SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31,1997.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____ to ______.
Commission File Number 33- 22359
BIONX IMPLANTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3458598
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1777 Sentry Parkway West, Gwynedd Hall, Suite 400
Blue Bell, Pennsylvania 19422 (215-643-5000)
(Address and telephone number, including area code, of
registrant's principal executive office)
Securities registered pursuant to Section 12(b) of the Act: none.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $.0019 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
reporting requirements for the past 90 days.
Yes X No____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates as of
February 2, 1998 was approximately $83,893,260.
Number of shares of Common Stock outstanding as of February 2, 1998: 8,916,812.
Documents incorporated by reference: Definitive proxy statement for the
registrant's 1998 annual meeting of shareholders (Part III).
<PAGE>
BIONX IMPLANTS, INC.
TABLE OF CONTENTS
PART I
Page
Item 1 Business of the Company.............................................3
Item 2 Properties..........................................................23
Item 3 Legal Proceedings...................................................23
Item 4 Submission of Matters to a Vote of Security Holders.................23
Item 4A Executive Officers of the Registrant................................23
PART II
Item 5 Market for the Registrant's Common Equity and Related Stockholder
Matters.............................................................24
Item 6 Selected Financial Data.............................................24
Item 7 Management's Discussion and Analysis of Results of Operations and
Financial Condition................................................27
Item 7A Quantitative and Qualitative Disclosures About Market Risk..........33
Item 8 Financial Statements and Supplementary Data ........................34
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................34
PART III
Item 10 Directors of the Registrant.........................................35
Item 11 Executive Compensation..............................................35
Item 12 Security Ownership of Certain Beneficial Owners and Management......35
Item 13 Certain Relationships and Related Transactions......................35
PART IV
Item 14 Exhibits, Financial Statements Schedules and Reports on Form 8-K....35
Signatures ................................................................37
<PAGE>
Item 1. Business of the Company
Introduction
Bionx Implants, Inc. (the "Company") was incorporated in Delaware in
October 1995 to coordinate the business 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 renamed Bionx Implants, Ltd. and has been
engaged in the development of resorbable polymer products since 1984), Biocon,
Ltd. (which held most of the Company's patents and patent applications and,
during 1997, was merged into Bionx Implants, Ltd.) and two companies organized
in the U.S. to further sales, marketing and development efforts, Biostent, Inc.
("Biostent") and Orthosorb, Inc. ("Orthosorb"). 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 (Bionix, B.V.) owned by such stockholders and the
former Finnish stockholders of Bionx Implants, Ltd. and Biocon, Ltd. The Company
intends to dissolve Biostent and Orthosorb in the future. 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. See Note 1 of the Notes to the Company's
Consolidated Financial Statements.
This Annual Report on Form 10-K contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 ("Forward-Looking Statements"). Such Forward-Looking Statements are subject
to risks and uncertainties that could cause actual results to differ materially
from those projected in such Forward-Looking Statements. Certain factors which
could materially affect such results and the future performance of the Company
are described in Exhibit 99.1 to this Annual Report on Form 10-K.
Overview
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 and cranio-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 ten
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 worldwide. The Company has received 510(k)
clearance from the U.S. Food and Drug Administration (the "FDA") for the seven
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 in 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 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 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.
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 traditional 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.
Cartilage and Cartilaginous Tissue Repair
Repairs to cartilaginous 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.
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 significantly, bone repaired with and supported by metal
devices relies upon the implant to perform the load-bearing functions previously
performed by bone. Physicians refer to this as stress shielding of the healing
bones. 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 may be used in their
manufacture. The low strength of these implants has lead 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 lead 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 a variety of proprietary resorbable polymer
fixation implant product lines, including screws, pins, tacks, arrows, membranes
and urology stents, which provide an alternative to currently marketed implants.
By modifying well-characterized resorbable polymers (e.g., poly-l-lactic acid
("PLLA") and polyglycolic acid ("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 and cranio-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 using custom metal forming techniques,
and, as a result, the Company has been able to design and develop 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 in an uncontrolled process, the
Company's Self-Reinforced, resorbable polymers degrade in a slow controlled
fashion. Only when the Self-Reinforced, resorbable implant has degraded into
small particles will they be released into the surrounding tissue for final
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 tissue.
Products
The Company currently markets ten product lines representing more than
100 distinct products. The Company's product lines are described below:
<PAGE>
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Product Lines Targeted Indications(1) Regulatory Status
- ------------------ -------------------- -----------------
Fracture Fixation:
SR PLLA Pins Fractures/Osteotomies Marketed Worldwide
SR PLLA Screws Fractures/Osteotomies Marketed Worldwide
SR PGA Pins Fractures/Osteotomies Marketed Worldwide
SR PGA Screws Fractures/Osteotomies Marketed Worldwide
Tissue Repair:
Meniscus Arrows Meniscus Repair Marketed Worldwide
SR-PLLA Tacks Ligament Attachment Marketed Worldwide
SR-PLLA Bankart Shoulder Repair Marketed Worldwide(2)
Tacks
Cranio-Facial Fixation
SR-PLLA Screw Endo-brow Lifts Marketed Outside U.S.(3)
Urology Stents:
SR-PGA Stents Post Benign Prostatic Marketed Outside U.S.
Hyperplasia Swelling FDA Submission Expected
in 1998(4)
SR-PLLA Stents Benign Prostatic Marketed Outside U.S.
Hyperplasia Prophylaxis FDA Submission Expected
in 1999(4)
- ------------------
(1) As described herein, FDA clearances for certain of the
Company's products are limited to specific indications.
(2) FDA clearance was received in January 1998; accordingly
marketing efforts in the U.S. are at an early stage.
(3) Marketing efforts in Europe commenced in March 1998.
(4) 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. See
Exhibit 99.1 to this Annual Report on Form 10-K - "Regulatory
Submission Dates Subject to Change" and "Government
Regulation."
- --------------------------------------------------------------------------------
<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 1.1 mm to
4.5 mm and in length from 10 mm to 70 mm, can be cut by a 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 and contains high concentrations of
nerves.
The Company's screws range in diameter from 2.0 mm for delicate hand
and foot procedures to 4.5 mm 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 meniscetomy, 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 secure knots
arthroscopically, which is one of the most technically demanding skills in
arthroscopic surgery. Surgical 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, was 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 designated 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.
PLLA Bankart Tacks
Forward dislocations of the shoulder joint involve the separation of
the ligaments from the bones that form the shoulder socket. Open surgical
procedures to repair the damaged ligaments are the standard of care in treating
patients with recurrent forward shoulder dislocations. However, more recently,
minimally invasive procedures have also been developed to repair these injuries.
Initially, metal screws were used to reattach the ligament to the bone. This
approach proved unsatisfactory, however, because the screws often became loose,
causing pain. Resorbable sutures have also been used to reattach the soft tissue
to the bone. However, while they proved effective, the sutures are sometimes
difficult to insert and present a risk of nerve injury. Resorbable tacks,
staples or plugs were subsequently developed to avoid the problems associated
with metal screws and resorbable sutures. The advantages of resorbable tacks,
staples or plugs are that they can be easily inserted into the bone for
reattachment of soft tissue and, because they are biogradable, they do not
require surgical removal. In addition, unlike metal screws, biodegradable
staples or plugs do not cause tissue irritation due to metal corrosion.
The Bionx Bankart Tack was cleared by FDA in January 1998 for use in
reattaching soft tissue to bone to repair a certain type of forward shoulder
dislocation. It is a high-strength, biocompatible, resorbable tack-type product,
which can be used in either open or minimally invasive surgery. The SR-PLLA
material enables the device to retain sufficient strength to maintain soft
tissue reattachment throughout the healing period, while its gradual resorption
eliminates the need to remove the device at a later point in time.
BioSorb PDLA Fixation System
Metallic fixation of the facial skeleton has become the accepted
standard of care in craniomaxillofacial trauma and reconstruction over the past
15 years. Titanium has become the material of surgical choice due to its
strength, malleability, and tissue compatibility. However, implant removal
remains an open long-term clinical question. Most metallic plates and screws are
not removed. As a result, foreign body metallic properties continue to remain in
the body. At present, there are no absolute answers regarding long-term
(25-year) viability. This environment creates a surgical receptiveness to
resorbable fixation implants in pediatric and adult craniofacial surgery,
provided the products are comparable to titanium in mechanical strength,
biocompatability and cost.
The Company's initial product submitted for FDA clearance (submitted in
August 1997) in the BioSorb family of resorbable screws and plates for
craniofacial cosmetic, trauma, and reconstruction surgery is the Endobrow Screw.
This screw has a "mushroom" head design for use in endoscopic browlifts. The
Endobrow Screw obviates the need for implant removal.
Additional submission of craniofacial products are planned by the
Company to expand the product line offering into trauma, orthognathic, and
reconstructive surgery. The Company recently commenced marketing efforts for the
Endobrow Screw internationally. The Company's Endobrow Screw and other
craniofacial products cannot be marketed or sold in the U.S. until approval is
obtained from the FDA. See "Government Regulation."
PGA Urology Stents
Benign prostatic hyperplasia ("BPH"), a common condition in older men,
is characterized by the enlargement of the prostrate gland, which can block the
normal flow of urine. 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 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 FDA has advised the Company that its urology
stent will require approval under the FDA's Premarket Approval ("PMA") process,
which process is generally more expensive and time-consuming than the FDA's
510(k) Premarket Notification process. The Company's stents cannot be marketed
or sold in the U.S. until approval is obtained from the FDA. See "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 system 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. To date, all of the Company's
implants sold in the U.S. have been cleared through the 510(k) Premarket
Notification process. However, lengthier and more costly PMA submissions will be
required in order to obtain approval to sell urological stents and may be
required for other new products in the U.S.
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.
<PAGE>
<TABLE>
<CAPTION>
Clinical Estimated Clinical/Regulatory
Product Indication Patients Duration Status(1)
-------- ---------- -------- --------- ----------
ORTHOPAEDICS
------------
<S> <C> <C> <C> <C>
PLLA Screws Colles fracture (wrist) 28 complete 510(k) clearance received 3/98(2)
Endo-brow lifts (face) 50 complete 510(k) clearance received 3/98(2)
Acetabular cup fixation (hip) 25 18-30 First patients enrolled
7/96
Femoral neck fixation (pediatric hip) 40 complete 510(k) submitted 8/97
PGA Screw Salter osteotomies (pediatric hip) 25 36-48 Commenced in 1997
PLLA Nail Osteochondritis dessicans (knee) 25 complete Enrollment commenced 10/96
PLLA Wedge High tibial osteotomy (leg) 25 6-8 Commenced in 1997
ACL fixation (knee) 20 6-12 Commenced in 1997
PLLA Screw/Washer Rotator cuff repair (shoulder) 25 12-30 To commence in 1998
PLLA/PDLA Anchor Bankart tears and rotator cuff * * 510(k) submitted 7/97
- -------------------
*Clinical data not meaningful.
UROLOGY
-------
PGA Stent Lumen support post BPH treatment 121 36-48 FDA submission in 1998
PLLA Stent Urethral stricture 60 24-36 Enrollment commenced pre-1996
PLLA Stent Use with finasteride 60 TBD Enrollment commenced 9/96
GENERAL SURGERY
---------------
PLLA Stent Bile duct blockage 10 18-30 Enrollment commenced 1/96
Pancreatic duct blockage 10 18-30 Enrollment commenced pre-1996
CRANIO-FACIAL SURGERY
---------------------
PDLA Screw and Plate Mid-face corrections 50 3-12 First patients enrolled 11/96
PLLA Plate Cranial-facial fractures 26 12-24 Enrollment commenced 1997
</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. See Exhibit 99.1 to this Annual Report on Form 10-K
"Regulatory Submission Dates Subject to Change."
(2) FDA clearance was received in March 1998; accordingly marketing efforts in
the U.S. are at an early stage.
<PAGE>
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:
Suture Anchors (PLLA and PDLA). Commercially available bone anchors
are designed to be deployed in 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 heads. 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.
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.
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
were chosen due to their greater tortional 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 expects to commence a
multi-center clinical trial of its intramedullary nails in children in 1998.
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 flexible pins 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 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 a managed network 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 invoicing functions directly and
paying commissions to its sales agents. The Company supports its U.S. managed
network of sales agents with an in-house staff of trainers and managers 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.
Manufacturing
The Company currently manufactures all of its implant products in its
Tampere, Finland facility. All finished goods production, packaging and testing
are conducted in a validated 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
Good Manufacturing Practices ("GMP") requirements. The facility is subject to
inspection by the FDA and European regulatory agencies. The Company has received
a European Community ("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 cranio-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 has 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.
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 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 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. in 1998 and to
commence the balance of the manufacturing process in the U.S. by 2000. The
foregoing statement regarding such plans constitutes a Forward-Looking
Statement. Actual timing could differ materially from such plans as a result of
a number of factors, including the availability of trained personnel, the
availability of necessary resources, space location factors and other factors
cited in this paragraph. 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. The Company continues to upgrade its production machinery and
processes in Finland to address 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 delays in filling orders in the future.
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 secrets and patent protection for new technologies,
products and processes.
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, when available, 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. 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 has received a notice of allowance for its U.S. patent
application that relates 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. In addition, the Japanese counterpart to another of the Company's
U.S. patent applications is being opposed. The Company is vigorously defending
its European and Japanese patent positions in these proceedings. One of these
European patents was revoked by the European Patent Office for lack of novelty
based on an earlier publication. The Company successfully appealed the European
Patent Office's revocation decision and has had that patent reinstated. The
other European patent and the Japanese patent applications are being challenged
on lack of novelty and inventiveness grounds on the basis of disclosures made in
patent and other publications. The validity of the European patent has been
recently upheld by the European Patent Office. No assurance can be given that
this favorable decision will not be appealed or that, if appealed, this
favorable decision will not be reversed. Further, no assurance may be given as
to the outcome of the pending Japanese opposition proceedings. In order to
clarify and confirm its U.S. patent position, the Company has requested
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 continue at least through the fourth
quarter of 1998 and could extend beyond that date. 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 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.
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 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. The Company has also initiated an opposition in the European
Patent Office challenging the grant of a third party's European patent relating
to a bioabsorbable membrane. No assurance can be given that this opposition will
result in either the revocation of this patent or the narrowing of its claims.
If this opposition is not 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 countries identified in this 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.
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 the
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, with
a resorbable staple from U.S. Surgical 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 Linvatec, Johnson & Johnson 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. For information regarding the potential impact of certain
competitive practices upon the Company's performance during the first six months
of 1998, see "Management's Discussion and Analysis of Financial Condition and
Results of Operation - Results of Operations For the Years Ended December 31,
1995, 1996 and 1997 - Product Sales."
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 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, warnings 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 Class I or Class II 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 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. Furthermore, the FDA is generally familiar with the
toxicological properties of polymers used in the Company's orthopaedic products
and to date has not required extensive preclinical or clinical testing with
respect to biocompatibility as a condition of granting 510(k) clearance to those
products. In certain submissions for orthopaedic products, the Company obtained
clearance within 90 days of submission. Other submissions by the Company,
however, have taken longer. The FDA has advised the Company that its urology
stent will require PMA approval. There can be no assurance that the FDA will not
determine that other products currently in development by the Company or future
products must also undergo the more costly, lengthy and uncertain PMA approval
process or that the FDA's familiarity with the Company's polymers will shorten
the FDA's review time or reduce testing requirements for either 510(k) clearance
or PMA approval.
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 the Quality System Regulation ("QSR") setting forth detailed GMP
requirements, which include testing, control and documentation requirements. The
QSR revises the previous GMP regulation and imposes certain enhanced
requirements that are likely to increase the cost of compliance. Enforcement of
GMP requirements has increased significantly in the last several years, and the
FDA has publicly stated that compliance will 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.
From time to time the FDA has made changes to the GMP requirements
which increase the cost of compliance. Changes in existing laws or requirements
or adoption of new laws or 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
applicable laws and requirements in the future or that applicable laws and
requirements 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 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 cranio-facial products. The Company submitted its required design
dossier for the Company's stent products in March 1998. 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 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, 1997, the Company employed 70 full-time employees;
28 full-time employees in the U.S. and 42 full-time employees in Finland. Of its
full-time employees, at that date 19 were engaged in sales and marketing, 10
were engaged in research, development, regulatory and quality assurance matters,
28 were engaged in manufacturing and 13 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.
Item 2. Properties
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 Blue Bell, Pennsylvania that is leased by the Company. The
Finnish facility, comprising approximately 15,000 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 7,300 square foot office space in Pennsylvania. The annual
rent on these facilities is approximately $215,000. In addition, in order to
establish a U.S. manufacturing presence, 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. No specific site has been selected. See "Business--Manufacturing".
Item 3. Legal Proceedings
Reference is made to "Business--Licenses, Trade Secrets, Patents and
Proprietary Rights" for information regarding certain patent proceedings. The
Company is subject from time to time to various other legal proceedings ("Other
Proceedings"), including product liability claims, which arise in the ordinary
course of its business. The Company believes that no existing Other Proceedings
are likely to have a material adverse effect on its business, financial
condition, and results of operations.
Item 4. Submissions of Matters to a Vote of Security Holders
Not applicable.
Item 4A. Executive Officers of the Registrant
The Company's executive officers, their respective ages (as of
December 31, 1997) and their positions with the Company are set forth below:
Name Age Position
David W. Anderson 45 President, Chief Executive Officer and Director
Pertti Tormala 52 Executive Vice President, Research and Director
Michael J. O'Brien 37 Vice President, Finance and Administration and Chief
Financial Officer
Pertti Viitanen 47 Managing Director of the Company's Finnish subsidiary
Stephen A. Lubischer 35 Vice President, U.S. Sales
Michael J. Simpson 52 President, Cranio-Facial Division
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.
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 Critikon subsidiary of Johnson & Johnson
from 1987 to April 1990.
Michael J. Simpson joined the Company in September 1997 as President of
the Company's cranio-facial division. Prior to joining the Company, Mr. Simpson
served as President of Synthes Maxillofacial and Vice President Sales and
Marketing, Synthes (USA) for the period 1982-1996. Synthes is a leading
manufacturer and marketer of skeletal fixation implants. From 1969 to 1982, Mr.
Simpson held a variety of medical device sales and marketing positions at
Stryker and Baxter V. Mueller.
Executive officers serve at the discretion of the Board, subject to the
provisions of applicable employment agreements.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) Market and Dividend Information
The Company's Common Stock commenced trading on the Nasdaq National
Market System under the symbol "BINX" on April 25, 1997. The following table
sets forth, for the periods indicated, the intra-day high and low sales prices
per share of Common Stock on the Nasdaq National Market System:
High Low
Second Quarter Ended June 30, 1997
(from April 25, 1997)................ $20.00 $10.50
Third Quarter Ended September 30, 1997.... 29.75 16.00
Fourth Quarter Ended December 31, 1997.... 26.50 20.00
As of February 2, 1998, there were 71 stockholders of record of the
Company's Common Stock. The Company estimates that as of such date, there were
approximately 2,930 beneficial owners of its Common Stock, although no
assurances can be given with respect to the accuracy of this estimate.
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 its growth and, therefore, does not anticipate paying any cash dividends
in the foreseeable future.
(b) Use of Proceeds
The Company's initial public offering was effected pursuant to a
registration statement on Form S-1 (No. 333-22359) declared effective by the
Securities and Exchange Commission (the "SEC") on April 24, 1997. The offering
commenced on April 25, 1997 and terminated after all securities were sold.
Pursuant to Rule 463, the following information is presented to supplement the
related information set forth in the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997:
(i) From April 25, 1997 through December 31, 1997, the Company has used
the following amount of the net proceeds from such offering for the following
categories enumerated by the SEC:
<PAGE>
Reasonable Estimated
Amount
------------------------
Category (in thousands)
Construction of plant, building and facilities $ 80
Purchase and installation of machinery and equipment 326
Purchases of real estate -
Acquisition of other businesses -
Repayment of indebtedness 655
Working capital -
Short term investments 20,039
Other purposes for which at least $100,000 -
has been used
(ii) None of the above-mentioned uses of proceeds represented direct or
indirect payments to directors or officers of the Company or their associates,
to persons owning ten percent or more of any class of equity security of the
Company or to affiliates of the Company. Such uses do not represent a material
change in the use of proceeds described in the above-mentioned registration
statement.
Item 6. Selected 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 Annual Report. The Consolidated Statement of Operations data
for the years ended December 31, 1995, 1996 and 1997 and the Consolidated
Balance Sheet data as of December 31, 1996 and 1997 are derived from audited
Consolidated Financial Statements of the Company included elsewhere in this
Annual Report. The Consolidated Statement of Operations data for the years ended
December 31, 1993 and 1994 and the Consolidated Balance Sheet data at December
31, 1993, 1994 and 1995 are derived from audited and unaudited consolidated
financial statements not included in this Annual Report.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1993(1) 1994 1995 1996 1997
(In thousands except per share amounts)
Consolidated Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Revenues.................................................. $1,177 $1,280 $1,622 $5,379 $16,014
Gross Profit.............................................. 831 804 1,084 3,165 12,336
Operating Expenses........................................ 1,135 883 2,439 7,819 10,579
Operating income (loss)................................... (304) (79) (1,355) (4,654) 1,757
Net income (loss)......................................... (219) (162) (1,478) (4,992) 2,158
Pro forma earnings (loss) per share(2):
Basic................................................ (0.89) 0.24
Diluted.............................................. (0.89) 0.23
Shares used in computing pro forma earnings (loss) per
share(2):
Basic................................................ 5,621 8,916
Diluted.............................................. 5,621 9,251
December 31,
--------------------------------------------------------------------
1993(1) 1994 1995 1996 1997
---- ---- ---- ---- ----
Consolidated Balance Sheet Data:
Working capital (deficit)................................. $ (224) $ (164) $ (576) $ 2,046 $24,549
Total assets.............................................. 2,551 2,029 1,794 9,370 33,541
Long-term debt less current portion....................... 890 301 896 590 115
Mandatorily redeemable convertible
preferred stock........................................ -- -- -- 5,000 --
Accumulated deficit....................................... (956) (1,215) (2,693) (7,686) (5,527)
Total stockholders' equity (deficit)...................... 333 (280) (1,036) 1,023 29,081
</TABLE>
- --------------------
(1) Consolidated Statement of Operations Data for the year ended December 31,
1993 and the Consolidated Balance Sheet Data as of December 31, 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 earnings (loss) per share.
<PAGE>
Item 7. 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 Annual Report on Form 10-K 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 Exhibit 99.1, in this "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and under the
caption "Business" in this Annual Report on Form 10-K.
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, as of December 31, 1997, had an accumulated deficit of
approximately $5.5 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, the write-off of
acquired in-process research and development, and the development of the
Company's manufacturing capabilities. Although the Company's revenues grew
significantly in the second half of 1996 and during 1997 and although the
Company reported a profit for 1997, 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. There can be no assurance that the Company will
be able to successfully commercialize its products or that profitability will
continue.
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 and during all of 1997 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 1995, 1996 and
1997, international product sales represented 65%, 32% and 15%, respectively, of
the Company's total product sales. See Note 14 of the Notes to the Company's
Consolidated Financial Statements.
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 operating
in the U.S. 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 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
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.
The Company sells its products through managed networks of independent
sales agents, distributors and dealers. In the U.S., the Company handles all
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, 1996 and 1997, Ethicon GmbH paid the Company
approximately $200,000, $201,000 and $0, 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 were released for commercial
sale in July, 1997. Revenues from the Company's sales of such products have not
been material. Accordingly, no assurance can be given that royalty payments from
Ethicon GmbH will be material. Furthermore, no assurance can be given that the
Company will be able to enter into other license arrangements regarding other
products 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 its capital
resources 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.
For information regarding the operations of the Company by geographic area, see
Note 14 of the Notes to the Company's Consolidated Financial Statements.
While the Company's operating losses have resulted in net operating
loss carryforwards of approximately $900,000 for income tax reporting purposes
as of December 31, 1997, 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 U.S. entities. The statutory tax rates
applicable to the Company and its foreign subsidiaries vary substantially. Tax
rates have fluctuated in the past and may do so in the future. See Note 12 of
the Notes to the Company's 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, the
results of regulatory inspections and the timing of expenses related to product
launches.
Results of Operations for the Years Ended December 31, 1995, 1996 and 1997
Product Sales. The Company's product sales increased by 272% from $1.4
million in 1995 to $5.0 million in 1996 and by 213% to $15.8 million in 1997.
The 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; revenues from the sale of Meniscus Arrow products were approximately $2.4
million in 1996, as compared with $0.2 million in 1995. 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 system
sales. The increase in product sales in 1997 reflected further penetration in
Meniscus Arrow sales in the United States (a 368% increase in 1997 to $11.2
million), as well as increased utilization of the Company's managed network of
independent sales agents in the U.S. and increased sales of several non-Arrow
products in both the U.S. and international markets. Revenues generated from the
sale of instrumentation systems and related loaner fees represented 15%, 20% and
11% of total sales in 1995, 1996 and 1997, respectively, increasing from
approximately $200,000 in 1995 to approximately $1.0 million in 1996 and $1.8
million in 1997. The 1996 and 1997 increases are attributable primarily to the
U.S. introduction of the Meniscus Arrow during the second quarter of 1996; 1996
and 1997 instrumentation revenues relating to the Meniscus Arrow were
approximately $453,000 and $850,000, respectively.
During the first quarter of 1998, the Company reported that
discounting and other competitive practices by competitors launching new
products were adversely impacting sales of the Meniscus Arrow. The Company
estimates that for the first six months of 1998, such practices (which are not
expected to continue on a long-term basis) are expected to reduce revenues from
Meniscus Arrow sales by approximately $2.0 million from the Company's previous
expectations. The immediately preceding sentence constitutes a Forward-Looking
Statement. Actual results could differ materially from the projections in that
sentence as a result of several factors, including the pricing practices of the
Company's competitors and other factors set forth in Exhibit 99.1 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
License and grant revenues. License and grant revenues increased by
29.3% from $267,000 in 1995 to $345,000 in 1996 and decreased by 29.9% to
$242,000 in 1997. The decline in revenue from 1996 to 1997 was due to the lack
of any license revenue recorded in 1997, compared with $200,000 and $201,000
recorded in 1995 and 1996, respectively.
Gross profit; gross profit margins. The Company's gross profit
increased by 192.1% from $1.1 million in 1995 to $3.2 million in 1996 and by
290% to $12.3 million in 1997. The increase in the Company's gross profit during
1997 and 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 66.8% in 1995 to 58.8% in 1996 and
increased to 77.0% in 1997. Substantially all of the decline in 1996 is
attributable to the inclusion within products sales and cost of goods sold of
revenues and expenses associated with the purchasing and sale of instrumentation
systems and to the accounting step-up in value of inventory related to the
Reorganization. During 1997, the increase in gross profit margin was primarily
due to the volume increase in revenues which created operational efficiencies in
production. 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 66.1% in 1995 to 66.7%
in 1996 and to 80.2% in 1997. The improvement in this portion of the Company's
gross profit margin in 1996 and 1997 resulted primarily from increased sales of
higher margin Meniscus Arrow products, increased U.S. based sales, 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 109.2% from $2.2 million in 1995 to $4.5
million in 1996 and by 114% to $9.7 million in 1997. Such expenses were 159.8%
of product sales in 1995, 89.9% of product sales in 1996 and 61.6% of product
sales in 1997. 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., increased expenses in regulatory and patent
activities, and increased expenses associated with establishing and supporting a
managed network of independent sales agents in the U.S. Selling, general and
administrative expenses have declined as a percentage of revenue due to
increased efficiencies resulting from the leveraging of certain non-selling
expenses over an expanded revenue base.
Acquired in-process research and development. In September 1996, in
connection with the Company's Reorganization, the Company recorded a
non-recurring charge of $2.8 million for the acquisition of in-process research
and development that had not yet reached technological feasibility.
Research and development. Research and development expenses increased
by 67.6% from $274,000 in 1995 to $460,000 in 1996 and by 89.3% to $871,000 in
1997. 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
interest income and expense and miscellaneous expense and income items. Interest
expense remained relatively constant from 1995 to 1996. During 1997, the Company
generated net interest income of $752,000 compared to net interest expense of
$98,000 and $87,000 in 1995 and 1996, respectively. Funds obtained form the
Company's initial public offering during the second quarter of 1997 generated
the net interest income for 1997. A foreign currency transaction gain of
$408,000 was recorded in "other income" in 1997. Net foreign currency
transaction gain and losses in 1995 and 1996 were insignificant.
Income taxes. Due to operating losses in Finland and in the U.S., the
Company did not incur any tax obligations during 1995. In 1996, one of the
Company's Finnish subsidiaries recorded a profit, which resulted in a Finnish
tax liability of $208,000. In 1997, the Company recorded an income tax provision
of $758,000, which primarily reflected the income generated in the Company's
Finnish subsidiary.
Net income.The Company reported net losses of $1,478,000 and $4,992,000
in 1995 and 1996 and net income of $2,158,000 in 1997.
Pro Forma Earnings (Loss) Per Share. Pro forma earnings per share for
1997 was $0.24 (basic) and $.023 (diluted), as compared with a $0.89 loss (basic
and diluted) in 1996. Effective December 31, 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
Earnings per Share (EPS). SFAS 128 establishes and simplifies the standards of
computing earnings per share previously found in Accounting Principles Board
Opinion No. 15, Earnings per Share, and makes them comparable to international
EPS standards. Under SFAS 128, basic earnings (loss) per share is computed using
the weighted average number of shares of common stock outstanding during the
period. Diluted earnings (loss) per share is computed using the weighted average
number of common and dilutive potential common shares outstanding during the
period. Potential common shares consist of stock options and warrants using the
treasury stock method and are excluded if their effect is antidilutive.
Pursuant to Securities and Exchange Commission (SEC) Staff Accounting
Bulletin No. 98 and SEC staff policy, all common shares issued during the
periods prior to the Company's initial public offering ("IPO") for nominal
consideration are presumed to have been issued in contemplation of the IPO and
are to be included in the calculation of basic earnings (loss) per share as if
they were outstanding for all periods presented. Similarly, common shares and
potential common shares issued during the period prior to the IPO for nominal
consideration are presumed to have been issued in contemplation of the IPO and
are to be included in the calculation of diluted earnings (loss) per share, even
though anti-dilutive, as if outstanding for all periods presented. The Company
had no common or potential common shares issued for nominal consideration during
the periods prior to the IPO.
The calculation of shares used in computing pro forma basic and diluted
earnings (loss) per share also includes the Company's mandatorily redeemable
convertible preferred stock and related warrants, assuming conversion into
shares of common stock (using the if-converted method) from the original date of
issuance in 1996. The calculation also assumes that the shares issued in the
Company's IPO were outstanding as of January 1, 1997.
Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Statement 130 is effective for fiscal years beginning after December
15, 1997. The Company plans to adopt this accounting standard as required. The
adoption of this standard will have no impact on the Company's earnings,
financial condition or liquidity, but will require the Company to classify items
of other comprehensive income in a financial statement and display the
accumulated balance of other comprehensive income separately in the equity
section of the balance sheet.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("Statement 131"). Statement 131 supersedes Statement of Financial
Accounting Standards No. 14, Financial Reporting for Segments of a Business
Enterprise, and establishes new standards for reporting information about
operation segments in annual financial statements and requires selected
information about operating segments in interim financial reports. Statement 131
also establishes standards for related disclosures about products and services,
geographic areas and major customers. Statement 131 is effective for periods
beginning after December 15, 1997. This Statement affects reporting in financial
statements only and will have no impact on the Company's results of operations,
financial condition or liquidity.
Year 2000 Compliance
The Company recognizes the need to ensure that its operations will not
be adversely impacted by Year 2000 hardware and software issues. The Company
intends to confirm its compliance regarding Year 2000 issues for both internal
and external information systems by the end of 1998. With respect to its own
computer systems, the Company expects to upgrade, generally, in order to meet
the demands of its expanding business. In the process, the Company is taking
steps to identify, correct, or reprogram and test its existing systems for Year
2000 compliance. In addition, the Company intends to communicate with
significant suppliers, financial institutions and other parties that provide
significant services to the Company in order to obtain Year 2000 compliance from
such third parties. Expenditures required to make the Company Year 2000
compliant will be expensed as incurred and are not expected to be material to
the Company's consolidated financial position or results of operations. This
expectation constitutes a Forward-Looking Statement. Actual results could differ
materially from such expectation as a result of a number of factors, including
the ability of the Company's significant suppliers and financial institutions to
become Year 2000 compliant and the actual timing of the Company's upgrading of
its own computer systems.
Quarterly Product Sales
The following table presents unaudited product sales information for
the quarters indicated. 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 Annual Report of
Form 10-K. Product sales for any period are not necessarily indicative of
product sales to be expected for any future period.
in thousands)
1996
Quarter ended March 31.....................................$ 666
Quarter ended June 30...................................... 730
Quarter ended September 30................................. 1,212
Quarter ended December 31.................................. 2,426
1997
Quarter ended March 31.....................................$ 3,218
Quarter ended June 30...................................... 3,822
Quarter ended September 30................................. 4,149
Quarter ended December 31.................................. 4,584
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. and the U.S. introduction of the Meniscus Arrow products
during the second quarter of 1996. 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. In addition, competitive
practices are expected to impact Meniscus Arrow sales during the first half of
1998. See "-- Results of Operations for the Years Ended December 31, 1995, 1996
and 1997 -- Product Sales."
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,
competitive sales practices, 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 $5.0
million in preferred stock (all of which was converted into Common Stock upon
consummation of the Company's initial public offering in April 1997) and
warrants (all of which were exercised during April 1997). The 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. During April
1997, the Company consummated its initial public offering. In May 1997, the
Underwriters exercised in full their over-allotment option granted in connection
with the initial public offering. Net proceeds from the initial public offering
(including the exercise of the over-allotment option) and the exercise of
warrants during April 1997 were $21.7 million. In addition, the Company made
arrangements for a $2 million credit line, secured by the personal property of
Bionx Implants, Inc. and its Biostent, Inc. subsidiary. Amounts to be advanced
thereunder are subject to the lender's discretion and are limited to specific
percentages of certain domestic receivables and inventory. To date, no amounts
have been borrowed pursuant to this facility.
At December 31, 1997 and 1996, cash and cash equivalents totaled $22.6
million and $1.6 million, respectively. The increase in cash and cash
equivalents of $21.0 million is primarily attributable to the net proceeds
received from the Company's 1997 initial public offering and the Company's
profitable operations during 1997.
As of December 31, 1997, the Company had working capital of $24.5
million. Long-term debt (including the current portion) was reduced by $655,000,
from the level at the beginning of the year to $159,000 as of December 31, 1997.
The majority of this debt was repaid from net proceeds generated from the
Company's initial public offering. The interest rates on the debt remaining as
of December 31, 1997 range from 1 - 3% per annum.
The Company believes that existing capital resources from its initial
public offering, its September 1996 private placement and its $2.0 million
credit line, together with cash flow from operations (if, and to the extent,
generated), will be sufficient to fund its operations for the forseeable future.
This statement constitutes a Forward-Looking Statement. Actual results could
differ materially from the Company's expectations regarding its capital
requirements and its sources of capital. The Company's future capital
requirements and the adequacy of available capital resources 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,
acquisition opportunities, progress with preclinical studies, clinical trials
and product clearances by the FDA and other agencies, the cost and timing of the
Company's 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 the Company's
products. To the extent that funds generated from the Company's operations,
together with its existing capital resources, and the net 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 beyond that described above, 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
<PAGE>
Item 8. Financial Statements and Supplementary Data
The following financial information is set forth on the following pages
immediately following this page:
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets as of
December 31, 1996 and 1997 F-2
Consolidated Statements of Operations
for the Years Ended December 31,
1995, 1996 and 1997 F-3
Consolidated Statement of Stockholders'
Equity (Deficit) for the Years Ended
December 31, 1995, 1996 and 1997 F-4
Consolidated Statements of Cash Flows
for the Years Ended December 31,
1995, 1996 and 1997 F-5
Notes to Consolidated Financial Statements F-7
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not applicable.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Bionx Implants, Inc.:
We have audited the accompanying consolidated balance sheets of Bionx
Implants, Inc. and subsidiaries as of December 31, 1996 and 1997, 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,
1997. 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, 1996 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
February 2, 1998
<PAGE>
<TABLE>
<CAPTION>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
December 31,
----------------------------------------------
1996 1997
<S> <C> <C>
---- ----
ASSETS
Current assets:
Cash and cash equivalents............................ $ 1,593,131 22,631,652
Inventory, net (note 3).............................. 1,030,809 2,549,528
Trade accounts receivable, net of allowance of.......
$110,707 and $97,325 as of December 31, 1997
and 1996, respectively........................... 1,708,432 3,069,895
Grants receivable.................................... 122,711 128,953
Deferred offering costs.............................. 194,981 --
Prepaid expenses and other current assets............ 153,005 158,434
Deferred tax asset................................... -- 355,000
--------- ----------
Total current assets...................................... 4,803,069 28,893,462
Investments............................................... 100,334 87,115
Deposits 43,964 --
Plant and equipment, net (note 4)......................... 483,219 849,241
Goodwill and intangibles, net............................. 3,939,163 3,711,163
--------- ---------
Total assets.............................................. $ 9,369,749 33,540,981
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable............................... $ 848,127 1,774,960
Long-term debt, current portion (note 7)............. 223,037 43,314
Related party (note 5)............................... 163,184 74,358
Current income tax liability......................... 205,065 994,229
Accrued and other current liabilities (note 6)....... 1,317,196 1,457,539
--------- ---------
Total current liabilities................................. 2,756,609 4,344,400
--------- ---------
Long-term debt (note 7)................................... 590,336 115,370
---------- ----------
Series A mandatorily redeemable convertible preferred
stock, par value $0.001 per share; 2,000,000 shares
authorized, 2,000,000 shares issued and outstanding
as of December 31, 1996, none issued and outstanding
at December 31, 1997 (note 9)........................ 5,000,000 --
Stockholders' equity (notes 9 and 11)
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, 5,318,424 and
8,916,812 shares issued and outstanding as of
December 31, 1996 and 1997, respectively......... 10,105 16,942
Additional paid-in capital........................... 8,967,993 35,616,254
Accumulated deficit.................................. (7,685,717) (5,527,354)
Foreign currency translation adjustment.............. (269,577) (1,024,631)
--------- -----------
Total stockholders' equity .............................. 1,022,804 29,081,211
--------- ----------
Total liabilities and stockholders' equity............... $ 9,369,749 33,540,981
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Years ended December 31,
-------------------------------------------------------------------------
<S> <C> <C> <C>
1995 1996 1997
---- ---- ----
Revenues:
Product sales............................. $ 1,354,719 5,033,952 15,772,674
License and grant revenues (note 13)...... 266,887 345,203 241,685
------- ------- -------
Total revenues...................... 1,621,606 5,379,155 16,014,359
--------- --------- ----------
Cost of goods sold........................... 538,013 2,214,061 3,678,112
------- --------- ---------
Gross profit................................. 1,083,593 3,165,094 12,336,247
--------- --------- ----------
Selling, general and administrative 2,164,340 4,527,421 9,708,389
Acquired in-process research and
development................................ -- 2,832,035 --
Research and development..................... 274,213 459,666 871,101
------- ----------- ------------
Total operating expenses..................... 2,438,553 7,819,122 10,579,490
--------- ---------- ----------
Operating income (loss)...................... (1,354,960) (4,654,028) 1,756,757
----------- ----------- ---------
Other income and (expenses):
Interest income and (expense), net........ (98,021) (86,906) 751,694
Other, net................................ (25,035) (42,951) 408,256
----------- ----------- -------
Total other income (expense), net... (123,056) (129,857) 1,159,950
----------- ---------- ---------
Income (loss) before provision for income
taxes .................................... (1,478,016) (4,783,885) 2,916,707
Provision for income taxes (note 12) -- (208,390) (758,344)
------------ --------- ---------
Net income (loss)............................ $(1,478,016) (4,992,275) 2,158,363
=========== =========== =========
Pro forma earnings (loss) per share (note 2):
Basic................................... $ (0.89) 0.24
Diluted................................. $ (0.89) 0.23
Shares used in computing pro forma
earnings (loss) per share (note 2):
Basic................................... 5,621,320 8,916,357
Diluted................................. 5,621,320 9,250,546
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
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 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) 8,442,389 -- -- 7,109,123
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 -- -- -- (4,992,275) -- (4,992,275)
---------- ---------- ------------- ----------- ----------- -----------
Balance, December 31, 1996 $ -- 10,105 8,967,993 (7,685,717) (269,577) 1,022,804
Proceeds from initial public offering, -- 4,370 21,095,441 -- -- 21,099,811
net Conversion of Series A mandatorily
redeemable convertible
preferred stock -- 2,000 4,998,000 -- -- 5,000,000
Foreign currency translation
adjustment -- -- -- -- (755,054) (755,054)
Proceeds from warrant exercise -- 466 551,568 -- -- 552,034
Proceeds from the exercise of
incentive stock options -- 1 3,252 -- -- 3,253
Net income -- -- -- 2,158,363 -- 2,158,363
-------- ---------- ------------- --------- ------------ -----------
Balance, December 31, 1997 $ -- 16,942 35,616,254 (5,527,354) (1,024,631) 29,081,211
========= ========== ========== =========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1996 and 1997
Years Ended December 31,
-----------------------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ (1,478,016) (4,992,275) 2,158,363
----------- ------------ ---------
Adjustments to reconcile net loss to
net cash (used in) provided by operating
activities:
Depreciation and amortization....................... 71,194 161,434 268,366
Acquired in-process research and development........ -- 2,832,035 --
Deferred tax provision.............................. -- -- (355,000)
Other non-cash charges.............................. -- 105,600 --
Change in assets and liabilities:
(Increase) decrease in accounts receivable........ 19,772 (1,310,264) (1,361,463)
Increase in inventory............................. (150,547) (299,165) (1,518,719)
Increase in grant receivable...................... -- (114,981) (6,242)
(Increase) decrease in deferred
issuance costs.................................. -- (194,981) 194,981
(Increase) decrease in prepaid expense
and other assets................................ (54,589) 17,060 (5,429)
(Increase) decrease in deposits................... -- (43,964) 43,964
Increase (decrease) in accounts payable........... 79,047 (60,568) 926,833
Increase (decrease) in related party.............. 198,096 (34,912) (88,826)
Increase in current tax liability................. -- 205,065 789,164
Increase (decrease) in accrued and
other liabilities............................... (240,309) 852,971 140,343
--------- ------- -------
(77,336) 2,115,330 (972,028)
--------- --------- ---------
Net cash provided by (used in) operating
activities.......................................... (1,555,352) (2,876,945) 1,186,335
----------- ----------- ---------
Cash flows from investing activities:
Purchases of plant and equipment.................... (37,316) (80,520) (406,388)
Purchases of investments............................ (2,056) -- --
Proceeds from sale of investments................... -- 3,827 13,219
----------- ----------- -----------
Net cash used in investing activities.................. (39,372) (76,693) (393,169)
----------- ---------- -----------
Cash flows from financing activities:
Proceeds from long-term debt........................ 484,139 -- --
Repayment of long-term debt......................... -- (446,124) (654,689)
Net proceeds from the issuance of
preferred stock................................... -- 4,894,786 --
Proceeds from the issuance of common stock.......... 765,333 49,875 --
Proceeds from initial public offering, net.......... -- -- 21,099,811
Exercise of warrants................................ -- -- 552,034
Proceeds from exercise of employee
stock options..................................... -- -- 3,253
--------- ---------- --------------
Net cash provided by financing activities.............. 1,249,472 4,498,537 21,000,409
--------- --------- ----------
Net effects of foreign exchange rate differences....... (43,408) (2,430) (755,054)
---------- ------- ---------
Net increase (decrease) in cash and
cash equivalents.................................... (388,660) 1,542,469 21,038,521
Cash and cash equivalents at beginning of period....... 439,322 50,662 1,593,131
--------- ------ ---------
Cash and cash equivalents at end of period............. $ 50,662 1,593,131 22,631,652
=========== ========= ==========
Supplemental disclosure of cash flow information:
Cash paid for interest................................. $ 54,213 195,035 26,398
Cash paid for taxes.................................... -- 3,325 190,578
=========== ============= ===========
Non-cash financing activities:
Issuance of common stock related to the
Reorganization.................................... $ -- 7,109,123 --
=========== ============= ===========
Conversion of Series A mandatorily redeemable
convertible preferred stock to common stock...... $ -- -- 5,000,000
=========== ============= ============
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
(1) ORGANIZATION
Basis of Presentation
Bionx Implants, Inc. (the Company) was incorporated in October, 1995 as
a Delaware corporation. In 1996, the Company completed a reorganization,
described more fully below, whereby four corporate entities that constituted 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.
Given the common ownership relationship of the four predecessor
corporations and the subsequent reorganization into the Company described below,
the accompanying financial statements include the four predecessor corporations'
financial statements combined for the year ended December 31, 1995 and for the
period January 1, 1996 to September 2, 1996. The predecessor corporations are
consolidated as of December 31, 1996 and 1997, for the period from September 3,
1996 to December 31, 1996, and for the year ended December 31, 1997.
Reorganization
In September 1996, the Company completed its reorganization. A group of
common stockholders controlled the U.S. subsidiaries and 61% of Bioscience, Ltd.
and approximately 58% of Biocon, Ltd. prior to the reorganization, with the
balance of the Finnish subsidiaries controlled by a group of minority
shareholders (the Minority Interest). The reorganization was accounted for as a
recapitalization except for the component associated with the Minority Interest,
which was accounted for as a purchase. The purchase price for the Minority
Interest has been allocated to assets acquired and liabilities assumed based on
their fair market value at the date of the reorganization. The fair value of the
assets acquired and liabilities assumed, after giving effect to the write-off of
certain purchased research and development ($2.8 million), is summarized as
follows (in thousands):
Current assets........................ $1,549
Plant and equipment................... 266
Intangibles........................... 800
Goodwill.............................. 3,219
Current liabilities................... (751)
Long-term liabilities................. (343)
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 the Dutch company were 2,684,211 shares of the Company's
common stock. As a result of the reorganization, the Company had four
wholly-owned subsidiaries--Orthosorb, Inc., Biostent, Inc., Bioscience, Ltd.,
and Biocon, Ltd.
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Shortly after the reorganization was completed, the Company issued a
total of 2,000,000 shares of its Series A mandatorily redeemable 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.
Initial Public Offering
During the second quarter of 1997, the Company completed its initial
public offering (the "IPO") of 2,300,000 shares of Common Stock (including the
exercise of the underwriters over-allotment of 300,000 shares) at $10.50 per
share. (Note 9)
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 craniofacial 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
ten product lines through managed networks of independent agents, distributors
and dealers.
Prior to 1997, the Company sustained operating losses and has generated
its first positive cash flow from operations during 1997. The Company plans to
continue to finance its future operations with revenues from future product
sales, royalty payments and license and government grant payments, if any, and
proceeds from the sale of capital stock. The Company's future operations are
dependent upon its ability to sustain profitable operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the financial statements
of the Company and its 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.
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Inventory
Inventory is valued at the lower of cost or market, with cost being
determined under a first-in, first-out (FIFO) method. Reserves are established
for excess and obsolete inventory on a specific identification basis.
Investments
Investments consist of certain real property interests in Finland. The
Company can classify its investments 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, 1996 and 1997.
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.
Intangibles
Patents and rights are stated at cost. Amortization of patents is
recorded using the straight-line method over the remaining legal lives of the
patents, generally for periods ranging up to 12 years. Accumulated amortization
related to patents and rights was $26,667 and $93,693 at December 31, 1996 and
1997, respectively.
Goodwill
Goodwill, representing costs in excess of the fair value of assets
acquired, is amortized on a straight-line basis over 20 years. On a periodic
basis, the Company evaluates the carrying value of intangible assets based upon
expectations of undiscounted cash flows. Accumulated amortization related to
goodwill was $53,658 and $214,632 at December 31, 1996 and 1997, respectively.
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.
<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 all of the Company's loans is approximately $130,500.
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 Exchange Risk Management
The Company routinely hedges its estimated net economic exposure
through foreign exchange options and forward cover on a rolling 12-month basis.
Market value gains are recognized in income currently and the resulting gains
offset foreign exchange transaction losses. Determination of hedge activity is
based upon market conditions, the magnitude of foreign currency assets and
liabilities and perceived risks. As of December 31, 1997, the Company had
options outstanding for the purchase of 17,000,000 Finnish Markkas. A net
foreign currency exchange transaction gain of $408,000 was recorded in "other
income" in 1997. There were no significant foreign currency transaction gains or
losses in 1995 and 1996.
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
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.
Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Statement 130 is effective for fiscal years beginning after December
15, 1997. The Company plans to adopt this accounting standard as required. The
adoption of this standard will have no impact on the Company's earnings,
financial condition or liquidity, but will require the Company to classify items
of other comprehensive income in a financial statement and display the
accumulated balance of other comprehensive income separately in the equity
section of the balance sheet.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("Statement 131"). Statement 131 supersedes Statement of Financial
Accounting Standards No. 14, Financial Reporting for Segments of a Business
Enterprise, and establishes new standards for reporting information about
operation segments in annual financial statements and requires selected
information about operating segments in interim financial reports. Statement 131
also establishes standards for related disclosures about products and services,
geographic areas and major customers. Statement 131 is effective for periods
beginning after December 15, 1997. This Statement affects reporting in financial
statements only and will have no impact on the Company's results of operations,
financial condition or liquidity.
Pro Forma Earnings (Loss) Per Share
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings per
Share (EPS). SFAS 128 establishes and simplifies the standards of computing
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
earnings per share previously found in Accounting Principles Board Opinion No.
15, Earnings per Share, and makes them comparable to international EPS
standards. Under SFAS 128, basic earnings (loss) per share is computed using the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings (loss) per share is computed using the weighted average number
of common and dilutive potential common shares outstanding during the period.
Potential common shares consist of stock options and warrants using the treasury
stock method and are excluded if their effect is antidilutive.
Pursuant to Securities and Exchange Commission (SEC) Staff Accounting
Bulletin No. 98 and SEC staff policy, all common shares issued during the
periods prior to the Company's IPO for nominal consideration are presumed to
have been issued in contemplation of the IPO and are to be included in the
calculation of basic earnings (loss) per share as if they were outstanding for
all periods presented. Similarly, common shares and potential common shares
issued during the period prior to the IPO for nominal consideration are presumed
to have been issued in contemplation of the IPO and are to be included in the
calculation of diluted earnings (loss) per share, even though anti-dilutive, as
if outstanding for all periods presented. The Company had no common or potential
common shares issued for nominal consideration during the periods prior to the
IPO.
The calculation of shares used in computing pro forma basic and diluted
earnings (loss) per share also includes the Company's mandatorily redeemable
convertible preferred stock and related warrants, assuming conversion into
shares of common stock (using the if-converted method) from the original date of
issuance in 1996. The calculation also assumes that the shares issued in the
Company's IPO were outstanding as of January 1, 1997.
The following table sets forth the calculation of the total number of
shares used in the computation of pro forma earnings (loss) per common share for
the years ended December 31, 1996 and 1997:
1996 1997
---- ----
Weighted average common shares outstanding 5,281,020 8,507,492
Assumed conversion of Series A Mandatorily
Redeemable Convertible Preferred Stock
and related warrants using the
if-converted method 340,300 408,865
------- -------
Shares used in computing pro forma basic
earnings (loss) per share 5,621,320 8,916,357
Incremental shares from assumed exercise of
dilutive options and warrants -- 334,189
---------- -------
Shares used in computing pro forma diluted
earnings (loss) per share 5,621,320 9,250,546
========= =========
The net loss per share for the year ended December 31, 1995 is not presented in
the Statement of Operations as it was before both the reorganization of the
Company as described in Note 1, and before the Company's initial public offering
as described in Note 9, and would not be meaningful.
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVENTORY
Inventory consists of the following components as of December 31, 1996
and 1997:
1996 1997
---- ----
Raw materials $ 101,122 $ 437,032
Finished goods 1,210,033 2,777,821
--------- ---------
1,311,155 3,214,853
Less reserves (280,346) (665,325)
--------- ---------
$ 1,030,809 $ 2,549,528
========= =========
(4) PLANT AND EQUIPMENT
Plant and equipment consist of the following components as of December
31, 1996 and 1997:
1996 1997
---- ----
Machinery and production equipment $ 883,016 $ 1,219,435
Computer equipment 14,613 84,582
-------- ---------
897,629 1,304,017
Less accumulated depreciation (414,410) (454,776)
--------- ---------
$ 483,219 $ 849,241
========== ===========
(5) RELATED PARTY TRANSACTIONS
Under an employment agreement dated August 21, 1992, the Company was
obligated to pay an executive officer (Dr. Pertti Tormala) 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. Dr. Tormala 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 $163,184 and $74,358 as of December 31, 1996 and 1997, respectively. In
December, 1996, the Company restructured the employment agreement with Dr.
Tormala to eliminate any future royalty obligation beyond these payments.
The Company's product development efforts are dependent upon Dr.
Tormala, 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 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. The Company's funding obligation, which amounted to
$0, $167,000 and $271,000 during the years ended December 31, 1995, 1996 and
1997, respectively, consists of providing the University with reasonable
compensation for University resources (including graduate students) utilized by
the Company.
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(6) ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist of the following
components as of December 31, 1996 and 1997:
1996 1997
---- ----
Commissions....................... $ 284,687 $ 457,184
Royalties......................... 75,000 267,986
Wages............................. 184,920 279,642
Taxes withheld.................... 236,306 82,079
Interest.......................... 77,252 948
Inventory purchases............... 23,002 --
Professional fees................. 305,492 234,658
Research.......................... -- 65,012
Other............................. 130,537 70,030
---------- -------------
$ 1,317,196 $ 1,457,539
========= ==========
(7) LONG-TERM DEBT
Long-term debt consists of the following components as of December 31,
1996 and 1997:
1996 1997
---- ----
Loans from financial institutions $ 546,930 $ 40,843
Loans from Finnish government 226,483 101,447
Other debt 39,960 16,394
------ ------
813,373 158,684
Less current portion (223,037) (43,314)
--------- --------
$ 590,336 $ 115,370
======= =======
The loans from the financial institutions are payable in semi-annual
and annual installments with interest rates of one percent (1%). The loans from
the Finnish government are made in order to support technology development and
are payable in annual installments with interest rates ranging from one to three
percent (1-3%).
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1997 are as follows: 1998, $43,314; 1999, $43,315;
2000, $29,707; 2001, $10,815 and 2002 and beyond, $31,533.
(8) LINE OF CREDIT
In April 1997, the Company entered into a $2 million credit line
agreement secured by the personal property of the Company and a subsidiary.
Amounts to be advanced thereunder are subject to the lender's discretion at an
interest rate of 8.25%, and are limited to specific percentages of certain
domestic receivables and inventory. To date, no amounts have been borrowed under
the credit line.
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) COMMON STOCKHOLDERS' EQUITY
In September, 1996, the Company issued 2,000,000 shares of Series A
mandatorily redeemable convertible preferred stock (the "Series A Preferred")
and warrants to purchase 421,065 shares of common stock at an exercise price of
$5.70 per share. The net proceeds to the Company were $4,894,786.
On February 24, 1997, the Company effected a 1 for 1.9 reverse stock
split. All common shares and per share amounts in the accompanying consolidated
financial statements have been retroactively adjusted to reflect this common
stock reverse split. Preferred stock amounts, other than the shares of common
stock into which Series A Preferred is convertible, have not been retroactively
adjusted.
During the second quarter of 1997, the Company completed its IPO of
2,300,000 shares of Common Stock (including the exercise of the underwriters
over-allotment of 300,000 shares) at $10.50 per share. Upon consummation of the
IPO, the 2,000,000 shares of Series A Preferred outstanding automatically
converted into 1,052,638 shares of common stock on a 1 for 1.9 basis. An
additional 245,065 shares of Common Stock were issued upon the exercise of all
outstanding warrants. The net proceeds of the IPO, after underwriting discounts
and costs in connection with the sale and distribution of the securities and the
exercise of the warrants, were approximately $21.7 million.
(10) COMMITMENTS UNDER OPERATING LEASES
The Company leases offices and laboratory facilities, equipment, and
vehicles under various non-cancelable operating lease arrangements. Future
minimum rental commitments required by such leases are as follows:
Year ending December 31:
1998 $295,720
1999 274,042
2000 272,691
2001 264,162
2002 173,733
Rental expense for the years ended December 31, 1995, 1996 and 1997
aggregated $90,815, $98,755, and $202,624, 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
issued 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, 1997, there were 199,432 additional shares available
for grant under the 1996 Option Plan. The per share weighted-average fair value
of stock options granted in 1995, 1996 and 1997 was $0.46 and $5.86, and $16.66,
respectively, on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions for the years ended December 31:
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995 1996 1997
---- ---- ----
Risk-free interest rate 7.06 6.50 6.22%
Expected life of option in years 10 10 10
Expected dividend yield - - -
Volatility of stock price - - 43.5%
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 and
net income decreased as indicated below:
1995 1996 1997
---- ---- ----
Net income (loss):
As reported $(1,478,016) $(4,992,275) 2,158,363
Pro forma (1,530,121) (5,074,269) 1,704,353
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.
A summary of activity under the 1996 Option Plan from January 1, 1995
to December 31, 1997 is as follows:
RANGE OF EXERCISE
SHARES PRICES PER SHARE
Balance, January 1, 1995................ -- --
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
Granted............................... 235,400 16.00-25.00
Exercised............................. (685) 4.75
Forfeited............................. (8,529) 4.75-9.50
---------- --------------
Balance, December 31, 1997.............. 650,568 $ 0.9025-25.00
======= ============
Shares exercisable at December 31, 1997 215,158 $ 0.9025-9.50
======= ===========
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options
outstanding under the 1996 Option Plan at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------- -------------------------
Weighted
Range of Average Weighted Weighted
Exercise Number Remaining Average Average
Prices Outstanding Contractual Exercise Number Exercise
Life (Years) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$ 0.9025 277,009 6.9 $ 0.9025 166,206 $ 0.9025
4.75-9.50 138,159 8.7 7.65 48,952 6.64
16.00-25.00 235,400 9.7 24.79 - -
------- --------
$.9025-25.00 650,568 8.3 $ 10.98 215,158 $ 2.21
======= =======
</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.
During 1997, the Company granted various employees options to acquire
235,400 shares of common stock at prices ranging from $16.00 to $25.00 per
share, the fair market value on the grant date.
(12) INCOME TAXES
At December 31, 1997, the Company and its subsidiaries had available
U.S. net operating loss carryforwards ("NOL") of approximately $939,000 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. 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.
Income tax expense attributable to the income before provision for
taxes was $208,390 and $758,344 for the years ended December 31, 1996 and 1997,
respectively, and differed from the amounts
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
computed by applying the U.S. federal income tax rate of 35 percent to pretax
income (loss) as a result of the following:
1996 1997
---- ----
Computed "expected" tax (benefit) expense $(1,674,360) 1,020,847
Increase (reduction) in income taxes
resulting from:
Difference in the foreign tax rates............... (47,430) (245,454)
Acquisition of in-process research and development 991,212 --
Net change in the valuation allowance for
deferred tax assets............................. 896,930 (146,804)
Goodwill amortization............................. -- 70,000
Other, net........................................ 42,038 59,755
-------- --------
Income tax expense $ 208,390 758,344
======= =======
The tax effects of temporary differences that give rise to significant
portions of the Federal, foreign and state deferred tax assets at December 31,
1996 and 1997 are presented below:
1996 1997
---- ----
Deferred tax assets:
Net operating loss carryforwards.............. $ 528,919 328,686
Research and development costs................ 184,125 109,890
Depreciation adjustments...................... 60,937 --
Inventory and related items................... 413,280 769,910
Recognition of accrued expenses or reserves
for financial statement reporting purposes
but not for income tax reporting purposes.... 128,844 315,815
---------- ----------
Total gross deferred tax assets............... 1,316,105 1,524,301
Less valuation allowance...................... (1,316,105) (1,169,301)
----------- -----------
Net deferred tax assets........................... $ -- 355,000
========== ==========
Realization of net deferred tax assets is dependent on future earnings,
which are uncertain. Accordingly, a valuation allowance was recorded by the
Company against certain assets at December 31, 1996 and 1997. The total
valuation allowance increased by $573,845, and decreased by $146,804 for the
years ended December 31, 1996 and 1997, 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. Royalties relating to this
agreement for the year ended December 31, 1997 were insignificant.
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, the Company has applied for grants from the Finnish
government to conduct research on resorbable polymers. The revenue from such
grants was $66,983, $143,916 and $241,685 for the years ended December 31, 1995,
1996 and 1997, respectively. In connection with such grants, the Company
typically commits to perform research projects and to report on the status of,
and the conclusions drawn from, its projects.
(14) GEOGRAPHIC INFORMATION
To date, the Company has manufactured its products solely in its
facility in Finland. The Company sells products in the U.S. through a network of
independent sales agents managed from its U.S. headquarters and sells products
internationally through a network of independent distributors and dealers
managed from the Company's facility in Finland. Information regarding the
Company's product sales, net income (loss) and identifiable assets by geographic
area is set forth below.
<PAGE>
<TABLE>
<CAPTION>
UNITED
STATES INTERNATIONAL ELIMINATIONS CONSOLIDATED
------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1995
Product sales:
Customers...................... $ 477,952 $ 876,767 $ -- $ 1,354,719
Intercompany................... -- 985,354 (985,354) --
---------- ------- --------- --------------
Total product sales.............. 477,952 1,862,121 (985,354) 1,354,719
Net income (loss)................ (1,323,214) 79,601 (234,403) (1,478,016)
Identifiable assets.............. 745,329 2,310,037 (1,261,128) 1,794,238
Year ended December 31, 1996
Product sales:
Customers...................... $ 3,412,204 $ 1,621,748 $ -- $ 5,033,952
Intercompany................... -- 3,506,864 (3,506,864) --
------------- --------- ----------- -------------
Total product sales 3,412,204 5,128,612 (3,506,864) 5,033,952
Net loss......................... (2,269,215) (1,476,516) (1,246,544) (4,992,275)
Identifiable assets.............. 5,061,627 8,468,315 (4,160,193) 9,369,749
Year ended December 31, 1997
Product & sales:
Customers...................... $ 13,449,891 $ 2,322,783 $ -- $ 15,772,674
Intercompany................... -- 7,072,314 (7,072,314) --
------------- --------- ----------- -------------
Total product sales: 13,449,891 9,395,097 (7,072,314) 15,772,674
Net income (loss)................ (615,759) 3,674,368 (900,246) 2,158,363
Identifiable assets.............. 33,670,471 6,849,627 (6,979,117) 33,540,981
</TABLE>
<PAGE>
PART III
Item 10. Directors of the Registrant
The registrant incorporates by reference herein information set forth
in its definitive proxy statement for its 1998 annual meeting of shareholders
that is responsive to the information required with respect to this Item.
Item 11. Executive Compensation
The registrant incorporates by reference herein information set forth
in its definitive proxy statement for its 1998 annual meeting of shareholders
that is responsive to the information required with respect to this Item.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The registrant incorporates by reference herein information set forth
in its definitive proxy statement for its 1998 annual meeting of shareholders
that is responsive to the information required with respect to this Item.
Item 13. Certain Relationships and Related Transactions
The registrant incorporates by reference herein information set forth
in its definitive proxy statement for its 1998 annual meeting of shareholders
that is responsive to the information required with respect to this Item.
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) See Item 8 for a list of financial statement information presented
herein.
(b) The following financial statement schedule is filed as part of this
Annual Report.
<PAGE>
Description Page
Schedule
Independent Auditor's Report S-1
II Valuation and Qualifying Accounts S-2
All other schedules have been omitted because they are not applicable or the
required information is included in the registrant's Consolidated Financial
Statements or the notes thereto.
(c) The following exhibits are incorporated by reference herein or
annexed to this Annual Report on Form 10-K:
3.1 Restated Certificate of Incorporation of the Registrant. (1)
3.2 Bylaws of the Registrant. (1)
4.1 Specimen Common Stock Certificate. (1)
10.1 Reorganization Agreement dated as of September 5, 1996. (1)
10.2 Registrant's 1996 Stock Option/Stock Issuance Plan. (1)
10.3 Form of Amended and Restated Employment Agreement between the Registrant
and David W. Anderson. (1)
10.4 Form of Employment Agreement between the Registrant's Subsidiary and
Pertti Tormala, as amended. (1)
10.5 Form of Proprietary Information and Inventions Agreement. (1)
10.6 Investors' Rights Agreement, dated as of September 6, 1996, between the
Registrant and certain holders of the Registrant's securities. (1)
10.7 Stock Purchase Agreement between the Registrant and purchasers of the
Company's Preferred Stock and Warrants. (1)
10.8* License Agreements between the Registrant's Subsidiary and Saul N.
Schreiber. (1)
10.9* License Agreement among the Registrant's Subsidiary, Pertti Tormala,
Markku Tamminmaki and Menifix I/S. (1)
10.10*Licensing, Manufacturing and Distribution Agreement among the
Registrant's Subsidiary, Pertti Tormala and various Danish and Finnish
inventors. (1)
10.11 Shareholders' Agreement among Bionix, B.V. and certain shareholders of the
Company. (1)
10.12 Headquarters Lease. (1)
10.13 Security Agreements and Secured Promissory Note. (1)
10.14 Form of Employment Agreement between the Registrant and Michael J.O'Brien.
21.1 List of Subsidiaries. (1)
23.1 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
99.1 Information Regarding Forward-Looking Statements
- ----------------------
(1) Incorporated by reference to the applicable exhibit set forth in the
Registrant's Registration Statement on Form S-1 initially filed with the
Commission on February 26, 1997 (No. 333-22359).
* Certain portions of this exhibit have been omitted based upon a request for
confidential treatment. The omitted portions of this exhibit have been
separately filed with the Securities and Exchange Commission.
(d) During the quarter ended December 31, 1997, the Company did not
file any Current Reports on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, this 30th
day of March, 1998.
BIONX IMPLANTS, INC.
By:/s/David W. Anderson
_____________________
David W. Anderson
(President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed by the following
persons in the capacities and on the dates indicated:
Signature Title Date
/s/David W. Anderson
- ----------------------
David W. Anderson President, Chief Executive Officer and
Director (Principal Executive Officer) March 30, 1998
____________________
David J. Bershad Director March 30, 1998
/s/Anthony J. Dimun*
_____________________
Anthony J. Dimun Director March 30, 1998
/s/David H. MacCallum*
_____________________
David H. MacCallum Director March 30, 1998
/s/Pertti Tormala*
_____________________
Pertti Tormala Director March 30, 1998
/s/Terry D. Wall*
_____________________
Terry D. Wall Director March 30, 1998
/s/Michael J. O'Brien
_____________________
Michael J. O'Brien Chief Financial and Accounting Officer March 30, 1998
*By:/s/David W. Anderson
_______________________
David W. Anderson
Attorney-in-Fact
<PAGE>
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors and Stockholders
Bionx Implants, Inc.:
Under date of February 2, 1998, we reported on the consolidated balance sheets
of Bionx Implants, Inc. and subsidiaries as of December 31, 1996 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for cash of the years in the three-year period ended December 31, 1997.
These consolidated financial statements and our report thereon are included in
the annual report on Form 10-K for the year ended December 31, 1997. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule of
Valuation and Qualifying Accounts. The 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, such 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.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
February 2, 1998
<PAGE>
<TABLE>
<CAPTION>
Schedule II
Bionx Implants, Inc. and Subsidiaries
Valuation and Qualifying Accounts
For the Three Years Ended December 31, 1997
Charged Charged Charged
Balance to Balance to Balance to Balance
at Costs and at Costs and at Costs and at
Classifications 12/31/94 Expenses Deductions 12/31/95 Expenses Deductions 12/31/96 Expenses Deductions 12/31/97
- --------------- --------- --------- ---------- -------- --------- ---------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Inventory
Reserves.... $ - 161,021 - 161,021 119,325 - 280,346 384,979 - 665,325
Accounts
Receivable
Reserves.... $ - - - - 97,325 - 97,325 31,035 (17,653) 110,707
--------- --------- --------- --------- ---------- ---------- --------- ---------- ---------- ----------
</TABLE>
<PAGE>
E-1
EXHIBIT INDEX
Exhibit
Number Description
10.14 Form of Employment Agreement between the
Registrant and Michael J. O'Brien
23.1 Consent of KPMG Peat Marwick LLP
24.1 Power of Attorney
27.1 Financial Data Schedule
99.1 Information Regarding Forward-Looking Statements
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement"), made as of the 15th day of November,
1997, by and between BIONX IMPLANTS, INC., a Delaware corporation (the
"Employer"), and MICHAEL J. O'BRIEN, an individual residing at 5733 Point
Pleasant Pike, Doylestown, PA 18901 (the "Employee"),
W-I-T-N-E-S-S-E-T-H
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 Vice
President, Finance and Administration, and Chief Financial 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 the Chief Financial
Officer, subject at all times to the control and direction of the Chief
Executive Officer and Board of Directors of the Employer, and shall perform such
services as typically are provided by the Chief Financial Officer of a
corporation and such other services consistent therewith as shall be assigned to
him from time to time by the Chief Executive Officer 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 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.
3. Term.
3.1 The term of this Agreement shall commence on the date hereof and
continue until two years from the date hereof (the "Initial Term") and shall be
automatically renewable thereafter for consecutive terms of one year each (each,
a "Renewal Term") unless and until terminated as of the end of the Initial Term
or any such Renewal Term by either party giving notice in writing to the other
party not less than ninety (90) days before the end of the period in question
and subject, however, to earlier termination pursuant to this Article 3.
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 Vice
President, Finance and Administration, and Chief Financial 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-five (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 Chief
Executive Officer and/or 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, 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.
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 and 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. In consideration for Employee's services hereunder, until
December 31, 1997, Employer shall pay Employee a salary at a rate of $110,000
per year. Thereafter, Employee's annual salary rate shall be reviewed by
Employer's Board of Directors on an annual basis and shall not be less than
$110,000 per year.
5. Executive Bonus. In addition to the salary described in Section 4
above, Employee may receive bonuses pursuant to any executive bonus plan to be
developed by Employer.
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; (iii) the Employer's business plans,
market analyses and other non-public financial information regarding Employer's
business; and (iv) 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 Employer notifies Employee in advance of any such
disclosure and cooperates with 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 in 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 business plans, analyses, financial
reports 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 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 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 sent to its principal headquarters
address in the United States, to the attention of the Chief Executive Officer,
with a copy to:
Peter H. Ehrenberg, Esq.
Lowenstein, Sandler PC
65 Livingston Avenue
Roseland, New Jersey 07068
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 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.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
BIONX IMPLANTS, INC.
By:/s/David W. Anderson
____________________________
David W. Anderson, President
/s/Michael J. O'Brien
______________________________
Michael J. O'Brien
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors and Stockholders
Bionx Implants, Inc.:
We consent to the incorporation by reference in the registration statement (No.
333-33541) on Form S-8 of Bionx Implants, Inc. of our report dated February 2,
1998, relating to the consolidated balance sheets of Bionx Implants, Inc. and
subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1997, which report appears in
the December 31, 1997, annual report on Form 10-K of Bionx Implants, Inc.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
March 30, 1998
WHEREAS, the undersigned officers and directors of Bionx Implants, Inc.
desire to authorize David W. Anderson and Michael J. O'Brien to act as their
attorneys-in-fact and agents, for the purpose of executing and filing an Annual
Report on Form 10-K, including all amendments thereto.
NOW, THEREFORE,
KNOW ALL MEN 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 true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, to sign the Bionx Implants, Inc. Annual Report
on Form 10-K for the year ended December 31, 1997, including any and all
amendments and supplements thereto, and to file the same, with all exhibits
thereto, and other 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 and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned have executed this power of attorney in
the following capacities on this 30 day of March, 1998.
SIGNATURE TITLE
/s/David W. Anderson
_____________________________ President, Chief Executive Officer
David W. Anderson and Director
_____________________________ Director
David J. Bershad
/s/Anthony J. Dimun
_____________________________ Director
Anthony J. Dimun
/s/David H. MacCallum
_____________________________ Director
David H. MacCallum
/sPertti Tormala
____________________________ Director
Pertti Tormala
/s/Terry D. Wall
____________________________ Director
Terry D. Wall
/s/Michael J. O'Brien
____________________________ Vice President, Administration and
Michael J. O'Brien Chief Financial Officer (Chief
Financial and Accounting Officer)
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<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF BIONX IMPLANTS, INC., AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 2
<CASH> 22,632
<SECURITIES> 0
<RECEIVABLES> 3,181
<ALLOWANCES> 111
<INVENTORY> 2,550
<CURRENT-ASSETS> 28,893
<PP&E> 1,304
<DEPRECIATION> 455
<TOTAL-ASSETS> 33,541
<CURRENT-LIABILITIES> 4,344
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 29,064
<TOTAL-LIABILITY-AND-EQUITY> 33,541
<SALES> 15,773
<TOTAL-REVENUES> 16,014
<CGS> 3,678
<TOTAL-COSTS> 10,579
<OTHER-EXPENSES> (408)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (752)
<INCOME-PRETAX> 2,917
<INCOME-TAX> 758
<INCOME-CONTINUING> 0
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<NET-INCOME> 2,158
<EPS-PRIMARY> .24
<EPS-DILUTED> .23
</TABLE>
EXHIBIT 99.1
BIONX IMPLANTS, INC.
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for "forward-looking statements" (as defined in the
Act). The Annual Report on Form 10-K to which this Exhibit is attached, the
Company's Annual Report to Shareholders, any Quarterly Report on Form 10-Q or
any Current Report on Form 8-K of the Company, or any other written or oral
statements made by or on behalf of the Company may include forward-looking
statements which reflect the Company's current view (as of the date such
forward-looking statement is made) with respect to future events, prospects,
projections or financial performance. These forward-looking statements are
subject to certain uncertainties and other factors that could cause actual
results to differ materially from those made, implied or projected in such
statements. These uncertainties and other factors include, but are not limited
to, the following matters (as well as other factors referenced in the Annual
Report on Form 10-K to which this Exhibit is attached or other filings or
written or oral statements made by or on behalf of the Company):
History of Operating Losses; Accumulated Deficit; Uncertainty of Future
Profitability; Fluctuating Results of Operations. The Company has incurred
substantial operating losses since its inception; at December 31, 1997, it had
an accumulated deficit of approximately $5.5 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 bodies, the development of sales, marketing and distribution
channels, the write-off of acquired in-process research and development and the
development of manufacturing capabilities. Although the Company's revenues grew
significantly during 1996 and 1997 and the Company reported a profit for 1997,
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 continue. 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
continued 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 operating 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.
Uncertainty of Market Acceptance. The Company's success will depend in
part upon the continued acceptance of the Company's Self-Reinforced, resorbable
implants, particularly its Meniscus Arrow products, 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.
Uncertainties Relating to Licenses, Trade Secrets, Patents and
Proprietary Rights. For information pertaining to risks associated with the
Company's licenses, trade secrets, patents and proprietary rights, see Item 1
("Business -- Licenses, Trade Secrets, Patents and Proprietary Rights") of the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Regulatory Submission Dates Subject to Change. The 1998 target for
filing a PMA application for the Company's PGA urology stent depends upon the
FDA's willingness to accept the data that the Company has collected from a
European study. This study was not conducted pursuant to a protocol precleared
by the FDA. The FDA may raise questions as to the design, endpoints, sample
size, and/or inclusion/exclusion criteria in connection with studies not
precleared by it. The Company intends to request a meeting with the FDA to
determine whether its data will be sufficient to support approval of a PMA
application. No assurance can be given that the FDA will find the existing data
sufficient to support approval. If the FDA concludes that the data are
insufficient to support approval, the Company will consider conducting a new
clinical trial in the U.S., which could extend the time required to obtain PMA
approval by at least two years.
From time to time the Company publicizes estimates regarding future
regulatory submission dates. Regulatory submissions can be delayed, or plans to
submit proposed products can be canceled, for a number of reasons, including the
receipt of unanticipated preclinical or clinical study reports, a determination
by the FDA that PMA approval 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.
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. 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 three 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 ands 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.
Government Regulation. For information regarding the risks associated
with U.S. and international government regulation, see Item 1 ("Business --
Government Regulations") of the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
Competition. Many of the Company's 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 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 Item 1
("Business -- Competition" and Item 7 ("Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Operations for the
years ended December 31, 1995, 1996 and 1997 - Product Sales") of the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
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 Item 1 ("Business -- Sales, Marketing
and Distribution") of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
Risks Relating to International Operations. Approximately 32% of the
Company's product sales during 1996 and approximately 15% of sales during 1997
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.
Product Liability Risks; Limited Insurance Coverage. For information
regarding rights associated with the Company's exposure to products liability
claims, see Item 1 ("Business -- Product Liability and Insurance") of the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
No Assurance of Ability to Manage Growth. The Company experienced
substantial growth in product sales during the second half of 1996 and during
1997. 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.
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. For
information regarding risks associated with the Company's plans to establish a
U.S. manufacturing capability, see Item 1 ("Business -- Manufacturing") of the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
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 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.
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.
Possible Volatility of Stock Price. 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 Company's Common Stock. Factors such as
variations in the Company's results of operations, comments by securities
analysts, under-performance against analysts' estimates, announcements of
technological innovations, new products or new pricing practices by the Company
or its competitors, changing government regulations and developments with
respect to FDA or foreign regulatory submissions, the results of regulatory
inspections, patents, proprietary rights or litigation may have a material
adverse effect on the market price of the Company's Common Stock.
The words "believe", "expect", "anticipate", "project" and similar
expressions identify "forward-looking statements", which speak only as of the
date that any such statement was made. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
