the stockholders of
the Corporation. Each share of Series A Preferred Stock shall entitle the
holder thereof to such number of votes per share as shall equal the number of
shares of Common Stock (including fractions of a share rounded up to the nearest
whole share) into which the shares of Series A Preferred Stock are then
convertible by its terms (after aggregating all shares into which shares of
Series A Preferred Stock held by each holder could be converted).
4B. Board Size. The Corporation shall not increase the maximum
----------
number of directors constituting the Board of Directors to a number in excess of
seven (7) without the written consent or affirmative vote of the holders of at
least a majority of the then outstanding shares of Series A Preferred Stock,
given in writing or by vote at a meeting, consenting or voting (as the case may
be) separately as a series.
4C. Board Seats. The holders of the Series A Preferred Stock,
-----------
voting as a separate series, shall be entitled to elect (1) one director of the
Corporation. The holders of the Series A Preferred Stock and the Common Stock,
voting together as a single class, shall be entitled to elect all other
directors of the Corporation. At any meeting (or in a written consent in lieu
thereof) held for the purpose of electing directors, the presence in person or
by proxy (or the written consent) of the holders of a majority of the shares of
Series A Preferred Stock then outstanding shall constitute a quorum of the
Series A Preferred Stock for the election of the director to be elected solely
by the holders of the Series A Preferred Stock. A vacancy in any directorship
elected by the holders of the Series A Preferred Stock shall be filled only by
vote or written consent of the holders of the Series A Preferred Stock, and a
vacancy in the directorships elected jointly by the holders of the Series A
Preferred Stock and the Common Stock shall be
<PAGE>
-5-
filled only by vote or written consent of the Series A Preferred Stock and the
Common Stock, as provided above.
5. Restrictions. At any time when shares of Series A Preferred Stock
------------
in an amount equal to at least 10% of the number of shares of Series A Preferred
Stock originally issued are outstanding, except where the vote or written
consent of the holders of a greater number or percentage of shares of the
Corporation is required by law or by the Certificate of Incorporation and in
addition to any other vote required by law or the Certificate of Incorporation,
without the approval of the holders of at least a majority of the then
outstanding shares of Series A Preferred Stock, given in writing or by vote at a
meeting, consenting or voting (as the case may be) separately as a series, the
Corporation will not undertake or do any of the following:
5A. Create or authorize the creation of any additional class or
series of shares of stock unless the same ranks junior to the Series A Preferred
Stock as to the distribution of assets on the liquidation, dissolution or
winding up of the Corporation, or increase the authorized amount of the Series A
Preferred Stock or increase the authorized amount of any additional class or
series of shares of stock unless the same ranks junior to the Series A Preferred
Stock as to the distribution of assets on the liquidation, dissolution or
winding up of the Corporation, or create or authorize any obligation or security
convertible into shares of Series A Preferred Stock or into shares of any other
class or series of stock unless the same ranks junior to the Series A Preferred
Stock as to the distribution of assets on the liquidation, dissolution or
winding up of the Corporation, whether any such creation, authorization or
increase shall be by means of amendment to the Certificate of Incorporation, as
amended, or by merger, consolidation or otherwise;
5B. Consent to (i) consolidation or merger of the Corporation into
or with any other entity or entities which results in the exchange of 40% or
more of the outstanding shares of the Corporation's voting securities (in a
single transaction or a series of related transactions) for securities or other
consideration issued or paid or caused to be issued or paid by any such entity
or affiliate thereof (other than a merger to reincorporate the Corporation in a
different jurisdiction) after which the holders of the Corporation's outstanding
voting securities hold less than 55% of the voting securities of the resulting
or surviving corporation, or (ii) the sale, lease, abandonment, transfer or
other disposition by the Corporation of 40% or more of its assets (in a single
transaction or a series of related transactions); unless upon such event the
holders of Series A Preferred Stock and Common Stock held as a result of the
exercise of a certain Common Stock Purchase Warrant dated ____________, 1996
(the "Warrant") receive net proceeds at least equal to the "Qualified Return
Price" (as defined below);
5C. Amend, alter or seek a waiver of any term of the Series A
Preferred Stock or otherwise amend, alter or repeal its Certificate of
Incorporation or By-laws in a way materially adverse to or inconsistent with the
terms of the Series A Preferred Stock;
5D. Purchase or set aside any sums for the purchase of, or pay any
dividend or make any distribution on, any shares of stock other than the Series
A Preferred Stock, except for dividends or other distributions payable on the
Common Stock solely in the form of additional
<PAGE>
-6-
shares of Common Stock and except for the purchase of shares of Common Stock
from former employees of the Corporation who acquired such shares directly from
the Corporation, if each such purchase is made pursuant to contractual rights
held by the Corporation relating to the termination of employment of such former
employee and the purchase price does not exceed the original issue price paid by
such former employee to the Corporation for such shares; or
5E. Redeem or otherwise acquire any shares of Series A Preferred
Stock except as expressly authorized in Section 7 hereof or pursuant to a
purchase offer made pro rata to all holders of the shares of Series A Preferred
Stock on the basis of the aggregate number of outstanding shares of Series A
Preferred Stock then held by each such holder.
5F. For purposes of Section 5B, "Qualified Return Price" shall
mean an amount equal to (i) $2.50 per share (and with respect to the exercised
Warrant, the initial exercise price), increased by (ii) thirty-five percent
(35%) each year, compounded on an annual basis measured from the date of
issuance (or exercise, in the case of the Warrant) to the date of calculation,
pro-rated for any partial years, reduced by (iii) the per share amount of any
dividends or other distributions on account of the Series A Preferred Stock or
Common Stock (issued upon exercise of the Warrant) actually made and paid prior
to the date of calculation, which amount, in the case of stock consideration
shall be calculated such that the proposed purchase price of shares to be
received by holders of Series A Preferred Stock and Common Stock (issued upon
exercise of the Warrant) is discounted by 25% unless such shares are freely
tradeable.
6. Conversions. The holders of shares of Series A Preferred Stock
-----------
shall have the following conversion rights:
6A. Right to Convert. Subject to the terms and conditions of this
----------------
Section 6, the holder of any share or shares of Series A Preferred Stock shall
have the right, at its option at any time, to convert any such shares of Series
A Preferred Stock (except that upon any liquidation of the Corporation the right
of conversion shall terminate at the close of business on the business day fixed
for payment of the amount distributable on the Series A Preferred Stock) into
such number of fully paid and nonassessable shares of Common Stock as is
obtained by (i) multiplying the number of shares of Series A Preferred Stock so
to be converted by $2.50 and (ii) dividing the result by the conversion price of
$2.50 per share or, in case an adjustment of such price has taken place pursuant
to the further provisions of this Section 6, then by the conversion price as
last adjusted and in effect at the date any share or shares of Series A
Preferred Stock are surrendered for conversion (such price, or such price as
last adjusted, being referred to as the "Conversion Price"). Such rights of
conversion shall be exercised by the holder thereof by giving written notice
that the holder elects to convert a stated number of shares of Series A
Preferred Stock into Common Stock and by surrender of a certificate or
certificates for the shares so to be converted to the Corporation at its
principal office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to the holders of the Series A
Preferred Stock) at any time during its usual business hours on the date set
forth in such notice, together with a statement of the name or names (with
address) in which the certificate or certificates for shares of Common Stock
shall be issued.
<PAGE>
-7-
6B. Issuance of Certificates; Time Conversion Effected. Promptly
--------------------------------------------------
after the receipt of the written notice referred to in Section 6A above and
surrender of the certificate or certificates for the share or shares of Series A
Preferred Stock to be converted, the Corporation shall issue and deliver, or
cause to be issued and delivered, to the holder, registered in such name or
names as such holder may direct, a certificate or certificates for the number of
whole shares of Common Stock issuable upon the conversion of such share or
shares of Series A Preferred Stock. To the extent permitted by law, such
conversion shall be deemed to have been effected and the Conversion Price shall
be determined as of the close of business on the date on which such written
notice shall have been received by the Corporation and the certificate or
certificates for such share or shares shall have been surrendered as aforesaid,
and at such time the rights of the holder of such share or shares of Series A
Preferred Stock shall cease, and the person or persons in whose name or names
any certificate or certificates for shares of Common Stock shall be issuable
upon such conversion shall be deemed to have become the holder or holders of
record of the shares represented thereby.
6C. Fractional Shares; Dividends; Partial Conversion. No
------------------------------------------------
fractional shares shall be issued upon conversion of Series A Preferred Stock
into Common Stock and no adjustment shall be made upon any conversion on account
of any cash dividends on the Common Stock issued upon such conversion. At the
time of each conversion, the Corporation shall pay in cash an amount equal to
all dividends, accrued and unpaid on the shares of Series A Preferred Stock
surrendered for conversion to the date upon which such conversion is deemed to
take place as provided in Section 6B. In case the number of shares of Series A
Preferred Stock represented by the certificate or certificates surrendered
exceeds the number of shares converted, the Corporation shall, upon such
conversion, execute and deliver to the holder, at the expense of the
Corporation, a new certificate or certificates for the number of shares of
Series A Preferred Stock represented by the certificate or certificates
surrendered which are not to be converted. If any fractional share of Common
Stock would, except for the provisions of the first sentence of this Section 6C,
be delivered upon such conversion, the Corporation, in lieu of delivering such
fractional share, shall pay to the holder surrendering the Series A Preferred
Stock for conversion an amount in cash equal to the current market price of such
fractional share, as determined in good faith by the Board of Directors of the
Corporation.
6D. Adjustment of Price Upon Issuance of Common Stock. Except as
-------------------------------------------------
provided in Section 6E, if and whenever the Corporation shall issue or sell, or
is, in accordance with Sections 6D(1) through 6D(7), deemed to have issued or
sold, any shares of Common Stock for a consideration per share less than the
Conversion Price in effect immediately prior to the time of such issue or sale,
then, forthwith upon such issue or sale, the Conversion Price shall be reduced
to the price determined by multiplying the applicable Conversion Price by a
fraction:
(1) the numerator of which shall be (a) the number of shares
of Common Stock outstanding immediately prior to the
issuance of such additional shares of Common Stock, plus
(b) the number of shares of Common Stock which the net
aggregate consideration, if any, received by the
Corporation for the total number of such
<PAGE>
-8-
additional shares of Common Stock so issued would purchase
at the applicable Conversion Price for the Series A
Preferred Stock in effect immediately prior to such
issuance, and
(2) the denominator of which shall be (a) the number of shares
of Common Stock outstanding immediately prior to the
issuance of such additional shares of Common Stock plus
(b) the number of such additional shares of Common Stock
so issued.
For purposes of this Section 6D, the following Sections 6D(1) to 6D(7)
shall also be applicable:
6D(1) Issuance of Rights or Options. In case at any time the
-----------------------------
Corporation shall in any manner grant (whether directly or by assumption in a
merger or otherwise) any warrants or other rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock or
security convertible into or exchangeable for Common Stock (such warrants,
rights or options being called "Options" and such convertible or exchangeable
stock or securities being called "Convertible Securities") whether or not
such Options or the right to convert or exchange any such Convertible
Securities are immediately exercisable, and the price per share for which
Common Stock is issuable upon the exercise of such Options or upon the
conversion or exchange of such Convertible Securities (determined by dividing
(i) the total amount, if any, received or receivable by the Corporation as
consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Corporation upon the
exercise of all such Options, plus, in the case of such Options which relate
to Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible
Securities and upon the conversion or exchange thereof, by (ii) the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options) shall be less than the Conversion
Price in effect immediately prior to the time of the granting of such
Options, then the total maximum number of shares of Common Stock issuable
upon the exercise of such Options or upon conversion or exchange of the total
maximum amount of such Convertible Securities issuable upon the exercise of
such Options shall be deemed to have been issued for such price per share as
of the date of granting of such Options or the issuance of such Convertible
Securities and thereafter shall be deemed to be outstanding. Except as
otherwise provided in Section 6D(3), no adjustment of the Conversion Price
shall be made upon the actual issue of such Common Stock or of such
Convertible Securities upon exercise of such Options or upon the actual issue
of such Common Stock upon conversion or exchange of such Convertible
Securities.
6D(2) Issuance of Convertible Securities. In case the Corporation
----------------------------------
shall in any manner issue (whether directly or by assumption in a merger or
otherwise) or sell any Convertible Securities, whether or not the rights to
exchange or convert any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable upon
such conversion or exchange (determined by dividing (i) the total amount
<PAGE>
-9-
received or receivable by the Corporation as consideration for the issue or
sale of such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon the
conversion or exchange thereof, by (ii) the total maximum number of shares of
Common Stock issuable upon the conversion or exchange of all such Convertible
Securities) shall be less than the Conversion Price in effect immediately
prior to the time of such issue or sale, then the total maximum number of
shares of Common Stock issuable upon conversion or exchange of all such
Convertible Securities shall be deemed to have been issued for such price per
share as of the date of the issue or sale of such Convertible Securities and
thereafter shall be deemed to be outstanding, provided that (a) except as
otherwise provided in Section 6D(3), no adjustment of the Conversion Price
shall be made upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities and (b) if any such issue or sale of
such Convertible Securities is made upon exercise of any Options to purchase
any such Convertible Securities for which adjustments of the Conversion Price
have been or are to be made pursuant to other provisions of this Section 6D,
no further adjustment of the Conversion Price shall be made by reason of such
issue or sale.
6D(3) Change in Option Price or Conversion Rate. Upon the happening
-----------------------------------------
of any of the following events, namely, if the purchase price provided for in
any Option referred to in Section 6D(1), the additional consideration, if
any, payable upon the conversion or exchange of any Convertible Securities
referred to in Section 6D(1) or 6D(2), or the rate at which Convertible
Securities referred to in Section 6D(1) or 6D(2) are convertible into or
exchangeable for Common Stock shall change at any time (including, but not
limited to, changes under or by reason of provisions designed to protect
against dilution), the Conversion Price in effect at the time of such event
shall forthwith be readjusted to the Conversion Price which would have been
in effect at such time had such Options or Convertible Securities still
outstanding provided for such changed purchase price, additional
consideration or conversion rate, as the case may be, at the time initially
granted, issued or sold, and any adjustments for dilutive issuances or deemed
dilutive issuances of Common Stock subsequent to such time shall be
determined based on such readjusted Conversion Price; and on the termination
of any such Option or any such right to convert or exchange such Convertible
Securities, the Conversion Price then in effect hereunder shall forthwith be
increased to the Conversion Price which would have been in effect at the time
of such termination had such Option or Convertible Securities, to the extent
outstanding immediately prior to such termination, never been issued.
6D(4) Consideration for Stock. In case any shares of Common Stock,
-----------------------
Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by
the Corporation therefor, without deduction therefrom of any expenses
incurred or any underwriting commissions or concessions paid or allowed by
the Corporation in connection therewith. In case any shares of Common Stock,
Options or Convertible Securities shall be issued or sold for a consideration
other than cash, the amount of the consideration other than cash received by
the Corporation shall be deemed to be the fair value of such consideration as
determined in good faith by the Board of Directors of the Corporation,
without deduction of any expenses incurred or any
<PAGE>
-10-
underwriting commissions or concessions paid or allowed by the Corporation in
connection therewith. In case any Options shall be issued in connection with
the issue and sale of other securities of the Corporation, together
comprising one integral transaction in which no specific consideration is
allocated to such Options by the parties thereto, such Options shall be
deemed to have been issued for such consideration as determined in good faith
by the Board of Directors of the Corporation.
6D(5) Record Date. In case the Corporation shall take a record of
-----------
the holders of its Common Stock for the purpose of entitling them (i) to
receive a dividend or other distribution payable in Common Stock, Options or
Convertible Securities or (ii) to subscribe for or purchase Common Stock,
Options or Convertible Securities, then such record date shall be deemed to
be the date of the issue or sale of the shares of Common Stock deemed to have
been issued or sold upon the declaration of such dividend or the making of
such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
6D(6) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or
for the account of the Corporation, and the disposition of any such shares
shall be considered an issue or sale of Common Stock for the purpose of this
Section 6D.
6E. Certain Issues of Common Stock Excepted. Anything herein to the
---------------------------------------
contrary notwithstanding, the Corporation shall not be required to make any
adjustment of the Conversion Price in the case of the issuance from and after
the date of filing of these terms of the Series A Preferred Stock of any
Reserved Shares, as defined in this Section 6E. For purposes hereof the term
"Reserved Shares" shall mean and include: (i) up to an aggregate of 1,052,632
shares (appropriately adjusted to reflect the occurrence of any event described
in Section 6F) of Common Stock to directors, officers, employees or consultants
of the Corporation in connection with their service as directors of the
Corporation, their employment by the Corporation or their retention as
consultants by the Corporation, plus such number of shares of Common Stock which
are repurchased by the Corporation from such persons after such date pursuant to
contractual rights held by the Corporation and at repurchase prices not
exceeding the respective original purchase prices paid by such persons to the
Corporation therefor (collectively, the "Employee Shares"); and (ii) such number
of shares of Common Stock or other securities convertible or exchangeable
therefor, as the Corporation may issue for purposes of corporate business
transactions, including joint venture, product development, acquisition of a
division or product line by the Corporation, with any such transaction and each
issuance of capital stock to be subject to the prior approval of at least a
majority of directors who are not regularly employed by the Corporation or any
wholly-owned subsidiary thereof and, if requested by the Director representative
of the holders of Series A Preferred Stock, based upon projected growth and
earnings analysis validated by a third party mutually acceptable to both the
Corporation and the Director representative of the holders of Series A Preferred
Stock that (i) the issuance of such shares by the Corporation shall be accretive
to earnings by at least 10% over the ensuing twelve (12) months; and (ii) the
sales revenue growth rate of the Corporation over the ensuing twelve
<PAGE>
-11-
(12) months shall be at least equal to the Corporation's historical sales growth
rate during the prior year (the "Transaction Shares").
6F. Subdivision or Combination of Common Stock. In case the
------------------------------------------
Corporation shall at any time subdivide (by any stock split, stock dividend or
otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price in effect immediately prior to such subdivision
shall be proportionately reduced, and, conversely, in case the outstanding
shares of Common Stock shall be combined into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination shall be
proportionately increased.
6G. Reorganization or Reclassification. If any capital
----------------------------------
reorganization or reclassification of the capital stock of the Corporation shall
be effected in such a way that holders of Common Stock shall be entitled to
receive stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization or reclassification, lawful
and adequate provisions shall be made whereby each holder of a share or shares
of Series A Preferred Stock shall thereupon have the right to receive, upon the
basis and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore receivable upon the conversion of
such share or shares of Series A Preferred Stock, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of such Common Stock equal to the number of
shares of such Common Stock immediately theretofore receivable upon such
conversion had such reorganization or reclassification not taken place, and in
any such case appropriate provisions shall be made with respect to the rights
and interests of such holder to the end that the provisions hereof (including
without limitation provisions for adjustments of the Conversion Price) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise of such
conversion rights.
6H. Notice of Adjustment. Upon any adjustment of the Conversion
--------------------
Price, then and in each such case the Corporation shall give written notice
thereof, by delivery in person, certified or registered mail, return receipt
requested, telecopier or telex, addressed to each holder of shares of Series A
Preferred Stock at the address of such holder as shown on the books of the
Corporation, which notice shall state the Conversion Price resulting from such
adjustment, setting forth in reasonable detail the method upon which such
calculation is based.
6I. Other Notices. In case at any time:
-------------
(i) the Corporation shall declare any dividend upon its Common Stock
payable in cash or stock or make any other distribution to the holders of its
Common Stock;
(ii) the Corporation shall offer for subscription pro rata to the
--- ----
holders of its Common Stock any additional shares of stock of any class or
other rights;
(iii) there shall be any capital reorganization or reclassification
of the capital stock of the Corporation, or a consolidation or merger of the
Corporation with or into
<PAGE>
-12-
another entity or entities, or a sale, lease, abandonment, transfer or other
disposition of all or substantially all its assets; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by delivery
in person, certified or registered mail, return receipt requested, telecopier or
telex, addressed to each holder of any shares of Series A Preferred Stock at the
address of such holder as shown on the books of the Corporation, (x) at least
twenty (20) days' prior written notice of the date on which the books of the
Corporation shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in respect
of any such reorganization, reclassification, consolidation, merger,
disposition, dissolution, liquidation or winding up, and (y) in the case of any
such reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up, at least twenty (20) days' prior written
notice of the date when the same shall take place. Such notice in accordance
with the foregoing clause (x) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the holders of
Common Stock shall be entitled thereto and such notice in accordance with the
foregoing clause (y) shall also specify the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, disposition, dissolution, liquidation or winding up, as the case may be.
6J. Stock to be Reserved. The Corporation will at all times reserve
--------------------
and keep available out of its authorized Common Stock, solely for the purpose of
issuance upon the conversion of Series A Preferred Stock as herein provided,
such number of shares of Common Stock as shall then be issuable upon the
conversion of all outstanding shares of Series A Preferred Stock. The
Corporation covenants that all shares of Common Stock which shall be so issued
shall be duly and validly issued and fully paid and nonassessable and free from
all taxes, liens and charges with respect to the issue thereof, and, without
limiting the generality of the foregoing, the Corporation covenants that it will
from time to time take all such action as may be requisite to assure that the
par value per share of the Common Stock is at all times equal to or less than
the Conversion Price in effect at the time. The Corporation will take all such
action as may be necessary to assure that all such shares of Common Stock may be
so issued without violation of any applicable law or regulation, or of any
requirement of any national securities exchange upon which the Common Stock may
be listed. The Corporation will not take any action which results in any
adjustment of the Conversion Price if the total number of shares of Common Stock
issued and issuable after such action upon conversion of the Series A Preferred
Stock would exceed the total number of shares of Common Stock then authorized by
the Certificate of Incorporation, as amended.
6K. No Reissuance of Series A Preferred Stock. Shares of Series A
-----------------------------------------
Preferred Stock which are converted into shares of Common Stock as provided
herein shall not be reissued.
<PAGE>
-13-
6L. Issue Tax. The issuance of certificates for shares of Common
---------
Stock upon conversion of Series A Preferred Stock shall be made without charge
to the holders thereof for any issuance tax in respect thereof, provided that
the Corporation shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any certificate
in a name other than that of the holder of the Series A Preferred Stock which is
being converted.
6M. Closing of Books. The Corporation will at no time close its
----------------
transfer books against the transfer of any Series A Preferred Stock or of any
shares of Common Stock issued or issuable upon the conversion of any shares of
Series A Preferred Stock in any manner which interferes with the timely
conversion of such Series A Preferred Stock, except as may otherwise be required
to comply with applicable securities laws.
6N. Definition of Common Stock. As used in this Section 6, the term
--------------------------
"Common Stock" shall mean and include the Corporation's authorized Common Stock,
par value $.001 per share, as constituted on the date of filing of these terms
of the Series A Preferred Stock, and shall also include any capital stock of any
class of the Corporation thereafter authorized which shall not be limited to a
fixed sum or percentage in respect of the rights of the holders thereof to
participate in dividends or in the distribution of assets upon the voluntary or
involuntary liquidation, dissolution or winding up of the Corporation; provided
that the shares of Common Stock receivable upon conversion of shares of Series A
Preferred Stock shall include only shares designated as Common Stock of the
Corporation on the date of filing of this instrument, or in case of any
reorganization or reclassification of the outstanding shares thereof, the stock,
securities or assets provided for in Section 6G.
6O. Mandatory Conversion. If at any time the Corporation shall
--------------------
effect a firm commitment underwritten public offering of shares of Common Stock
in which (i) the gross proceeds received by the Corporation from such public
offering shall be at least $10,000,000 and (ii) the price paid by the public for
such shares shall be at least $5.00 per share (appropriately adjusted to reflect
the occurrence of any event described in Section 6F), then effective upon the
closing of the sale of such shares by the Corporation pursuant to such public
offering, all outstanding shares of Series A Preferred Stock shall automatically
convert to shares of Common Stock on the basis set forth in this Section 6. In
addition, upon the approval of holders representing at least 66 2/3% of the
outstanding Series A Preferred Stock, or at such time as only 200,000 shares
(subject to equitable adjustments for stock splits, stock dividends and the
like) of Series A Preferred Stock remain outstanding, all outstanding shares of
Series A Preferred Stock shall automatically convert to shares of Common Stock
on the basis set forth in this Section 6. Holders of shares of Series A
Preferred Stock so converted may deliver to the Corporation at its principal
office (or such other office or agency of the Corporation as the Corporation may
designate by notice in writing to such holders) during its usual business hours,
the certificate or certificates for the shares so converted. As promptly as
practicable thereafter, the Corporation shall issue and deliver to such holder a
certificate or certificates for the number of whole shares of Common Stock to
which such holder is entitled, together with any cash dividends and payment in
lieu of fractional shares to which such holder may be entitled pursuant to
Section 6C. Until such time as a holder of shares of Series A Preferred Stock
shall surrender his or its
<PAGE>
-14-
certificates therefor as provided above, such certificates shall be deemed to
represent the shares of Common Stock to which such holder shall be entitled upon
the surrender thereof.
7. Redemption. The shares of Series A Preferred Stock shall be redeemed
----------
as follows:
7A. Mandatory Redemption. At any time after August __, 2001 upon the
--------------------
written request of holders of not less than a majority of the then outstanding
shares of Series A Preferred Stock, the Corporation shall be obligated to redeem
from each holder of shares of Series A Preferred Stock, all of the shares of
Series A Preferred Stock held by such holder, with such redemption to be
completed within ninety (90) days of the date the notice of redemption is
delivered to the Corporation (the "Redemption Date").
7B. Redemption Price and Payment. The shares of Series A Preferred
----------------------------
Stock to be redeemed on the Redemption Date shall be redeemed by paying for each
such share in cash an amount equal to $2.50 per share plus, in the case of each
share, an amount equal to all dividends declared but unpaid thereon, computed to
the Redemption Date (such amount being referred to as the "Redemption Amount").
Such payment shall be made in full on the Redemption Date to all the holders
entitled thereto, pro rata, based on the relative number of shares being
redeemed by each such holder.
7C. Redemption Mechanics. At least 20 but not more than 30 days prior
--------------------
to the Redemption Date, written notice (the "Redemption Notice") shall be given
by the Corporation by delivery in person, certified or registered mail, return
receipt requested, telecopier or telex, to each holder of record (at the close
of business on the business day next preceding the day on which the Redemption
Notice is given) of shares of Series A Preferred Stock notifying such holder of
the redemption and specifying the Redemption Amount, the Redemption Date and the
place where said Redemption Amount shall be payable. The Redemption Notice shall
be addressed to each holder at his address as shown by the records of the
Corporation. From and after the close of business on the Redemption Date, unless
there shall have been a default in the payment of the Redemption Amount, all
rights of holders of shares of Series A Preferred Stock (except the right to
receive the Redemption Price) shall cease with respect to such shares, and such
shares shall not thereafter be transferred on the books of the Corporation or be
deemed to be outstanding for any purpose whatsoever. If the funds of the
Corporation legally available for redemption of shares of Series A Preferred
Stock on the Redemption Date are insufficient to redeem the total number of
outstanding shares of Series A Preferred Stock, the holders of shares of Series
A Preferred Stock shall share ratably in any funds legally available for
redemption of such shares according to the respective amounts which would be
payable with respect to the full number of shares owned by them if all such
outstanding shares were redeemed in full. The shares of Series A Preferred Stock
not redeemed shall remain outstanding and entitled to all rights and preferences
provided herein. At any time thereafter when additional funds of the Corporation
are legally available for the redemption of such shares of Series A Preferred
Stock, such funds will be used, at the end of the next succeeding fiscal
quarter, to redeem the balance of such shares, or such portion thereof for which
funds are then legally available, on the basis set forth above.
<PAGE>
-15-
7D. Default. If the Corporation fails to redeem the Series A
-------
Preferred Stock in full as called for, the Corporation shall be obligated to pay
an additional interest amount to the holders of outstanding Series A Preferred
Stock based on the Redemption Amount outstanding ("Redemption Interest") payable
in cash quarterly in arrears at the initial rate of 8% per annum calculated from
the date of the redemption notice, increasing one point each successive calendar
quarter (or portion thereof) during which the full outstanding Redemption Amount
balance (plus Redemption Interest, if any) is not paid in full. In the event
that the Corporation does not pay such Redemption Interest in full within one
hundred twenty (120) days following the date of the redemption notice, then all
accrued and unpaid Redemption Interest shall be due and payable in kind in the
form of additional shares of Series A Preferred Stock, at an assumed value of
$2.50 per share, in an amount equal to the Redemption Interest ("PIK Interest")
until such time as the Corporation has sufficient legal capital available to pay
the Redemption Interest in cash. Any and all outstanding Redemption Interest
amounts shall be included as being due and payable to the holders of Series A
Preferred Stock for purposes of determining the Stated Preference upon any
liquidation under Section 3.
7E. Redeemed or Otherwise Acquired Shares to be Retired. Any shares
---------------------------------------------------
of Series A Preferred Stock redeemed pursuant to this Section 7 or otherwise
acquired by the Corporation in any manner whatsoever shall be canceled and shall
not under any circumstances be reissued; and the Corporation may from time to
time take such appropriate corporate action as may be necessary to reduce
accordingly the number of authorized shares of Series A Preferred Stock.
8. Amendments. No provision of these terms of the Series A Preferred
----------
Stock may be amended, modified or waived without the written consent or
affirmative vote of the holders of at least a majority of the then outstanding
shares of Series A Preferred Stock, except for those provisions which expressly
call for a greater number or percentage of shares of Series A Preferred Stock.
COMMON STOCK
1. Relative Rights of Common Stock and Preferred Stock. All preferences,
---------------------------------------------------
voting powers, relative, participating, optional or other specific rights and
privileges, and qualifications, limitations, or restrictions of the Common Stock
are expressly made subject and subordinate to those that may be fixed with
respect to any shares of Preferred Stock.
2. Voting Rights. Except as otherwise required by law or this Certificate
-------------
of Incorporation, each holder of Common Stock shall have one vote in respect of
each share of stock held by him of record on the books of the Corporation for
the election of directors and on all matters submitted to a vote of stockholders
of the Corporation.
3. Dividends. Subject to the preferential rights of the Preferred Stock,
---------
the holders of shares of Common Stock shall be entitled to receive, when and if
declared by the Board of
<PAGE>
-16-
Directors, out of the assets of the Corporation which are by law available
therefor, dividends payable either in cash, in property or in shares of capital
stock.
4. Dissolution, Liquidation or Winding Up. In the event of any
--------------------------------------
dissolution, liquidation or winding up of the affairs of the Corporation, after
distribution in full of the preferential amounts, if any, to be distributed to
the holders of shares of the Preferred Stock, holders of Common Stock shall be
entitled, unless otherwise provided by law or this Certificate of Incorporation,
to receive all of the remaining assets of the Corporation or whatever kind
available for distribution to stockholders ratably in proportion to the number
of shares of Common Stock held by them respectively.
IN WITNESS WHEREOF, the undersigned under penalty of perjury hereby
certifies that this instrument is the act and deed of Bionix, Inc. and that the
facts stated in the foregoing certificate of designations, preferences and
rights of its Series A Convertible Participating Preferred Stock are true this
5th day of September, 1996.
BIONIX, INC.
By: /s/ David Anderson
---------------------------
David Anderson, President
<PAGE>
EXHIBIT 3.2
[THIS RESTATED CERTIFICATE OF INCORPORATION WILL BE FILED AT THE
CLOSE OF THE OFFERING]
RESTATED CERTIFICATE OF INCORPORATION
OF
BIONX IMPLANTS, INC.
Bionx Implants, Inc., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is Bionx Implants, Inc. Bionx
Implants, Inc. was originally incorporated under the name Bionix, Inc. The
original Certificate of Incorporation of the corporation was filed with the
Secretary of State of the State of Delaware on October 11, 1995.
2. Pursuant to Sections 242 and 245 of the General Corporation Law
of the State of Delaware, this Restated Certificate of Incorporation restates
and integrates and further amends the provisions of the Certificate of
Incorporation of this corporation.
3. The text of the Restated Certificate of Incorporation as
heretofore amended or supplemented is hereby restated and further amended to
read in its entirety as follows:
ARTICLE I
The name of the corporation is Bionx Implants, Inc. (the
"corporation").
ARTICLE II
The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
The aggregate number of shares which the corporation shall have
authority to issue is thirty nine million six hundred thousand (39,600,000),
divided into thirty one million six
<PAGE>
hundred thousand (31,600,000) shares of common stock with par value of $.0019
per share and eight million (8,000,000) shares of preferred stock with par value
of $.001 per share.
The preferred stock may be issued from time to time in one or more
series. The Board of Directors of the corporation is hereby expressly
authorized to provide, by resolution or resolutions duly adopted by it prior to
issuance, for the creation of each such series and to fix the designation and
the powers, preferences, rights, qualifications, limitations and restrictions
relating to the shares of each such series. The authority of the Board of
Directors with respect to each series of preferred stock shall include, but not
be limited to, determining the following:
(a) the designation of such series, the number of shares to
constitute such series and the stated value if different from the par value
thereof;
(b) whether the shares of such series shall have voting rights,
in addition to any voting rights provided by law, and, if so, the terms of
such voting rights, which may be general or limited;
(c) the dividends, if any, payable on such series, whether any
such dividends shall be cumulative, and, if so, from what dates, the
conditions and dates upon which such dividends shall be payable, and the
preference or relation which such dividends shall bear to the dividends
payable on any shares of stock of any other class or any other series of
preferred stock;
(d) whether the shares of such series shall be subject to
redemption either by the corporation or the holders thereof, and, if so,
the times, prices and other conditions of such redemption;
(e) the amount or amounts payable upon shares of such series
upon, and the rights of the holders of such series in, the voluntary or
involuntary liquidation, dissolution or winding up, or upon any
distribution of the assets, of the corporation;
(f) whether the shares of such series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to and the
manner in which any such retirement or sinking fund shall be applied to the
purchase or redemption of the shares of such series for retirement or other
corporate purposes and the terms and provisions relating to the operation
thereof;
(g) whether the shares of such series shall be convertible into,
or exchangeable for, shares of stock of any other class or any other series
of preferred stock or any other securities and, if so, the price or prices
or the rate or rates of conversion or exchange and the method, if any, of
adjusting the same, and any other terms and conditions of conversion or
exchange;
(h) the limitations and restrictions, if any, to be effective
while any shares of such series are outstanding upon the payment of
dividends or the making of
-2-
<PAGE>
other distributions on, and upon the purchase, redemption or other
acquisition by the corporation of, the common stock or shares of stock of
any other class or any other series of preferred stock;
(i) the conditions or restrictions, if any, upon the creation of
indebtedness of the corporation or upon the issue of any additional stock,
including additional shares of such series or of any other series of
preferred stock or of any other class; and
(j) any other powers, preferences and relative, participating,
optional and other specific rights, and any qualifications, limitations and
restrictions, thereof.
The powers, preferences and relative, participating, optional and
other special rights of each series of preferred stock, and the qualifications,
limitations or restrictions thereof, if any, may differ from those of any and
all other series at any time outstanding. All shares of any one series of
preferred stock shall be identical in all respects with all other shares of such
series, except that shares of any one series issued at different times may
differ as to the dates from which dividends thereof shall be cumulative.
ARTICLE V
The corporation is to have perpetual existence.
ARTICLE VI
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized:
1. To make, alter or repeal the by-laws of the corporation.
2. To authorize and cause to be executed mortgages and liens upon
the real and personal property of the corporation.
3. To set apart out of any of the funds of the corporation available
for dividends a reserve or reserves for any proper purpose and to abolish any
such reserve in the manner in which it was created.
4. By a majority of the whole Board of Directors, to designate one
or more committees, each committee to consist of one or more of the directors of
the corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. The by-laws may provide that in the
absence or disqualification of a member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such
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committee, to the extent provided in the resolution of the Board of Directors,
or in the by-laws of the corporation, shall have and may exercise all the powers
and authority of the board of directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to amending the Certificate of Incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
by-laws of the corporation; and, unless the resolution or by-laws expressly so
provide, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock.
5. When and as authorized by the stockholders in accordance with
law, to sell, lease or exchange all or substantially all of the property and
assets of the corporation, including its good will and its corporate franchises,
upon such terms and conditions and for such consideration, which may consist in
whole or in part of money or property including shares of stock in, and/or other
securities of, any other corporation or corporations, as its board of directors
shall deem expedient and for the best interests of the corporation.
ARTICLE VII
Elections of directors need not be by written ballot unless the by-
laws of the corporation shall so provide.
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
The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
ARTICLE X
1. Limitation of Liability. To the fullest extent permitted by the
-----------------------
General Corporation Law of the State of Delaware as the same exists or as may
hereafter be amended, 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.
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2. Amendments. Neither any amendment nor repeal of this Article X,
----------
nor the adoption of any provision of the corporation's Certificate of
Incorporation inconsistent with this Article X, shall eliminate or reduce the
effect of this Article X, in respect of any matter occurring, or any action or
proceeding accruing or arising or that, but for this Article X, would accrue or
arise, prior to such amendment, repeal, or adoption of an inconsistent
provision.
ARTICLE XI
1. Every person who is or was a director or officer of the
corporation shall be indemnified by the corporation to the fullest extent
allowed by Section 145 of the Delaware General Corporation Law against all
liabilities and expenses imposed upon or incurred by that person in connection
with any proceeding in which that person may be made, or threatened to be made,
a party, or in which that person may become involved by reason of that person
being or having been a director or officer or of serving or having served in any
capacity with any other enterprise at the request of the corporation, whether or
not that person is a director or officer or continues to serve the other
enterprise at the time the liabilities or expenses are imposed or incurred.
2. To the fullest extent permitted by applicable law, the
corporation is authorized to provide indemnification of (and advancement of
expenses to) agents of the corporation (and any other persons to which Delaware
law permits the corporation to provide indemnification) through bylaw
provisions, agreements with such agents or other persons, votes of stockholders
or disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the Delaware General
Corporation Law, subject only to limits created by applicable Delaware law
(statutory or non-statutory), with respect to actions for breach of duty to the
corporation, its stockholders and others.
ARTICLE XII
The following provisions shall be effective immediately after the
corporation consummates the closing of a sale of shares of Common Stock made
pursuant to a firm commitment underwritten public offering of Common Stock in
which (i) the gross proceeds received by the corporation from such public
offering are at least ten million dollars and (ii) the price paid by the public
for such shares is at least $9.50:
1. No action shall be taken by the shareholders of the corporation
except at an annual or special meeting of the stockholders called in accordance
with the By-laws of the corporation and no action shall be taken by the
stockholders by written consent.
2. Upon the later of the date on which this Restated Certificate of
Incorporation is filed with the Secretary of State of Delaware and the date on
which this Article XII becomes effective in accordance with its terms (such
later date being referred to herein as the "Effective Date"), the Board of
Directors of the corporation shall be divided into three classes, the respective
terms of office of which shall end in successive years . The number of directors
on the Board shall be determined in accordance with the by-laws of the
corporation. The number of
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directors in each class shall be as nearly equal as possible, except that no
director shall be moved from one class to another class in order to attain
equality or near equality in the size of the respective classes. Such classes
shall be designated as "Class I", "Class II" and "Class III". Unless they are
elected to fill vacancies or elected pursuant to the next paragraph, the
directors in each class shall hold office until the third successive annual
meeting of shareholders after their election and until their successors shall
have qualified, such that at each annual meeting of shareholders only one class
of directors shall be elected. In the event that a director is elected to fill a
vacancy, the term of such director shall expire at the next annual meeting of
shareholders.
At the meeting of shareholders at which this Restated Certificate of
Incorporation was adopted by the shareholders of the corporation, the
shareholders of the corporation elected directors and designated which of the
elected directors shall serve in each of the classes specified above as of the
Effective Date. If, on the Effective Date, a person elected as a director at
such meeting remains on the Board, such person shall serve in the class so
designated by the shareholders at such meeting. If any person so elected ceases
to serve on the Board prior to the Effective Date (such person, a "Vacating
Director") and the Board appoints another person (the "New Director") to fill
the vacancy of the Vacating Director, the term of the New Director shall expire
at the next annual meeting of shareholders.
Nothwithstanding any provision herein to the contrary, the provisions
of this Article XII, including without limitation this paragraph, shall not be
amended unless any such amendment is approved by holders of at least two-thirds
of the outstanding capital stock of each class of capital stock entitled to vote
thereon.
IN WITNESS WHEREOF, Bionix, Inc. has caused this certificate to be
signed by David W. Anderson, its President, and Michael J. O'Brien, its
Secretary, this ____ day of __________, 1997.
___________________________________
David W. Anderson, President
___________________________________
Michael J. O'Brien, Secretary
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EXHIBIT 3.3
BIONX IMPLANTS, INC.
* * * * *
AMENDED AND RESTATED B Y - L A W S
(As amended through February 14, 1997)
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Wilmington,
County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other places
both within and without the State of Delaware as the board of directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
directors shall be held in the City of Malvern, State of Pennsylvania, at such
place as may be fixed from time to time by the board of directors, or at such
other place either within or without the State of Delaware as shall be
designated from time to time by the board of directors and stated in the notice
of the meeting. Meetings of stockholders for any other purpose may be held at
such time and place, within or without the State of Delaware, as shall be stated
in the notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual meetings of stockholders, commencing with the year
1997, shall be held on the thirtieth day of March if not a legal holiday, and if
a legal holiday, then on the next secular day following, at 1 P.M., or at such
other date and time as shall be designated from time to time by the board of
directors and stated in the notice of the meeting, at which they
<PAGE>
shall elect by a plurality vote a board of directors, and transact such other
business as may properly be brought before the meeting.
Section 3. Written notice of the annual meeting stating the place,
date and hour of the meeting shall be given to each stockholder entitled to vote
at such meeting not less than ten nor more than sixty days before the date of
the meeting.
Section 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the president and shall be called by the
president or secretary at the request in writing of a majority of the board of
directors, or at the request in writing of stockholders owning a majority in
amount of the entire capital stock of the corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
Section 6. Written notice of a special meeting stating the place,
date and hour of the meeting and the purpose or purposes for which the meeting
is called, shall be given not less than ten nor more than sixty days before the
date of the meeting, to each stockholder entitled to vote at such meeting.
Section 7. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the office.
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Section 8. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the Stockholders, the Stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required in which case
such express provision shall govern and control the decision of such question.
Section 10. Unless otherwise provided in the certificate of
incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three years from its date, unless the proxy provides for a longer period.
Section 11. At any annual or special meeting of stockholders,
proposals by stockholders and persons nominated for election as directors by
stockholders shall be considered only if advance notice thereof has been timely
given as provided herein and such proposals or nominations are otherwise proper
for consideration under applicable law and the certificate of incorporation and
by-laws of the corporation. Notice of any proposal to be presented by any
stockholder or of the name of any person to be nominated
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by any stockholder for election as a director of the corporation at any meeting
of stockholders shall be delivered to the secretary of the corporation at its
principal executive office not less than 60 nor more than 90 days prior to the
date of the meeting; provided, however, that if the date of the meeting is first
publicly announced or disclosed (in a public filing, in a press release reported
by the Dow Jones News Service, Associated Press or comparable national news
service, or otherwise) less than 70 days prior to the date of the meeting, such
advance notice shall be given not more than ten days after such date is first so
announced or disclosed. Public notice shall be deemed to have been given more
than 70 days in advance of the annual meeting if the corporation shall have
previously disclosed, in these by-laws or otherwise, that the annual meeting in
each year is to be held on a determinable date, unless and until the Board
determines to hold the meeting on a different date. Any stockholder who gives
notice of any such proposal shall deliver therewith the text of the proposal to
be presented and a brief written statement of the reasons why such stockholder
favors the proposal and setting forth such stockholder's name and address, the
number and class of all shares of each class of stock of the corporation
beneficially owned by such stockholder and any material interest of such
stockholder in the proposal (other than as a stockholder). Any stockholder
desiring to nominate any person for election as a director of the corporation
shall deliver with such notice a statement in writing setting forth the name of
the person to be nominated, the number and class of all shares of each class of
stock of the corporation beneficially owned by such person, the information
regarding such person required by paragraphs (a), (e) and (f) of Item 401 of
Regulation S-K adopted by the Securities and Exchange Commission (or the
corresponding provisions of any regulation subsequently adopted by the
Securities and Exchange Commission applicable to the corporation), such person's
signed consent to serve as a director of the corporation if elected, such
stockholder's name and address and the number and class of all shares of each
class of stock of the corporation beneficially owned by such stockholder. As
used herein, shares "beneficially owned" shall mean all shares as to which such
person, together with such person's affiliates and associates (as defined in
Rule 12b-2 under the Securities Exchange Act of 1934), may be deemed to
beneficially own pursuant to Rules 13d-3 and 13d-5 under the Securities Exchange
Act of 1934 ("Exchange Act"), as well as all shares as to which such person,
together with such person's affiliates and associates, has the right to become
the beneficial owner pursuant to any
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agreement or understanding, or upon the exercise of warrants, options or rights
to convert or exchange (whether such rights are exercisable immediately or only
after the passage of time or the occurrence of conditions). The person presiding
at the meeting, in addition to making any other determinations that may be
appropriate to the conduct of the meeting, shall determine whether such notice
has been duly given and shall direct that proposals and nominees not be
considered if such notice has not been given. Nothing in this section shall be
deemed to affect any rights of stockholders to request inclusion of proposals in
the corporation's proxy statement pursuant to Rule 14A-8 of the Exchange Act.
Notwithstanding Article VIII of these by-laws or any provision of the
certificate of incorporation or the fact that a lesser percentage may be
specified by Delaware law, the affirmative vote of the holders of at least
seventy-five percent (75%) of the votes which all the stockholders would be
entitled to cast at any annual election of directors or class of directors shall
be required to amend, repeal, or adopt any provision inconsistent with this
section. This section shall not take effect until the conversion of all of the
corporation's outstanding Series A Preferred Stock
ARTICLE III
DIRECTORS
Section 1. The number of directors which shall constitute the whole
board shall be not less than five nor more than nine; provided, however, that
while there are any shares of Preferred Stock outstanding, the Board shall
consist of not less than six and not more than seven members. The first board
shall consist of five directors. Thereafter, within the limits above specified,
the number of directors shall be determined by resolution of the board of
directors or by the stockholders at the annual meeting. The directors shall be
elected at the annual meeting of the stockholders, except as provided in Section
2 of this Article, and each director elected shall hold office until his
successor is elected and qualified. Directors need not be stockholders.
Section 2. Vacancies and newly created directorships resulting from
any increase in the authorized number of directors may be filled by a majority
of the directors then in
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office, though less than a quorum, or by a sole remaining director, and the
directors so chosen shall hold office until the next annual election and until
their successors are duly elected and shall qualify, unless sooner displaced. If
there are no directors in office, then an election of directors may be held in
the manner provided by statute. If, at the time of filling any vacancy or any
newly created directorship, the directors then in office shall constitute less
than a majority of the whole board (as constituted immediately prior to any such
increase) , the Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent of the total number of the shares at
the time outstanding having the right to vote for such directors, summarily
order an election to be held to fill any such vacancies or newly created
directorships, or to replace the directors chosen by the directors then in
office.
Section 3. The business of the corporation shall be managed by or
under the direction of its board of directors which may exercise all such powers
of the corporation and do all such lawful acts and things as are not by statute
or by the certificate of incorporation or by these by-laws directed or required
to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The board of directors of the corporation may hold
meetings, both regular and special, either within or without the State of
Delaware. Commencing at such time as the corporation first issues shares of
Preferred Stock, the Board shall meet no less frequently than once during each
calendar quarter.
Section 5. The first meeting of each newly elected board of directors
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
board of directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter
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provided for special meetings of the board of directors, or as shall be
specified in a written waiver signed by all of the directors.
Section 6. Regular meetings of the board of directors may be held
without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the board may be called by the
president on three days' notice to each director, either personally or by mail
or by telegram; special meetings shall be called by the president or secretary
in like manner and on like notice (i) on the written request of two directors
unless the board consists of only one director; in which case special meetings
shall be called by the president or secretary in like manner and on like notice
on the written request of the sole director or (ii) on the written request of
holders of at least 25% of the outstanding shares of Series A Convertible
Participating Preferred Stock.
Section 8. At all meetings of the board a majority of the directors
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the board of directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the board of directors the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of
incorporation or these by-laws, any action required or permitted to be taken at
any meeting of the board of directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
incorporation or these by-laws, members of the board of directors, or any
committee designated by the board of directors, may participate in a meeting of
the board of directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons
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participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The board of directors may, by resolution passed by a
majority of the whole board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee.
Any such committee, to the extent provided in the resolution of the
board of directors, shall have and may exercise all the powers and authority of
the board of directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation (except that
a committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the board of directors
as provided in Section 151(a) fix any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), adopting an agreement of
merger or consolidation, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the corporation's property and assets,
recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the by-laws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock or to adopt a certificate of ownership and
merger. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the board of directors.
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Section 12. Each committee shall keep regular minutes of its meetings
and report the same to the board of directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
incorporation or these by-laws, the board of directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the board of directors and may be paid
a fixed sum for attendance at each meeting of the board of directors or a stated
salary as director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
REMOVAL OF DIRECTORS
Section 14. Unless otherwise restricted by the certificate of
incorporation or by law, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of shares entitled
to vote at an election of directors.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these by-laws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.
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Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
by-laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the
board of directors and shall be a president, a vice-president, a secretary and a
treasurer. The board of directors may also choose additional vice-presidents,
and one or more assistant secretaries and assistant treasurers. Any number of
offices may be held by the same person, unless the certificate of incorporation
or these by-laws otherwise provide.
Section 2. The board of directors at its first meeting after each
annual meeting of stockholders shall choose a president, one or more vice-
presidents, a secretary and a treasurer.
Section 3. The board of directors may appoint such other officers
and agents as it shall deem necessary who shall hold their offices for such
terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the board.
Section 4. The salaries of all officers and agents of the
corporation shall be fixed by the board of directors; provided, however, if the
board has established a compensation committee, no increase in salary of the
officers of the corporation shall occur unless such increase is approved by such
committee.
Section 5. The officers of the corporation shall hold office until
their successors are chosen and qualify. Any officer elected or appointed by
the board of directors may be removed at any time by the affirmative vote of a
majority of the board of directors. Any vacancy occurring in any office of the
corporation shall be filled by the board of directors.
THE PRESIDENT
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Section 6. The president shall be the chief executive officer of the
corporation, shall preside at all meetings of the stockholders and the board of
directors, shall have general and active management of the business of the
corporation and shall see that all orders and resolutions of the board of
directors are carried into effect.
Section 7. He shall execute bonds, mortgages and other contracts
requiring a seal, under the seal of the corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the board of
directors to some other officer or agent of the corporation.
THE VICE-PRESIDENTS
Section 8. In the absence of the president or in the event of his
inability or refusal to act, the vice-president (or in the event there be more
than one vice-president, the vice-presidents in the order designated by the
directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the board of directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 9. The secretary shall attend all meetings of the board of
directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the board of directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the board of directors, and shall
perform such other duties as may be prescribed by the board of directors or
president, under whose supervision he shall be. He shall have custody of the
corporate seal of the corporation and he, or an assistant secretary, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by his signature or by the signature of such assistant
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secretary. The board of directors may give general authority to any other
officer to affix the seal of the corporation and to attest the affixing by his
signature.
Section 10. The assistant secretary, or if there be more than one,
the assistant secretaries in the order determined by the board of directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the secretary or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 11. The treasurer shall have the 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 depositories as may be designated by the board of directors.
Section 12. He shall disburse the funds of the corporation as may be
ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the president and the board of directors, at
its regular meetings, or when the board of directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
corporation.
Section 13. If required by the board of directors, he shall give the
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the board of directors for
the faithful performance of the duties of his office and for the restoration to
the corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
-12-
<PAGE>
Section 14. The assistant treasurer, or if there shall be more than
one, the assistant treasurers in the order determined by the board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the treasurer or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the treasurer and
shall perform such other duties and have such other powers as the board of
directors may from time to time prescribe.
ARTICLE VI
CERTIFICATES FOR SHARES
Section 1. The shares of the corporation shall be represented by a
certificate or shall be uncertificated. Certificates shall be signed by, or in
the name of the corporation by, the chairman or vice-chairman of the board of
directors, or the president or a vice-president, and by the treasurer or an
assistant treasurer, or the secretary or an assistant secretary of the
corporation.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers,' designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
-13-
<PAGE>
Within a reasonable time after the issuance or transfer of
uncertificated stock, the corporation shall send to the registered owner thereof
a written notice containing the information required to be set forth or stated
on certificates pursuant to Sections 151, 156, 202(a) or 218(a) or a statement
that the corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
Section 2. Any of or all the signatures on a certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 3. The board of directors may direct a new certificate or
certificates or uncertificated shares to be issued in place of any certificate
or certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates or uncertificated
shares, the board of directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or his legal representative, to advertise
the same in such manner as it shall require and/or to give the corporation a
bond in such sum as it may direct as indemnity against any claim that may be
made against the corporation with respect to the certificate alleged to have
been lost, stolen or destroyed.
TRANSFER OF STOCK
-14-
<PAGE>
Section 4. Upon surrender to the corporation or the transfer agent of
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Upon receipt of proper transfer instructions from the registered owner of
uncertificated shares such uncertificated shares shall be canceled and issuance
of new equivalent uncertificated shares or certificated shares shall be made to
the person entitled thereto and the transaction shall be recorded upon the books
of the corporation.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the board of directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 6. The corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
-15-
<PAGE>
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation,
subject to the provisions of the certificate of incorporation, if any, may be
declared by the board of directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside
out of any funds of the corporation available for dividends such sum or sums as
the directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
ANNUAL STATEMENT
Section 3. The board of directors shall present at each annual
meeting, and at any special meeting of the stockholders when called for by vote
of the stockholders, a full and clear statement of the business and condition of
the corporation.
CHECKS
Section 4. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the board of directors may from time to time designate.
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<PAGE>
FISCAL YEAR
Section 5. The fiscal year of the corporation shall be fixed by
resolution of the board of directors.
SEAL
Section 6. The corporate seal shall have inscribed thereon the name
of the corporation, the year of its organization and the words "Corporate Seal,
Delaware". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
Section 7. The corporation shall indemnify to the full extent
permitted by law any person made or threatened to be made a party to any action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such person or such person's testator or intestate is or
was a director or officer of the corporation or serves or served at the request
of the corporation any other enterprise as a director or officer. Expenses,
including attorneys' fees, incurred by any such person in defending any such
action, suit or proceeding shall be paid or reimbursed by the corporation
promptly upon receipt by it of an undertaking of such person to repay such
expenses if it shall ultimately be determined that such person is not entitled
to be indemnified by the corporation. The rights provided to any person by this
by-law shall be enforceable against the corporation by such person who shall be
presumed to have relied upon it in serving or continuing to serve as a director
or officer as provided above. No amendment of this by-law shall impair the
rights of any person arising at any time with respect to events occurring prior
to such amendment. For purposes of this bylaw, the term "corporation" shall
include any predecessor of the corporation and any constituent corporation
(including any constituent of a constituent) absorbed by the corporation in a
consolidation or merger; the term "other enterprise" shall include any
corporation, partnership, joint venture, trust or employee benefit plan; service
"at the request of the corporation" shall include service as a director or
officer of the corporation which imposes duties
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<PAGE>
on, or involves services by, such director or officer with respect to an
employee benefit plan, its participants or beneficiaries; any excise taxes
assessed on a person with respect to an employee benefit plan shall be deemed to
be indemnifiable expenses; and action by a person with respect to an employee
benefit plan which such person reasonably believes to be in the interest of the
participants and beneficiaries of such plan shall be deemed to be action not
opposed to the best interests of the corporation.
ARTICLE VIII
AMENDMENTS
Section 1. These by-laws may be altered, amended or repealed or new
bylaws may be adopted by the stockholders or by the board of directors, when
such power is conferred upon the board of directors by the certificate of
incorporation at any regular meeting of the stockholders or of the board of
directors or at any special meeting of the stockholders or of the board of
directors if notice of such alteration, amendment, repeal or adoption of new by-
laws be contained in the notice of such special meeting. If the power to adopt,
amend or repeal by-laws is conferred upon the board of directors by the
certificate of incorporation it shall not divest or limit the power of the
stockholders to adopt, amend or repeal by-laws.
-18-
<PAGE>
Exhibit 10.1
REORGANIZATION AGREEMENT
THIS AGREEMENT (the "Agreement"), made and entered into as of the 5th day
of September, 1996, by and among the United States residents listed in Exhibit A
---------
annexed hereto (each, a "U.S. Investor" and collectively, the "U.S. Investors"),
the residents of Finland listed in Exhibit B annexed hereto (each, a "Finnish
---------
Investor" and, collectively, the "Finnish Investors"), BIOSCIENCE, LTD.
("Bioscience"), a corporation organized under the laws of Finland, BIOCON, OY
("Biocon"), a corporation organized under the laws of Finland, ORTHOSORB, INC.
("Orthosorb"), a corporation organized under the laws of New Jersey, BIOSTENT,
INC. ("Biostent"), a corporation organized under the laws of New Jersey, and
BIONIX, INC. ("Newco"), a corporation organized under the laws of Delaware,
WITNESSETH THAT:
WHEREAS, the U.S. Investors and the Finnish Investors own all of the
capital stock of Bioscience and Biocon, the U.S. Investors and Bioscience own
all of the capital stock of Orthosorb, and the U.S. Investors own all of the
capital stock of Biostent;
WHEREAS, the U.S. Investors and the Finnish Investors desire to raise
additional capital to be utilized in connection with the businesses of
Bioscience, Biocon, Orthosorb and Biostent;
WHEREAS, the U.S. Investors and the Finnish Investors have determined
that in order to raise such capital, it is necessary to reorganize the corporate
structure of the above-mentioned businesses so that such businesses are
controlled by a single corporation, Newco, which, in turn, is owned directly and
indirectly by the U.S. Investors and the Finnish Investors;
WHEREAS, at present, the shareholdings of each U.S. Investor in
Bioscience, Biocon, Biostent and Orthosorb is accurately set forth in Exhibit A
----------
annexed hereto;
WHEREAS, at present, the shareholdings of each Finnish Investor in
Bioscience and Biocon is accurately set forth in Exhibit B annexed hereto;
---------
WHEREAS, it is the intention of the parties hereto that after all of the
transactions described herein, the U.S. Investors will own, directly and
indirectly, a 61% equity interest in Newco and the Finnish Investors will own
indirectly a 39% interest in Newco; and
WHEREAS, each of the parties intends that the restructuring of the above-
mentioned corporations required in order to effect such reorganization (the
"Reorganization") shall be effected in the manner provided for herein,
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein, the parties hereto hereby agree as follows:
<PAGE>
1. DEFINITIONS. For purposes of this Agreement, the following terms
-----------
shall have the following meanings:
1.1 "Biocon Class A Shares" shall mean shares of Biocon's Class A Common
Stock.
1.2 "Biocon Class B Shares" shall mean shares of Biocon's Class B Common
Stock.
1.3 "Bioscience Shares" shall mean shares of Bioscience's common stock .
1.4 "Biostent Shares" shall mean shares of Biostent's common stock, no
par value.
1.5 "Dutch Company" shall mean Bionix B.V., a private company with
limited liability, which is in the process of being organized under
the laws of the Netherlands in accordance with Section 4 hereof.
1.6 "Finnish Representative" shall mean Pertti Tormala or his designee.
1.7 "Investor" shall mean any U.S. Investor or any Finnish Investor and
"Investors" shall mean all of the U.S. Investors and all of the
Finnish Investors.
1.8 "Newco Common Shares" shall mean shares of common stock of Newco, par
value $.001 per share.
1.9 "Operating Companies" shall mean Bioscience, Biocon, Biostent and
Orthosorb.
1.10 "Orthosorb Shares" shall mean shares of Orthosorb's common
stock, no par value.
1.11 "Shareholders' Agreements" shall mean the shareholders' agreements
previously entered into by the U.S. Investors and the Finnish
Investors with respect to the capital stock of the Operating
Companies.
1.12 "U.S. Representative" shall mean Anthony J. Dimun or his designee.
2. REPRESENTATIONS. The parties hereto hereby represent as follows:
---------------
2.1 Each U.S. Investor represents to each of the other Investors
that such U.S. Investor owns the number of shares of capital stock of
each of the Operating Companies set forth opposite such U.S.
Investor's name in Exhibit A annexed hereto and that such U.S.
----------
Investor owns such shares free and clear of any and all
-2-
<PAGE>
agreements, restrictions, liens and encumbrances (collectively,
"Limitations"), has the right and power to transfer such shares
hereunder free and clear of all Limitations and shall transfer such
shares hereunder free and clear of all Limitations.
2.2 Each Finnish Investor represents to each of the other Investors
that such Finnish Investor owns the number of shares of capital stock
of Bioscience and Biocon set forth opposite such Finnish Investor's
name in Exhibit B annexed hereto and that such Finnish Investor owns
---------
such shares free and clear of any and all Limitations, has the right
and power to transfer such shares hereunder free and clear of all
Limitations and shall transfer such shares hereunder free and clear of
all Limitations.
2.3 Each Investor represents to each of the other Investors that
such Investor is not aware of any Shareholders' Agreement applicable
to the Operating Companies other than the Shareholders' Agreements
described in Exhibit C annexed hereto.
---------
2.4 Simultaneous with the execution of this Agreement, each of the
Operating Companies has delivered to the U.S. Representative and the
Finnish Representative copies of all of their organizational documents
and copies of all minutes of such entities reflecting any and all
meetings of the directors and shareholders of such companies held
since their respective dates of organization.
2.5 Each of the Operating Companies represents that since December
31, 1995, it has not incurred any liabilities outside of the ordinary
course of business and none of the events described in Exhibit D
---------
annexed hereto has occurred.
2.6 Simultaneous with the execution of this Agreement, each of the
Operating Companies has delivered to the U.S. Representative and the
Finnish Representative copies of each material contract to which it is
subject and copies of each employee benefit plan, if any, which it has
adopted.
2.7 Each of the Operating Companies represents that Exhibit E annexed
---------
hereto accurately sets forth the aggregate outstanding capital stock
of such Operating Company and that Exhibits A and B annexed hereto
----------------
accurately set forth the ownership of such Operating Company's capital
stock. Each of the Operating Companies represents that except as set
forth in such Exhibit E, there are no options, warrants or other
---------
rights or other securities outstanding which entitle any person or
entity to acquire any shares of capital stock of such Operating
Company.
3. REPURCHASE OF ORTHOSORB SHARES. Immediately prior to the closing
------------------------------
described in Section 5 hereof ( the "First Closing"), Orthosorb shall purchase
from Bioscience, and
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<PAGE>
Bioscience shall sell to Orthosorb, the 250 Orthosorb Shares presently owned by
Bioscience. At such time, Bioscience shall deliver to Orthosorb stock
certificates representing such Orthosorb Shares, duly endorsed for transfer, and
Orthosorb shall deliver to Bioscience a promissory note, in the principal amount
of $320,000, such note to be in the form and substance of the promissory note
annexed hereto as Exhibit F.
---------
4. FORMATION AND INITIAL CAPITALIZATION OF THE DUTCH COMPANY.
---------------------------------------------------------
4.1 FORMATION. Promptly after the execution of this Agreement, the
Investors shall cause the Dutch Company to be organized under the laws
of the Netherlands under the name Bionix, B.V. The Dutch Company
shall have articles of incorporation that shall be in the form and
substance of the articles of incorporation annexed hereto as Exhibit
-------
G, subject to such changes as shall be approved by the U.S.
-
Representative and the Finnish Representative. The incorporators of
the Dutch Company shall be selected by mutual agreement of the U.S.
Representative and the Finnish Representative. Upon formation of the
Dutch Company, the managing directors of the Dutch Company shall be
David W. Anderson, Terence D. Wall, David H. MacCallum, David J.
Bershad, Pertti O. Tormala, Pentti V. Rokkanen and Pertti J. Viitanen,
and the officers of the Dutch Company shall be as follows: President:
David W. Anderson; Vice President: Pertti O. Tormala; Treasurer:
Anthony J. Dimun; and Secretary: Jukka Laitasalo.
4.2 DELIVERY BY FINNISH INVESTORS. Immediately after execution of
this Agreement, each Finnish Investor shall deliver to the Finnish
Representative all of the Biocon Class A Shares, Biocon Class B Shares
and Bioscience Shares owned by such Finnish Investor as set forth on
Exhibit B hereto, duly endorsed in blank for transfer.
4.3 DELIVERY BY U.S. INVESTORS. Immediately after execution of this
Agreement, each U.S. Investor shall deliver to the U.S.
Representative the following number of Biocon Class A Shares, Biocon
Class B Shares and Bioscience Shares owned by such U.S. Investor, duly
endorsed in blank for transfer:
<TABLE>
<CAPTION>
U.S. INVESTOR BIOCON CLASS A SHARES BIOCON CLASS B SHARES BIOSCIENCE SHARES
- ------------- --------------------- --------------------- -----------------
<S> <C> <C> <C>
David W. Anderson 62.7 21 24.0
Bershad Investment 115.0 39 44.0
Group, LP
BTAR Associates, LP 62.0 21 23.7
David H. MacCallum 46.6 16 18.0
TDW Associates, LP 922.7 314 354.8
</TABLE>
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<PAGE>
5. FIRST CLOSING. The law firm of Nauta Dutilh shall represent the Dutch
-------------
Company in connection with its formation. Such counsel is hereinafter referred
to as the "Dutch Counsel". A closing (the "First Closing") shall be held at the
offices of the Dutch Counsel on such date immediately after the Dutch Company
has been incorporated as shall be agreed upon by the U. S. Representative and
the Finnish Representative; provided, however, that the Dutch Company shall not
be incorporated and the First Closing shall not be held (i) in the event that,
on the date thereof, the U. S. Representative and the Finnish Representative
determine that the liabilities of Biocon exceed the basis of Biocon's assets and
(ii) in the event that either the U.S. Representative or the Finnish
Representative determine that such First Closing shall not be consummated.
Prior to the First Closing, the Finnish Representative shall deliver to the
Dutch Counsel in escrow certificates representing all of the shares of capital
stock delivered to the Finnish Representative pursuant to Section 4.2 hereof.
Prior to the First Closing, the U.S. Representative shall deliver to the Dutch
Counsel in escrow certificates representing all of the shares of capital stock
delivered to the U.S. Representative pursuant to Section 4.3 hereof. In no
event shall the Dutch Company be incorporated and in no event shall the First
Closing be held unless all of the shares required to be delivered to the Finnish
Representative and the U.S. Representative pursuant to Sections 4.2 and 4.3
hereof shall have been delivered to the Finnish Representative and the U.S.
Representative by the Investors and shall have been delivered by the Finnish
Representative and the U.S. Representative to the Dutch Counsel. Such
deliveries by the Finnish Representative and the U.S. Representative shall be
made in accordance with escrow arrangements satisfactory to the Finnish
Representative and the U.S. Representative. At the First Closing, the parties
hereto shall cause the Dutch Company to issue a total of 390,000 shares of the
Dutch Company's Class A common stock ("Dutch Company Class A Shares") to the
Finnish Investors, such shares to be allocated among the Finnish Investors in
accordance with the applicable allocation set forth in Exhibit H annexed hereto.
---------
At the First Closing, the parties hereto shall cause the Dutch Company to issue
a total of 120,000 shares of the Dutch Company's Class B common stock ("Dutch
Company Class B Shares") to the U.S. Investors, such shares to be allocated
among the U.S. Investors in accordance with the allocation set forth in Exhibit
-------
H annexed hereto.
- -
6. FORMATION AND CAPITALIZATION OF NEWCO.
-------------------------------------
6.1 FORMATION. Promptly after the execution of this Agreement, the
Investors shall cause Newco to amend its certificate of incorporation
and by-laws such that its certificate of incorporation and by-laws
shall be in the form and substance of the certificate of
incorporation and by-laws annexed hereto as Exhibit J, subject to such
---------
changes as shall be approved by the U.S. Representative and the
Finnish Representative. The parties hereto shall cause the minutes of
Newco to reflect that the directors of Newco shall be David W.
Anderson, Terence D. Wall, David J. Bershad, Anthony J. Dimun, David
MacCallum, Pertti Tormala and, immediately prior to the infusion of
capital by T. Rowe Price or an entity associated with T. Rowe Price,
Terral Jordan, and the officers of Newco shall be as follows:
President: David W. Anderson; Vice Presidents: Pertti Tormala and
Pertti Viitanen; Treasurer: Anthony J. Dimun; and Secretary: Peter H.
Ehrenberg.
-5-
<PAGE>
Immediately after the First Closing has been completed, a
second closing (the "Second Closing") shall be held at the offices of
Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A. (counsel to the U. S.
Investors), 65 Livingston Avenue, Roseland, New Jersey 07068.
6.2 DELIVERY OF CAPITAL STOCK HELD BY THE DUTCH COMPANY. By
execution of this Agreement, the Investors hereby authorize the Dutch
Counsel and the officers of the Dutch Company to take any and all
steps necessary to contribute to Newco, at the Second Closing, all of
the Biocon Class A Shares, Biocon Class B Shares and Bioscience Shares
contributed to the Dutch Company at the First Closing, consisting of a
total of 5,709 Biocon Class A Shares, 1,911 Biocon Class B Shares and
1,962.5 Bioscience Shares. Upon receipt of such contribution, the
parties hereto shall cause Newco to issue to the Dutch Company a total
of 5,100,000 Newco Common Shares. At the Second Closing, the U.S.
Investors shall contribute to Newco the following number of Biocon
Class A Shares, Biocon Class B Shares, Bioscience Shares, Orthosorb
Shares and Biostent Shares and Newco shall issue to the U.S. Investors
a total of 4,900,000 Newco Common Shares, allocated among the U.S.
Investors in accordance with Exhibit K annexed hereto:
---------
<TABLE>
<CAPTION>
U.S. INVESTOR BIOCON CLASS BIOCON CLASS BIOSCIENCE ORTHOSORB BIOSTENT
- ------------- A SHARES B SHARES SHARES SHARES SHARES
------------ ------------ ---------- --------- --------
<S> <C> <C> <C> <C> <C>
David W. Anderson 256.3 86 98.0 31 31.00
Bershad Investment 470.0 160 180.0 75 100.00
Group, LP
BTAR Associates, LP 253.0 85 96.8 40 53.33
David H. MacCallum 190.4 65 73.5 35 46.67
TDW Associates, LP 3,768.3 1,280 1,448.2 600 800.00
At the Second Closing, Biocon shall contribute to Newco 191 Bioscience
Shares owned by Biocon.
</TABLE>
6.3 FINAL CAPITALIZATION. It is understood that upon completion of
the Second Closing and prior to any financing that may be consummated
by Newco, the U.S. Investors will directly own a total of 4,900,000
Newco Common Shares and the Dutch Company will directly own a total of
5,100,000 Newco Common Shares. It is further understood that at such
time the U.S. Investors will directly own a total of 120,000 Dutch
Company Class B Shares (holding 60% of the voting rights of the Dutch
Company Shares) and the Finnish Investors will own a total of 390,000
Dutch Company Class A Shares (holding 40% of the voting rights of the
Dutch Company Shares).
-6-
<PAGE>
7. LIQUIDATION OF ORTHOSORB AND BIOSTENT. As soon as practicable after
-------------------------------------
the Second Closing is consummated, the parties hereto shall take all steps
necessary to cause Orthosorb (at that time, a wholly-owned subsidiary of Newco)
and Biostent (at that time, a wholly-owned subsidiary of Newco) to be merged
into Newco pursuant to the documentation annexed hereto as Exhibit L, subject to
---------
such changes as shall be agreed upon by the U. S. Representative and the Finnish
Representative to effect the foregoing mergers. No additional shares of capital
stock shall be issued to any party in connection with such mergers, it being
understood that the sole purpose of such mergers is to consolidate in Newco all
of the business previously performed by Orthosorb and Biostent.
8. MERGER OF BIOSCIENCE AND BIOCON. As soon as practicable after the
-------------------------------
mergers described in Section 7 hereof have been consummated, the parties hereto
shall cause Biocon (at that time, a wholly-owned subsidiary of Newco) to be
merged into Bioscience (then also a wholly-owned subsidiary of Newco). No
additional shares of capital stock shall be issued to any party in connection
with such merger, it being understood that the purpose of such merger is to
consolidate in one corporation all of the business previously performed by
Biocon and Bioscience.
9. TERMINATION OF SHAREHOLDERS' AGREEMENTS; NEW ARRANGEMENTS. All of the
---------------------------------------------------------
Shareholders' Agreements shall terminate as of the First Closing.
Notwithstanding the foregoing, each Investor consents to the transfer by each
other Investor of shares of the capital stock of the Operating Companies, the
Dutch Company or Newco to a partnership controlled by such transferring Investor
and by members of the family of such transferring Investor. At the First
Closing, each of the Investors shall enter into a shareholders' agreement in the
form of the agreement annexed hereto as Exhibit M. During the period prior to
---------
the time that Biostent and Orthosorb are merged into Newco, such entities shall
comply with the management guidelines annexed hereto as Exhibit N (the
---------
"Guidelines"). During the period prior to the time that Biocon merges into
Bioscience, Biocon shall comply with the Guidelines. Until such time as the
Board of Newco determines that it is no longer necessary, Bioscience shall
comply with the Guidelines. The Board of Newco shall have the right to revise
the Guidelines at any time.
10. FURTHER ASSURANCES. The parties hereto agree (i) to furnish upon
------------------
request to each other such further information, (ii) to execute and deliver to
each other such other documents and (iii) to do such other acts and things, all
as the U.S. Representative and the Finnish Representative may at any time
reasonably request for the purpose of carrying out the intent of this Agreement.
11. GOVERNING LAW; JURISDICTION; SERVICE OF PROCESS. This Agreement
-----------------------------------------------
shall be governed by and construed in accordance with the laws of the State of
Delaware, without application of the conflict of laws principles thereof. Any
legal action, suit or other proceeding arising out of, or in any way connected
with, the enforcement of any award described in Section 12 hereof may be brought
in the courts of the State of New Jersey, or in the United States courts for the
District of New Jersey. With respect to any such proceeding in any such court:
(a) each party hereto generally and unconditionally submits itself and its
property to the nonexclusive
-7-
<PAGE>
jurisdiction of such court; (b) each party hereto waives, to the fullest extent
permitted by law, any objection it has or hereafter may have to the venue of
such proceeding, as well as any claim it has or may have that such proceeding is
in an inconvenient forum; and (c) process may be served on any party hereto
anywhere in the world, by regular mail, sent to such party's address as set
forth or described in Exhibit O annexed hereto or to such other address as shall
---------
be provided by a party to both the U.S. Representative and the Finnish
Representative.
12. DISPUTE RESOLUTION. Any controversy or claim arising out of or
------------------
relating to this Agreement, or the alleged breach thereof, shall be resolved by
arbitration before a panel of three arbitrators (one of whom shall be selected
by the U. S. Representative, one of whom shall be selected by the Finnish
Representative and one of whom shall be selected by the other two arbitrators)
in accordance with the Commercial Arbitration Rules of the American Arbitration
Association. The arbitration shall take place at a mutually acceptable
location. The arbitration shall be conducted using the Expedited Procedures of
the Commercial Arbitration Rules, regardless of the amount in dispute. The
parties hereto shall bear their own attorney fees and costs in connection with
any such arbitration, and shall share equally the arbitrators' compensation
charges and the administrative fees of the American Arbitration Association. The
award rendered by the arbitrator(s) shall be final and binding upon the parties
involved in such arbitration, and judgment upon the award may be entered in any
court of competent jurisdiction.
13. SURVIVAL. All representations, warranties and agreements contained in
--------
this Agreement shall survive the consummation of the transactions contemplated
by this Agreement, notwithstanding any investigation conducted, or knowledge
acquired, with respect thereto.
14. HEADINGS. All headings in this Agreement are for convenience only and
--------
do not affect the meaning of any provision.
15. SUCCESSORS OR ASSIGNS; NO THIRD PARTY RIGHTS. This Agreement is
--------------------------------------------
binding upon and inures to the benefit of the parties hereto and their permitted
successors and assigns. This Agreement may not be assigned by any party hereto
without the prior written consent of the U.S. Representative and the Finnish
Representative. Nothing in this Agreement confers, or is intended to confer,
expressly or by implication, any rights or remedies upon any person not a party
hereto.
16. COMPLETE AGREEMENT; MODIFICATIONS. This Agreement constitutes the
---------------------------------
entire agreement among the parties hereto with respect to the transactions
contemplated hereby and supersedes all prior agreements and understandings with
respect to the subject matter hereof. This Agreement may not be amended or
modified in any way, nor may noncompliance with its terms be waived, except
pursuant to a written instrument signed by the party to be charged.
17. SEVERABILITY. Any provision of this Agreement that is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such
-8-
<PAGE>
prohibition or unenforceability without invalidating the remaining provisions
hereof; any such prohibition or unenforceability shall not invalidate or render
unenforceable such provision in any other jurisdiction.
18. COUNTERPARTS. This Agreement may be executed by the parties hereto in
------------
separate counterparts, each of which when so executed and delivered shall be
deemed an original. All such counterparts together constitute but one and the
same instrument.
19. CONSTRUCTION. It is understood that this Agreement is not intended to
------------
be construed against the party that drafted this Agreement merely by virtue of
the fact that such party was responsible for the drafting hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
BIOSCIENCE, LTD. BIOCON, OY
BY: /s/ Bioscience, Ltd. By: /s/ Biocon, OY
-------------------------- ------------------------------
ORTHOSORB, INC. BIOSTENT, INC.
By: /s/ David W. Anderson By: /s/ David W. Anderson
----------------------------- ------------------------------
BIONIX, INC.
/s/ David W. Anderson
- -----------------------------
David W. Anderson
By: /s/ David W. Anderson
------------------------------
David W. Anderson, President
BERSHAD INVESTMENT GROUP, LP
By: /s/ David J. Bershad
---------------------------------
David J. Bershad, General Partner
-9-
<PAGE>
BTAR ASSOCIATES, LP
By: STRATEGIC CONCEPTS, INC.,
general partner
By: /s/ Anthony J. Dimun
------------------------------
Anthony J. Dimun, President
/s/ David H. MacCallum
- ------------------------------
David H. MacCallum
TDW ASSOCIATES, LP
By: TDW III, INC.,
general partner
By: /s/ Terence D. Wall
------------------------------
Terence D. Wall, President
/s/ Ole Bostman
- ------------------------------
Ole Bostman
/s/ E. Antero Makela
- ------------------------------
E. Antero Makela
NAJ VET LTD.
By: /s/ NAJ VET LTD.
-----------------------------
NOVATOR
By: /s/ Pentti Rokkanen
-----------------------------
ORTHO SCI LTD.
-10-
<PAGE>
By: /s/ ORTHO SCI LTD.
-----------------------------
/S/ Esa Partio
- -------------------------------
Esa Partio
/s/ Timo Pohjonen
- -------------------------------
Timo Pohjonen
/s/ Pentti Rokkanen
- -------------------------------
Pentti Rokkanen
/s/ Matti Suuronen
- -------------------------------
Matti Suuronen
/s/ Riita Suuronen
- -------------------------------
Riita Suuronen
/s/ Marrku Tamminmaki
- -------------------------------
Marrku Tamminmaki
/s/ Matti Tormala
- -------------------------------
Matti Tormala
/s/ Perrti Tormala
- -------------------------------
Perrti Tormala
/s/ Seppo Vainiopaa
- -------------------------------
Seppo Vainionpaa
/s/ Pertti Viitanen
- -------------------------------
Pertti Viitanen
-11-
<PAGE>
EXHIBITS
EXHIBIT DESCRIPTION
A Shareholdings of U.S. Investors
B Shareholdings of Finnish Investors
C Existing Shareholders' Agreements
D Extraordinary Events
E Outstanding Shares
F Promissory Note
G Dutch Company Organizational Documents
H Allocation of Dutch Company Shares
I Omitted
J Newco's Certificate of Incorporation and By-Laws
K Allocation of Newco Shares Among U.S. Investors
L Orthosorb/ Biostent Merger
M Shareholders' Agreement
N Guidelines
O Addresses
<PAGE>
Exhibit 10.3
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement"), made as of the 24th day of February,
1997, by and between BIONX IMPLANTS, INC., a Delaware corporation (the
"Employer"), and DAVID W. ANDERSON, an individual residing at 1157 Brynllawn
Road, Villanova, Pennsylvania 19085 (the "Employee"),
W-I-T-N-E-S-S-E-T-H
WHEREAS, Employee entered into an employment agreement with Biostent,
Inc. dated as of April 1, 1995 which provided for the assignment of that
agreement by Biostent, Inc. to a holding company upon the formation of that
holding company (the "Prior Agreement");
WHEREAS, pursuant to a reorganization agreement, Employer became the
holding company of Biostent, Inc. and, with Employer's consent, the Prior
Agreement was assigned to the Employer;
WHEREAS, the parties desire to extend the term of the Prior Agreement
and restate the Prior Agreement to eliminate certain provisions which are no
longer applicable;
WHEREAS, the parties intend for this Agreement to amend, restate and
thereby supersede the Prior Agreement in all respects;
WHEREAS, Employer desires to employ Employee, and Employee desires to
accept such employment, all in accordance with the terms and conditions set
forth herein,
NOW THEREFORE, it is agreed as follows:
1. Employment. Commencing on the date hereof, Employer shall employ
----------
Employee, and Employee shall serve as an employee of Employer, upon the terms
and conditions set forth herein.
2. Scope of Employment. During the term of this Agreement, Employee
-------------------
shall devote his entire business time, attention and energy to the business, and
to seeking improvement in the profitability, of Employer. He shall serve as
Chief Executive Officer of Employer and its subsidiaries and shall have the
authority to perform and shall perform all of the duties that are customary for
the office of Chief Executive Officer, subject at all times to the control and
direction of the Board of Directors of the Employer, and shall (i) execute
Employer's strategic business plan to maximize global opportunities of
Employer's technology, (ii) provide leadership to raise the required equity
funding necessary to reach the goals set forth in Employer's business plan and
(iii) perform such services as typically are provided by the Chief Executive
Officer of a corporation and such other services consistent therewith as shall
be assigned to him from time to time by the Chairman of the Board and the Board
of Directors of Employer. During the term of this Agreement, Employee shall not
engage in any other business activity which, in the reasonable judgment of
Employer's Board of Directors. conflicts with the
<PAGE>
duties of Employee hereunder, whether or not such activity is pursued for gain,
profit or other pecuniary advantage; provided. however, that it is understood
that this Section 2 shall not preclude Employee from making passive investments
in other companies as long as Employer notifies the Chairman of the Board in
advance in the event that the Employee intends to make a passive investment with
the Employer's industry..
3. Term.
----
3.1 The term of this Agreement shall commence on the date hereof and
continue until December 31, 1998 (the "Initial Term") and shall be automatically
renewable thereafter for consecutive terms of one year each unless and until
terminated as of the end of any such period by either party giving notice in
writing to the other party not less than ninety (90) before the end of the
period in question and subject, however, to earlier termination pursuant to this
Article 3. For purposes of this Agreement, the phrase "Agreement Term" shall
mean the Initial Term and, if this Agreement is renewed pursuant to its terms,
any period for which this Agreement has been renewed and the term "Renewal Term"
shall mean any such renewal ter,.
3.2 Notwithstanding the term of employment provided for in Section
3.1, this Agreement shall immediately terminate upon Employee's death or
Permanent Disability. For purposes of this Agreement, Permanent Disability shall
mean any physical or mental condition which materially interferes with the
performance of Employee's customary duties in Employee's capacity as Chief
Executive Officer of Employer where such disability has continued for a period
of ninety (90) consecutive days or for a total of one hundred and eighty (180)
days in any period of three hundred and sixty (365) consecutive days.
3.3 Notwithstanding the term of employment provided for in Section
3.1 hereof, Employer shall have the right to terminate Employee's employment for
Cause, upon written notice to Employee. For purposes of this Agreement, "Cause"
shall mean (i) the conviction of Employee by a court of competent jurisdiction
of a felony or a misdemeanor which, in the reasonable judgment of Employer, is
likely to have a material adverse effect on the business of Employer, (ii)
Employee's material breach of this Agreement, or (iii) Employee's willful
disregard of lawful and proper written instructions of Employer's Board of
Directors.
3.4 Notwithstanding the term of employment provided for in Section
3.1 hereof, Employer shall have the right to terminate Employee's employment
without Cause, in the sole judgment of Employer, upon written notice to
Employee.
3.5 Employee shall have the right to terminate this Agreement for
Good Reason (as defined below), upon written notice to Employer. For purposes of
this Agreement, "Good Reason" shall mean Employer's material breach of this
Agreement, provided that Employee first provides Employer with written notice of
such conduct and Employer fails to make substantial efforts to correct such
conduct within fifteen (15) business days of its receipt of such notice. A
termination of this Agreement by Employer without Cause prior to the expiration
of the term hereof shall be treated for all purposes hereunder as if Employee
had terminated this Agreement for Good Reason.
-2-
<PAGE>
3.6 In the event of Employee's termination pursuant to Section 3.2 or
Section 3.3 hereof, Employer shall only be obligated to pay Employee any unpaid
salary and bonus and benefits accrued to the date of termination. except as
otherwise expressly provided in any of Employer's written benefit plans.
3.7 In the event that Employee terminates this Agreement for Good
Reason, or Employer terminates this Agreement without Cause, in either case
prior to the expiration of the Initial Term, the Employer shall, until the first
anniversary of the date of Employee's termination of employment, (i) continue to
be obligated to make the salary payments described in Section 4 hereof and (ii)
continue to be obligated to provide benefits substantially comparable to the
benefits described in Section 7 hereof. In the event that Employee terminates
this Agreement for Good Reason, or Employer terminates this Agreement without
Cause, in either case during any Renewal Term, the Employer shall, until the six
month anniversary of the date of Employee's termination of employment, (i)
continue to be obligated to make the salary payments described in Section 4
hereof and (ii) continue to be obligated to provide benefits substantially
comparable to the benefits described in Section 7 hereof. While Employee shall
have no obligation to mitigate damages, any salary or other benefits actually
received by Employee from another employer (or, if Employee shall be self-
employed, 75% of the gross compensation received by Employee in such capacity
after exclusion of the first $10,000 so received) after such termination shall
be applied against amounts payable by Employer to Employee pursuant to this
Section 3.7.
3.8 The payments provided for in Sections 3.6 and 3.7, respectively,
above shall be Employee's sole and exclusive relief and shall be in lieu of any
other termination benefits or payments of any kind whatsoever which are hereby
expressly waived, for or in connection with such termination. Appropriate and
required withholding for Social Security, federal and state income taxes (or
comparable withholdings which may be applicable for employees outside the United
States), together with any other deductions authorized by Employee or required
by law or court order, shall be made and will reduce the gross amount to be paid
under this Agreement.
4. Salary.
------
(a) Subject to Section 4(b) hereof, in consideration for Employee's
services hereunder, Employer shall pay Employee a salary at a rate of $160,000
per year.
(b) Employee's salary rate shall be reviewed by Employer's Board of
Directors on an annual basis but shall not be less than $160,000 per year.
5. Annual Bonus. In addition to the salary described in Section 4
------------
above, Employee shall be given an opportunity to earn an annual bonus for each
calendar year, commencing with the year ending December 31, 1997. The amount of
any such bonus shall be determined in the discretion of the Board of Directors
of the Employer or the Compensation Committee thereof.
-3-
<PAGE>
6. Automobile Allowance. Employer will pay Employee an automobile
--------------------
allowance of $500 per month.
7. Health Insurance. Employer will enroll Employee in Employer's
----------------
health insurance plan as is from time to time generally made available to other
employees of Employer.
8. Intentionally Omitted.
---------------------
9. Other Benefits.
---------------
(a) Employee shall be entitled to three (3) weeks of paid vacation
each year to be taken at such times as are mutually convenient to
Employee and Employer.
(b) Employee shall receive from Employer such other benefits as shall
be comparable to benefits generally made available from time to time
to other employees of Employer.
10. Business Expenses. Employer will reimburse Employee, in
-----------------
accordance with any Employer-established policies or guidelines, for all
reasonable business expenses actually incurred by Employee in promoting the
business of Employer, upon presentation by Employee, from time to time, of an
itemized account of such expenses.
11. Trade Secrets and Covenant Against Competition.
----------------------------------------------
11.1 The trade secrets of Employer are hereby defined as including (i)
the processes utilized and to be utilized in Employer's business; (ii) the
methods and results of Employer's research; and (iii) any other confidential
information or data relating to the business of Employer and its affiliates
which is not publicly known.
11.2 Employee agrees that he will not, either during his employment
or at any time after cessation of such employment. impart or disclose any of
such trade secrets to any person, firm or corporation other than Employer or its
affiliates, or use any of such trade secrets, directly or indirectly, for his
own benefit or for the benefit of any person, firm or corporation other than
Employer or its affiliates. Employee's obligations under this Section 11.2 shall
cease with respect to any such trade secret if such trade secret (i) was already
known to Employee at the time of disclosure, free of any obligation to keep it
confidential, (ii) was at the time of disclosure or thereafter became part of
the public domain through no fault of wrongful act of Employee, or (iii) was
subsequently disclosed to Employee without breach of this Agreement by a third
person who rightfully received and disclosed it without breaching any
confidentiality obligation to Employer. It is also understood by the parties
that Employee may be required to disclose trade secret information (a) pursuant
to subpoena or other court process, (b) at the express direction of any other
authorized government agency or (c) otherwise as required by law or regulation.
Disclosure of trade secret information or any part thereof in such circumstances
will not constitute a breach of the confidentiality provisions set forth in this
Agreement, provided that Employee notifies Employer in advance of any such
disclosure and cooperates with
-4-
<PAGE>
Employer in any efforts that Employer may make to seek a protective order with
respect to such disclosure.
11.3 In addition to the foregoing agreements relating to Employer's
trade secrets, during the term of this Agreement (including any renewals
thereof) and during the term of the "Post-Employment Period" (as defined
herein), Employee will not, without Employer's prior written consent, (i)
solicit any of the employees of Employer or Employer's affiliates for the
purpose of hiring or retaining any such employees, (ii) hire or retain or cause
to be hired or retained any of the employees of Employer or Employer's
affiliates or (iii) become involved m any manner, including without limitation
as an officer, director, employee, consultant, representative, partner, owner or
shareholder (except as a holder of less than a five (5%) percent equity interest
in a public entity) in any business located in the United States which is in the
business of inventing, developing, manufacturing, marketing. providing or
selling products competitive with the products that Employer or its subsidiaries
have developed, manufactured, marketed, produced or sold, or are in the process
of developing (and reasonably expect to bring to market within one (1) year
after the expiration of the Post-Employment Period or longer if required by the
F.D.A clearance or approval process), manufacturing, marketing, producing or
selling as of the date that Employee's employment terminates. For purposes of
this Agreement, the term "Post-Employment Period" shall mean the period
commencing on the date that this Agreement is terminated for any reason and
ending either (x) two years from the date of termination of this Agreement or
(y) if this Agreement is terminated by the Employee for Good Reason or by the
Employer without Cause, on the later of (a) two years from the date of such
termination or (b) the last date on which Employer makes salary payments to
Employee pursuant to Section 3.7 above.
11.4 Employee agrees that all memoranda, lab books, notes, records,
charts, formulae, specifications, lists and other documents made, compiled,
received, held or used by Employee while employed by Employer, concerning any
phase of Employer's business or its trade secrets, shall be Employer's property
and shall be delivered by Employee to Employer upon termination of Employee's
employment or at any earlier time on the request of Employer.
11.5 Any invention or improvement made or conceived by Employee
during the term of Employee's employment by Employer (whether during or after
working hours) relating in any manner to the business of Employer, shall be
promptly disclosed in writing by Employee to Employer and shall be the sole
property of Employer. Upon Employer's request (whenever made), Employee shall
execute and assign to Employer all related applications for letters patent to
the United States and such foreign countries as Employer may designate and shall
execute and deliver to Employer such other instruments as Employer deems
necessary. Any invention or improvement made or conceived by Employee prior to
termination of Employee's employment shall be deemed to have been made or
conceived during Employee's employment hereunder, provided that such invention
or improvement relates to an aspect of Employer's business as of the date of
termination of Employee's employment.
11.6 Employee acknowledges that given his access to information
regarding Employer, the provisions of this Section 11 are reasonable and
necessary to protect Employer's
-5-
<PAGE>
business. Employee further acknowledges that he has carefully reviewed the
provisions of this Section 11, he fully understands the economic consequences
thereof, he has assessed the respective advantages and disadvantages to him of
entering into this Agreement and he has concluded that, in light of his
education, skills and abilities, the restrictions set forth in this Section 11
will not prevent him from earning a living after the termination of this
Agreement. Employee agrees that each of the provisions of this Section 11,
including, without limitation, the period of time, geographical area and types
and scope of the restrictions on Employee's activities specified herein, are
intended to be and shall be divisible. Employee further acknowledges the
reasonableness of these provisions as an integral part of the terms of his
employment. If any provision of this Section 11 (including any sentence. clause
or part thereof) shall be adjudicated to be invalid or unenforceable, such
provision shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the operation of such provision in the particular jurisdiction in
which such adjudication is made. In addition, if any particular provision
contained in this Agreement shall for any reason be held to be excessively broad
as to duration, geographical scope, activity or subject, it shall be construed
by limiting and reducing such provision as to such characteristic so that the
provision is enforceable to the fullest extent compatible with the applicable
law as it shall then appear.
11.7 As it would be very difficult to measure the damages which would
result to Employer from a breach of any of the covenants contained in this
Section 11, in the event of such a breach Employer shall have the right to have
such covenants specifically enforced by a court of competent jurisdiction.
Employee hereby recognizes and acknowledges that irreparable injury or damage
shall result to the business of Employer in the event of a breach or threatened
breach by Employee of the terms and provisions of this Section 11. Therefore,
Employee agrees that Employer shall be entitled to an injunction restraining
Employee from engaging in any activity constituting such breach or threatened
breach. Nothing contained herein shall be construed as prohibiting Employer from
pursuing any other remedies available to Employer at law or in equity for such
breach or threatened breach, including, but not limited to, recovery of damages
from Employee and, if Employee is still employed by Employer, terminating the
employment of Employee in accordance with the terms and provisions hereof.
12. Miscellaneous.
--------------
12.1 Entire Agreement. This instrument contains the entire agreement
----------------
of the parties with respect to the employment of Employee and supersedes all
prior agreements or arrangements between the parties concerning Employee's
employment by Employer and specifically supersedes and terminates any prior
agreement concerning severance to be paid to the Employee in the event of a
termination of his employment. This Agreement cannot be changed orally but only
by an agreement in writing signed by the party against whom enforcement of any
waiver, change, modification, extension or discharge is sought.
12.2 Severability. If any provision of this Agreement is declared
------------
invalid by any legal tribunal, then such provision shall be deemed automatically
modified to conform to the requirements for validity as declared at such time,
and, as so modified, shall be deemed a provision of this Agreement as though
originally included herein. In the event that the provision
-6-
<PAGE>
invalidated is of such a nature that it cannot be so modified, the provision
shall be deemed deleted from this Agreement as though the provision had never
been included herein. In either case, the remaining provisions of this Agreement
shall remain in effect.
12.3 Construction. The parties intend that this Agreement shall not
------------
be construed against the party that has drafted all or any portion of this
Agreement.
12.4 Notice. Any notice or other communication required or permitted
------
under this Agreement shall be sufficient if in writing and delivered personally,
sent by facsimile, or by certified or express mail, or by overnight courier, and
shall be deemed given when so delivered except if mailed, in which case then two
days after mailing) to the parties as set forth below, unless changed n writing:
(a) to Employee at his residence address indicated above, or:
--------
(b) to the Employer by notice to:
--------
Terry D. Wall
160 Lloyd Road
Montclair, New Jersey 07042
with a copy to:
Peter H. Ehrenberg
Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A.
65 Livingston Avenue
Roseland, New Jersey 17068
12.5 Successors. The rights and obligations of Employee under this
----------
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of the Employer, including any successors by merger or purchase or
otherwise.
12.6 Governing Law. This Agreement shall be interpreted in
-------------
accordance with and be governed by the laws of the State of Delaware.
12.7 Paragraph Headings. The paragraph headings used in this
------------------
Agreement are included solely for convenience and shall not affect or be used in
connection with the interpretation of this Agreement.
12.8 Arbitration. Any controversy, claim or dispute arising out of or
-----------
relating to this Agreement or its construction and interpretation may, at the
election of either the Employee or the Employer, be settled by arbitration in
New Jersey in accordance with the then-current rules of the American Arbitration
Association, and judgment upon the award rendered in such
-7-
<PAGE>
arbitration may be entered in any court having jurisdiction thereof. In
addition, any controversy, claim or dispute concerning the scope of this
arbitration clause or whether a particular dispute falls within this arbitration
clause may also be settled by arbitration in accordance with the rules of the
American Arbitration Association.
12.9 Prior Agreement. The Prior Agreement is superseded in all
---------------
respects by this Agreement. All stock options granted to Employee pursuant to
the Prior Agreement shall be governed by the terms of Employer's 1996 Stock
Option/Stock Issuance Plan.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
BIONX IMPLANTS, INC.
By:_____________________
______________________
David W. Anderson
-8-
<PAGE>
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
--------------------
1. Parties:
a) Bionx Implants, Inc., a corporation organized under the laws of
the State of Delaware, U.S.A. and a manufacturer and marketer of Self-
Reinforced, resorbable polymer implants used in a variety of
applications including orthopaedic surgery, urology, dentistry and
maxillo-facial surgery (the "Corporation").
b) Professor Pertti Tormala ("Tormala")
2. Purpose of the Agreement:
In order to maintain the high standard of product development of the
Corporation and its subsidiaries, and, further to support the
fulfillment of the Corporation's strategic objectives on a worldwide
basis, Tormala and Bionix have agreed to the following terms and
conditions of employment. This agreement supersedes all previous
agreements between the parties hereto and their affiliates or
subsidiaries.
3. Status of Tormala:
Tormala is appointed as Executive Vice President, Research and
Development of the Corporation, with full responsibilities for the
research and development staff and facilities of the Corporation.
Tormala will report in his capacity as Executive Vice President to the
President and Chief Executive Officer of the Corporation.
4. Term:
The initial term of this agreement will be five (5) years, terminating
on February 23, 2002. The parties may agree that after the initial
term, this agreement will automatically renew for one (1) year periods
until notice by either party. The notice period in this agreement
will be six (6) months.
5. Remuneration:
The remuneration of Tormala during the period of this agreement will
be the following:
Tormala will receive a base salary of FIM 45,000 per month, payable
twice monthly by the Corporation's Finish subsidiaries. Tormala and
the Corporation agree that Tormala's base salary (which represents an
increase over the base salary previously payable to Tormala and a
reduction in the amount of time commitment required of Tormala) is
intended to provide Tormala with reasonable
<PAGE>
compensation for Tormala's assignment of all intellectual and
industrial property rights to all of the products Tormala develops,
creates or invents during the term of this agreement (subject only to
the exceptions set forth in Section 11 hereof).
Tormala will also eligible for cash bonuses, if and when awarded, when
granted by the Compensation Committee of the Board of Directors of
Bionix. Tormala will also be eligible to participate in the Bionix
1996 Stock Option/Stock Issuance Plan.
Bionix will also provide Tormala with a car, paid for by the
Corporation, and will reimburse Tormala for all reasonable travel and
entertainment costs required by the Corporation for the performance of
this duties.
6. Pension Benefits:
Tormala's pension benefits shall be in accordance with the Finnish TEL
system.
7. Holiday Benefits:
Tormala is entitled to a four week summer holiday and a two-week
winter holiday. Tormala will decide the vacation periods and will
notify the President and CEO of his plans in advance.
8. Daily working time:
Tormala will have no defined daily work period. However, Tormala
agrees to use his best efforts and the substantial majority of his
time available to the Corporation to further the development of the
Corporation's products and to give all his support to the other
activities of Bionix. Tormala agrees not to devote more than 16 hours
per month during normal business hours to a business which (i) shall
be spun off from the Corporation and (ii) shall be engaged in the
development, manufacture or sale of polymer-based advanced drug
delivery systems.
9. Other employment:
The Corporation is aware of Tormala's present activities at the
Tampere University and related duties and agrees that the conduct of
these duties may continue at their present levels.
10. Non-competition:
Tormala undertakes that during a period of 36 months after the
termination of this agreement he will not directly or indirectly have
an interest in or be engaged,
-2-
<PAGE>
concerned or involved in businesses or scientific activities competing
with the business activities of the Corporation or its subsidiaries.
The period noted above will not apply if Tormala's employment is
terminated without cause by the Corporation.
11. Industrial property rights:
Tormala agrees that all patents, patent applications, know-how,
technical data and other industrial and intellectual property rights
relating to the Corporation's research and development activities in
which Tormala may have any interest whatsoever, regardless of the area
of application, have been irrevocably transferred by Tormala to, and
will continue to be the property of, the Corporation. All such
intellectual and industrial rights developed by or under the direction
of Tormala during the term of this agreement will also be transferred
to the Corporation by Tormala. The only exceptions to this
irrevocable transfer are the following agreements: (1) the agreement
between Tormala and TEKES covering the use of Ultrasound in Tableting
and, (2) the agreement between Tormala and Orion Pharma covering the
use of proprietary Polyorthoesters in drug delivery formulations
specific to molecular entities that are the proprietary property of
Orion.
12. Applicable law and disputes:
This Agreement is governed by Finnish law.
All disputes concerning the terms and interpretation of this Agreement
are to be resolved in accordance with the law on arbitration. The
sole arbitrator, if and when the parties cannot reach an agreement,
shall be determined by the Finnish Central Chamber of Commerce on
request of either of the parties.
This Agreement has been prepared in two identical copies, one to each
party.
Dated: 24 February 1997.
BIONX IMPLANTS, INC.
By:
________________________
David W. Anderson, President
_________________________
Pertti Tormala
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<PAGE>
EXHIBIT 10.5
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
BIONIX, INC.
279 B Great Valley Parkway
Malvern, PA 19355
Gentlemen:
The following confirms, effective December 12, 1996, an agreement between
me and Bionix, Inc., a Delaware corporation (the "Company," which term includes
Bioscience, Ltd., Biocon, Oy, Orthosorb, Inc., Biostent, Inc. and any other
subsidiary or parent of the foregoing entities ), which is a material part of
the consideration for my employment by the Company:
1. I recognize that the Company is engaged in a continuous program of
research, development and production respecting its business, present and
future, including fields generally related to its business, and that the Company
possesses and will continue to possess information that has been created,
discovered, developed or otherwise become known to the Company (including,
without limitation, information created by, discovered or developed by, or made
known to, me during the period of or arising out of my employment by the
Company) and/or in which property rights have been assigned or otherwise
conveyed to the Company , which information has commercial value in the business
in which the Company is engaged. All of the aforementioned information is
hereinafter called "Proprietary Information". By way of illustration, but not
limitation, Proprietary Information includes trade secrets, processes, formulas,
data, know-how, software programs, improvements, inventions, techniques,
marketing plans, strategies, forecasts, new products, computer programs,
designs, copyrightable material and customer lists.
2. I understand that my employment and this Agreement create a
relationship of confidence and trust between me and the Company with respect to
any information:
(i) applicable to the business of the Company; or
(ii) applicable to the business of any client or customer of the
Company, which may be made known to me by the Company or by any client or
customer of the Company, or learned by me during the period of my employment
(hereinafter "Confidential Information").
3. As used in this Agreement, the period of my employment by the Company
includes any time in which I may be retained by the Company as a consultant or
officer.
4. In consideration of my employment by the Company and the compensation
received by me from the Company from time to time, I hereby agree as follows:
(a) All Proprietary Information shall be the sole property of the
Company and its assigns, and the Company and its assigns shall be the sole owner
of all patents and other rights in connection therewith. I hereby assign to the
Company any rights I may have or acquire in such
<PAGE>
Proprietary Information. At all times, both during my employment by the Company
and after its termination, I will keep in confidence and trust all Proprietary
Information and Confidential Information, and I will not use or disclose, in
whole or in part, any Proprietary Information or Confidential Information or
anything relating to it without the written consent of the Company, except as
may be necessary in the ordinary course of performing my duties on behalf of the
Company. Notwithstanding the foregoing, it is understood that, after the
termination of my period of employment by the Company, I am free to use
information which is or becomes available to the public generally (except as a
direct or indirect result of a breach of this Agreement).
(b) All documents, records, apparatus, equipment, software programs
(commercial or proprietary) and other physical property, whether or not
pertaining to Proprietary Information, furnished to me by the Company or
produced by myself or others in connection with my employment shall be and
remain the sole property of the Company and shall be returned to it immediately
as and when requested by the Company. Even if the Company does not so request,
I shall return and deliver all such property (including without limitation all
copies in my possession) upon termination of my employment by me or by the
Company for any reason, and I will not take with me any such property or any
reproduction of such property upon such termination.
(c) I will promptly disclose to the Company, or any persons
designated by it, all improvements, developments, designs, inventions, formulas,
ideas, original works of authorship, processes, techniques, know-how and data,
whether or not patentable or registrable under copyright or similar statutes,
made or conceived or reduced to practice or learned by me, either alone or
jointly with others, during the term of my employment (all said improvements,
developments, designs, inventions, formulas, ideas, original works of
authorship, processes, techniques, know-how and data shall be hereinafter
collectively called "Inventions"). I hereby acknowledge that all original works
of authorship which are made by me, either alone or jointly with others, during
the term and within the scope of my employment and which are protectable by
copyright are "works made for hire", as that term is defined in the United
States Copyright Act (17 U.S.C.A. (S)101).
(d) All Inventions which I have developed or may develop (in whole or
in part, either alone or jointly with others) (i) using equipment, supplies,
facilities, or trade secret information of the Company, or (ii) during the hours
for which I received or may receive compensation from the Company, or (iii)
which relate, at the time of conception or reduction to practice of the
Invention, to the business of the Company or to its actual or demonstrably
anticipated research or development, or (iv) which resulted or may result, in
whole or in part, from work performed by me for the Company, shall be the sole
property of the Company and its assigns, and the Company and its assigns shall
be the sole owner of all patents, copyrights and
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<PAGE>
other rights in connection therewith. I shall communicate promptly and disclose
to the Company, in such form as the Company requests, all information, details,
and data pertaining to the Inventions. I hereby assign to the Company any rights
I may have or acquire in such Inventions. I further agree as to all such
Inventions to assist the Company in every proper way (but at the Company's
expense) to obtain and from time to time enforce patents, copyrights and other
rights with respect to said Inventions in any and all countries, and to that end
I will execute all documents for use in applying for and obtaining such patents,
copyrights and other rights therein and enforcing same, as the Company may
desire, together with any assignments thereof to the Company or persons
designated by it. My obligation to communicate as set forth above and to assist
the Company in obtaining and enforcing patents, copyrights, and other rights for
such Inventions in any and all countries shall continue beyond the termination
of my employment, but the Company shall compensate me at a reasonable rate after
such termination for time actually spent by me at the Company's request on such
assistance. In the event that the Company is unable for any reason whatsoever to
secure my signature to any lawful and necessary document required to apply for
or execute any applications for patents, copyrights, or other rights with
respect to such an Invention (including renewals, extensions, continuations,
divisions, or continuations in part thereof), I hereby irrevocably designate and
appoint the Company and its duly authorized officers and agents, as my agents
and attorneys-in-fact to act for and in my behalf and instead of me, to execute
and file any such application and to do all other lawfully permitted acts to
further the prosecution and issuance of patents, copyrights and other rights
therein with the same legal force and effect as if executed by me.
(e) As a matter of record, I attach hereto as Exhibit A a complete list
of (i) all inventions, original works of authorship, developments, improvements,
and trade secrets relevant to the subject matter of my employment by the Company
which have been made or conceived or first reduced to practice by me alone or
jointly with others during my employment with the Company, which I desire to
remove from the operation of this Agreement, and (ii) all materials and
documents of a former employer which I propose to bring to my employment; and I
covenant that such list is complete. If no such list is attached to this
Agreement, I represent that I have no such inventions, improvements,
developments, trade secrets, materials or documents at the time of signing this
Agreement.
(f) I represent that my performance of all the terms of this Agreement
and as an employee of the Company does not and will not breach any agreement to
keep in confidence proprietary information acquired by me in confidence or in
trust prior to my employment by the Company. I have not entered into, and I
agree that I will not enter into, any agreement, either written or oral, in
conflict herewith.
(g) I represent that I did not learn during my prior employment any
ideas or information which my employer indicated were considered confidential
and proprietary or which were disclosed to me in a manner which should have made
me realize they were so considered.
(h) If I cannot make the representation provided in paragraph g, I will
check the following box:
[_] I cannot make the representation in paragraph g above.
If I have checked the above box, I hereby represent that I have not
brought and will not bring to the Company or make use of any such confidential
and proprietary information or ideas
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<PAGE>
during my employment by the Company unless such information or ideas (i) become
publicly available for reasons other than actions on my part, (ii) are
independently developed by others at or on behalf of the Company who do not
receive access to such information from me, or (iii) are received by the Company
from a third party who had possession of such information or ideas.
(i) I will not bring on to the premises of the Company any unpublished
document or any property belonging to my former or concurrent employers or
companies, if any, unless consented to in writing by such employers or
companies.
(j) I recognize that the Company has received and in the future will
receive from third parties their confidential or proprietary information subject
to a duty on the Company's part to maintain the confidentiality of such
information and to use it only for certain limited purposes. I agree that I owe
the Company and such third parties, during the term of my employment and
thereafter, a duty to hold all such confidential or proprietary information in
the strictest confidence and not to disclose it to any person, firm, or
corporation (except as necessary in carrying out my work for the Company
consistent with the Company's agreement with such third party) or to use it for
the benefit of any one other than for the Company or such third party
(consistent with the Company's agreement with such third party) without the
express written authorization of the Board of Directors of Bionix, Inc.
(k) I agree to keep and maintain adequate and current written records of
all inventions and original works of authorship made by me (solely or jointly
with others) during the term of my employment with the Company. The records
will be in the form of notes, sketches, drawings, and any other format that may
be specified by the Company. The records will be available to and remain the
sole property of the Company at all times.
(l) I agree to assign to the government of any country all of my right,
title and interest in and to any and all inventions, original works of
authorship, developments, improvements, or trade secrets whenever such full
title is required to be in such government by a contract between the Company and
such government or any of its agencies.
(m) If I am employed in California, this Agreement does not require me
to assign or offer to assign to the Company any invention which an employee
cannot be obligated to assign under Section 2870 of the California Labor Code,
which provides as follows:
(i) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(a) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or
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<PAGE>
(b) Result from any work performed by the employee for the
employer.
(ii) To the extent a provision in an employment agreement purports to
require an employer to assign an invention otherwise excluded from being
required to be assigned under subdivision (i), such provision is against the
public policy of California and is unenforceable.
However, I will disclose any Inventions as required by Section 4.c hereof
regardless of whether I believe the Invention is protected by Section 2870, in
order to permit the Company to engage in a review process to determine such
issues as may arise. Such disclosure shall be received in confidence by the
Company.
5. I agree that, during the term of my employment with the Company, I
will deliver to the Company (and will not keep in my possession or deliver to
anyone else) any and all devices, records, data, notes, reports, proposals,
lists, correspondence, specifications, drawings, blueprints, sketches,
materials, equipment, other documents or property, or reproductions of any of
the aforementioned items belonging to the Company, its successors or assigns.
In the event of the termination of my employment, I agree to sign and deliver
the "Termination Certification" attached hereto as Exhibit B.
7. I agree to execute any proper oath or verify any proper document
required to carry out the terms of this Agreement. I represent that my
performance of all of the terms of this Agreement will not breach any agreement
to keep in confidence proprietary information acquired by me in confidence or in
trust prior to my employment by the Company. I have not entered into, and I
agree I will not enter into, any oral or written agreement in conflict herewith.
8. This Agreement shall be effective as of the date hereof.
9. I agree that it would be difficult to measure damage to the Company
from any breach by me of the covenants set forth in Section 4 of this Agreement,
that injury to the Company from any such breach would be impossible to
calculate, and that money damages would therefore be an inadequate remedy.
Accordingly, I agree that if I breach any of such covenants, the Company shall
be entitled, in addition to all other remedies it may have, to injunctive relief
or other appropriate orders to restrain or remedy any such breach by me without
showing or proving any actual damage sustained by the Company.
10. This Agreement sets forth the entire agreement and understanding
between the Company and me relating to the subject matter hereof and merges all
prior discussions between us. No modification of or amendment to this
Agreement, nor any waiver of any rights under this agreement, will be effective
unless in writing signed by the party to be charged. Any subsequent change or
changes in my duties, salary, or compensation will not affect the validity or
scope of this Agreement.
11. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorneys' fees, costs, and necessary disbursements in addition to
any other relief to which such party may be entitled.
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<PAGE>
12. If any provision of this Agreement is held by a court of competent
jurisdiction to be invalid, void, or unenforceable, the remaining provisions
shall nevertheless continue in full force without being impaired or invalidated
in any way.
13. This Agreement shall be governed by and construed under the laws of
the State of Delaware applicable to contracts entered into and to be performed
wholly within the State of Delaware.
14. This Agreement shall be binding upon me, my heirs, executors,
assigns, administrators and guardians and shall inure to the benefit of the
Company, its successors and assigns.
_____________________________________
Employee's Signature
_____________________________________
Print Name of Employee Here
Accepted and Agreed to by
Bionix, Inc., a Delaware corporation
By:___________________________
David Anderson, President
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<PAGE>
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT cont'd
EXHIBIT A
TO PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
1. The following is a complete list of all inventions or improvements
relevant to the subject matter of my employment by ________________ (the
"Company"), and the business of the Company that have been made or conceived or
first reduced to practice by me alone or jointly with others prior to my
employment by the Company.
_______ No inventions or improvements
_______ See below: Any and all inventions regarding
____________________________________
____________________________________
____________________________________
2. I propose to bring to my employment the following materials and
documents of a former employer:
______ No materials or documents.
______ See below:
__________________________________
__________________________________
__________________________________
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<PAGE>
EXHIBIT B
TERMINATION CERTIFICATION
This is to certify that I do not have in my possession, nor have I failed
to return, any devices, records, data, notes, reports, proposals, lists,
correspondence, specifications, drawings, blueprints, sketches, materials,
equipment, other documents or property, or reproductions of Bionix, Inc., a
Delaware corporation, or its subsidiaries, affiliates, successors, or assigns
(together, the "Company").
I further certify that I have complied with all the terms of the Company's
Proprietary Information and Inventions Agreement signed by me, including the
reporting of any inventions and original works of authorship (as defined
therein) conceived or made by me (solely or jointly with others) which are
covered by that agreement.
I further agree that, in compliance with the Company's Proprietary
Information and Inventions Agreement, I will preserve as confidential all trade
secrets, confidential knowledge, data, or other proprietary information relating
to products, processes, know-how; designs, formulas, developmental or
experimental work, computer programs, databases, other original works of
authorship, customer lists, business plans, financial information or the subject
matter pertaining to any business of the Company or any business of its
clients, consultants or licensees.
Date: _____________ 19__.
_______________________
(Employee's Signature)
_________________________
(Print Employee's Name Here)
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<PAGE>
EXHIBIT 10.6
INVESTORS' RIGHTS AGREEMENT
THIS INVESTORS' RIGHTS AGREEMENT ("Agreement") is made as of the 6th
day of September, 1996 by and among BIONIX, INC., a Delaware corporation (the
"Company"), the parties designated as "Investors" on the signature pages hereof,
each of which is herein referred to as an "Investor," and the parties designated
as "Founding Stockholders" on the signature pages hereof, each of whom is herein
referred to as a "Founding Stockholder".
RECITALS
WHEREAS, the Founding Stockholders presently own all but 105,000 of
the outstanding shares of capital stock of the Company;
WHEREAS, the Company and the Investors have negotiated and shall
execute a Stock Purchase Agreement of even date herewith (the "Series A
Agreement");
WHEREAS, execution of this Agreement is a condition to the
consummation of the Series A Agreement; and
WHEREAS, in order to induce the Company to enter into the Series A
Agreement and to induce the Investors to invest funds in the Company pursuant to
the Series A Agreement, the Investors, the Founding Stockholders and the Company
intend that this Agreement shall govern the rights of the Investors to cause the
Company to register shares of Common Stock issuable to the Investors and shall
govern certain other matters forth herein;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. REGISTRATION RIGHTS. This Section 1 sets forth the Company's
-------------------
agreement with respect to the registration of shares of Common Stock that the
Investors may acquire upon conversion of any shares of Series A Preferred Stock
(as defined in the Series A Agreement) or upon exercise of any Warrants (as
defined in the Series A Agreement) purchased by the Investors pursuant to the
Series A Agreement. The Company shall have no obligation hereunder to register
any shares of Series A Preferred Stock or Warrants. Subject to the foregoing,
the Company covenants and agrees with respect to the registration of the Common
Stock as follows:
1.1 DEFINITIONS. For purposes of this Section 1:
-----------
(a) The term "Act" means the Securities Act of 1933, as amended.
(b) The term "Common Stock" shall mean the Company's common stock,
par value $.001 per share.
<PAGE>
(c) The term "Form S-3" means such form under the Act as is in
effect on the date hereof or any registration form under the Act subsequently
adopted by the SEC which permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the SEC.
(d) The term "Holder" means any person owning or having the right to
acquire Registrable Securities (including any Founding Stockholders to the
extent that such Founding Stockholders acquire Series A Preferred Stock or
Warrants pursuant to the Series A Agreement) or any assignee thereof in
accordance with Section 1.13 hereof.
(e) The term "1934 Act" shall mean the Securities Exchange Act
of 1934, as amended.
(f) The term "register," "registered," and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Act, and the declaration or
ordering of effectiveness of such registration statement or document.
(g) The term "Registrable Securities" means the Common Stock
issuable or issued upon conversion of the Series A Preferred Stock, par value
$.001 per share, issued by the Company pursuant to the Series A Agreement, the
Common Stock issued or issuable upon exercise of the Warrants issued pursuant to
the Series A Agreement, the Common Stock acquired pursuant to Section 2.2
hereof, and any other shares of Common Stock issued in respect of such shares
(because of stock splits, stock dividends, reclassifications, recapitalizations,
or similar events.)
(h) The number of shares of "Registrable Securities then
outstanding" shall mean, as of a particular date, the number of shares of Common
Stock outstanding on such date which are Registrable Securities, the number of
shares of Common Stock issuable on such date pursuant to the conversion of
shares of Series A Preferred Stock outstanding on such date and the number of
shares of Common Stock issuable on such date pursuant to the exercise of
Warrants which are outstanding on such date.
(i) The term "SEC" shall mean the Securities and Exchange
Commission.
1.2 REQUEST FOR REGISTRATION.
------------------------
(a) If the Company shall receive, at any time after the earlier of
(i) the date four years from the date hereof or (ii) six (6) months after the
effective date of the first registration statement for a public offering of
securities of the Company (other than a registration statement relating either
to the sale of securities to employees of the Company pursuant to a stock
option, stock purchase or similar plan or to an SEC Rule 145 transaction), a
written request from the Holders of a majority of the Registrable Securities
then outstanding that the Company file a registration statement under the Act
covering the registration of at least thirty-three and
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<PAGE>
one-third percent (33-1/3%) of the Registrable Securities then outstanding (or a
percentage less than 33-1/3% if the anticipated aggregate offering price, net of
underwriting discounts and commissions, would exceed $5,000,000), then the
Company shall:
(i) within ten (10) days of the receipt thereof, give
written notice of such request to all Holders; and
(ii) effect as soon as practicable the registration under
the Act of all Registrable Securities which the Holders request to be
registered, subject to the limitations of subsection 1.2(b), within twenty (20)
days of the mailing of such notice by the Company in accordance with Section
3.5.
(b) If the Holders initiating the registration request hereunder
("Initiating Holders") intend to distribute the Registrable Securities covered
by their request by means of an underwriting, they shall so advise the Company
as a part of their request made pursuant to subsection 1.2(a) and the Company
shall include such information in the written notice referred to in subsection
1.2(a)(i). The managing underwriter or underwriters will, at the Company's
option, either (i) be selected by the Company and be reasonably acceptable to a
majority in interest of the Initiating Holders or (ii) be selected by a majority
in interest of the Initiating Holders and be reasonably acceptable to the
Company. In either such event, the right of any Holder to include his
Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed
upon by a majority in interest of the Initiating Holders and such Holder) to the
extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall (together with the Company as provided in
subsection 1.4(e)) enter into an underwriting agreement in customary form with
the underwriter or underwriters selected for such underwriting. Notwithstanding
any other provision of this Section 1.2, if the managing underwriter advises the
Initiating Holders in writing that marketing factors require a limitation of the
number of shares to be underwritten, then the Initiating Holders shall so advise
all Holders of Registrable Securities which would otherwise be underwritten
pursuant hereto, and the number of shares of Registrable Securities that may be
included in the underwriting shall be allocated among all Holders thereof,
including the Initiating Holders, in proportion (as nearly as practicable) to
the amount of Registrable Securities of the Company owned by each Holder;
provided, however, that the number of shares of Registrable Securities to be
included in such underwriting shall not be reduced unless all other securities
(other than securities offered directly by the Company) are first entirely
excluded from the underwriting.
(c) Notwithstanding the foregoing, if the Company shall furnish to
Holders requesting registration pursuant to this Section 1.2, a certificate
signed by the Chief Executive Officer of the Company stating that in the good
faith judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its stockholders for such registration statement
to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer taking action
with respect to such filing for a period of not more than ninety (90) days after
receipt of the request of the
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<PAGE>
Initiating Holders; provided, however, that the Company may not utilize this
right more than once in any twelve-month period.
(d) In addition, the Company shall not be obligated to effect, or to
take any action to effect, any registration pursuant to this Section 1.2:
(i) After the Company has effected two registrations pursuant to
this Section 1.2 and such registrations have been declared or ordered effective;
(ii) During the period starting with the date sixty (60) days
prior to the Company's good faith estimate of the date of filing of, and ending
on a date one hundred eighty (180) days after the effective date of, a
registration subject to Section 1.3 hereof, provided that the Company is
actively employing all reasonable efforts to cause such registration statement
to become effective; or
(iii) If the Initiating Holders propose to dispose of shares of
Registrable Securities that may be immediately registered on Form S-3 pursuant
to a request made pursuant to Section 1.12 below.
1.3 COMPANY REGISTRATION. If (but without any obligation to
--------------------
do so) the Company proposes to register (including for this purpose a
registration effected by the Company for stockholders other than the Holders)
any of its stock or other securities under the Act in connection with the public
offering of such securities solely for cash (other than a registration relating
to the sale of securities to participants in a Company stock option, stock
purchase or similar plan or an SEC Rule 145 transaction, a registration on any
form which does not include substantially the same information as would be
required to be included in a registration statement covering the sale of the
Registrable Securities or a registration in which the only Common Stock being
registered is Common Stock issuable upon conversion of debt securities that are
also being registered), the Company shall, at such time, promptly give each
Holder written notice of such registration. Upon the written request of any
Holder given within twenty (20) days after mailing of such notice by the Company
in accordance with Section 3.5, the Company shall, subject to the provisions of
Section 1.8, cause to be registered under the Act all of the Registrable
Securities that such Holder has requested to be registered.
1.4 OBLIGATIONS OF THE COMPANY. Whenever required under this
--------------------------
Section 1 to effect the registration of any Registrable Securities, the Company
shall:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, subject to Section 1.17, upon
the request of the Holders of a majority of the Registrable Securities
registered thereunder, keep such registration statement effective for a period
of up to one hundred twenty (120) days or until the distribution contemplated in
the Registration Statement has been completed; provided, however, that (i) such
120-day period shall be extended for a period of time equal to the period that
the Holder refrains from selling any securities included in such registration at
the request of an underwriter of Common Stock (or
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<PAGE>
other securities) of the Company; and (ii) in the case of any registration of
Registrable Securities on Form S-3 that are intended to be offered on a
continuous or delayed basis, such 120-day period shall be extended, if
necessary, to keep the registration statement effective until all such
Registrable Securities are sold, provided that Rule 415, or any successor rule
under the Act, permits an offering on a continuous or delayed basis, and
provided further that applicable rules under the Act governing the obligation to
file a post-effective amendment permit, in lieu of filing a post-effective
amendment that (I) includes any prospectus required by Section 10(a)(3) of the
Act or (II) reflects facts or events representing a material or fundamental
change in the information set forth in the registration statement, the
incorporation by reference into the registration statement of information
(required to be included in (I) and (II) above) contained in periodic reports
filed pursuant to Section 13 or 15(d) of the 1934 Act.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders;
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process or to submit to the jurisdiction of any taxing authority in
any such states or jurisdictions, except as may be required by the Act.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Act, of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
(g) Cause all such Registrable Securities registered hereunder to be
listed on any securities exchange on which similar securities issued by the
Company are then listed.
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(h) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereto and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
(i) Furnish, at the request of any Holder requesting registration of
Registrable Securities pursuant to this Section 1, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to this Section 1, if such securities are being
sold through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities.
1.5 FURNISH INFORMATION.
-------------------
(a) It shall be a condition precedent to the obligations of the
Company to take any action pursuant to this Section 1 with respect to the
Registrable Securities of any selling Holder that such Holder shall furnish to
the Company such information regarding itself, the Registrable Securities held
by it, and the intended method of disposition of such securities as shall be
required to effect the registration of such Holder's Registrable Securities.
(b) The Company shall have no obligation with respect to any
registration requested pursuant to Section 1.2 or Section 1.12 if, due to the
operation of subsection 1.5(a), the number of shares or the anticipated
aggregate offering price of the Registrable Securities to be included in the
registration does not equal or exceed the number of shares or the anticipated
aggregate offering price required to originally trigger the Company's obligation
to initiate such registration as specified in subsection 1.2(a) or subsection
1.12(b)(2), whichever is applicable.
1.6 EXPENSES OF DEMAND REGISTRATION. All expenses other than
-------------------------------
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 1.2, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company
(including fees and disbursements of counsel for the Company in its capacity as
counsel to the selling Holders hereunder and if Company counsel does not make
itself available for this purpose, then the Company will pay the reasonable fees
and disbursements of one counsel for the selling Holders) shall be borne by the
Company; provided, however, that the Company shall not be required to pay for
any expenses of any registration proceeding begun pursuant to Section 1.2 if the
registration request is subsequently withdrawn at the request of the Holders of
a majority of the Registrable Securities to be registered (in which case all
Holders participating therein shall bear such expenses), unless the Holders of a
majority of the Registrable Securities agree to forfeit their right to one
demand registration pursuant to Section 1.2; provided further, however, that if
at the time of such withdrawal, the Holders have learned of a material adverse
change in the condition, business, or prospects of the Company from that known
to the Holders at the time of their request and have withdrawn the request with
reasonable
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<PAGE>
promptness following disclosure by the Company of such material adverse change,
then the Holders shall not be required to pay any of such expenses and shall
retain their rights pursuant to Section 1.2.
1.7 EXPENSES OF COMPANY REGISTRATION. The Company shall bear
--------------------------------
and pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 1.3 for each Holder (which right may be assigned as provided
in Section 1.13), including (without limitation) all registration, filing and
qualification fees, printers' fees and accounting fees relating or apportionable
thereto and the fees and disbursements of counsel for the Company in its
capacity as counsel to the selling Holders hereunder and if Company counsel does
not make itself available for this purpose, then the Company will pay the
reasonable fees and disbursements of one counsel for the selling Holders
selected by them, but excluding underwriting discounts and commissions relating
to Registrable Securities.
1.8 UNDERWRITING REQUIREMENTS. In connection with any offering
-------------------------
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 1.3 to include any of the Holders'
securities in such underwriting unless such Holders accept the terms of the
underwriting as agreed upon between the Company and the underwriters selected in
the manner described herein, and then only in such quantity as the underwriters
determine in their sole discretion will not jeopardize the success of the
offering by the Company. If the total amount of securities, including
Registrable Securities, requested by stockholders to be included in such
offering exceeds the amount of securities (other than securities to be sold by
the Company) that the managing underwriters determine in their sole discretion
is compatible with the success of the offering, then the Company shall be
required to include in the offering only that number of such securities,
including Registrable Securities, that the managing underwriters determine in
their sole discretion will not jeopardize the success of the offering (the
securities so included to be apportioned pro rata among the selling stockholders
according to the total amount of securities entitled to be included therein
owned by each selling stockholder or in such other proportions as shall mutually
be agreed to by such selling stockholders),but in no event shall the amount of
securities of the selling Holders included in the offering be reduced below
thirty percent (30%) of the total amount of securities included in such
offering, unless such offering is the initial public offering of the Company's
securities in which case the shares registered on behalf of the Holders may be
reduced to zero if the managing underwriters make the determination described
above and such reduction is effected on a pro rata basis among all stockholders
of the Company requesting or entitled to registration. For purposes of the
preceding parenthetical concerning apportionment for any selling stockholder
that is a partnership or corporation, the partners, retired partners and
stockholders of such holder, or the estates and family members of any such
partners and retired partners and any trusts for the benefit of any of the
foregoing persons, shall be deemed to be a single "selling stockholder", and any
pro-rata reduction with respect to such "selling stockholder" shall be based
upon the aggregate amount of shares carrying registration rights owned by all
entities and individuals included in such "selling stockholder", as defined in
this sentence.
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<PAGE>
1.9 DELAY OF REGISTRATION. No Holder shall have any right to
---------------------
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 1.
1.10 INDEMNIFICATION. In the event that any Registrable
---------------
Securities are included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, any underwriter (as defined in the Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the Act or the 1934 Act, against any losses, claims, damages, or
liabilities (joint or several) to which they may become subject under the Act,
the 1934 Act or other federal or state law, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise out of or are
based upon any of the following statements, omissions or violations
(collectively a "Violation"): (i) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Act, the 1934 Act, any state securities law or
any rule or regulation promulgated under the Act, or the 1934 Act or any state
securities law; and the Company will pay to each such Holder, underwriter or
controlling person, as incurred, any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss, claim,
damage, liability, or action; provided, however, that the indemnity agreement
contained in this subsection 1.10(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company, nor shall the Company
be liable in any such case for any such loss, claim, damage, liability, or
action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by any such Holder,
underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder (severally,
not jointly) will indemnify and hold harmless the Company, each of its
directors, each of its officers who has signed the registration statement, each
person, if any, who controls the Company within the meaning of the Act, any
underwriter, any other Holder selling securities in such registration statement
and any controlling person of any such underwriter or other Holder, against any
losses, claims, damages, or liabilities to which any of the foregoing persons
may become subject, under the Act, or the 1934 Act or other federal or state
law, insofar as such losses, claims, damages, or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder expressly
for use in connection with such registration; and each such Holder will pay, as
incurred, any legal or other expenses reasonably incurred by any person intended
to be indemnified pursuant to this subsection 1.10(b), in connection with
investigating or defending any such loss, claim damage, liability, or
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<PAGE>
action; provided, however, that the indemnity agreement contained in this
subsection 1.10(b) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Holder; provided, that, in no event shall any indemnity under
this subsection 1.10(b) exceed the net proceeds from the offering received by
such Holder.
(c) Promptly after receipt by an indemnified party under this Section
1.10 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 1.10, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel designated by the
indemnifying party; provided, however, that an indemnified party (together with
all other indemnified parties) shall have the right to retain one separate
counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential conflicting
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.10, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.10.
(d) If the indemnification provided for in this Section 1.10 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any loss, liability, claim, damage, or expense referred to
herein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in any underwriting agreement
entered into in connection with any related underwritten public offering are in
conflict with the foregoing provisions, the provisions in such underwriting
agreement shall control.
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<PAGE>
(f) The obligations of the Company and Holders under this Section 1.10
shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 1.
1.11 REPORTS UNDER THE 1934 ACT. With a view to making available
--------------------------
to the Holders the benefits of Rule 144 promulgated under the Act and any other
rule or regulation of the SEC that may at any time permit a Holder to sell
securities of the Company to the public without registration or pursuant to a
registration on Form S-3, the Company agrees to use its best efforts to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times commencing ninety (90) days
after the effective date of the first registration statement filed by the
Company with the SEC for the offering of its securities to the general public;
(b) take such action, including the voluntary registration of its
Common Stock under Section 12 of the 1934 Act, as is necessary to enable the
Holders to utilize Form S-3 for the sale of their Registrable Securities, such
action to be taken as soon as practicable after the one year anniversary of the
date on which the first registration statement filed by the Company with the SEC
for the offering of its securities to the general public is declared effective;
(c) after the effective date of the first registration statement filed
by the Company with the SEC for the offering of its securities to the general
public, file with the SEC in a timely manner all reports and other documents
required of the Company under the Act and the 1934 Act; and
(d) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by the Company that
it has complied with the reporting requirements of SEC Rule 144 (at any time
commencing ninety (90) days after the effective date of the first registration
statement filed by the Company with the SEC), the Act and the 1934 Act ( any
time after it has become subject to such reporting requirements), or that it
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualified), (ii) a copy, if applicable, of the most
recent annual or quarterly report of the Company and such other reports and
documents filed by the Company with the SEC, and (iii) after the effective date
of the first registration statement filed by the Company with the SEC for the
offering of its securities to the general public, such other information as may
be reasonably requested in availing a Holder of any rule or regulation of the
SEC which permits the selling of any such securities without registration.
1.12 FORM S-3 REGISTRATION. In case the Company shall receive
---------------------
from any Holder or Holders a written request or requests that the Company effect
a registration on Form S-3 and any related qualification or compliance with
respect to an underwritten offering of all or a part of the Registrable
Securities owned by such Holder or Holders, the Company will:
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<PAGE>
(a) promptly give written notice of the proposed registration, and
any related qualification or compliance, to all other Holders; and
(b) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holder's or
Holders' Registrable Securities as are specified in such request, together with
all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within fifteen (15) days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this Section 1.12: (1)
if Form S-3 is not available for such offering by the Holders; (2) if the
Holders, together with the holders of any other securities of the Company
entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) at an aggregate price to the
public (net of any underwriters' discounts or commissions) of less than
$1,000,000; (3) if the Company shall furnish to Holders a certificate signed by
the President of the Company stating that in the good faith judgment of the
Board of Directors of the Company, it would be seriously detrimental to the
Company and its stockholders for such Form S-3 Registration to be effected at
such time, in which event the Company shall have the right to defer the filing
of the Form S-3 registration statement for a period of not more than sixty (60)
days after receipt of the request of the Holder or Holders under this Section
1.12; provided, however, that the Company shall not utilize this right more than
once in any twelve month period; or (4) in any particular jurisdiction in which
the Company would be required to qualify to do business or to execute a general
consent to service of process or to submit to the taxing authority of such
jurisdiction, in effecting such registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file a registration
statement on Form S-3 covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All expenses incurred in connection with a
registration requested pursuant to Section 1.12, including (without limitation)
all registration, filing, qualification, printer's and accounting fees and the
reasonable fees and disbursements of counsel for the Company (including fees and
disbursements of counsel for the Company in its capacity as counsel to the
selling Holders hereunder and if Company counsel does not make itself available
for this purpose, then the Company will pay the reasonable fees and
disbursements of one counsel for the selling Holders), but excluding any
underwriters' discounts or commissions associated with Registrable Securities,
shall be borne by the Company. Registrations effected pursuant to this Section
1.12 shall not be counted as demands for registration or registrations effected
pursuant to Sections 1.2 or 1.3, respectively.
1.13 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
---------------------------------
Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to (i) a partner or
shareholder of such Holder or (ii) a transferee or assignee of such securities
who acquires at least twenty percent (20%) of the Registrable Securities (as
adjusted for stock splits, combinations and the like) owned by such Holder,
provided that: (a) the Company is, within a reasonable time after such
transfer, furnished
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<PAGE>
with written notice of the name and address of such transferee or assignee and
the securities with respect to which such registration rights are being
assigned; (b) such transferee or assignee agrees in writing to be bound by and
subject to the terms and conditions of this Agreement, including without
limitation the provisions of Section 1.15 below; and (c) such assignment shall
be effective only if immediately following such transfer the further disposition
of such securities by the transferee or assignee is not a public offering
requiring registration under the Act.
1.14 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and
---------------------------------------------
after the date of this Agreement, the Company shall not, without the prior
written consent of the Holders of a majority of the outstanding Registrable
Securities, enter into any agreement with any holder or prospective holder of
any securities of the Company that would allow such holder or prospective holder
(a) to include such securities in any registration filed under Section 1.2
hereof, unless under the terms of such agreement, such holder or prospective
holder may include such securities in any such registration only to the extent
that the inclusion of his securities will not reduce the amount of the
Registrable Securities of the Holders that is included or (b) to make a demand
registration that could result in such registration statement being declared
effective prior to the earlier of either of the dates set forth in subsection
1.2(a) or within one hundred twenty (120) days of the effective date of any
registration effected pursuant to Section 1.2.
1.15 "MARKET STAND-OFF AGREEMENT". Each Investor hereby agrees
---------------------------
that, during the period of duration specified by the Company and a managing
underwriter of Common Stock or other securities of the Company, following the
effective date of a registration statement of the Company filed under the Act,
such Investor shall not, to the extent requested by the Company and such
underwriter, directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase or
otherwise transfer or dispose of (other than to donees who agree to be similarly
bound) any securities of the Company held by such Investor at any time during
such period except Common Stock included in such registration statement;
provided, however, that:
(a) all executive officers and directors of the Company and all
Founding Stockholders enter into similar agreements; and
(b) such market stand-off time period shall not exceed 180 days.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Investor until the end of such period.
Notwithstanding the foregoing, the obligations described in this
Section 1.15 shall not apply to a registration relating solely to employee
benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated
in the future, or a registration relating solely to an SEC Rule 145 transaction
on Form S-4 or a similar form that may be promulgated in the future.
1.16 TERMINATION OF REGISTRATION RIGHTS. No Holder shall be
----------------------------------
entitled to exercise any right provided for in this Section 1 after five (5)
years following the
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<PAGE>
consummation of a sale of securities pursuant to a registration statement filed
by the Company under the Act in connection with the initial firm commitment
underwritten offering of its securities to the general public.
1.17 SUSPENSION OF REGISTRATION OBLIGATIONS. Notwithstanding any
--------------------------------------
provisions herein to the contrary, the Company shall have the right to suspend
the effectiveness of any registration statement or withdraw any registration
statement if such action is determined by the Company, upon advice of counsel,
to be reasonably necessary to protect the Company against liability under
federal or securities laws. In such event, the Company shall use reasonable
efforts to terminate such suspension or refile such registration statement as
promptly as possible and to maintain the effectiveness of such registration
statement for such extended period of time as the Board of Directors shall
determine, in its discretion, to be reasonable under the circumstances.
2. COVENANTS.
---------
2.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall deliver
--------------------------------
to each Investor:
(a) as soon as practicable, but in any event within ninety (90) days
after the end of each fiscal year of the Company, a consolidated income
statement, statement of cash flows and statement of changes in stockholders'
equity for such fiscal year and a consolidated balance sheet of the Company as
of the end of such year, such year-end financial statements to be in reasonable
detail, prepared in accordance with generally accepted accounting principles
("GAAP"), and audited and certified by independent public accountants of
nationally recognized standing selected by the Company;
(b) as soon as practicable, but in any event within forty-five (45)
days after the end of each of the first three (3) quarters of each fiscal year
of the Company, an unaudited consolidated income statement and statement of cash
flows for such fiscal quarter and an unaudited balance sheet as of the end of
such fiscal quarter;
(c) if such Investor holds an aggregate of at least 100,000 shares of
Series A Preferred Stock: within thirty (30) days of the end of each month, an
unaudited consolidated income statement and statement of cash flows and balance
sheet for and as of the end of such month, in reasonable detail, comparing
actual performance to budget;
(d) if such Investor holds an aggregate of at least 100,000 shares of
Series A Preferred Stock: as soon as practicable, but in any event at least
thirty (30) days prior to the end of each fiscal year, a budget and business
plan for the next fiscal year, prepared on a monthly basis, including
consolidated balance sheets and statement of cash flows for such months and, as
soon as prepared, any other budgets or revised budgets prepared by the Company;
and
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<PAGE>
(e) with respect to the financial statements called for in subsections
(b) and (c) of this Section 2.1, an instrument executed by the Chief Financial
Officer or President of the Company and certifying that such financial
statements were prepared in accordance with GAAP consistently applied with prior
practice for earlier periods (with the exception of footnotes that may be
required by GAAP) and fairly present, in all material respects, the consolidated
financial condition of the Company and its consolidated results of operations
for the period specified, subject to year-end audit adjustment.
2.2 RIGHT OF FIRST OFFER. Subject to the terms and conditions
--------------------
specified in this Section 2.2, the Company hereby grants to each Holder a right
of first offer with respect to future sales by the Company of its Shares (as
hereinafter defined). A Holder shall be entitled to apportion the right of
first offer hereby granted it among itself and its partners and affiliates in
such proportions as it deems appropriate.
Each time the Company proposes to offer any shares of, or securities
convertible into or exercisable for any shares of, any class of its capital
stock ("Shares"), the Company shall first make an offering of such Shares to
each Holder in accordance with the following provisions:
(a) The Company shall deliver a notice by certified mail ("Notice") to
the Holders stating (i) its bona fide intention to offer such Shares, (ii) the
number of such Shares to be offered, and (iii) the price and terms, if any, upon
which it proposes to offer such Shares.
(b) Within fifteen (15) calendar days after receipt of the Notice, the
Holder may elect to purchase or obtain, at the price and on the terms specified
in the Notice, up to that portion of such Shares which equals the proportion
that the number of shares of Registrable Securities issued and held by such
Holder bears to the total number of shares of Registrable Securities issued and
held by all Holders. The Company shall promptly, in writing, inform each Holder
that purchases all of the shares available to it ("Fully-Exercising Holder") of
any other Holder's failure to do likewise. During the ten-day period commencing
after receipt of such information, each Fully-Exercising Holder shall be
entitled to obtain that portion of the Shares for which Holders were entitled to
subscribe but that were not subscribed for by the Holders that is equal to the
proportion that the number of shares of the Registrable Securities then held by
such Fully-Exercising Holder bears to the total number of shares of the
Registrable Securities issued and held by all Fully-Exercising Holders who wish
to purchase some of the unsubscribed shares.
(c) If all Shares that Holders are entitled to obtain pursuant to
subsection 2.2(b) are not elected to be obtained as provided in subsection
2.2(b) hereof, the Company may, during the 180-day period following the
expiration of the period provided in subsection 2.2(b) hereof, offer the
remaining unsubscribed portion of such Shares to any person or persons at a
price not less than, and upon terms no more favorable to the offeree than, the
price and terms specified in the Notice. If the Company does not enter into an
agreement for the sale of the Shares within such period, or if such agreement is
not consummated within 90 days of the
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execution thereof, the right provided hereunder shall be deemed to be revived
and such Shares shall not be offered unless first reoffered to the Holders in
accordance herewith.
(d) The right of first offer in this Section 2.2 shall not be
applicable (i) to the issuance or sale of not to exceed 947,632 shares of Common
Stock (or options therefor) to directors, officers, employees, distributors and
consultants for the primary purpose of soliciting or retaining their employment
or business, or (ii) to the issuance of Series A Preferred Stock and Warrants
pursuant to the Series A Agreement, or (iii) to, or after consummation of, a
bona fide, firmly underwritten public offering of shares of Common Stock,
registered under the Act pursuant to a registration statement, or (iv) to the
issuance of securities pursuant to the conversion or exercise of convertible
securities, or (v) to the issuance of securities in connection with a business
or product acquisition of or by the Company, whether by merger, reincorporation,
consolidation, purchase or sale of assets, sale or exchange of stock or
otherwise, or (vi) to the issuance of stock, warrants or other securities or
rights in connection with the grant of marketing rights or otherwise to persons
or entities with which the Company or any of its subsidiaries has business
relationships; provided, however, that the exclusions set forth in clauses (v)
and (vi) above shall only apply if the issuances are approved by (a) a majority
in interest of the Holders and (b) a majority of the members of the Company's
Board of Directors other than the "Founding Stockholder Nominees" (as defined
herein).
(e) The right of first refusal set forth in this Section 2.2 may not
be assigned or transferred, except that (i) such right is assignable by each
Holder to any wholly owned subsidiary or parent of, or to any corporation or
entity that is, within the meaning of the Act, controlling, controlled by or
under common control with, any such Holder, and (ii) such right is assignable
between and among any of the Holders.
2.3 BOARD OF DIRECTORS. As of the closing under the Series A
------------------
Agreement, the Board of Directors of the Company shall consist of six members:
David W. Anderson, David J. Bershad, Anthony J. Dimun, Terral M. Jordan, Pertti
Tormala and Terence D. Wall. It is understood that after such closing, a seventh
director shall be added by the Board. Each of the Investors and Founding
Stockholders shall vote all of their shares of capital stock of the Company in
favor of two "Founding Stockholders Nominees" each time that directors of the
Company are elected. In the event that any such "Founding Stockholder Nominee"
should cease to serve as a member of the Board of Directors of the Company and
should his or her replacement be selected by the shareholders of the Company,
each of the Investors and Founding Stockholders shall vote all of their shares
of capital stock of the Company in favor of a replacement director designated by
holders of a majority in interest of the Common Stock held by the Founding
Stockholders. For purposes of this Agreement, the term "Founding Stockholder
Nominees" shall mean two officers or key employees of the Company designated by
the holders of a majority in interest of the Common Stock held by all Founding
Stockholders. An individual nominated by the Founding Stockholders to fill a
vacancy of any of the Founding Stockholder Nominees shall also be an officer or
key employee of the Company. Initially, the Founding Stockholder Nominees shall
be David W. Anderson and Pertti Tormala.
-15-
<PAGE>
2.4 OTHER REGISTRATION RIGHTS. The Company shall not grant
-------------------------
registration rights to any shareholder without the approval of a majority in
interest of the Holders.
2.5 LIMITATIONS AND TERMINATION OF COVENANTS. The covenants set
----------------------------------------
forth in Sections 2.1, 2.3 and 2.4 hereof shall terminate as to all Investors
and be of no further force or effect when the sale of securities pursuant to a
registration statement filed by the Company under the Act in connection with a
firm commitment underwritten offering of its securities to the general public is
consummated or when the Company first becomes subject to the periodic reporting
requirements of Sections 12(g) or 15(d) of the 1934 Act, whichever event shall
first occur. The covenants set forth in Section 2.2 hereof shall terminate as to
all Investors and be of no further force and effect when the shares of Series A
Preferred Stock issued pursuant to the Series A Agreement are no longer
outstanding.
3. MISCELLANEOUS.
-------------
3.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided
----------------------
herein, the terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective successors and assigns of the parties
(including transferees of any shares of Registrable Securities, subject to
limitations on assignability provided for herein). Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
3.2 GOVERNING LAW. This Agreement shall be governed by and
-------------
construed under the laws of the State of Delaware as applied to agreements among
Delaware residents entered into and to be performed entirely within Delaware.
3.3 COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.4 TITLES AND SUBTITLES. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
3.5 NOTICES. Unless otherwise provided, any notice required or
-------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or on the
fifth (5th) calendar day after deposit with the United States Post Office, by
registered or certified mail, postage prepaid and addressed to the party to be
notified at the address indicated for such party on the signature page hereof,
or at such other address as such party may designate by ten (10) days' advance
written notice to the other parties.
3.6 EXPENSES. If any action at law or in equity is necessary to
--------
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable
-16-
<PAGE>
attorneys' fees, costs and necessary disbursements in addition to any other
relief to which such party may be entitled.
3.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Registrable Securities then outstanding. Any amendment or
waiver effected in accordance with this subsection 3.7 shall be binding upon
each Holder of any Registrable Securities then outstanding or securities
exercisable for or convertible into Registrable Securities (including Holders of
any securities deemed Registrable Securities pursuant to Section 1.1(d) hereof),
each future holder of all such Registrable Securities, and the Company.
3.8 SEVERABILITY. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
3.9 AGGREGATION OF STOCK. All shares of Registrable Securities held
--------------------
or acquired by affiliated entities or persons shall be aggregated together for
the purpose of determining the availability of any rights under this Agreement.
3.10 ENTIRE AGREEMENT. This Agreement constitutes the full and entire
----------------
understanding and agreement between the parties hereto with regard to the
subject matter hereof.
3.11 RULE OF CONSTRUCTION. This Agreement shall not be construed
--------------------
against the party that drafted this Agreement merely by virtue of the fact that
such party drafted this Agreement.
3.12 LEGEND. The parties hereto shall take all steps necessary to
------
assure that the stock certificates representing all shares of the Company's
capital stock owned by Investors and Founding Stockholders bear a legend
referencing the agreement set forth in Section 2.3 hereof, such legend to be in
such form as the Company shall reasonably determine.
3.13 ATTORNEYS' FEES. In the event of any dispute involving the
---------------
terms hereof, the prevailing parties shall be entitled to collect legal fees and
expenses from the other parties to the dispute.
-17-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Investors'
Rights Agreement as of the date first above written.
BIONIX, INC.
By: /s/ David W. Anderson
---------------------------------------
David W. Anderson, President
Address: 279B Great Valley Parkway
Malvern, PA 19355
INVESTORS*:
/s/ David J. Bershad
------------------------------------------
David J. Bershad
Address: 2 Stonebridge Road
Montclair, New Jersey
BTAR ASSOCIATES, L.P.
By: STRATEGIC CONCEPTS, INC.,
general partner
By: /s/ Anthony J. Dimun
---------------------
Anthony J. Dimun
Title: President
Address: 46 Parsonnage Hills Road
Short Hills, New Jersey 07078
*David J. Bershad, BTAR Associates, LP and TDW Associates, LP are deemed to be
"Investors" hereunder with respect to securities that they will acquire pursuant
to the Series A Agreement.
-18-
<PAGE>
TDW ASSOCIATES, LP
By: TDW III, INC., general partner
By: /s/ Terence D. Wall
----------------------
Terence D. Wall
Title: President
Address: 160 Lloyd Road
Montclair, New Jersey 07042
T. ROWE PRICE THRESHOLD
FUND III, L.P.,
By: T. Rowe Price Threshold Fund
Associates, Inc., General Partner of
T. Rowe Price Threshold Fund III, L.P.
By: /s/ Junerose C. Sordoni
----------------------------------
Junerose C. Sordoni
Address: 100 E. Pratt Street
Baltimore, Maryland 21202
H & Q BIONIX INVESTORS, L.P.
By: /s/ H & Q BIONIX INVESTORS, L.P.
-------------------------------------
Address: HAMBRECHT & QUIST
One Bush Street
San Francisco, CA 94104
-19-
<PAGE>
LANDMARK FINANCIAL ASSOCIATES II, L.P.
By: /s/ John J. Moroney
--------------------------------------
John J. Moroney, General Partner
Address: P.O. Box 187
Harrington Park, New Jersey 07640
/s/ Russell Stravitz
----------------------------------------
Russell Stravitz
Address: 4181 Harris Trail
Atlanta, Georgia 30327
STAGE RIGHT LTD. DEFINED JMS F/B/O RICHARD LANDIS PROFIT
BENEFITS PENSION PLAN SHARING KEOGH PLAN
By: /s/ Richard Landis By: /s/ Richard Landis
-------------------------- --------------------------------------
Address: By: /s/ Gail R. Simon, Esq.
Janney Montgomery Scott --------------------------------------
1801 Market Street Address: Janney Montgomery Scott
Philadelphia, Pennsylvania 19103 1801 Market Street
Attention: Retirement Plans Philadelphia, Pennsylvania 19103
Department Attention: Retirement Plans
Account No. 78814956 Department
Account No. 50424025
SAUL N. AND ELAINE S. SCHREIBER
FAMILY TRUST
By: /s/ Saul Schreiber
-------------------------------------
Address: 5501 N. 19th Avenue., Suite 331
Phoenix, Arizona 85015
-20-
<PAGE>
DELAWARE CHARTER GUARANTEE
& TRUST CUSTODIAN FBO DAVID H.
MACCALLUM
By: /s/ David H. MacCallum
-------------------------------------
David H. MacCallum
Address: 64 East 66th Street
New York, New York 10021
DESERT ORTHOPEDICS AND
REHABILITATION LTD.
PROFIT SHARING PLAN
By: /s/ Saul Schreiber
------------------------------------
Address: 5501 N. 19th Avenue, Suite 331
Phoenix, AZ 85015
/s/ Samuel E. Navarro
------------------------------------
Samuel E. Navarro
Address: c/o UBS Securities
299 Park Avenue
New York, NY 10171
/s/ Lori Gonye
------------------------------------
Lori Gonye
Address: c/o UBS Securities
299 Park Avenue
New York, NY 10171
-21-
<PAGE>
/s/ Kevin Kotler
-------------------------------
Kevin Kotler
Address: c/o UBS Securities
299 Park Avenue
New York, NY 10171
-21A-
/s/ Jeffrey O'Donnell
-------------------------------
Jeffrey O'Donnell
22
<PAGE>
FOUNDING STOCKHOLDERS*
BIONIX, B.V.
By: /s/ David Anderson
-----------------------------------
David Anderson, President
Address: 279B Great Valley Parkway
Malvern, PA 19355
/s/ David W. Anderson
-----------------------------------
David W. Anderson
Address: 27B Great Valley Parkway
Malvern, PA 19355
/s/ David H. MacCallum
-----------------------------------
David H. MacCallum
Address: 64 East 66th Street
New York, New York 10021
-23-
<PAGE>
BERSHAD INVESTMENT GROUP, L.P.
By: /s/ David J. Bershad
---------------------------------------
David J. Bershad
Title: General Partner
Address: 2 Stonebridge Road
Montclair, New Jersey
BTAR ASSOCIATES, L.P.
By: STRATEGIC CONCEPTS, INC.,
general partner
By: /s/ Anthony J. Dumun
------------------------
Anthony J. Dimun
Title: President
Address: 46 Parsonage Hills Road
Short Hills, New Jersey 07078
TDW ASSOCIATES, LP
By: TDW III, Inc., general partner
By: /s/ Terence D. Wall
-------------------------
Terence D. Wall
Title: President
Address: 160 Lloyd Road
Montclair, New Jersey 07042
*David J. Bershad, LP, BTAR Associates, LP and TDW Associates, LP are deemed to
be "Founding Stockholders" hereunder with respect to all shares of Bionix, Inc.
owned by them other than shares purchased pursuant to the Series A Agreement.
-24-
<PAGE>
Exhibit 10.7
STOCK PURCHASE AGREEMENT
------------------------
THIS STOCK PURCHASE AGREEMENT is made as of the 6th day of September,
1996, by and among BIONIX, INC., a Delaware corporation (the "Company"),
BIOSCIENCE, LTD., a Finnish corporation ("Bioscience"), BIOCON, OY, a Finnish
corporation ("Biocon"), BIOSTENT, Inc., a New Jersey corporation ("Biostent"),
ORTHOSORB, INC., a New Jersey corporation ("Orthosorb", and, collectively with
Bioscience, Biocon and Biostent, the "Subsidiaries"), and the parties identified
as "Investors" on the signature pages hereof, each of which is herein referred
to as an "Investor". For purposes of this Agreement, the term "Corporation"
shall refer to the Company and the Subsidiaries collectively.
The parties hereto hereby agree as follows:
1. PURCHASE AND SALE OF STOCK AND WARRANTS.
---------------------------------------
1.1 SALE AND ISSUANCE OF SERIES A PREFERRED STOCK AND WARRANTS.
----------------------------------------------------------
1.1.1 The Company shall adopt and file with the Secretary of
State of Delaware on or before the Closing (as defined below) a Certificate of
Designation, Number, Powers, Preferences and Relative, Participating, Optional,
and Other Special Rights and the Qualifications, Limitations, Restrictions and
Other Distinguishing Characteristics (the "Certificate of Designation") setting
forth the terms and conditions of the Company's Series A Convertible
Participating Preferred Stock (the "Series A Preferred Stock"), such Certificate
of Designation to be in the form and substance of the Certificate of Designation
annexed hereto as Exhibit A. Such Certificate of Designation will further amend
---------
the Company's amended Certificate of Incorporation. Excluding such Certificate
of Designation, the Company's amended Certificate of Incorporation (the
"Certificate of Incorporation") and the Company's By-laws are set forth in
Exhibit B annexed hereto.
- ---------
1.1.2 The Company shall issue common stock purchase warrants (the
"Warrants") reflecting the terms set forth in the form of the warrant annexed
hereto as Exhibit C. Each Warrant provides for the purchase of one share of the
---------
Company's Common Stock, par value $.001 per share (the "Common Stock"), at an
exercise price of $3.00 per share.
1.1.3 Subject to the terms and conditions of this Agreement,
each Investor agrees, severally, to purchase at the Closing, and the Company
agrees to sell and issue to each Investor at the Closing, that number of shares
of the Company's Series A Preferred Stock set forth opposite each Investor's
name on Exhibit D annexed hereto, at a price of $2.49 per share and (b) Warrants
---------
to that number of shares of the Company's Common Stock set
forth opposite each Investor's name on such Exhibit D, at a price of $.025 per
---------
Warrant. At the the Company shall deliver to each Investor
certificates representing the number of shares of Series A Preferred Stock that
such Investor is purchasing and the Warrants that such Investor is purchasing
against payment of the purchase price therefor by certified check, wire
transfer, or any combination thereof. Any Investor purchasing Series A Preferred
Stock and Warrants pursuant to this Agreement shall become a party to this
Agreement and a party to the Investors' Rights Agreement and Co-Sale Agreement
referred to herein, all dated as
<PAGE>
of the date hereof. This Agreement, the Warrants, such Investors' Rights
Agreement and such Co-Sale Agreement are collectively referred to herein as the
"Transaction Agreements".
1.2 CLOSING.
-------
(a) The purchase and sale of the Series A Preferred Stock and Warrants
shall take place at the offices of Lowenstein, Sandler, Kohl, Fisher & Boylan,
P.A., 65 Livingston Avenue, Roseland, New Jersey at 10:00 A.M., on [__________,
1996,] or at such other time and place as the Company and Investors acquiring in
the aggregate more than one half of the shares of Series A Preferred Stock and
Warrants sold pursuant hereto mutually agree upon orally or in writing (the
"Closing").
2. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION. The Corporation
-------------------------------------------------
hereby represents and warrants to each Investor as follows:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION; REORGANIZATION.
-------------------------------------------------------------
2.1.1 The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite corporate power and authority to carry on its business as now
conducted. The Company is duly qualified to do business as a foreign corporation
in Pennsylvania and is not required to be qualified to transact business in any
other jurisdiction, excepting only jurisdictions in which the failure to so
qualify would not have a material adverse effect on its business or properties.
2.1.2 The Company was reorganized in the manner described in Exhibit
-------
E annexed hereto (the "Reorganization"). All corporate action with respect to
- -
the Reorganization, including authorization, execution, delivery and
governmental filings required in connection therewith, has been taken and the
Reorganization is complete and effective.
2.2 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of the
--------------------------------
Company consists of the following:
2.2.1 PREFERRED STOCK. 10,000,000 shares of Preferred Stock, of which
---------------
2,000,000 shares have been reserved for sale at the Closing as Series A
Preferred Stock and none of which are presently issued and outstanding. The
rights, privileges and preferences of the Series A Preferred Stock will be as
stated in the Certificate of Designation.
2.2.2 COMMON STOCK. 60,000,000 shares of common stock ("Common
------------
Stock"), of which 10,105,000 shares are issued and outstanding. The existing
shareholders of the Company and their current holdings of the Company's capital
stock are summarized in Exhibit F annexed hereto.
---------
2.2.3 OUTSTANDING SHARES. The outstanding shares of Common Stock are
------------------
all duly and validly authorized and issued, fully paid and nonassessable, and
were issued in accordance
-2-
<PAGE>
with the registration or qualification provisions of the Securities Act of 1933,
as amended (the "Act"), and any relevant state securities laws or pursuant to
valid exemptions therefrom.
2.2.4 RIGHTS TO PURCHASE. Except for (A) the conversion privileges
------------------
of the Series A Preferred Stock, (B) Warrants to purchase up to 800,000 shares
of Common Stock to be issued pursuant to this Agreement, (C) the rights provided
under the Transaction Agreements, (D) options to purchase 637,816 shares of
Common Stock which have been granted to David W. Anderson and other employees
pursuant to the Stock Option Agreements annexed hereto as Exhibit G and (E)
---------
309,816 additional shares of Common Stock reserved for issuance pursuant to the
Company's Stock Option/Stock Issuance Plan, a copy of which is annexed hereto as
Exhibit H, there are not, and will not be as of the Closing Date, outstanding
- ---------
any options, warrants, rights (including conversion or pre-emptive rights) or
agreements for the purchase or acquisition from the Company of any shares of its
capital stock. Except with respect to the Company's Certificate of
Incorporation and By-laws, the Transaction Agreements, the Company's
Reorganization Agreement (a copy of which has previously been furnished to
counsel for the Investors) and the Shareholders' Agreement among Bionix, B.V.
and its shareholders (a copy of which has previously been furnished to counsel
for the Investors), the Company is not a party or subject to any agreement or
understanding, and, to the best of the Company's knowledge, there is no
agreement or understanding among any persons and/or entities, which affects or
relates to the voting or giving of written consents by a director of the Company
or the voting or giving of written consents by a director or stockholder with
respect to any security of the Company.
2.3 SUBSIDIARIES. The Company does not presently own or control,
------------
directly or indirectly, any interest in any other corporation, association, or
other business entity other than (i) Bioscience and Biocon, both of which are
Finnish corporations and wholly-owned subsidiaries of the Company, and (ii)
Biostent and Orthosorb, both of which are New Jersey corporations and wholly-
owned subsidiaries of the Company. The Company plans to merge Biocon with and
into Bioscience and to merge Biostent and Orthosorb with and into the Company.
The Company is not a participant in any joint venture, partnership, or similar
arrangement.
2.4 AUTHORIZATION. All corporate action on the part of the Company
-------------
and its officers, directors and stockholders necessary for the authorization,
execution and delivery of the Transaction Agreements, the performance of all
obligations of the Company hereunder and thereunder, and the authorization,
issuance (or reservation for issuance), sale and delivery of the Series A
Preferred Stock and Warrants being sold hereunder and any Common Stock issuable
upon conversion or exercise thereof, has been taken or will be taken prior to
the Closing. The Transaction Agreements constitute valid and legally binding
obligations of the Company, enforceable in accordance with their respective
terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief, or other equitable
remedies, and (iii) to the extent that indemnification provisions contained in
the Investors' Rights Agreement may be limited by applicable federal or state
securities laws.
2.5 VALID ISSUANCE OF PREFERRED AND COMMON STOCK. The Series A
--------------------------------------------
Preferred Stock that is being purchased by the Investors hereunder, when issued,
sold and delivered in
-3-
<PAGE>
accordance with the terms of this Agreement for the consideration expressed
herein, will be duly and validly issued, fully paid, and nonassessable. Such
Series A Preferred Stock and the Warrants being purchased by the Investors
hereunder will be free of restrictions on transfer other than restrictions on
transfer under the Transaction Agreements and under applicable state and federal
securities laws. The shares of Common Stock issuable upon conversion of the
Series A Preferred Stock purchased under this Agreement and upon exercise of the
Warrants purchased under this Agreement have been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of the Certificate of
Designation or the Warrants, whichever is applicable, will be duly and validly
issued, fully paid, and nonassessable and will be free of restrictions on
transfer other than restrictions on transfer under the Transaction Agreements
and under applicable state and federal securities laws.
2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except for such filings as may be required by
applicable state securities laws.
2.7 OFFERING. Subject in part to the truth and accuracy of each
--------
Investor's representations set forth in Section 3 hereof of this Agreement, the
offer, sale and issuance of the Series A Preferred Stock and Warrants as
contemplated by this Agreement are exempt from the registration requirements of
the Act.
2.8 LITIGATION. There is no action, suit, proceeding or
----------
investigation pending or currently threatened against the Corporation that
questions the validity of the Transaction Agreements or the right of the
Corporation to enter into the Transaction Agreements, or to consummate the
transactions contemplated hereby or thereby, or that may reasonably be expected
to result, either individually or in the aggregate, in any material adverse
change in the consolidated assets, financial condition or results of operations
of the Corporation. The Corporation is not a party or subject to the provisions
of any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality.
2.9 PATENTS AND TRADEMARKS.
----------------------
(a) Exhibit I annexed hereto includes a true and complete list of all
---------
patents, patent applications, trademarks, service marks, trademark and service
mark applications, trade names, copyrights and licenses presently owned or held
by the Corporation. To the best of the Corporation's knowledge, the Corporation
owns or possesses, or can obtain by payment of royalties in amounts which, in
the aggregate, do not and will not materially adversely affect the business and
the prospects of the Corporation, all of the patents, trademarks, service marks,
trade names, copyrights, proprietary rights and processes, trade secrets, and
licenses or rights to the foregoing necessary for the conduct of the
Corporation's business as now conducted (including any applications therefor)
(collectively, the "Proprietary Rights"). To the best of the Corporation's
knowledge, the business of the Corporation as now conducted does not infringe or
violate any of the patents, trademarks, service marks, trade names, copyrights,
licenses or other proprietary rights of any person or entity.
-4-
<PAGE>
(b) The Corporation has taken commercially reasonable actions and made
such applicable applications and filings as it deemed commercially reasonable
pursuant to applicable laws to perfect or protect its interests in the
Proprietary Rights, except where the failure to take such actions or make such
applications or filings would not have a material adverse effect on the
Corporation's business as currently conducted or as proposed to be conducted or
materially interfere with the use or enforcement of such Proprietary Rights in
the ordinary course of its business. To the best of the Corporation's
knowledge, each consultant to the Corporation has validly assigned all of such
consultant's rights in and to the Proprietary Rights to the Company or one of
the Subsidiaries.
(c) The Reorganization, the execution, delivery and performance of the
Transaction Agreements and the performance of the Company's obligations as set
forth in the Certificate of Incorporation and the consummation of the
transactions contemplated hereby and thereby will not (A) cause the forfeiture
or termination or give rise to a right of forfeiture or termination of any
Proprietary Right, or (B) in any way impair or adversely affect the right of the
Corporation to develop, make, use, sell, license, market or dispose of or to
bring any action for the infringement of, any Proprietary Right or any products,
services or technology designed, developed, manufactured, licensed, sold,
marketed or serviced by the business of the Corporation (collectively,
"Products").
(d) Except for any written obligations of the Corporation as set forth
in the agreements listed on Exhibits J or K annexed hereto, the development,
----------------
manufacture, marketing, license, sale, use or disposal of any Products does not
or would not violate any license or agreement between the Company or any of its
Subsidiaries and any third party. To the best knowledge of the Company, neither
the Corporation nor any of its consultants has misappropriated any third party
trade secrets. There is no claim or litigation pending or, to the best of the
Company's knowledge, threatened, contesting the validity, ownership or right to
develop, make, use, sell, license, market or dispose of any Proprietary Right.
(e) To the best of the knowledge of the Corporation, no third party is
infringing on any Proprietary Right where such infringement could materially
adversely limit the protection afforded by the Proprietary Rights to the
development, manufacture, use, sale, license, sublicense, marketing or
disposition of the Products.
(f) The Corporation has taken all commercially reasonable steps
necessary or appropriate (including, without limitation, entering into
appropriate confidentiality and nondisclosure agreements with consultants to the
Corporation, in the form attached as Exhibit L annexed hereto (the
----------
"Nondisclosure Agreement")), to safeguard and maintain the secrecy and
confidentiality of, and the proprietary rights in, the Proprietary Rights.
(g) Neither the Corporation nor, to the best of the Company's
knowledge, any of its employees, consultants or independent contractors are
making any unauthorized use of any confidential information of third parties or
any confidential information in which any of their present or past consultants
or independent contractors has claimed a proprietary interest and the
Corporation is not aware of any facts that would give rise to any such claim.
The Corporation is not aware that any consultant is obligated under any contract
(including any license, covenant or commitment of any nature), or subject to any
judgment, decree or order of any court or administrative agency, that would
-5-
<PAGE>
interfere with the use of such consultant's best efforts to promote the
interests of the Corporation or would conflict with the Corporation's business
as now conducted. To the best of the Corporation's knowledge, no prior employer
of any consultant of the Corporation has any right to or interest in any
inventions, improvements, discoveries or other information assigned to the
Corporation by a consultant pursuant to a Nondisclosure Agreement executed by
such consultant, or otherwise so assigned.
(h) All of the Corporation's consultants or independent contractors
whose employment responsibility requires access or who have actual access to
confidential or proprietary information of the Company have executed and
delivered a Nondisclosure Agreement, and all such agreements are in full force
and effect.
2.10 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
---------------------------------
violation or default of any provision of its Certificate of Incorporation or By-
Laws, and the Corporation is not in material violation or material default of
any material instrument, judgment, order, writ, decree or contract to which it
is a party or by which it is bound, or, to the best of the Company's knowledge,
of any provision of any statute, rule or regulation applicable to the
Corporation. The execution, delivery and performance of the Transaction
Agreements, and the consummation of the transactions contemplated hereby and
thereby, will not result in any such violation or be in material conflict with
or constitute, with or without the passage of time and giving of notice, either
a material default under any such provision, instrument, judgment, order, writ,
decree or contract or an event that results in the creation of any material
lien, charge or encumbrance upon any assets of the Corporation or the
suspension, revocation, impairment, forfeiture or nonrenewal of any material
permit, license, authorization, or approval applicable to the Corporation, its
business or operations or any of its assets or properties.
2.11 AGREEMENTS; ACTION.
------------------
2.11.1 Except for the Articles of Association as amended from time to
time of Bionix, B.V. and agreements explicitly referred to herein or
contemplated hereby or by any of the other Transaction Agreements or by the
Shareholders' Agreement among Bionix, B.V. and its shareholders, there are no
material agreements of any nature between the Corporation and any of its
officers, directors or other affiliates, including without limitation any
agreement or other arrangement providing for payments to any such person or
entity or regarding voting rights or control over the Corporation.
2.11.2 Except as disclosed in any exhibit or agreement disclosed
hereunder, there are no material agreements to which the Corporation is a party
or by which it is bound that may involve (i) obligations (contingent or
otherwise) of the Corporation in excess of $100,000, or (ii) provisions
restricting the development, manufacture or distribution of the Corporation's
products or services, or (iii) indemnification by the Corporation with respect
to infringements of proprietary rights.
2.11.3 Exhibit J annexed hereto contains the form of the Corporation's
---------
material distribution, sales representative and sales agency agreements.
Exhibit K annexed hereto contains a description of any material agreement
- ---------
pursuant to which the Corporation has received an existing license from a third-
party or granted an existing license to a third-party.
-6-
<PAGE>
2.11.4 Exhibit M annexed hereto contains a description of all
---------
indebtedness of the Corporation to banks or other lenders (other than lessors
under operating leases) and a description of any security interests, pledges or
other encumbrances on the Corporation's property which have been given to secure
such indebtedness. Except as otherwise set forth in Exhibit E annexed hereto,
---------
since January 1, 1996, the Corporation has not declared or paid any dividends or
authorized or made any distribution upon or with respect to any class or series
of its capital stock and the Corporation has not (i) made any loans or advances
to any officer or director of the Corporation, other than ordinary advances for
travel expenses, or (ii) entered into any transaction outside of the ordinary
course of business.
2.11.5 Except for the sale of the Corporation's products by a
subsidiary of Vital Signs, Inc. (which sales effort terminated with the
commencement of sales managed by the Corporation) and agreements described in
exhibits annexed hereto, (A) the Corporation has not entered into any business
transaction with any entity controlled by an officer or director of the
Corporation, (B) to the best of the Company's knowledge, no officer, or director
of the Company or any of its Subsidiaries or member of his or her immediate
family is affiliated with any firm or corporation that competes with the
Corporation, except that this representation shall not apply with respect to
officers and directors of the Company or any of its Subsidiaries and members of
their immediate families that own stock in publicly traded companies (equal to
no more than 2% of the outstanding shares of such public companies) that may
compete with the Corporation and (C) to the best of the Company's knowledge, no
officer or director of the Company and no member of the immediate family of any
officer or director of the Company is directly or indirectly interested in any
material contract between the Company or any of its Subsidiaries and any of its
customers, suppliers, distributors, sales representatives or sales agents.
2.12 BUSINESS PLAN. The Business Plan dated February 1996 previously
-------------
delivered to each Investor was prepared in good faith by the Company and, to the
best of the Company's knowledge, does not, with respect to any historical
matters, contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made therein not misleading. It
is understood that (A) with respect to projections contained in the Business
Plan, the Company represents only that such projections were prepared in good
faith and that the Company reasonably believes that there is a reasonable basis
for such projections, it being understood that no assurances can be given that
actual results of operations will in fact be the same as or even approximate the
projected results and (B) all representations regarding such Business Plan are
qualified by the disclaimers set forth in Exhibit N annexed hereto.
---------
2.13 PERMITS. The Corporation has all franchises, permits, licenses,
-------
and any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which would materially and adversely affect the
business, consolidated results of operations or consolidated financial condition
of the Corporation. To the best of the Corporation's knowledge, the Corporation
is not in default in any material respect under any of such franchises, permits,
licenses or other similar authority. The Corporation has not received any
notices from the U.S. Food and Drug Administration regarding its non-compliance
with Good Manufacturing Practices ("GMP") and, to the best of the Corporation's
knowledge, is in compliance in all material respects with GMP and has
implemented appropriate policies and procedures under GMP.
-7-
<PAGE>
2.14 ENVIRONMENTAL AND SAFETY LAWS. To the best of the Corporation's
-----------------------------
knowledge, the Corporation is not in violation of any applicable statute, law or
regulation relating to the environment or occupational health and safety, the
violation of which would materially and adversely affect the business,
consolidated results of operations or consolidated financial condition of the
Corporation.
2.15 MANUFACTURING AND MARKETING RIGHTS. Except as set forth in
----------------------------------
Exhibits J and K annexed hereto, the Corporation has not granted rights to
- ----------------
manufacture, produce, assemble, license, market or sell its products to any
other person and is not bound by any agreement that affects the Corporation's
exclusive right to develop, manufacture, assemble, distribute, market or sell
its products.
2.16 REGISTRATION RIGHTS. Except as provided in the Investors'
-------------------
Rights Agreement, the Corporation has not granted or agreed to grant any
registration rights, including piggyback registration rights, to any person or
entity.
2.17 TITLE TO PROPERTY AND ASSETS. The Corporation owns its property
----------------------------
and assets free and clear of all mortgages, liens and encumbrances, except such
encumbrances and liens that arise in the ordinary course of business and do not
materially impair the Corporation's ownership or use of such property or assets.
2.18 FINANCIAL STATEMENTS. The Company has annexed hereto as Exhibit
-------------------- -------
O its audited financial statements as of December 31, 1995, and for the fiscal
- -
year then ended and unaudited financial statements for the six months ended June
30, 1996 (the "Financial Statements"). The Financial Statements fairly present
the consolidated financial condition and operating results of the Corporation as
of the dates, and for the periods, indicated therein. The Financial Statements
have been prepared in accordance with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods indicated and with
each other, except that no footnotes have been prepared with respect to the 1996
financial statements. Except as set forth in the Financial Statements, the
Corporation has no material liabilities that would be required to be disclosed
on the face of a balance sheet prepared in accordance with GAAP other than (i)
liabilities incurred in connection with the Reorganization and the offering of
the Series A Preferred Stock and Warrants or in the ordinary course of business
subsequent to the date of the most recent balance sheet included within the
Financial Statements (the "Balance Sheet Date"), and (ii) obligations under
contracts and commitments incurred in the ordinary course of business. The
Corporation is not a guarantor of any indebtedness of any person, firm or
corporation other than an entity affiliated with the Company.
2.19 CHANGES. Since the Balance Sheet Date, there has not been:
-------
2.19.1 any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the consolidated financial
condition, results of operations or business of the Corporation;
2.19.2 any material change or amendment to a material contract or
arrangement by which the Corporation or any of its assets or properties is bound
or subject;
-8-
<PAGE>
2.19.3 any resignation or termination of employment of any key
officer of the Corporation other than Jeffrey O'Donnell; or
2.19.4 to the best of the Company's knowledge, any other event or
condition of any character that may reasonably be expected to materially and
adversely affect the consolidated financial condition, results of operations or
business of the Corporation.
2.20 EMPLOYEE MATTERS. Except as described in Exhibit P annexed
---------------- ---------
hereto, the Corporation does not maintain any "employee benefit plan" as such
term is defined in the Employee Retirement Income Security Act of 1974. The
Corporation has not entered into any written employment agreements other than
those described in Exhibit P annexed hereto. None of the Corporation's
----------
employees are represented by any labor union, and there has been no labor strike
or other action taken by organized labor with respect to the Corporation
(including, without limitation, any organizational drive) or, to the best of the
Company's knowledge, threatened.
2.21 TAX RETURNS, PAYMENTS AND ELECTIONS. The Corporation has filed
-----------------------------------
(when due) all tax returns and reports as required by law. These returns and
reports are true and correct in all material respects. The Corporation has paid
all taxes and other assessments when due.
2.22 NON-COMPETITION AGREEMENTS. David W. Anderson's and Pertti
--------------------------
Tormala's employment agreements referenced in Exhibit P annexed hereto contain a
---------
non-competition agreement.
2.23 NON-DISCLOSURE AND DEVELOPMENT AGREEMENT. Non-Disclosure and
----------------------------------------
Development Agreements in the form of the agreement annexed hereto as Exhibit R
---------
have been executed by each of the officers of the Company and by each other
employee of the Corporation determined by management to be a key employee of the
Corporation.
2.24 BASE SALARY OF CEO. The base salary of David W. Anderson, the
------------------
Company's Chief Executive Officer, is not more than $150,000.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each Investor hereby
-----------------------------------------------
represents and warrants that:
3.1 AUTHORIZATION. Such Investor has full power and authority to
-------------
enter into the Transaction Agreements, and each such Agreement constitutes its
valid and legally binding obligation, enforceable in accordance with its terms,
except (i) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium, and other laws of general application affecting enforcement of
creditors' rights generally, (ii) as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies, and (iii) to the extent the indemnification provisions contained in
the Investors' Rights Agreement may be limited by applicable federal or state
securities laws.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with
---------------------------------
such Investor in reliance upon such Investor's representation to the Company,
which by such Investor's execution of this Agreement such Investor hereby
confirms, that the Series A Preferred Stock and Warrants to be received by such
Investor and the capital stock issuable upon conversion or exercise
-9-
<PAGE>
thereof (collectively, the "Securities") will be acquired for investment for
such Investor's own account, not as a nominee or agent, and not with a view to
the resale or distribution of any part thereof, and that such Investor has no
present intention of selling, granting any participation in, or otherwise
distributing the same. By executing this Agreement, such Investor further
represents that such Investor does not have any contract, undertaking, agreement
or arrangement with any person to sell, transfer or grant participations to such
person or to any third person, with respect to any of the Securities.
3.3 DISCLOSURE OF INFORMATION. Such Investor believes it has
-------------------------
received all the information it considers necessary or appropriate for deciding
whether to purchase the Series A Preferred Stock and Warrants. Such Investor
further represents that it has had an opportunity to ask questions and receive
answers from the Company regarding the terms and conditions of the offering of
the Series A Preferred Stock and Warrants and the business, properties,
prospects and financial condition of the Company.
3.4 INVESTMENT EXPERIENCE. Such Investor is an investor in
---------------------
securities of private companies and acknowledges that it is able to fend for
itself, can bear the economic risk of its investment and has such knowledge and
experience in financial or business matters that it is capable of evaluating the
merits and risks of the investment in the Series A Preferred Stock and Warrants,
as well as the underlying Common Stock. If other than an individual, such
Investor also represents that it has not been organized for the purpose of
acquiring the Series A Preferred Stock or the Warrants.
3.5 ACCREDITED INVESTOR. Such Investor is an "accredited investor"
-------------------
within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of
Regulation D, as presently in effect.
3.6 RESTRICTED SECURITIES. Such Investor understands that the
---------------------
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations, such securities may not be resold without registration
under the Act except in certain limited circumstances. In this connection, such
Investor represents that it is aware that it may be required to hold the
Securities indefinitely and is familiar with SEC Rule 144, as presently in
effect, and understands the resale limitations imposed thereby and by the Act.
3.7 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting
----------------------------------
the representations set forth above, such Investor further agrees not to make
any disposition of all or any portion of the Securities unless and until the
transferee has agreed in writing for the benefit of the Company to be bound by
this Section 3 hereof and the Investors' Rights Agreement and Co-Sale Agreement
provided and to the extent that this Section and such Agreements are then
applicable, and:
3.7.1 There is then in effect a registration statement under the Act
covering such proposed disposition and such disposition is made in accordance
with such Registration Statement; or
3.7.2 (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
requested by the Company, such Investor shall have furnished the
-10-
<PAGE>
Company with an opinion of counsel, satisfactory to the Company, that such
disposition will not require registration of such shares under the Act.
3.7.3 Notwithstanding the provisions of paragraphs 3.7.1 and 3.7.2
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by an Investor that is a partnership to a direct successor (by
law or otherwise) to such partnership, a partner of such partnership or a
retired partner of such partnership who retires after the date hereof, or to the
estate of any such partner or retired partner or the transfer by gift, will or
intestate succession of any partner to his or her spouse or to the siblings,
lineal descendants or ancestors of such partner or his or her spouse, if the
transferee agrees in writing to be subject to the terms hereof to the same
extent as if he or she were an original Investor hereunder.
3.8 LEGENDS. It is understood that the certificates evidencing the
-------
Securities may bear one or all of the following legends:
3.8.1 "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT
WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
3.8.2 Any legend required by the laws of any State.
3.8.3 The legend set forth under Section 3.8.1 shall be removed from
such certificates, at the request of the holder thereof, at such time as the
shares represented by such certificate become eligible for resale pursuant to
Rule 144(k) under the Act.
3.9 DISCLAIMERS. Each Investor understands and acknowledges that
-----------
such Investor has been advised with respect to the following:
3.9.1 The disclaimers set forth in Exhibit N annexed hereto; and
---------
3.9.2 The statement of risk factors set forth in Exhibit S
---------
annexed hereto.
4. CONDITIONS OF INVESTOR'S OBLIGATIONS AT CLOSING. The obligations of
-----------------------------------------------
each Investor under subsection 1.1.3 of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions, the
waiver of which shall not be effective against any Investor who does not consent
in writing thereto:
4.1 REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties of the Company contained in Section 2 hereof shall be true on and as
of the Closing with the same effect as though such representations and
warranties had been made on and as of the date of the Closing.
-11-
<PAGE>
4.2 PERFORMANCE. The Company shall have performed and complied with
-----------
all agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing.
4.3 COMPLIANCE CERTIFICATE. The Company shall deliver to each
----------------------
Investor at the Closing a certificate stating that, to the best of its
knowledge, the conditions specified in Sections 4.1 and 4.2 have been fulfilled.
4.4 QUALIFICATIONS. All authorizations, approvals, or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Securities pursuant to this Agreement shall be duly obtained and effective
as of the Closing.
4.5 INVESTORS' RIGHTS AGREEMENT. The Company and each Investor shall
---------------------------
have entered into the Investors' Rights Agreement in the form annexed hereto as
Exhibit T.
- ---------
4.6 CO-SALE AGREEMENT. The Company, the Investors, and each of the
-----------------
Founding Stockholders (as defined in the Co-Sale Agreement) shall have entered
into the Co-Sale Agreement in the form annexed hereto as Exhibit U.
---------
4.7 OPINION OF COUNSEL. Counsel to the Company shall have delivered
------------------
to the Investors an opinion letter in the form annexed hereto as Exhibit V.
---------
4.8 CHARTER AND BYLAWS. The Certificate of Incorporation and
------------------
Certificate of Designation shall have been filed with the office of the
Secretary of State of the State of Delaware. The By-laws as set forth in
Exhibit B annexed hereto shall remain (as of the Closing) effective without
- ---------
change.
4.9 COMMITTEES. The Board of Directors of the Company shall have
----------
established an Audit Committee and a Compensation Committee consisting of one or
more members. Terral Jordan has been named as a member of each such committee.
4.10 OTHER MATTERS. All corporate and other proceedings in
-------------
connection with the Reorganization and the transactions contemplated by the
Transaction Agreements and all documents and instruments incident to such
transactions shall be reasonably satisfactory in substance and form to the
Investors and their counsel, and the Investors and their counsel shall have
received all such counterpart originals or certified or other copies of such
documents as they may reasonably request.
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of
--------------------------------------------------
the Company to the Investors under this Agreement are subject to the fulfillment
on or before the Closing of each of the following conditions:
-12-
<PAGE>
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties of the Investors contained in Section 3 hereof shall be true on and
as of the Closing with the same effect as though such representations and
warranties had been made on and as of the Closing.
5.2 PAYMENT OF PURCHASE PRICE. The Investors shall have delivered
-------------------------
the purchase price specified in Section 1.1.3 hereof. A minimum of 800,000
shares of Series A Preferred Stock and 320,000 Warrants shall have been
purchased by all Investors at the Closing.
5.3 QUALIFICATIONS. All authorizations, approvals, or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Securities pursuant to this Agreement shall be duly obtained and effective
as of the Closing.
5.4 INVESTORS' RIGHTS AGREEMENT. The Company and the Investors shall
---------------------------
have entered into the Investors' Rights Agreement described in Section 4.5
hereof.
5.5 CO-SALE AGREEMENT. The Company, the Investors, and each of the
-----------------
Founding Stockholders shall have entered into the Co-Sale Agreement described
in Section 4.6 hereof.
5.6 OTHER MATTERS. All corporate and other proceedings in connection
-------------
with the Reorganization and the transactions contemplated by the Transaction
Agreements and all documents and instruments incident to such transactions shall
be reasonably satisfactory in substance and form to the Company and its counsel,
and the Company and its counsel shall have received all such counterpart
originals or certified or other copies of such documents as they may reasonably
request.
6. KEY MAN INSURANCE; NEW OFFICERS. As soon as practicable after the
-------------------------------
Closing, the Company shall purchase and, while shares of Series A Preferred
Stock are outstanding, thereafter shall maintain key man insurance in the amount
of $1.0 million on the lives of each of David W. Anderson and Pertti Tormala,
subject to the following conditions: (i) the purchase of such insurance shall be
subject to the approval of the Compensation Committee of the Board, which shall
have the discretion to reduce the amount of such insurance if $1.0 million of
insurance cannot be obtained by the Company from a reputable insurance company
at a premium that is reasonable to, and affordable by, the Company and (ii) the
obligation set forth in this Section 6 shall apply with respect to David W.
Anderson and Pertti Tormala only while such person is providing services to the
Company or one or more of its Subsidiaries. Subsequent to the Closing, the
Company shall use reasonable efforts to hire and employ a suitable chief
financial officer and a suitable European operating officer.
7. MISCELLANEOUS.
-------------
7.1 SURVIVAL OF WARRANTIES. The warranties, representations and
----------------------
covenants of the Company and the Investors contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investors or the Company.
-13-
<PAGE>
7.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
----------------------
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Securities). Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
7.3 GOVERNING LAW. This Agreement shall be governed by and construed
-------------
under the laws of the State of Delaware (without application of principles of
conflicts of laws).
7.4 COUNTERPARTS; FACSIMILE. This Agreement may be executed in two
-----------------------
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. Signatures hereon
may be evidenced by facsimile transmissions.
7.5 CAPTIONS. The captions used in this Agreement are used for
--------
convenience only and are not to be considered in construing or interpreting this
Agreement.
7.6 NOTICES. Unless otherwise provided, any notice required or
-------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified, by
facsimile transmission upon delivery thereof or upon deposit with the United
States Post Office, by registered or certified mail, postage prepaid and
addressed to the party to be notified at the address indicated for such party on
the signature page hereof or in Exhibit D annexed hereto, or at such other
---------
address as such party may designate by ten (10) days' advance written notice to
the other parties.
7.7 FINDER'S FEE. Each party represents that it neither is nor will
------------
be obligated for any finders' fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which such Investor or any of its officers, partners,
employees, or representatives is responsible. The Company agrees to indemnify
and hold harmless each Investor from any liability for any commission or
compensation in the nature of a finders' fee (and the costs and expenses of
defending against such liability or asserted liability) for which the Company or
any of its officers, employees or representatives is responsible.
7.8 EXPENSES. Irrespective of whether the Closing is effected, the
--------
Company shall pay all costs and expenses that it incurs and each Investor shall
pay all costs and expenses that it incurs with respect to the negotiation,
execution, delivery and performance of this Agreement, except that the Company
shall pay the reasonable fees up to a maximum of $20,000 and expenses of Testa,
Hurwitz & Thibeault, LLP (counsel to the Investors). If any action at law or in
equity is necessary to enforce or interpret the terms of this Agreement or the
Transaction Agreements, the prevailing party shall be entitled to reasonable
attorneys' fees, costs and necessary disbursements in addition to any other
relief to which such party may be entitled.
-14-
<PAGE>
7.9 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Common Stock issued or issuable upon conversion of the Series
A Preferred Stock acquired pursuant to this Agreement. Any amendment or waiver
effected in accordance with this paragraph shall be binding upon each holder of
any securities purchased under this Agreement at the time outstanding (including
securities into which such securities are convertible), each future holder of
all such securities, and the Company.
7.10 SEVERABILITY. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and such balance shall be enforceable in
accordance with its terms.
7.11 ENTIRE AGREEMENT. This Agreement and the documents referred to
----------------
herein constitute the entire agreement with respect to the subject matter hereof
among the parties and no party shall be liable or bound to any other party in
any manner by any warranties, representations, or covenants except as
specifically set forth herein or therein.
7.12 RULE OF CONSTRUCTION. The parties do not intend that this
--------------------
Agreement shall be construed against the party that drafted this Agreement or
any portion of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Stock Purchase
Agreement as of the date first above written.
BIONIX, INC.
By: /s/ David W. Anderson
---------------------------------
David W. Anderson, President
Address: 279 B Great Valley Parkway
Malvern, PA 19355
Telephone: 610-296-0919
Telecopy: 610-296-2249
INVESTORS:
/s/ David J. Bershad
------------------------------------
David J. Bershad
-15-
<PAGE>
BTAR ASSOCIATES, L.P.
By: STRATEGIC CONCEPTS, INC.,
General Partner
By: /s/ Anthony J. Dimun
---------------------------
Anthony J. Dimun
President
TDW ASSOCIATES, L.P.
By: TDW III, INC.,
General Partner
By: /s/ Terence D. Wall
--------------------------------
Terence D. Wall,
President
DELAWARE CHARTER GUARANTEE &
TRUST/Custodian FBO David H. MacCallum
By: /s/ David H. MacCallum
--------------------------------
David H. MacCallum
T. ROWE PRICE THRESHOLD FUND III, L.P.,
By: T. Rowe Price Threshold Fund Associates,
Inc., General Partner of T. Rowe Price
Threshold Fund III, L.P.
By: /s/ Junerose C. Sordoni
--------------------------------
Junerose C. Sordoni
H & Q BIONIX INVESTORS, L.P.
By: /s/ H & Q BIONIX INVESTORS, L.P.
--------------------------------
-16-
<PAGE>
LANDMARK FINANCIAL ASSOCIATES II, L.P.
By: /s/ John J. Moroney
----------------------------------
John J. Moroney, General Partner
/s/ Russell Stravitz
-------------------------------------
Russell Stravitz
STAGE RIGHT LTD. DEFINED JMS F/B/O RICHARD LANDIS PROFIT
BENEFITS PENSION PLAN SHARING KEOGH PLAN
By: /s/ Richard Landis By: /s/ Richard Landis
---------------------- ----------------------------------
By: /s/ Gail R. Smien, Esq.
----------------------------------
DESERT ORTHOPEDICS AND
REHABILITATION LTD.
PROFIT SHARING PLAN
By: /s/ Saul Schreiber
----------------------------------
SAUL N. and ELAINE S. SCHREIBER
FAMILY TRUST
By: /s/ Saul Schreiber
----------------------------------
/s/ Samuel E. Navarro
-------------------------------------
Samuel E. Navarro
/s/ Kevin Kotler /s/ Lori Gonye
- ------------------------- -------------------------------------
Kevin Kotler Lori Gonye
-17-
<PAGE>
BIOSCIENCE, LTD.
By: /s/ Pertti Viitanen
----------------------------------
BIOCON, OY
By: /s/ Pertti Viitanen
----------------------------------
BIOSTENT, INC.
By: /s/ David W. Anderson
----------------------------------
ORTHOSORB, INC.
By: /s/ David W. Anderson
----------------------------------
-18-
<PAGE>
EXHIBITS
Exhibit Description
------- -----------
A Certificate of Designation of the Series A Preferred Stock
B Certificate of Incorporation (as amended, but without the
Certificate of Designation) and By-Laws
C Common Stock Purchase Warrant
D List of Investors
E Description of the Reorganization
F Existing Shareholders
G Stock Option Agreements
H Stock Option/Stock Issuance Plan
I Patents Agreements
J Distribution and Sales Representative Agreements
K License Agreements
L Nondisclosure Agreement
M Indebtedness
N Disclaimers
O Financial Statements
P Employment Agreements and Employee Benefit Plans
Q Omitted
R Nondisclosure and Development Agreement
S Statement of Risk Factors
T Investors' Rights Agreement
U Co-Sale Agreement
V Opinion Letter
D-1
<PAGE>
EXHIBIT 10.8
LICENSE AGREEMENT
THIS AGREEMENT dated as of May 1, 1995 (hereinafter the "Effective Date")
between Saul N. Schreiber, a citizen of the United States of America, whose
address is 5501 19th Avenue, Phoenix, Arizona, U.S.A. 85015 (hereinafter
"SCHREIBER") and Biocon Oy, a Finnish corporation, whose address is P. O. BOX 3,
FIN-33721 Tampere, Finland (hereinafter "BIOCON"'.).
WITNESSETH:
WHEREAS, SCHREIBER is the owner of U.S. Patents NOs. 4,873,976 and 4,635,637
and has the right to license others under such patents; and
WHEREAS, BIOCON desires to acquire an exclusive license under the patents;
NOW THEREFORE, in consideration of the promises and mutual covenants herein
contained, SCHREIBER and BIOCON agree as follows:
I. Definitions
1.1 "Licensed Patents" means U.S. Patent No. 4,873,976 and any
reissue or re-examination thereof, and U. S. Patent No. 4,635,637 and any
reissue or re-examination thereof.
1.2 "Subsidiary" means a corporation, company, or other entity more
than fifty percent (50%) of whose outstanding shares or securities (representing
the right, other than as affected by events of default, to vote for the election
of directors or other managing authority) are, now or hereafter, owned or
controlled, directly or indirectly, by a party hereto, but such corporation,
company, or other entity shall be deemed to be a Subsidiary only as long as such
ownership or control exists.
1.3 "Licensed Entity" means Bioscience, Inc., BIOCON and all
Subsidiaries of BIOCON sublicensed under Article III and all Sublicensees of
BIOCON under Article IV.
1.4 "Relicensed Product" means an insertable suture intended for
repairing body tissue and coming within the scope of any of the apparatus claims
1-18 and 24-31 of the Licensed Patent No. 4,873,976 or any claim of Licensed
Patent No. 4,635,637.
1.5 "Licensed Method" means a method of repairing a tear in a
meniscus and coming within the scope of any of method claims 19-23 of the
Licensed Patent No. 4,873,976.
1.6 "Net Selling Price" means the price invoiced by a Licensed
Entity to an unaffiliated purchaser for a Licensed Product less the following:
any actual discounts, allowances and commissions; any insurance and freight
charges and any taxes, customs duties and other government charges included in
such invoice price; any amounts repaid or credited because of
<PAGE>
returned Licensed Products and retroactive price deductions. If the price
invoiced by Licensed Entity in any transaction with respect to any Licensed
Product is less than its Fair Market Value, the Net Selling Price shall be the
Fair Market Value.
1.7 "Fair Market Value" means the Net Selling Price that Licensed
Entity would realize (assuming a reasonable and fair recovery of cost to
Licensed Entity and a reasonable profit margin) if the relevant Licensed Product
were sold to an unaffiliated buyer in an arm's length sale in the same country,
in the same quantity, and contemporaneously with the relevant transaction.
1.8 "Approval Date" shall mean the date on the first of the month
immediately following the date on which the FDA issues its approval of the sale
and use in the United States of America of the Licensed Product and the Licensed
Method.
1.9 "Approval Year" shall mean the year commencing with the Approval
Date.
2.0 "Reporting Quarter" shall mean each three month period
commencing with the Effective Date.
II. LICENSES
2.1 Subject to Articles V and VI, SCHREIBER grants to BIOCON and to
Bioscience Inc., the parent corporation of BIOCON, an irrevocable, exclusive
license under the Licensed Patents to make, have made, import, have imported,
use, sell and otherwise dispose of Licensed Products, to practice the Licensed
Method. Whenever the term "sold'' is employed, it is intended also to embrace
the words ''used'' and the phrase ''otherwise disposed of"; the words "sales"
and "selling'' are to be interpreted correspondingly. SCHREIBER also grants to
customers of BIOCON and to those in privity with BIOCON an immunity from suit
under any of the method claims of Licensed Patent No. 4,873,976.
2.2 SCHREIBER agrees not to assert any claim of infringement of the
Licensed Patents against any customer, mediate and immediate, of a Licensed
Entity with respect to any Licensed Product and/or with respect to any practice
of the Licensed Method in the circumstance in which (a) the Licensed Product has
been obtained directly or indirectly from a Licensed Entity and (b) the
applicable royalty has been paid pursuant to this agreement.
III. EXTENSION OF LICENSE TO SUBSIDIARIES
The license granted herein shall include the right of BIOCON to license its
Subsidiaries. Each Subsidiary so sublicensed shall be bound by the terms and
conditions of this agreement (except to the extent that the obligations of such
terms and conditions are fulfilled on its behalf by BIOCON under the provisions
of Article V as if it were named herein in place of BIOCON). Any sublicense
granted to a Subsidiary shall automatically, and without the requirement of
individual notice, terminate on the date such sublicensed Subsidiary ceases to
be a
-2-
<PAGE>
Subsidiary of BIOCON, or this agreement is terminated under any of the
provisions of Article VI, whichever is earlier.
IV. SUBLICENSES
4.1 BIOCON shall have the exclusive right under the Licensed Patents
to grant sublicenses to others at royalty rates not less than those required to
be paid in accordance with Article V of this Agreement.
4.2 With respect to sublicenses granted by BIOCON under this Article
4.1, BIOCON shall pay over to SCHREIBER that portion of royalties received from
its sublicensees necessary to yield SCHREIBER returns on Licensed Products, sold
by such sublicensees equal to the amounts which SCHREIBER would have received
from BIOCON on equivalent Licensed Products sold by it.
4.3 Termination under any of the provisions of Article VI of the
license granted to BIOCON in this Agreement shall terminate all sublicenses
which may have been granted by BIOCON, provided that any sublicensee may elect
to continue its sublicense by advising SCHREIBER in writing, within (60) sixty
days of the sublicensee's receipt of written notice of such termination, of its
election, and of its agreement to assume in respect to SCHREIBER all the
obligations (including obligations for payment) contained in its sublicensing
agreement with BIOCON. Any sublicense granted by BIOCON shall contain provisions
corresponding to those of this paragraph respecting termination and the
conditions of continuance of sublicenses.
V. ROYALTIES
5.1 Within thirty (30) days after the date of execution of this
Agreement by SCHREIBER, BIOCON shall pay to SCHREIBER the amount of
[CONFIDENTIAL PORTION OMITTED AND FILED SEPERATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION]
5.2 BIOCON agrees to pay a sales royalties to SCHREIBER for each
Licensed Product sold by a Licensed Entity in the amount of [CONFIDENTIAL
PORTION OMITTED AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION]
5.3 BIOCON shall calculate the amount of royalties due to Schreiber
in accordance with Article 5.2 for each Licensed Product which, when made or
sold by Licensed Entity or by a sublicensee of BIOCON would, but for the license
granted hereunder, constitute infringement of any claim of the Licensed Patents.
Licensed Products which are built and used solely for the purposes of product
development, testing, and marketing of Licensed Products, including those used
for verification of design, qualification of design, reliability testing, and
demonstration units, and also those which are given as samples without charge to
physicians, hospitals, and the like for the purpose of promoting sales of the
Licensed Products are exempt from royalty.
-3-
<PAGE>
5.4 Licensed Entity agrees to maintain accurate records of its
operations under this license and shall require the maintenance of similar
records by its sublicensed Subsidiaries and sublicensees. Within forty-five
(45) days after the termination of each Reporting Quarter commencing with the
Effective Date and extending throughout the continuance of this agreement,
Biocon shall submit to SCHREIBER a report detailing:
(a) the receipts for sales of Licensed Products by Licensed Entity and by
any sublicensee of Licensed Entity pursuant to Article IV during such Reporting
Quarter;
b) the product identification applicable to each Licensed Product
reported;
(c) the deductions allowed under Article 1.6; and
(d) the computation of any royalty payable under Article 2 for such
Reporting Quarter; and at the same time as submitting such report shall pay the
amount due.
5.5 All sums of money specified in Article V are to be paid in lawful
money of the United States of America and shall be remitted via wire transfer to
[CONFIDENTIAL PORTION OMITTED AND FILED SEPERATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION]
5.6 Licensed Entity shall permit the records prescribed under Article
5.4 to be inspected during regular business hours twice during each year of this
agreement by auditors paid for by SCHREIBER as to whom BIOCON has no reasonable
objection, but only to the extent necessary to verify the sums due and payable.
VI. TERM OF AGREEMENT; TERMINATION
6.1 The term of this agreement is from the Effective Date until the
expiration date of the Licensed Patent No. 4,873,976, unless terminated earlier
under Articles 6.2 or 6.4.
6.2 This agreement shall terminate only in accordance with the
following provisions:
(a) Termination by BIOCON:
BIOCON shall have the right to terminate this agreement only by giving three
months prior written notice to SCHREIBER.
(b) Termination By Final Adjudication:
This agreement will terminate automatically in the event of an adjudication
by a court of competent jurisdiction that all relevant claims of the Licensed
Patents are invalid, which decision is not timely appealed, or if appealed, is
affirmed.
-4-
<PAGE>
6.3 Any termination pursuant to Article 6.2 shall not relieve
Licensed Entity of any obligation or liability accrued prior to such
termination, and such termination shall not affect in any manner any rights of
SCHREIBER under this agreement prior to such termination.
6.4 SCHREIBER has the right to terminate this agreement:
a. forthwith by written notice to BIOCON only if Licensed Entity is
in breach of any of its terms or obligations, and, following written notice
given by SCHREIBER identifying such breach, fails to rectify that breach; or
where the breach is incapable of rectification, fails to make amends to
SCHREIBER'S satisfaction within forty-five (45) days beginning with the date of
the note; or
b. by notice to BIOCON in the event that BIOCON has:
(1) failed to submit to the FDA within one year following the
Effective Date a request for clearance of the Licensed Product; or
(2) failed to secure approval of the Licensed Product from the U.S.
Food & Drug Administration within four (4) years after the Effective Date.
VII. WARRANTY
SCHREIBER represents and warrants that he has the full right and power to
grant the license and release of Articles II and III and that there are no
outstanding agreements, assignments or encumbrances inconsistent with the
provisions of this license and release, and that there are no patents or patent
applications owned by him anywhere in the world, other than United States Patent
No. 4,873,976 and 4,635,637 and which are directed to insertable sutures
intended for repairing body tissue.
VIII. NOTICES AND OTHER COMMUNICATIONS
Any notice or other communication required or permitted to be given to
either party shall be sufficiently given on the date of mailing if sent to such
party by registered or certified mail (sent air mail or otherwise by the fastest
service available) postage prepaid, addressed to it at its address set forth
below, or to such other address as it may designate by written notice given to
the other party.
-5-
<PAGE>
In the case of BIOCON:
Biocon Oy
P. O. Box 3
FIN-33721 Tampere,
Finland
and
David W. Anderson
President and C.E.O.
Bioscience Inc.
279B Great Valley Parkway
Malvern, Pennsylvania 19355
In the case of SCHREIBER:
Saul N. Schreiber
5501 19th Avenue,
Phoenix, Arizona,
U.S.A. 85015
IX. TRANSFERABILITY OF RIGHTS AND OBLIGATIONS
9.1 Any license or release granted in this agreement by a party in
respect to the Licensed Patents shall be binding upon any successor of the party
in ownership or control of the Licensed Patents.
9.2 The obligations of BIOCON to make reports, pay royalties, and
maintain records in respect to any subsisting license under this agreement shall
run in favor of any person or legal entity which is a successor or assignee of
SCHREIBER in respect to SCHREIBER's benefits under the agreement.
9.3 The licenses received by any party under this agreement shall
pass to any assigns for the benefit of creditors of the Licensed Entity and to
any receiver of its assets, or to any person or corporation succeeding to its
entire business in Licensed Products as a result of sale, consolidation,
reorganization, or otherwise, provided such assignee, receiver, person, or legal
entity shall, without delay, accept in writing the provisions of this agreement
and agree to become in all respects bound thereby in the place and stead of the
licensed party, but may not otherwise be transferred without the written consent
of the licensed party.
X. KNOW-HOW AND TRADE SECRETS
No license or other right is granted by this agreement to either party,
directly or by implication, estoppel, or otherwise of any trade secrets or know-
how. Neither party is required to furnish or disclose to the other any technical
information.
-6-
<PAGE>
XI. APPLICABLE LAW
Recognizing that there is a large body of law of the state of New York
related to commercial transactions, the parties hereto agree that this agreement
shall be construed, and the legal relations between the parties hereto be
determined in accordance with the laws of the State of New York, United States
of America.
XII. ARBITRATION
Provided the parties hereinafter agree in writing, and then only to the
extent agreed in writing, any controversy or claim arising under or related to
this Agreement shall be settled by arbitration in accordance with the Center for
Public Resources Rules for Non-Administered Arbitration of Patent and Trade
Secret Disputes in effect on the date such controversy or claim first arises.
Such arbitration shall be conducted by a single arbitrator; however, if either
party deems the issue or issues are of major importance, it may elect that the
arbitration shall be conducted before a panel of three arbitrators. The
arbitrator(s) shall be appointed by the Center for Public Resources.
Notwithstanding the choice of law provision of Article XI, the arbitration shall
be governed by the United States Arbitration Act, 9 U.S. (S)1-16. The place of
the arbitration shall be Washington D.C. Insofar as the proceeding relates to
issues of patent validity, or scope of patent claims, as distinct from the terms
of this agreement, it shall also be governed by 35 U.S.C. (S)294, to the extent
applicable. In the event the parties hereto do not agree that the controversy or
claim should be settled by arbitration, then either party may seek resolution of
the controversy or claim in a court of competent jurisdiction.
XIII. FDA APPROVAL/MARKETING
13.1 BIOCON agrees to keep SCHREIBER reasonably informed regarding
BIOCON's efforts to secure approval from the U. S. Food & Drug Administration.
13.2 BIOCON agrees to take reasonable steps to use SCHREIBER's name in
connection with the marketing and sale of the Licensed Products.
XIV. MISCELLANEOUS
14.1 This agreement becomes operative and binding on the parties as of
the Effective Date only when it has been executed by each party.
14.2 No amendment or modification of this agreement shall be valid or
binding upon the parties unless made in writing and signed by or on behalf of
each party.
14.3 This agreement embodies the entire understanding of the parties
and supersedes all previous communications, representations, or understandings,
either oral or written, between the parties relating to the subject matter
hereof.
-7-
<PAGE>
14.4 The headings of the several sections are inserted for convenience
of reference only and are not intended to be a part of, or to affect the meaning
or interpretation of, this agreement.
IN WITNESS WHEREOF the parties hereto have caused this agreement to be duly
executed as follows:
SAUL N. SCHREIBER
Date: May 22, 1995 By: /s/ Saul N. Schreiber
------------------------------- -----------------------------
(Seal)
BIOCON OY
Date: June 6, 1995 By: /s/ Pertti Tormala
------------------------------- ------------------------------
(Seal)
-8-
<PAGE>
EXHIBIT 10.9
LICENSE AGREEMENT
This agreement is made by and between Mr. Pertti Tormala, address Runeberginkatu
3 A 1, 33710 Tampere, Finland, Mr. Markku Tamminmaki, address Kukkolankatu 23,
33400 Tampere, Finland (hereinafter jointly referred to as "the Finnish Team",
and
Menifix I/S (Peter Albrecht Olsen and Gert Kristensen), address Nivaenge 173,
DK-2990 Niva, Denmark (hereinafter jointly referred to as "the Danish Team") and
Biocon Oy, whose registered office is at Runeberginkatu 3 A 1 33710 Tampere,
Finland (hereinafter jointly referred to as "Biocon") on the other part.
1. BACKGROUND
The Finnish and Danish team are developing in cooperation a [CONFIDENTIAL
PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION].
The invention is based on the [[CONFIDENTIAL PORTION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]. Biocon Oy is the owner
of patents and know-how relating to said products.
The cooperation has proceeded on such a level that the patent shall be applied
for the device in Finland during the next months.
The parties to this agreement desire to launch industrial production of this
device as soon as possible.
2. DEFINITIONS
In this agreement:
a) [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION] invented and developed by the team and any development
hereof made by the parties.
b) "Exclusive Territory" shall mean the world.
c) "Confidential information" shall mean all scientific, commercial or technical
data and information including but not limited to information relating to market
reports and surveys, customer lists, trade secrets, documents, correspondence,
methods, skills, practices, training, procedures, research, machinery,
equipment, instruments, expertices, discoveries, inventions, improvements, data
drawings, designs, calculations, specifications, techniques and processes
regarding the DEVICE.
<PAGE>
3. OBJECT OF THE AGREEMENT
The team hereby grants to Biocon the exclusive right to make or to have made,
use and sell the DEVICE in the Exclusive Territory.
The team undertakes to conduct research work and to use its best efforts in
order to develop further and improve the characteristics of the DEVICE.
The team shall provide Biocon with such information, specifications and data
with respect to the DEVICE as shall be necessary to improve Biocon's potentially
to carry out the targets in this agreement.
The team agrees to keep Biocon continuously informed of all research and
development results in regard to the DEVICE during the development process.
The rights granted to Biocon include any additional modifications and
improvements of the DEVICE.
Biocon shall inform the team about any changes and improvements of the DEVICE.
After the agreement of Biocon the tram can participate in international
congresses and present research results [CONFIDENTIAL PORTION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]
4. SUBLICENSES
Biocon is entitled to grant sublicenses within the Exclusive Territory at its
sole discretion. Such sublicensing shall not relieve Biocon of any obligation
under this Agreement. Biocon must include in possible license agreements the
paragraph that the team is entitled to the royalties of all marketed Products
according to this Agreement regardless which company manufactures or markets the
products. Biocon is obliged to inform the team of sublicenses.
5. PATENTS
Biocon is entitled at its own expense and at its sole discretion to take any and
all necessary measures in order to apply for patents for the DEVICE in the
Exclusive Territory. In the patent applications the team shall be reported as
the inventor and Biocon as the applicant.
Biocon is also entitled to register this agreement with the proper patent and
other authorities as such time as the registration is possible in accordance
with the legislation of the country in question. The team undertakes to provide
Biocon with all necessary authorization and documents for these purposes. The
team is entitled to receive a copy of all patent applications filed by Biocon.
-2-
<PAGE>
6. COMMISSION
In consideration of the license granted by the team to Biocon in accordance with
the terms and conditions in this agreement, Biocon agrees to pay the team a
royalty net of any withholding company taxes as follows:
(a)
an initial sum of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION]. This down payment shall be divided within
the teams as follows:
[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION]
[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION]
This payment shall be effected upon after initial presentation of any research
group of results in congress or paper which results show that this method is
recommendable for surgical use. This payment shall be non-refundable to the Team
and shall not be credited against the royalty payments referred to hereinafter.
(b)
The amount of the royalty shall be [CONFIDENTIAL PORTION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] of the DEVICE sold by
Biocon whilst the patent applications are still pending and not a single patent
has been granted. This royalty shall be divided within the teams as follows:
[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION]
[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION]
Provided that the patent in accordance with the above terms shall be granted
Biocon agrees retroactively to pay the team an additional royalty of
[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION] of the DEVICE sold by Biocon for the period from signing
this agreement until the granting of the said patent. This royalty shall be
divided within the team on such a manner that the Danish Team shall receive of
the total royalty of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION] and the Finnish Team [CONFIDENTIAL PORTION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION].
The term "net selling price" means the gross amount billed for Products less
trade or quantity discounts, transportation charges or allowances, credits or
allowances, any tax, excise, or other governmental charge upon the production,
sale, transportation, delivery or use of said Products.
-3-
<PAGE>
(c)
Irrespective of sales actually made by Biocon, the minimum royalties payable to
the team shall not be less than [CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]
- - [CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION] in the first 12 month after initial presentation of any
research group of results in a congress or paper which results show that this
method is recommendable for surgical use.
- - [CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION] in the next 12 month
- - [CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION] in the next 12 month and [CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] in
each succeeding 12 months that this agreement subsists.
The right to such a part of a minimum royalty which has not accrued as aforesaid
shall accrue at the end of each 12 months.
(d)
The royalty shall be paid quarterly no later than 30 days after the end of such
period as evidenced by statements provided by Biocon for the previous period.
Delay in payment results in payment of interest of [CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] delay.
7. ACCOUNTS AND RECORDS
Biocon will keep at its principal place of business full and accurate accounts
and records of all relevant invoices and other documents connected with the
manufacture and sale of the DEVICE including all such particulars as will enable
the royalty to be determined and will, at reasonable times permit a chartered
accountant nominated by the Danish Team to inspect such documents in the
possession or control of Biocon which relate in a relevant information relating
to such documents and such other information as may be necessary or appropriate
to enable the amount of royalties to be calculated.
8. TRADEMARK
Biocon is entitled to use any trademark of its choice for the DEVICE upon
informing the team.
9. UNFAIR COMPETITION AND INFRINGEMENT OF RIGHTS
The parties shall inform one another of all acts of unfair competition and all
infringements of patents or similar rights which have come to their notice.
Biocon agrees to bear all expenses of any possible defensive action against such
acts and infringements. The team agrees to give Biocon all information,
assistance and authority to enable Biocon to ensure the necessary legal
protection.
-4-
<PAGE>
All damage collected or any profits from any action referred to above shall be
for the sole benefit of Biocon.
10. SECRECY AND COMPETITION CLAUSE
The parties shall undertake to treat as strictly confidential and not to divulge
to any third party any of the Confidential Information disclosed by the other
party and not to make use of any such Confidential Information than in co-
operation with the other party.
Once this agreement has been signed the team shall refrain from any competitive
action against Biocon whether direct or indirect as regards the DEVICE or
competetive products within the Exclusive Territory.
Biocon agrees during the term of this agreement to refrain from manufacturing or
selling or distributing directly or indirectly any products competing with the
DEVICE.
11. CHANGES IN THE MARKET SITUATION
In case the DEVICE despite of the patent granted would face competition and
provided further, that this competition would have essential effects on the
market situation the parties shall conduct negotiations to agree on a reduced
minimum royalty, which, however shall not be reduced below [CONFIDENTIAL PORTION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] of the
DEVICE.
On the other hand, if the sale of the DEVICE becomes a great success the parties
shall conduct negotiations to agree on an increased royalty.
12. TERMS AND TERMINATION
This agreement comes into force once it has been duly signed by the parties.
Provided that a patent protecting the exploitation of the DEVICE shall be
granted this agreement shall be valid in different countries until the
corresponding patent rights have been expired.
Provided that the patent applications for the DEVICE shall be rejected, or if
only such patents are granted which do not actually protect the industrial
exploitation of the DEVICE, this agreement shall be valid for an initial period
of twelve (12) years from the date hereof.
This agreement may be terminated forthwith for cause by either party if the
other party fails to fulfill any of its obligations under this agreement and
such default is not
-5-
<PAGE>
remedied within 30 days of the date on which a written
notice hereof has been dispatched, the right to ask for damages being reserved.
Notice of termination shall be given by registered letter.
The team shall have the option to terminate this agreement if Biocon is adjudged
bankrupt or placed in the hand of receiver or otherwise enters into any scheme
for composition with creditors or makes any assignment of all or substantially
all its assets for the benefit of creditors.
In case of termination of this agreement all patent rights and know-how belongs
to the Team.
13. GOVERNING LAW AND ARBITRATION
This agreement shall be governed by the laws of Sweden.
Any dispute arising out of or in connection with this agreement shall finally be
settled in Stockholm without recourse to any court, in accordance with the rules
of conciliation and arbitration of Central Chamber of Commerce of Sweden by one
or more arbitrators designated in conformity with the rules of the above
Chamber.
14. NOVELTY
The Team does not warrant the novelty of DEVICE.
15. QUALITY OF DEVICE
Biocon shall manufacture products of high quality.
The Team shall be entitled to inspect whether products manufactured under the
license are of the required quality.
16. MAINTENANCE IN FORCE OF ANY PATENTS UNDER THIS AGREEMENT
Biocon shall keep in force any patents granted for the DEVICE. However, if the
team and Biocon find in agreement that the patents have lost their significance
e.g. because of several competitive products with equal quality, Biocon can if
it desires expire the patents.
17. WIDENING OF RESEARCH
Biocon can start to deliver devices, like clamps to surgical research groups for
research purposes to other countries than Denmark three (3) months after the
first thirty (30) sterile clamps have been delivered to the Danish Team for
research purposes.
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<PAGE>
This agreement on 6 numbered pages (1-6), has been executed in three original
counterparts, one for Biocon, one for the Danish Team and one for the Finnish
Team.
Copenhagen 14. 12. 1988
/s/ Pertti Tormala /s/ Peter Albrecht Olson
- ----------------------- -----------------------------
(Pertti Tormala) (Peter Albrecht Olson)
(Menifix I/S)
/s/ Markku Tamminmaki /s/ Gert Kristensen
- --------------------------- ------------------------
(Markku Tamminmaki) (Gert Kristensen)
BIOCON OY
/s/ Pertti Tormala
- -----------------------
-7-
<PAGE>
EXHIBIT 10.10
LICENSE, MANUFACTURING AND DISTRIBUTION AGREEMENT
-------------------------------------------------
This agreement is made between:
Mr. Gert Kristensen and Mr. Peter Albrecht Olsen, address Nivavaenge
173, DR-2990 Niva, Denmark and Mr. Klaus Fredskilde, address Staget 24, DK-3070
Snekkeasten, Denmark hereinafter jointly referred to as "Danish Inventors" and
Mr. Pertti Tormala, address Runeberginkatu 3 A, SF-33710 Tampere, Finland, Mr.
Markku Tamminmaki, address Kukkolankatu 23, SF-33400 Tampere, Finland and Mrs.
Marja Pellinen, address Aaltosenkatu 31-33 B 12, SF-33500 Tampere, Finland
hereinafter jointly referred to as "Finnish Inventors"
and
Biocon Oy (including its subsidiaries, daughter companies or
corresponding), whose registered office is at Runeberginkatu 3 A, Sf-33710
Tampere, Finland hereinafter referred to as "Biocon".
All the above inventors and Biocon are hereinafter jointly referred to
as "parties".
1. BACKGROUND
The Finnish Inventors, Gert Kristensen, Peter Albrecht Olsen and
Biocon Oy are developing in cooperation a [CONFIDENTIAL PORTION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]
The invention is based on [CONFIDENTIAL PORTION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]. Biocon Oy is the owner
of patents and know-how relating to said products.
The cooperation has proceeded on such a level that the patent
application shall be filed for the device in near future.
The Parties are developing together [CONFIDENTIAL PORTION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]
The parties to this agreement define in this agreement the rights and
duties of parties to INSTRUMENT.
<PAGE>
2. DEFINITIONS
In this agreement:
a) [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION]
b) [CONFIDNETIAL PORTION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION]
c) "Exclusive Territory'' shall mean the world.
d) "Confidential information" shall mean all scientific, commercial
or technical data and information including but not limited to information
relating to market reports and surveys, customer lists, trade secrets,
documents, correspondence, methods, skills, practices, training, procedures,
research, machinery, equipment, instruments, expertices, discoveries,
inventions, improvements, data drawings, designs, calculations, specifications,
techniques and processes regarding the INSTRUMENT.
3. OBJECT OF THE AGREEMENT
The parties hereby grant to Biocon the exclusive right to manufacture
or to have manufactured the INSTRUMENT in the Exclusive Territory. The parties
hereby also grant to Biocon the exclusive right to use and sell the INSTRUMENT
in the Exclusive Territory.
The parties undertake to conduct research and development work and to
use their best efforts in order to develop further and improve the
characteristics of the instrument.
The parties shall provide Biocon with such information, specifications
and data with respect to the INSTRUMENT as shall be necessary to improve
Biocon's potentiality to carry out the targets in this agreement.
The parties agree to keep Biocon continuously informed of all research
and development results in regard to the INSTRUMENT during the development
process.
The rights granted to Biocon include any additional modifications and
improvements of the INSTRUMENT.
-2-
<PAGE>
Biocon shall inform the parties about any changes and improvements of
the DEVICE and INSTRUMENT.
After the agreement of Biocon the parties can participate in
international congresses and present research results [CONFIDENTIAL PORTION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]
4. SUBLICENSES
Biocon will negotiate with a manufacturing company (the Company A) to
grant for it the exclusive right to manufacture INSTRUMENTS for Biocon. Biocon
is also entitled to grant sublicenses at its sole discretion to use and to sell
INSTRUMENTS within the Exclusive Territory. Such sublicensing shall not relieve
Biocon of any obligation under this Agreement. Biocon must include in possible
license agreements the paragraph that the Danish and Finnish Inventors are
entitled to the royalties of all marketed INSTRUMENTS according to this
Agreement regardless which company manufactures or markets the products. Biocon
is obliged to inform the parties of sublicenses.
5. PATENTS
Biocon is entitled at its own expense and at its sole discretion to
take any and all necessary measures in order to file for patents for the
INSTRUMENT in the Exclusive Territory. In the patent applications the Danish
and Finnish Inventors shall be reported as the inventor and Biocon as the
applicant.
Biocon is also entitled to register this agreement with the proper
patent and other authorities as such time as the registration is possible in
accordance with the legislation of the country in question. The Danish and
Finnish Inventors undertake to provide Biocon with all necessary authorization
and documents for these purposes. The Danish and Finnish Inventors are entitled
to receive a copy of all patent applications filed by Biocon.
-3-
<PAGE>
6. COMMISSION
6.1. Commission to be paid by Biocon
In consideration of the licenses granted by the parties to Biocon in
accordance with the terms and conditions in this agreement, Biocon agrees to pay
the Danish and Finnish Inventors a royalty net of any withholding company taxes
as follows:
The amount of the royalty shall be [CONFIDENTIAL PORTION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] of the INSTRUMENTS
sold by Biocon whilst the patent applications are still pending and not a single
patent has been granted. This royalty shall be divided within the teams as
follows:
- [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION]
- [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION]
Provided that the patents in accordance with the above terms shall be
granted Biocon agrees retroactively to pay the Danish and Finnish Inventors an
additional royalty of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION] of the INSTRUMENTS sold by Biocon for
the period from signing this agreement until the granting of the said patent.
This royalty shall be divided within the team on such a manner that the Danish
Inventors shall receive of the total royalty of [CONFIDENTIAL PORTION OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] and the
Finnish Inventors [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION].
The term "net selling price" means the gross amount billed for
Products less trade or quantity discounts, transportation charges or allowances,
credits or allowances, any tax, excise or other governmental charge upon the
production, sale, transportation, delivery of use of said Products.
6.2. Commission to be paid by Company A.
Biocon is obliged to include in agreement with Company A the paragraph
that the Company A shall pay to the Danish and Finnish [CONFIDENTIAL PORTION
OMITTED AND FILED SEPARATELY]
-4-
<PAGE>
WITH THE SECURITIES AND EXCHANGE COMMISSION]. These royalties are defined in the
similar way as the royalties to be paid by Biocon defined in paragraph 6.1. The
royalties to be paid by Company A will be divided by Danish and Finnish
Inventors in the similar way as the royalties to be paid by Biocon.
6.3. Minimum royalty
Biocon and Company A are jointly obliged to pay at equal basis to the
Danish and Finnish Inventors the following minimum royalty. Irrespective of
sales actually made by Biocon and Company A, the minimum royalties payable to
the Danish and Finnish Inventors shall not be less than
- [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION] in the first 12 month after initial
presentation by any research group of results in a congress or paper which
results show that Instrument is recommendable for surgical use.
- [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION] US Dollars in the next 12 month
- [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION] US Dollars in the next 12 month and
[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION] in each succeeding 12 months that this agreement subsists.
The right to such a part of a minimum royalty which has not accrued as
aforesaid shall accrue at the end of each 12 months.
6.4. Terms of paying
The royalties shall be paid annually no later than 90 days after the
end of such period as evidenced by statements provided by Biocon and Company A
for the previous period. Delay in payment results in payment of interest of
[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION] delay.
7. ACCOUNTS AND RECORDS
-5-
<PAGE>
Biocon will keep at its principal place of business full and accurate
accounts and records of all relevant invoices and other documents connected with
the manufacture and sale of the INSTRUMENT including all such particulars as
will enable the royalty to be determined and will, at reasonable times permit a
chartered accountant nominated by the Danish or Finnish Inventors to inspect
such documents in the possession or control of Biocon which relate in a relevant
information relating to such documents and such other information as may be
necessary or appropriate to enable the amount of royalties to be calculated.
8. TRADEMARK
Biocon is entitled to use any trademark of its choice for the
INSTRUMENT upon informing the parties.
9. UNFAIR COMPETITION AND INFRINGEMENT OF RIGHTS
The parties shall inform one another of all acts of unfair competition
and all infringements of patents or similar rights which have come to their
notice. Biocon agrees to bear all expenses of any possible defensive action
against such acts and infringements. The Danish and Finnish Investors agree to
give Biocon all information, assistance and authority to enable Biocon to ensure
the necessary legal protection.
All damage collected or any profits from any action referred to above
shall be for the sole benefit of Biocon.
10. SECRECY AND COMPETITION CLAUSE
The parties shall undertake to treat as strictly confidential and not
to divulge to any third party any of the Confidential Information disclosed by
the other party and not to make use of any such Confidential Information than in
co-operation with the other parties.
Once this agreement has been signed the Danish and Finnish Inventors
shall refrain from any competitive action against Biocon whether direct or
indirect as regards the INSTRUMENT or competitive products within the Exclusive
Territory.
Biocon agrees during the term of this agreement to refrain from
manufacturing or selling or distributing directly or indirectly any products
competing with the INSTRUMENT.
-6-
<PAGE>
11. CHANGES IN THE MARKET SITUATION
In case the INSTRUMENT despite of the patent granted would face
competition and provided further, that this competition would have essential
effects on the market situation the parties shall conduct negotiations to agree
on a reduced minimum royalty, which, however shall not be reduced below
[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION] of the INSTRUMENTS sold by Company A and [CONFIDENTIAL
PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION] of the INSTRUMENTS sold by Biocon.
On the other hand, if the sale of the INSTRUMENT becomes a great
success the parties shall conduct negotiations to agree on an increased royalty.
12. TERMS AND TERMINATION
This agreement comes into force once it has been duly signed by the
parties.
Provided that a patent protecting the exploitation of the INSTRUMENT
shall be granted this agreement shall be valid in different countries until the
corresponding patent rights have been expired.
Provided that the patent applications for the INSTRUMENT shall be
rejected, or if only such patents are granted which do not actually protect the
industrial exploitation of the INSTRUMENT, this agreement shall be valid for an
initial period of twelve (12) years from the date hereof.
This agreement may be terminated forthwith for cause by any party if
one of the parties fails to fulfill any of its obligations under this agreement
and such default is not remedied within 30 days of the date on which a written
notice hereof has been dispatched, the right to ask for damages being reserved.
Notice of termination shall be given by registered letter.
The Danish and Finnish Investors shall have the option to terminate
this agreement if Biocon is adjudged bankrupt or placed in the hand of receiver
or otherwise enters
-7-
<PAGE>
into any scheme for composition with creditors or makes any assignment of all or
substantially all its assets for the benefit of creditors.
In case of the above termination of this agreement all patent rights
and know-how belongs to the Danish and Finnish Inventors.
13. GOVERNING LAW AND ARBITRATION
This agreement shall be governed by the laws of Sweden.
Any dispute arising out of or in connection with this agreement shall
finally be settled in Stockholm without recourse to any court, in accordance
with the rules of conciliation and arbitration of Central Chamber of Commerce of
Sweden by one or more arbitrators designated in conformity with the rules of the
above Chamber.
14. NOVELTY
The Danish and Finnish Inventors do not warrant the novelty of
INSTRUMENT.
15. QUALITY OF INSTRUMENT
The Danish and Finnish Inventors shall be entitled to inspect whether
products manufactured under the license are of the required quality.
16. MAINTENANCE IN FORCE OF ANY PATENTS UNDER THIS AGREEMENT
Biocon shall keep in force any patents granted for the INSTRUMENT.
However, if the parties find in agreement that the patents have lost their
significance, e.g. because of several competitive products with equal quality,
Biocon can if it desires expire the patents.
-8-
<PAGE>
This agreement on 9 numbered pages (1-9), has been executed in seven
original counterparts, one for Biocon, three for the Danish Inventors and three
for the Finnish Inventors.
September 28, 1989
/s/ Pertti Tormala /s/ Peter Albrecht-Olsen
------------------ ------------------------
(Pertti Tormala) (Peter Albrecht-Olsen)
/s/ Markku Tamminmaki /s/ Gert Kristensen
- --------------------- -------------------
(Markku Tamminmaki) (Gert Kristensen)
/s/ Marja Pellinen /s/ Klaus Redskilde
- ------------------ -------------------
(Marja Pellinen) (Klaus Redskilde)
/s/ Pertti Tormala
- ------------------
BIOCON OY
-9-
<PAGE>
EXHIBIT 10.11
SHAREHOLDERS' AGREEMENT
-----------------------
This Agreement, dated as of September 5, 1996, by and among Bionix,
B.V., a Netherlands corporation (the "Dutch Company"), and each of the
shareholders of the Dutch Company identified on the signature page hereof (the
"Shareholders"),
W I T N E S S E T H T H A T
WHEREAS, the Dutch Company has recently been incorporated under the
laws of the Netherlands;
WHEREAS, certain of the shareholders of the Dutch Company are
residents of Finland (the "Finnish Shareholders") and certain of the
shareholders of the Dutch Company are residents of the United States (the "U.S.
Shareholders", and, collectively with the Finnish Shareholders, the
"Shareholders");
WHEREAS, the Finnish Shareholders own, in the aggregate, 390,000
shares of the Class A common stock of the Dutch Company (the "Class A Shares");
WHEREAS, the U.S. Shareholders own, in the aggregate, 120,000 shares
of the Class B common stock of the Dutch Company (the "Class B Shares", and,
collectively with the Class A Shares, the "Common Shares");
WHEREAS, the principal asset of the Dutch Company is 5,100,000 shares
of the Common Stock of Bionix, Inc., a Delaware corporation (the "Company"),
such shares being hereinafter referred to as the "Company Common Stock"; and
WHEREAS, the parties hereto desire to enter into certain agreements
regarding (i) their rights to obtain distributions of shares of Company Common
Stock owned by the Dutch Company, (ii) certain restrictions on the transfer of
the Common Shares and (iii) certain voting matters,
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein, the parties hereto hereby agree as follows:
1. Definitions. The following terms shall have the following
-----------
meanings:
"Assessments Receivable" shall mean amounts which the Dutch Company
has assessed the Shareholders pursuant to Section 6 hereof but which have not
yet been received by the Dutch Company; provided, however, that any amount which
remains unpaid for more than ninety days after an assessment has been made shall
be disregarded for purposes of calculating Assessments Receivable hereunder.
<PAGE>
"Finnish Representative" shall mean Pertti Tormala or such other
person as shall be designated as the "Finnish Representative" by holders of a
majority in interest of the Class A Shares.
"Proportionate Share" shall mean a fraction, the numerator of which
shall equal the number of Common Shares owned by a particular Shareholder and
the denominator of which shall equal the number of Common Shares owned by all
Shareholders.
"U.S. Representative" shall mean Anthony J. Dimun or such other person
as shall be designated as the "U.S. Representative" by holders of a majority in
interest of the Class B Shares.
2. Exchange of Company Common Stock for Class A Shares. Subject
---------------------------------------------------
to applicable provisions of the laws of the Netherlands and applicable
provisions of the Articles of Association of the Dutch Company as amended from
time to time, the following provisions shall apply in the event that any Finnish
Shareholder desires to obtain from the Dutch Company a number of shares of
Company Common Stock in an amount up to such Shareholder's Proportionate Share
of the number of shares of Company Common Stock held by the Dutch Company:
2.1 The Finnish Shareholder desiring to effect such an
exchange (the "Exchanging Finnish Shareholder") shall notify the Finnish
Representative in writing of such Shareholder's intention to effect an exchange.
Such exchange shall not occur unless the Finnish Representative consents in
writing to such exchange. No such consent shall be granted in the event that
(i) the Dutch Company's assets (including Assessments Receivable but excluding
all shares of Company Common Stock owned by the Dutch Company) do not exceed the
Dutch Company's liabilities, (ii) there is then outstanding any assessment made
by the Dutch Company pursuant to Section 6 hereof which the Exchanging Finnish
Shareholder has not paid or (iii) counsel to the Dutch Company advises the Dutch
Company that such exchange is prohibited by law or by the provisions of the
Dutch Company's Articles of Association as amended from time to time.
2.2 In the event that the Finnish Representative provides
such consent in accordance with Section 2.1, a closing shall be held in which
the Exchanging Finnish Shareholder shall deliver to the Dutch Company the number
of Common Shares that such Shareholder desires to exchange and the Dutch Company
shall deliver to such Exchanging Finnish Shareholder such number of shares of
Company Common Stock as shall equal the total number of shares of Company Common
Stock owned by the Dutch Company multiplied by a fraction, the numerator of
which shall equal the number of Class A Shares of the Dutch Company being
exchanged by the Exchanging Finnish Shareholder and the denominator of which
shall equal the total number of Common Shares owned by all Shareholders.
3. Exchange of Company Common Stock for Class B Shares. Subject
---------------------------------------------------
to applicable provisions of the laws of the Netherlands and applicable
provisions of the Articles of Association of the Dutch Company as amended from
time to time, the following provisions shall
-2-
<PAGE>
apply in the event that any U.S. Shareholder desires to obtain from the Dutch
Company a number of shares of Company Common Stock in an amount up to such
Shareholder's Proportionate Share of the number of shares of Company Common
Stock held by the Dutch Company:
3.1 The U.S. Shareholder desiring to effect such an exchange
(the "Exchanging U.S. Shareholder") shall notify the U.S. Representative in
writing of such Shareholder's intention to effect an exchange. Such exchange
shall not occur unless the U.S. Representative consents in writing to such
exchange. No such consent shall be granted in the event that (i) the Dutch
Company's assets (including Assessments Receivable but excluding all shares of
Company Common Stock owned by the Dutch Company) do not exceed the Dutch
Company's liabilities, (ii) there is then outstanding any assessment made by the
Dutch Company pursuant to Section 6 hereof which the Exchanging U.S. Shareholder
has not paid or (iii) counsel to the Dutch Company advises the Dutch Company
that such exchange is prohibited by law or by the provisions of the Dutch
Company's Articles of Association as amended from time to time.
3.2 In the event that the U.S. Representative provides such
consent in accordance with Section 3.1, a closing shall be held in which the
Exchanging U.S. Shareholder shall deliver to the Dutch Company the number of
Common Shares that such Shareholder desires to exchange and the Dutch Company
shall deliver to such Exchanging U.S. Shareholder such number of shares of
Company Common Stock as shall equal the total number of shares of Company Common
Stock owned by the Dutch Company multiplied by a fraction, the numerator of
which shall equal the number of Class B Shares of the Dutch Company being
exchanged by the Exchanging U.S. Shareholder and the denominator of which shall
equal the total number of Common Shares owned by all Shareholders.
4. Finnish Cash Out Steps. Subject to the laws of the Netherlands
----------------------
and the provisions of the Dutch Company's Articles of Association as amended
from time to time, each Finnish Shareholder shall have the right to cause the
Dutch Company to purchase from such Shareholder some or all of such
Shareholder's Class A Shares in accordance with the following procedures:
4.1 Such Finnish Shareholder may utilize this Section 4 only in
the event that the Finnish Representative grants a written consent to such
Finnish Shareholder upon receipt of written notice from such Finnish Shareholder
that such Finnish Shareholder seeks to avail himself, herself or itself of this
Section 4 procedure. No such consent shall be granted in the event that (i) the
Dutch Company's assets (including Assessments Receivable but excluding all
shares of Company Common Stock owned by the Dutch Company) do not exceed the
Dutch Company's liabilities, (ii) there is then outstanding any assessment made
by the Dutch Company pursuant to Section 6 hereof which such Finnish Shareholder
has not paid (unless such Finnish Shareholder agrees, in form and substance
satisfactory to the Dutch Company, to reduce the amount payable to such Finnish
Shareholder pursuant to this Section 4 by the amount of all of such Finnish
Shareholder's unpaid assessments), (iii) counsel to the Dutch Company advises
the Dutch Company that such Finnish Shareholder's utilization of this Section 4
procedure is prohibited by law or by the provisions of the Dutch Company's
Articles of Association as amended from time to time or (iv) the Dutch Company
is subject to an agreement prohibiting it
-3-
<PAGE>
from selling any of its Company Common Stock or restricting it from doing so in
any material respect.
4.2 If the Finnish Representative grants such consent in
accordance with Section 4.1, such Finnish Shareholder shall specify the number
of Class A Shares to be exchanged for a cash payment pursuant to this Section 4
(the "Finnish Cash Number").
4.3 Upon receipt of notification from the Finnish Representative
that it has consented to a request from a Finnish Shareholder pursuant to this
Section 4, the Dutch Company shall use its reasonable efforts to sell such
number of shares of its Company Common Stock as shall equal the total number of
shares of Company Common Stock owned by the Dutch Company multiplied by a
fraction, the numerator of which shall equal the Finnish Cash Number and the
denominator of which shall equal the aggregate number of Common Shares owned by
all Shareholders. Promptly, but in no event more than ten days, after the Dutch
Company has sold such number of its shares of Company Common Stock and received
the proceeds therefrom, a closing shall be held at the Dutch Company's
headquarters. At such closing, such Finnish Shareholder shall deliver such
number of Class A Shares as shall equal the Finnish Cash Number and the Company
shall deliver to such Finnish Shareholder the proceeds of such sales, net of the
Dutch Company's expenses and tax liabilities, if any, resulting from such sales.
5. U.S. Cash Out Steps. Subject to the laws of the Netherlands and
-------------------
the provisions of the Dutch Company's Articles of Association as amended from
time to time, each U.S. Shareholder shall have the right to cause the Dutch
Company to purchase from such Shareholder some or all of such Shareholder's
Class B Shares in accordance with the following procedures:
5.1 Such U.S. Shareholder may utilize this Section 5 only in the
event that the U.S. Representative grants a written consent to such U.S.
Shareholder upon receipt of written notice from such U.S. Shareholder that such
U.S. Shareholder seeks to avail himself, herself or itself of this Section 5
procedure. No such consent shall be granted in the event that (i) the Dutch
Company's assets (including Assessments Receivable but excluding all shares of
Company Common Stock owned by the Dutch Company) do not exceed the Dutch
Company's liabilities, (ii) there is then outstanding any assessment made by the
Dutch Company pursuant to Section 6 hereof which such U.S. Shareholder has not
paid (unless such U.S. Shareholder agrees, in form and substance satisfactory to
the Dutch Company, to reduce the amount payable to such U.S. Shareholder
pursuant to this Section 5 by the amount of all of such U.S. Shareholder's
unpaid assessments), (iii) counsel to the Dutch Company advises the Dutch
Company that such U.S. Shareholder's utilization of this Section 5 procedure is
prohibited by law or by the provisions of the Dutch Company's Articles of
Association as amended from time to time or (iv) the Dutch Company is subject to
an agreement prohibiting it from selling any of its Company Common Stock or
restricting it from doing so in any material respect.
5.2 If the U.S. Representative grants such consent in accordance
with Section 5.1, such U.S. Shareholder shall specify the number of Class B
Shares to be exchanged for a cash payment pursuant to this Section 5 (the "U.S.
Cash Number").
-4-
<PAGE>
5.3 Upon receipt of notification from the U.S. Representative
that it has consented to a request from a U.S. Shareholder pursuant to this
Section 5, the Dutch Company shall use its reasonable efforts to sell such
number of shares of its Company Common Stock as shall equal the total number of
shares of Company Common Stock owned by the Dutch Company multiplied by a
fraction, the numerator of which shall equal the U.S. Cash Number and the
denominator of which shall equal the aggregate number of Common Shares owned by
all Shareholders. Promptly, but in no event more than ten days, after the Dutch
Company has sold such number of its shares of Company Common Stock and received
the proceeds therefrom, a closing shall be held at the Dutch Company's
headquarters. At such closing, such U.S. Shareholder shall deliver such number
of Class B Shares as shall equal the U.S. Cash Number and the Company shall
deliver to such U.S. Shareholder the proceeds of such sales, net of the Dutch
Company's expenses and tax liabilities, if any, resulting from such sales.
6. Assessments. It is understood that the Dutch Company is a passive
-----------
holding company that has no means of generating revenues other than through the
sale of its shares of Company Common Stock. It is further understood that while
the Dutch Company is not expected to have substantial expenses, it will have
certain administrative expenses for which cash will be required in order to make
payments. The parties hereto agree that in the event that the Dutch Company
requires cash to meet expenses, the Shareholders will pay such expenses in
accordance with the following provisions:
6.1 On a quarterly basis, the Dutch Company shall determine the
amount of cash it is expected to require in order to meet its expenses. The
Dutch Company shall then send a letter to each Shareholder assessing such
Shareholder such Shareholder's Proportionate Share of the expected expenses.
6.2 Notwithstanding the foregoing, in no event shall the Dutch
Company issue assessments aggregating more than $25,000 per year. In the event
that the Dutch Company requires cash in excess of that amount, it will be
necessary for the Dutch Company to either borrow such excess or sell shares of
Company Common Stock to fund such excess.
6.3 No Shareholder shall be required to pay an assessment with
respect to any period after such Shareholder ceases being a shareholder of the
Dutch Company. It shall be a condition to any transfer of the Class A Shares or
Class B Shares that the transferee execute an agreement, in form and substance
satisfactory to the Dutch Company, pursuant to which such transferee agrees to
be bound by the terms of this Agreement with respect to periods after such
transferee becomes a shareholder of the Dutch Company.
7. Restriction on Pledges. No Shareholder will pledge or encumber
----------------------
any of his Class A Shares or Class B Shares without the approval of the Finnish
Representative and the U.S. Representative.
8. Voting. The U.S. Shareholders, the Finnish Shareholders and the
------
Dutch Company agree that with respect to any matter to be voted on by the
shareholders of the
-5-
<PAGE>
Company, to the extent legally permissible, they will cause the Dutch Company to
vote a certain number of shares of Company Common Stock owned by the Dutch
Company (such number of shares hereinafter referred to as the "Specified
Number") as directed by the Finnish Representative. The Specified Number shall
be determined by taking the percentage of the number of shares of the Dutch
Company owned by the Finnish Shareholders (regardless of class) at the time of
the vote to the total number of shares of the Dutch Company then outstanding and
multiplying that percentage by the total number of shares of Company Common
Stock then owned by the Dutch Company. For example, if the Dutch Company owned
5,100,000 shares of Company Common Stock, the Finnish Shareholders owned 390,000
shares of the Dutch Company and there were 510,000 shares of the Dutch Company
outstanding, the Specified Number would be calculated as follows:
390,000
------- = 76.47%
510,000
76.47% x 5,100,000 = 3,900,000
The Specified Number would be 3,900,000, and the Dutch Company would vote
3,900,000 of the 5,100,000 shares of Company Common Stock that it owns as
directed by the Finnish Representative.
9. Governing Law; Jurisdiction; Service of Process. This Agreement
-----------------------------------------------
shall be governed by and construed in accordance with the laws of the State of
Delaware, without application of the conflict of laws principles thereof. Any
legal action, suit or other proceeding arising out of, or in any way connected
with, the enforcement of any award described in Section 10 hereof may be brought
in the courts of the State of New Jersey, or in the United States courts for the
District of New Jersey. With respect to any such proceeding in any such court:
(a) each party hereto generally and unconditionally submits itself and its
property to the nonexclusive jurisdiction of such court; (b) each party hereto
waives, to the fullest extent permitted by law, any objection it has or
hereafter may have to the venue of such proceeding, as well as any claim it has
or may have that such proceeding is in an inconvenient forum; and (c) process
may be served on any party hereto anywhere in the world, by regular mail, sent
to such party's address as set forth or described (i) on the signature page
hereof or (ii) in Exhibit O annexed to the Reorganization Agreement executed by
---------
the parties hereto in connection with the formation of the Dutch Company and the
Company, or to such other address as shall be provided by a party to both the
U.S. Representative and the Finnish Representative.
10. Dispute Resolution. Any controversy or claim arising out of or
------------------
relating to this Agreement, or the alleged breach thereof, shall be resolved by
arbitration before a panel of three arbitrators (one of whom shall be selected
by the U. S. Representative, one of whom shall be selected by the Finnish
Representative and one of whom shall be selected by the other two arbitrators)
in accordance with the Commercial Arbitration Rules of the American Arbitration
Association. The arbitration shall take place at a mutually acceptable
location. The arbitration shall be conducted using the Expedited Procedures of
the Commercial Arbitration Rules,
-6-
<PAGE>
regardless of the amount in dispute. The parties hereto shall bear their own
attorneys' fees and costs in connection with any such arbitration, and shall
share equally the arbitrators' compensation charges and the administrative fees
of the American Arbitration Association. The award rendered by the arbitrator(s)
shall be final and binding upon the parties involved in such arbitration, and
judgment upon the award may be entered in any court of competent jurisdiction.
11. Term. This Agreement shall terminate (i) upon the mutual written
----
consent of the Finnish Representative and the U.S. Representative, (ii) upon the
liquidation of the Dutch Company or (iii) at such time as the Dutch Company no
longer owns any shares of Company Common Stock.
12. Headings. All headings in this Agreement are for convenience only
--------
and do not affect the meaning of any provision.
13. Successors or Assigns; No Third Party Rights. This Agreement is
--------------------------------------------
binding upon and inures to the benefit of the parties hereto and their permitted
successors and assigns. This Agreement may not be assigned by any party hereto
without the prior written consent of the U.S. Representative and the Finnish
Representative. Nothing in this Agreement confers, or is intended to confer,
expressly or by implication, any rights or remedies upon any person not a party
hereto.
14. Complete Agreement; Modifications. This Agreement constitutes
---------------------------------
the entire agreement among the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings with respect to
the subject matter hereof. This Agreement may not be amended or modified in any
way, nor may noncompliance with its terms be waived, except pursuant to a
written instrument signed by the party to be charged.
15. Severability. Any provision of this Agreement that is prohibited
------------
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof; any such prohibition or
unenforceability shall not invalidate or render unenforceable such provision in
any other jurisdiction.
16. Counterparts. This Agreement may be executed by the parties
------------
hereto in separate counterparts, each of which when so executed and delivered
shall be deemed an original. All such counterparts together constitute but one
and the same instrument.
17. Construction. It is understood that this Agreement is not
------------
intended to be construed against the party that drafted this Agreement merely by
virtue of the fact that such party was responsible for the drafting hereof.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
BIONIX, N.V.
By: /s/ David W. Anderson
--------------------------
David W. Anderson
/s/ David W. Anderson
- -----------------------------
David W. Anderson
BERSHAD INVESTMENT GROUP, LP
By: /s/ David J. Bershad
-----------------------------
David J. Bershad, General Partner
BTAR ASSOCIATES, L.P.
By: STRATEGIC CONCEPTS, INC.,
general partner
By: /s/ Anthony J. Dimun
------------------------------
Anthony J. Dimun, President
/s/ David H. MacCallum
- ------------------------------
David H. MacCallum
TDW ASSOCIATES, L.P.
By: TDW III, INC.,
general partner
By: /s/ Terence D. Wall
------------------------------
Terence D. Wall, President
-8-
<PAGE>
/s/ Ole Bostman
- ------------------------------
Ole Bostman
/s/ E. Antero Makela
- ------------------------------
E. Antero Makela
NAJ VET LTD.
By: /s/ NAJ VET LTD.
-----------------------------
NOVATOR
By: /s/ Pentti Rokkanen
-----------------------------
ORTHO SCI LTD.
By: /s/ ORTHO SCI LTD.
-----------------------------
/s/ Esa Partio
- -------------------------------
Esa Partio
/s/ Timo Pohjonen
- -------------------------------
Timo Pohjonen
/s/ Pentti Rokkanen
- -------------------------------
Pentti Rokkanen
/s/ Matti Suuronen
- -------------------------------
Matti Suuronen
-9-
<PAGE>
/s/ Riita Suuronen
- -------------------------------
Riita Suuronen
/s/ Marrku Tamminmaki
- -------------------------------
Marrku Tamminmaki
/s/ Matti Tormala
- -------------------------------
Matti Tormala
/s/ Pertti Tormala
- -------------------------------
Perrti Tormala
/s/ Seppo Vainionpaa
- -------------------------------
Seppo Vainionpaa
/s/ Pertti Viitanen
- -------------------------------
Pertti Viitanen
-10-
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF BIONX IMPLANTS, INC. (1)
NAME OF SUBSIDIARY JURISDICTION OF ORGANIZATION BUSINESS NAME
- -------------------- ---------------------------- --------------------
DOMESTIC:
Biostent, Inc. New Jersey Bionx Implants, Inc.
Orthosorb, Inc. New Jersey Bionx Implants, Inc.
INTERNATIONAL:
Biocon OY Finland Biocon OY
Bioscience OY Finland Bioscience OY
_________________
(1) All subsidiaries are wholly-owned by the Registrant.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Bionx Implants, Inc.:
The audits referred to in our report dated January 24, 1997, except for the
first paragraph of Note 15 which is as of February 24, 1997, included the
related financial statement schedule as of December 31, 1996, and for each of
the years in the three-year period ended December 31, 1996, included in the
registration statement. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits. In our opinion, the financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We consent to the use of our reports included herein and to the reference of
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
February 24, 1997
<PAGE>
Exhibit 23.3
CONSENT
We hereby consent to the reference to our firm under the caption
"Experts" in the Registration Statement on Form S-1 to be filed by Bionx
Implants, Inc. with the Securities and Exchange Commission.
KENYON & KENYON
By: /s/ Richard Mayer
------------------------
Dated: February 25, 1997
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