<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
JOHNSON & JOHNSON
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEW JERSEY 2844 22-1024240
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
STEVEN M. ROSENBERG, ESQ.
ONE JOHNSON & JOHNSON PLAZA
NEW BRUNSWICK, NEW JERSEY 08933
(908) 524-0400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
ROBERT A. KINDLER, ESQ. DAVID J. SEGRE, ESQ.
CRAVATH, SWAINE & MOORE CHRISTOPHER D. MITCHELL, ESQ.
WORLDWIDE PLAZA WILSON SONSINI GOODRICH & ROSATI
825 EIGHTH AVENUE 650 PAGE MILL ROAD
NEW YORK, NY 10019 PALO ALTO, CALIFORNIA 94304-1050
(212) 474-1000 (415) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon
consummation of the Merger referred to herein.
If the securities being registered to this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED(1) REGISTERED PER UNIT OFFERING PRICE FEE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $1.00 per
share................................ N/A(2) N/A(2) $68,833,901(3) $20,859(4)
===========================================================================================================
</TABLE>
(1) The Registration Statement relates to securities of the Registrant issuable
to holders of common stock of Gynecare, Inc., ("Gynecare Common Stock") a
Delaware corporation ("Gynecare"), in the proposed merger of a wholly owned
subsidiary of the Registrant with and into Gynecare.
(2) Pursuant to Rule 457(o) under the Securities Act of 1933, as amended (the
"Securities Act"), only the title of the class of securities to be
registered, the proposed maximum aggregate offering price for such class of
securities and the amount of registration fee need appear in the
"Calculation of Registration Fee" Table.
(3) Estimated solely for purposes of calculating the registration fee required
by Section 6(b) of the Securities Act and calculated pursuant to Rule 457(f)
under the Securities Act. Pursuant to Rule 457(f)(1) under the Securities
Act, the proposed maximum aggregate offering price of the Gynecare Common
Stock was calculated in accordance with Rule 457(c) under the Securities Act
as: (a) $8.1875 the average of the high and low prices per share of Gynecare
Common Stock on October 14, 1997 as reported on the Nasdaq National Market,
multiplied by (b) 8,407,194 the aggregate number of shares of Gynecare
Common Stock outstanding as of the Record Date (as defined in the Proxy
Statement/Prospectus included in this Registration Statement.)
(4) Pursuant to Rule 457(b) under the Securities Act, $13,663 of the
registration fee was paid on August 22, 1997 by the Registrant in connection
with the filing of preliminary proxy materials of Gynecare included herein.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
================================================================================
<PAGE> 2
October 17, 1997
Dear Stockholder:
At our Special Meeting to be held on November 19, 1997, you will be asked
to vote upon the approval and adoption of the Agreement and Plan of Merger dated
as of August 4, 1997 (as amended, the "Merger Agreement"), among Johnson &
Johnson ("Johnson & Johnson"), Lima Merger Corp., a wholly owned subsidiary of
Johnson & Johnson ("Lima"), and Gynecare, Inc. ("Gynecare") providing for the
merger of Lima with and into Gynecare upon the terms and subject to the
conditions of the Merger Agreement. The foregoing proposal is described more
fully in the accompanying Proxy Statement/Prospectus.
After careful consideration, the Gynecare Board of Directors has
unanimously determined that the terms of the Merger Agreement and the
transactions contemplated thereby are fair to, and in the best interests of,
Gynecare stockholders. Accordingly, the Gynecare Board of Directors has
unanimously approved the Merger Agreement and unanimously recommends that the
stockholders of Gynecare vote FOR approval and adoption of the Merger Agreement.
The approval and adoption of the Merger Agreement requires the affirmative vote
of holders of at least a majority of the outstanding shares of common stock of
Gynecare. Pursuant to a stockholder agreement with Johnson & Johnson, certain
affiliated stockholders of Gynecare, together holding greater than 50% of the
outstanding shares of Gynecare common stock, have agreed to, among other things,
vote (or cause to be voted) their shares of Gynecare common stock in favor of
approval and adoption of the Merger Agreement.
Stockholders are urged to review carefully the information contained in the
Proxy Statement/Prospectus prior to deciding how to vote their shares at the
Special Meeting.
Whether or not you expect to attend the Special Meeting in person, please
complete, sign and promptly return the enclosed proxy card in the enclosed
postage-prepaid envelope to assure representation of your shares. You may revoke
your proxy at any time before it has been voted, and if you attend you may vote
in person, even if you previously returned your proxy card. Your prompt
cooperation will be greatly appreciated.
Sincerely,
/s/ ROSEANNE HIRSCH
Roseanne Hirsch
President and Chief Executive Officer
<PAGE> 3
GYNECARE, INC.
235 CONSTITUTION DRIVE,
MENLO PARK, CA 94025
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 19, 1997
October 17, 1997
TO THE STOCKHOLDERS OF GYNECARE, INC.
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Gynecare, Inc., a Delaware corporation ("Gynecare"), will be held
on November 19, 1997 at 9:30 a.m., local time, at the principal executive
offices of Gynecare located at 235 Constitution Drive, Menlo Park, California.
At the Special Meeting you will be asked to consider and vote upon the
following matters:
(1) approval and adoption of the Agreement and Plan of Merger dated as
of August 4, 1997 (as amended, the "Merger Agreement"), among Johnson &
Johnson ("Johnson & Johnson"), Lima Merger Corp., a wholly owned subsidiary
of Johnson & Johnson ("Lima"), and Gynecare providing for the merger of
Lima with and into Gynecare upon the terms and subject to the conditions of
the Merger Agreement (the "Merger"); and
(2) such other business as may properly come before the Special
Meeting or any adjournment thereof.
Pursuant to the Merger Agreement, each share of common stock, par value
$.001 per share, of Gynecare ("Gynecare Common Stock") issued and outstanding at
the effective time of the Merger will be converted into the right to receive
that number of fully paid and nonassessable shares of Johnson & Johnson common
stock, par value $1.00 per share ("Johnson & Johnson Common Stock"), equal to
the number obtained by dividing $8.46 by the average per share closing price of
Johnson & Johnson Common Stock during the 20 full trading days preceding the
date of the last full trading day prior to the Special Meeting, as such prices
are reported on the New York Stock Exchange, Inc. Composite Transactions Tape.
THE BOARD OF DIRECTORS OF GYNECARE UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
Detailed information concerning the Merger Agreement and the Merger is
contained in the attached Proxy Statement/Prospectus; please read it carefully.
ONLY STOCKHOLDERS WHO WERE HOLDERS OF RECORD AT THE CLOSE OF BUSINESS ON
SEPTEMBER 25, 1997 WILL BE ENTITLED TO RECEIVE NOTICE OF AND TO VOTE AT THE
SPECIAL MEETING.
Whether or not you expect to attend the Special Meeting in person, please
complete, sign and promptly return the enclosed proxy card in the enclosed
postage-prepaid envelope. A stockholder who executes a proxy may revoke it at
any time before it is exercised by giving written notice of revocation to
Gynecare, by subsequently filing another proxy or by attending the Special
Meeting and voting in person.
By order of the Board of Directors,
/s/ MALCOM M. FARNSWORTH, JR.
Malcom M. Farnsworth, Jr.
Vice President,
Chief Financial Officer and Secretary
YOUR VOTE IS IMPORTANT.
PLEASE COMPLETE, SIGN AND PROMPTLY RETURN YOUR PROXY CARD.
HOLDERS OF GYNECARE COMMON STOCK SHOULD NOT SEND STOCK
CERTIFICATES WITH THEIR PROXY CARDS.
<PAGE> 4
GYNECARE, INC.
PROXY STATEMENT
JOHNSON & JOHNSON
PROSPECTUS
This Proxy Statement/Prospectus is being furnished to the stockholders of
Gynecare, Inc. ("Gynecare" or the "Company") in connection with the solicitation
of proxies by the Board of Directors of Gynecare (the "Gynecare Board") for use
at the special meeting of stockholders of Gynecare to be held on November 19,
1997 at 9:30 a.m., local time, at the principal executive offices of Gynecare
located at 235 Constitution Drive, Menlo Park, California, including any
adjournments or postponements thereof (the "Special Meeting").
At the Special Meeting, the holders of common stock, par value $.001 per
share, of Gynecare ("Gynecare Common Stock") will consider and vote upon the
approval and adoption of the Agreement and Plan of Merger dated as of August 4,
1997 (as amended, the "Merger Agreement"), among Johnson & Johnson ("Johnson &
Johnson"), Lima Merger Corp., a wholly owned subsidiary of Johnson & Johnson
("Lima"), and Gynecare providing for the merger of Lima with and into Gynecare
upon the terms and subject to the conditions of the Merger Agreement (the
"Merger"). Pursuant to the Merger Agreement, each share of Gynecare Common Stock
issued and outstanding at the effective time of the Merger will be converted
into the right to receive that number of fully paid and nonassessable shares of
common stock, par value $1.00 per share, of Johnson & Johnson ("Johnson &
Johnson Common Stock"), equal to the number obtained by dividing $8.46 by the
average per share closing price of Johnson & Johnson Common Stock during the 20
full trading days preceding the date of the last full trading day prior to the
Special Meeting, as such prices are reported on the New York Stock Exchange,
Inc. ("NYSE") Composite Transactions Tape.
The Gynecare Board has unanimously determined that the terms of the Merger
Agreement and the transactions contemplated thereby are fair to, and in the best
interests of, Gynecare stockholders. Accordingly, the Gynecare Board has
unanimously approved the Merger Agreement and unanimously recommends that the
stockholders of Gynecare vote FOR approval and adoption of the Merger Agreement,
pursuant to which Gynecare will become a wholly owned subsidiary of Johnson &
Johnson and stockholders of Gynecare will become stockholders of Johnson &
Johnson.
This Proxy Statement/Prospectus also serves as a prospectus of Johnson &
Johnson under the Securities Act of 1933, as amended (the "Securities Act"),
relating to the shares of Johnson & Johnson Common Stock issuable in connection
with the Merger.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to stockholders of Gynecare on or about October 21, 1997.
------------------------------------
THE SECURITIES TO BE ISSUED IN THE MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------------
The date of this Proxy Statement/Prospectus is October 17, 1997.
<PAGE> 5
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS,
IN CONNECTION WITH THE SOLICITATION AND THE OFFERING MADE BY THIS PROXY
STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY OR AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES IN ANY
JURISDICTION IN WHICH SUCH SOLICITATION OR OFFERING MAY NOT LAWFULLY BE MADE.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL IMPLY THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF JOHNSON &
JOHNSON OR GYNECARE SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
2
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
<S> <C> <C> <C>
Available Information............... 3
Incorporation of Certain Documents
by Reference...................... 4
Trademarks.......................... 4
Summary............................. 5
Special Meeting................... 5
Vote Required..................... 5
The Merger........................ 6
Market Price Data................. 9
Certain Financial Data............ 10
The Special Meeting................. 14
Special Meeting................... 14
Record Date; Shares Entitled to
Vote; Vote Required............ 14
Proxies; Proxy Solicitation....... 15
The Merger.......................... 15
Background of the Merger.......... 15
Recommendation of the Gynecare
Board and Reasons for the
Merger......................... 17
Opinion of Financial Advisor...... 18
Effective Time.................... 23
Merger Consideration.............. 23
Exchange Agent; Exchange
Procedures; Dividends; No
Further Ownership Rights in
Gynecare Common Stock; No
Fractional Shares.............. 23
Stock Exchange Listing............ 25
Expenses.......................... 25
Material Federal Income Tax
Consequences................... 25
Anticipated Accounting
Treatment...................... 26
Interests of Certain Persons in
the Merger..................... 26
Resale of Johnson & Johnson Common
Stock.......................... 27
The Merger Agreement................ 28
The Merger........................ 28
Representations and Warranties.... 28
Business of Gynecare Pending the
Effective Time of the Merger... 29
Effect on Gynecare Benefit Plans
and Stock Options.............. 31
Conditions to the Consummation of
the Merger..................... 31
No Solicitation................... 33
Termination, Amendment and
Waiver......................... 33
The Stockholder Agreement......... 34
The Credit Agreement.............. 35
Management and Operations After the
Merger............................ 35
Comparative Stock Prices and
Dividends......................... 36
Business of Johnson & Johnson....... 37
Business of Gynecare, Inc........... 37
Selected Historical Financial Data
of Gynecare....................... 52
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of Gynecare......... 54
Executive Officers of Gynecare
Following the Merger.............. 60
Security Ownership of Gynecare...... 61
Executive Compensation of
Gynecare.......................... 63
Certain Transactions of Gynecare.... 65
Description of Capital Stock of
Gynecare.......................... 66
Comparison of Rights of Common
Stockholders of Johnson & Johnson
and Gynecare...................... 67
Other Matters....................... 71
Absence of Appraisal Rights......... 72
Experts............................. 72
Legal Matters....................... 72
Future Stockholder Proposals........ 73
Index to Financial Statements of
Gynecare.......................... F-1
ANNEXES
Annex I Agreement and Plan of
Merger, as amended
Annex II Stockholder Agreement
Annex III Opinion of Alex. Brown &
Sons Incorporated
</TABLE>
AVAILABLE INFORMATION
Johnson & Johnson and Gynecare are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). In accordance with the Exchange Act, Johnson & Johnson and Gynecare file
proxy statements, reports and other information with the Securities and Exchange
Commission (the "SEC"). This filed material can be inspected and copied at the
public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the SEC: Chicago Regional Office (Suite 1400, Northwestern Atrium Center, 500
West Madison Street, Chicago, Illinois 60661) and New York Regional Office
(Seven World Trade Center,
3
<PAGE> 7
13th Floor, New York, New York 10048). The filed material also is available to
the public from commercial document retrieval services and at the web site
maintained by the SEC at "http://www.sec.gov." Copies of such material also can
be obtained by mail from the Public Reference Section of the SEC, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, such
material can be inspected at the offices of the NYSE, 20 Broad Street, New York,
New York 10005 for Johnson & Johnson, and the National Association of Securities
Dealers, Inc. (the "NASD"), 1935 K Street, N.W., Washington, D.C. 20006 for
Gynecare.
Johnson & Johnson has filed a Registration Statement on Form S-4 (the
"Registration Statement") with the SEC under the Securities Act with respect to
the Johnson & Johnson Common Stock to be issued upon consummation of the Merger.
This Proxy Statement/Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits thereto, certain portions of
which have been omitted as permitted by the rules and regulations of the SEC.
Copies of the Registration Statement are available from the SEC, upon payment of
prescribed rates. For further information, reference is made to the Registration
Statement and the exhibits filed therewith. Statements contained in this Proxy
Statement/Prospectus or in any document incorporated by reference in this Proxy
Statement/Prospectus relating to the contents of any contract or other document
referred to herein or therein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following Johnson & Johnson documents are incorporated by reference in
this Proxy Statement/Prospectus: (i) Johnson & Johnson's Annual Report on Form
10-K for the fiscal year ended December 29, 1996, as amended by Amendment No. 1
thereto, (ii) Johnson & Johnson's Quarterly Report on Form 10-Q for the quarter
ended March 30, 1997, (iii) Johnson & Johnson's Quarterly Report on Form 10-Q
for the quarter ended June 29, 1997 and (iv) the description of Johnson &
Johnson Common Stock set forth in Johnson & Johnson's Registration Statements
filed pursuant to Section 12 of the Exchange Act, and any amendment or report
filed for the purpose of updating any such description.
A COPY OF THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE (EXCLUDING
EXHIBITS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO
THE INFORMATION INCORPORATED HEREIN) THAT ARE NOT PRESENTED HEREIN OR DELIVERED
HEREWITH WILL BE PROVIDED BY FIRST-CLASS MAIL WITHOUT CHARGE TO EACH PERSON,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS
DELIVERED, UPON ORAL OR WRITTEN REQUEST OF ANY SUCH PERSON. REQUESTS SHOULD BE
DIRECTED TO THE OFFICE OF THE CORPORATE SECRETARY, ONE JOHNSON & JOHNSON PLAZA,
NEW BRUNSWICK, NEW JERSEY 08933 (TELEPHONE (908) 524-2455). IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS IN ADVANCE OF THE SPECIAL MEETING TO WHICH THIS
PROXY STATEMENT/PROSPECTUS RELATES, ANY SUCH REQUEST SHOULD BE MADE BY NOVEMBER
3, 1997.
All reports filed by Johnson & Johnson and all definitive proxy or
information statements filed by Johnson & Johnson pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this Proxy
Statement/Prospectus and prior to the date of the Special Meeting shall be
deemed to be incorporated by reference into this Proxy Statement/Prospectus from
the dates of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated in this Proxy Statement/Prospectus
shall be deemed to be modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained herein or in any
other subsequently filed document that also is or is deemed to be incorporated
by reference modifies or supersedes such statement.
All information contained in this Proxy Statement/Prospectus relating to
Johnson & Johnson has been supplied by Johnson & Johnson, and all information
relating to Gynecare has been supplied by Gynecare.
TRADEMARKS
THIS PROXY STATEMENT/PROSPECTUS CONTAINS TRADEMARKS OF GYNECARE AND MAY
CONTAIN TRADEMARKS OF OTHERS. GYNECARE TRADEMARKS INCLUDE WITHOUT LIMITATION
THERMACHOICE(TM), UTERINE BALLOON THERAPY(TM) AND VERSAPOINT(TM).
4
<PAGE> 8
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained elsewhere
in this Proxy Statement/Prospectus, in the attached Annexes and in the documents
incorporated herein by reference. Gynecare stockholders are urged to read
carefully this Proxy Statement/Prospectus and the attached Annexes in their
entirety.
SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to Gynecare stockholders
in connection with the solicitation of proxies by the Gynecare Board for use at
the Special Meeting to be held on November 19, 1997 at 9:30 a.m., local time, at
the principal executive offices of Gynecare located at 235 Constitution Drive,
Menlo Park, California. Only holders of record of Gynecare Common Stock at the
close of business on September 25, 1997 (the "Record Date"), will be entitled to
notice of, and to vote at, the Special Meeting. At the Special Meeting, holders
of Gynecare Common Stock will be asked to consider and vote upon the approval
and adoption of the Merger Agreement, a copy of which is attached as Annex I to
this Proxy Statement/Prospectus, pursuant to which Lima will be merged with and
into Gynecare. Gynecare will be the surviving corporation in the Merger (the
"Surviving Corporation") and will become a wholly owned subsidiary of Johnson &
Johnson. Holders of Gynecare Common Stock will also transact such other business
as may properly come before the Special Meeting. See "THE SPECIAL
MEETING--Special Meeting."
VOTE REQUIRED
The close of business on September 25, 1997 has been fixed as the Record
Date for determining the holders of Gynecare Common Stock who are entitled to
receive notice of and to vote at the Special Meeting. As of the Record Date,
there were 8,407,194 shares of Gynecare Common Stock outstanding, of which
4,285,237 shares (approximately 51.0% of the outstanding shares) of Gynecare
Common Stock were beneficially owned by directors and executive officers of
Gynecare and their affiliates. All such directors and executive officers of
Gynecare and their affiliates have agreed to vote all such shares in favor of
the approval and adoption of the Merger Agreement. The holders of record on the
Record Date of shares of Gynecare Common Stock are entitled to one vote per
share of Gynecare Common Stock on each matter submitted to a vote at the Special
Meeting. The presence in person or by proxy of the holders of shares
representing a majority of Gynecare Common Stock issued and outstanding and
entitled to vote is necessary to constitute a quorum for the transaction of
business at the Special Meeting. Under the Delaware General Corporation Law (the
"DGCL"), the affirmative vote of holders of at least a majority of the
outstanding shares of Gynecare Common Stock is required for approval and
adoption of the Merger Agreement ("Stockholder Approval"). An abstention from
voting or a broker non-vote will have the practical effect of a vote against
approval and adoption of the Merger Agreement since a vote to abstain or a
broker non-vote represents one fewer vote for such approval and adoption. See
"THE SPECIAL MEETING--Special Meeting."
Pursuant to the terms of a Stockholder Agreement dated as of August 4,
1997, among Johnson & Johnson and certain affiliated stockholders of Gynecare
(the "Stockholder Agreement"), such stockholders have agreed, among other
things, to vote (or cause to be voted) their shares of Gynecare Common Stock in
favor of approval and adoption of the Merger Agreement and each of the other
transactions contemplated thereby at the Special Meeting. Together, such
stockholders held on the Record Date 4,210,411 shares (approximately 50.08% of
the outstanding shares) of Gynecare Common Stock. Consequently, such
stockholders together are generally able to control the vote of all matters
submitted to a vote of the Gynecare stockholders, including approval and
adoption of the Merger Agreement. The general effect of the Stockholder
Agreement is to ensure that Stockholder Approval will be obtained. See "THE
MERGER--Interests of Certain Persons in the Merger" and "THE MERGER
AGREEMENT--The Stockholder Agreement."
No approval by stockholders of Johnson & Johnson is required to effect the
Merger.
5
<PAGE> 9
THE MERGER
The Parties. Johnson & Johnson, organized in the State of New Jersey in
1887, employs approximately 89,300 people worldwide and is engaged in the
manufacture and sale of a broad range of products in the health care field in
many countries of the world. Johnson & Johnson's primary interest, both
historically and currently, has been in products related to health and
well-being. Johnson & Johnson's worldwide business is divided into three
segments: consumer, pharmaceutical and professional. The consumer segment's
principal products are personal care and hygienic products, including oral and
baby care products, first aid products, nonprescription drugs, sanitary
protection products and adult skin and hair products; the pharmaceutical
segment's principal worldwide franchises are in the allergy, antibacterial,
antifungal, biotech, central nervous system, contraceptive, dermatology,
gastrointestinal and immunobiology fields; and the professional segment's
products include suture and mechanical wound closure products,
minimally-invasive surgical instruments, diagnostic products, medical equipment
and devices, disposable contact lenses, surgical instruments, joint replacements
and products for wound management and infection prevention.
The principal executive offices of Johnson & Johnson are located at One
Johnson & Johnson Plaza, New Brunswick, New Jersey 08933. The telephone number
is (908) 524-0400.
Lima, a Delaware corporation, is a wholly owned subsidiary of Johnson &
Johnson formed solely for the purposes of the Merger.
Gynecare designs, develops and markets minimally invasive and
cost-effective medical devices for the treatment of uterine disorders. The
Company's first product, the ThermaChoice Uterine Balloon Therapy system, is
used to treat women who experience dysfunctional uterine bleeding. The
ThermaChoice system is designed as a minimally invasive procedure that can be
performed in eight minutes in a clinic or physician's office. The system is
currently under clinical investigation in the U.S. and approved for marketing in
Canada and in over 30 other countries. Gynecare's application for premarket
approval ("PMA") of the ThermaChoice system has been filed by the U.S. Food and
Drug Administration ("FDA"). On October 6, 1997, the Ob/Gyn Devices Advisory
Panel of the FDA recommended to the FDA that it approve Gynecare's PMA
application, subject to certain conditions. The FDA will consider the Advisory
Panel's recommendation in its final review of Gynecare's PMA application. The
ThermaChoice system is not approved for marketing in the United States and the
Advisory Panel's recommendation does not imply that a decision about the
approvability of the application has been made by the FDA. Gynecare submitted
its PMA application for the ThermaChoice system to the FDA on June 17, 1997.
Gynecare's second product, the VersaPoint Bipolar Electrosurgery system, is
used to treat women diagnosed with benign uterine pathologies including
fibroids, polyps, adhesions and divided septa. The VersaPoint microelectrode
vaporizes, cuts and desiccates tissue through the use of proprietary bipolar
technology. In November 1996, Gynecare received 510(k) clearance from the FDA to
market the VersaPoint system in the United States.
On September 19, 1997, Gynecare and Ethicon, Inc., a wholly-owned
subsidiary of Johnson & Johnson ("Ethicon" and, together with Johnson & Johnson,
"J&J"), entered into a distribution agreement by which Ethicon will serve as a
non-exclusive distributor for Gynecare's VersaPoint and ThermaChoice products in
the United States for a period of six months. The distribution agreement was
negotiated on an arm's-length basis and may be terminated by either party for
any reason by giving the other party 30 days' notice.
Gynecare was incorporated in the state of California on March 8, 1994 and
subsequently reincorporated in the State of Delaware on November 20, 1995. In
connection with Gynecare's incorporation in March 1994, Origin Medsystems, Inc.
("Origin"), a subsidiary of Guidant Corporation ("Guidant"), assigned to
Gynecare its license to patents and technology covering the ThermaChoice Uterine
Balloon Therapy system developed through the date of assignment. Origin
previously licensed the rights to the patents and technology in January 1993.
Guidant, through Origin, owned approximately 30% of the outstanding shares of
Gynecare Common Stock at September 25, 1997. The principal executive offices of
Gynecare are located at 235 Constitution Drive, Menlo Park, California 94025.
The telephone number is (415) 614-2500.
6
<PAGE> 10
Merger Consideration. At the effective time of the Merger (the "Effective
Time"), each issued and outstanding share of Gynecare Common Stock, other than
shares owned by Johnson & Johnson, Lima or Gynecare, will be converted into the
right to receive that number of fully paid and nonassessable shares of Johnson &
Johnson Common Stock equal to the number obtained by dividing $8.46 by the
average per share closing price of Johnson & Johnson Common Stock during the 20
full trading days preceding the date of the last full trading day prior to the
Special Meeting, as such prices are reported on the NYSE Composite Transactions
Tape (the "Exchange Ratio"). No fractional shares of Johnson & Johnson Common
Stock will be issued in the Merger and holders of shares of Gynecare Common
Stock will be entitled to a cash payment in lieu of any such fractional shares.
See "THE MERGER--Merger Consideration" and "THE MERGER-- Exchange Agent;
Exchange Procedures; Dividends; No Further Ownership Rights in Gynecare Common
Stock; No Fractional Shares."
Recommendation of the Gynecare Board and Reasons for the Merger. THE
GYNECARE BOARD HAS UNANIMOUSLY DETERMINED THAT THE TERMS OF THE MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO, AND IN THE BEST INTERESTS
OF, GYNECARE STOCKHOLDERS. ACCORDINGLY, THE GYNECARE BOARD HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS
OF GYNECARE VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. In reaching
its decision to approve the Merger Agreement and recommend the Merger, the
Gynecare Board considered a number of factors. See "THE MERGER--Background of
the Merger" and "THE MERGER--Recommendation of the Gynecare Board and Reasons
for the Merger." For a discussion of the interests that certain directors and
executive officers of Gynecare have with respect to the Merger that are
different from, or in addition to, the interests of stockholders of Gynecare
generally, see "THE MERGER--Interests of Certain Persons in the Merger." Such
interests, together with other relevant factors, were considered by the Gynecare
Board in making its recommendation and approving the Merger Agreement. See "THE
MERGER--Recommendation of the Gynecare Board and Reasons for the Merger."
Opinion of Financial Advisor. Alex. Brown & Sons Incorporated ("Alex.
Brown") has delivered its written opinion dated August 3, 1997, to the Gynecare
Board that, as of such date and subject to the assumptions made, matters
considered and limitations set forth in such opinion, and based on the facts and
circumstances as they existed at the time, the Exchange Ratio was fair to the
stockholders of Gynecare from a financial point of view. The full text of the
opinion of Alex. Brown is included as Annex III to this Proxy
Statement/Prospectus. Gynecare stockholders are urged to read the opinion in its
entirety. See "THE MERGER--Opinion of Financial Advisor."
Interests of Certain Persons in the Merger. As of the Record Date,
directors and executive officers of Gynecare and their affiliated entities owned
(i) 4,183,803 shares of Gynecare Common Stock for which they will receive the
same consideration as other Gynecare stockholders and (ii) unexercised options
to acquire, 608,389 shares of Gynecare Common Stock, which will be treated as
described below under "THE MERGER--Interests of Certain Persons in the Merger."
Pursuant to the terms of the 1995 Director Option Plan, all outstanding Stock
Options (as defined) held by current directors of Gynecare granted under such
plan will become fully vested and exercisable for three months following the
Effective Date. At the Record Date, Stock Options to purchase an aggregate of
35,000 shares were outstanding under such plan. In addition, options to purchase
an aggregate of 400,000 shares of Gynecare Common Stock granted to Roseanne
Hirsch, the President and Chief Executive Officer of Gynecare, in connection
with and as a condition to her acceptance of employment with Gynecare, will,
pursuant to their terms, become fully vested and exercisable at the Effective
Time. Johnson & Johnson also has agreed to cause the Surviving Corporation to
fulfill and honor in all respects the obligations of Gynecare pursuant to
certain indemnification agreements currently in effect between Gynecare and
certain persons, and pursuant to the indemnification provisions contained in
Gynecare's Restated Certificate of Incorporation (the "Gynecare Certificate of
Incorporation") and By-laws (the "Gynecare By-laws"). See "THE MERGER--Interests
of Certain Persons in the Merger."
Gynecare Stock Options. Under the terms of the Merger Agreement, each
outstanding stock option granted under any plan or arrangement providing for the
grant of options to purchase shares of Gynecare Common Stock (a "Stock Option")
will be amended and converted into an option to acquire, on the same terms and
conditions as were applicable under the Stock Option, the number of shares of
Johnson & Johnson
7
<PAGE> 11
Common Stock (rounded down to the nearest whole share) determined by multiplying
the number of shares of Gynecare Common Stock subject to the Stock Option by the
Exchange Ratio at a price per share of Johnson & Johnson Common Stock (rounded
down to the nearest whole cent) equal to (a) the aggregate exercise price for
the shares of Gynecare Common Stock otherwise purchasable pursuant to the Stock
Option divided by (b) the aggregate number of shares of Johnson & Johnson Common
Stock deemed purchasable pursuant to such Stock Option.
Regulatory Approvals Required. The consummation of the Merger is subject
to the expiration or termination of the relevant waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). Johnson & Johnson and Gynecare have filed notification and report forms
under the HSR Act. Effective September 16, 1997 the waiting period under the HSR
Act was terminated. See "OTHER MATTERS--Regulatory Approvals Required."
Conditions to the Merger. The obligations of Johnson & Johnson and
Gynecare to consummate the Merger are subject to various conditions, including,
without limitation, obtaining Stockholder Approval and regulatory approvals,
approval for listing (subject to official notice of issuance) on the NYSE of the
Johnson & Johnson Common Stock to be issued in connection with the Merger and
the absence of any injunction or other legal restraint preventing the
consummation of the Merger. See "THE MERGER AGREEMENT-- Conditions to the
Consummation of the Merger."
No Solicitation. Under the Merger Agreement, Gynecare has agreed that it
will not, nor will it authorize or permit any of its officers, directors or
employees or any investment banker, attorney or other advisor or representative
retained by it to, directly or indirectly, (i) solicit, initiate or encourage
the submission of any Takeover Proposal (as defined) or (ii) participate in any
discussions or negotiations regarding, or furnish to any person any non-public
information with respect to, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes any Takeover Proposal.
See "THE MERGER AGREEMENT--No Solicitation."
Termination. The Merger Agreement may be terminated, and the Merger
contemplated thereby may be abandoned, at any time prior to the Effective Time,
whether before or after receipt of Stockholder Approval, (i) by mutual written
consent of Johnson & Johnson, Lima and Gynecare; or (ii) by either Johnson &
Johnson or Gynecare, if the Merger is not consummated by November 30, 1997, if
certain legal restraints or prohibitions are in effect resulting from any suit,
action or proceeding by any Governmental Entity (as defined in the Merger
Agreement), if Stockholder Approval is not obtained at the Stockholder Meeting
or by written consent or if there are certain breaches of, or inaccuracies
contained in, the other party's representations, warranties, covenants or
agreements and such breaches or inaccuracies are not cured in all material
respects within 45 days, subject to certain conditions and limitations. In the
event the Merger Agreement is terminated (subject to certain exceptions),
Johnson & Johnson has agreed to loan up to $5 million to Gynecare (which amount
may be increased to $6 million in certain circumstances) pursuant to the terms
of the Loan and Security Agreement attached as Exhibit B to the Merger Agreement
(the "Credit Agreement"). See "THE MERGER AGREEMENT--Termination, Amendment and
Waiver" and "THE MERGER AGREEMENT--The Credit Agreement."
Absence of Appraisal Rights. In accordance with Section 262 of the DGCL,
holders of Gynecare Common Stock are not entitled to appraisal rights in
connection with the Merger. See "ABSENCE OF APPRAISAL RIGHTS."
Certain Federal Income Tax Consequences. It is a condition to the
obligation of Gynecare to consummate the Merger that Gynecare and Johnson &
Johnson receive the opinion of Wilson Sonsini Goodrich & Rosati Professional
Corporation and the opinion of Cravath Swaine & Moore, respectively, in each
case to the effect that the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), and that Johnson & Johnson, Lima and Gynecare will each be a party to
the reorganization within the meaning of Section 368(b) of the Code. Such
opinions, which have been delivered to Gynecare and Johnson & Johnson, assume
that the Merger will take place as described in the Merger Agreement and that
certain factual matters represented by Johnson &
8
<PAGE> 12
Johnson, Lima, Gynecare and certain Gynecare stockholders will be true and
correct at the Effective Time. See "THE MERGER--Material Federal Income Tax
Consequences."
Anticipated Accounting Treatment. Johnson & Johnson intends to treat the
Merger as a pooling of interests for accounting and financial reporting
purposes.
Certain Considerations. In considering whether to vote in favor of the
adoption of the Merger Agreement, Gynecare stockholders should consider the
following: (i) the Exchange Ratio will be determined based on the average per
share closing price of Johnson & Johnson Common Stock during the 20 full trading
days preceding the date of the last full trading day prior to the Special
Meeting and (ii) the market price of a share of Johnson & Johnson Common Stock
on the closing date of the Merger (the "Closing Date") can be expected to vary
from its price as of the date of this Proxy Statement/Prospectus and the dates
during such 20-day period due to changes in the business, operations or
prospects of Johnson & Johnson, general market and economic conditions and other
factors.
GYNECARE STOCKHOLDERS SHOULD NOT FORWARD GYNECARE STOCK CERTIFICATES TO THE
EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS. GYNECARE STOCKHOLDERS
SHOULD NOT RETURN GYNECARE STOCK CERTIFICATES WITH THE ENCLOSED PROXY. See "THE
MERGER--Exchange Procedures; Dividends; No Further Ownership Rights in Gynecare
Common Stock; No Fractional Shares"
MARKET PRICE DATA
Johnson & Johnson Common Stock (symbol: JNJ) is listed for trading on the
NYSE and Gynecare Common Stock (symbol: GYNE) is quoted on the Nasdaq National
Market.
The following table sets forth the last reported sales prices per share of
Johnson & Johnson Common Stock on the NYSE Composite Transactions Tape and of
Gynecare Common Stock on the Nasdaq National Market on August 1, 1997, the last
trading day before announcement of the Merger Agreement, and on October 16,
1997, the last trading day prior to the date of this Proxy Statement/Prospectus:
<TABLE>
<CAPTION>
JOHNSON & JOHNSON GYNECARE
COMMON COMMON
STOCK STOCK
----------------- --------
<S> <C> <C>
August 1, 1997................................................ $611/16 $81/2
October 16, 1997.............................................. 58 7/8 85/16
</TABLE>
9
<PAGE> 13
CERTAIN FINANCIAL DATA
The Merger will not have a material impact, on a pro forma basis, on the
Johnson & Johnson financial data presented below.
The following tables present selected historical financial data for each of
Johnson & Johnson and Gynecare. The selected historical financial data for
Johnson & Johnson are derived from the historical financial statements of
Johnson & Johnson that are incorporated by reference in this Proxy Statement/
Prospectus. The information set forth below for Johnson & Johnson should be read
in conjunction with such historical financial statements and the notes thereto.
The historical financial statements of Johnson & Johnson have been audited by
Coopers & Lybrand L.L.P., independent certified public accountants, for each of
the five fiscal years in the period ended December 29, 1996. The historical
financial statements of Johnson & Johnson as of and for the six months ended
June 30, 1996 and June 29, 1997 are derived from the unaudited historical
financial statements of Johnson & Johnson that are incorporated herein by
reference, and in the opinion of management of Johnson & Johnson, reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the information for such periods. The unaudited results of
operations for the six months ended June 29, 1997 may not be indicative of the
results of operations for fiscal 1997.
The information set forth below for Gynecare should be read in conjunction
with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF GYNECARE" and the Financial Statements of Gynecare and Notes
thereto included elsewhere in this Proxy Statement/Prospectus. The selected
financial data as of December 31, 1993 and for the year then ended and for the
period from January 1, 1994 to March 7, 1994 are derived from audited financial
statements of the Uterine Balloon Therapy Business Operations of Origin that
have been included elsewhere herein and are qualified by reference to such
Financial Statements of Gynecare and Notes thereto. Certain costs and expenses
presented in the statement of operations of the Uterine Balloon Therapy Business
Operations of Origin represent allocations and management estimates. As a
result, the statements of operations presented for periods prior to March 8,
1994 are not strictly comparable to those of subsequent periods and may not be
indicative of the results of operations that would have been achieved had the
Uterine Balloon Therapy Business Operations of Origin operated as a
non-affiliated entity during such period. The selected financial data set forth
below with respect to Gynecare's Statements of Operations for the period from
March 8, 1994 (Date of Inception) to December 31, 1994 and for the years ended
December 31, 1995 and 1996 and the balance sheets at December 31, 1994, 1995 and
1996 are derived from audited financial statements of Gynecare that have been
included elsewhere herein and are qualified by reference to such Financial
Statements of Gynecare and Notes related thereto. The Gynecare selected
historical financial information at and for the six month periods ended June 30,
1996 and 1997 are derived from the unaudited historical financial statements of
Gynecare, which are included elsewhere herein and, in the opinion of the
management of Gynecare, include all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the information for such
periods. The unaudited results of operations for the six months ending June 30,
1997 are not indicative of the results of operations for fiscal 1997 or for any
other period.
10
<PAGE> 14
JOHNSON & JOHNSON AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE FIGURES)
<TABLE>
<CAPTION>
(UNAUDITED)
SIX
FISCAL YEAR ENDED MONTHS ENDED
---------------------------------------------------------- ---------------------
JAN. 3, JAN. 2, JAN. 1, DEC. 31, DEC. 29, JUNE 30, JUNE 29,
1993 1994 1995 1995 1996 1996 1997
------- ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS DATA
Sales................................... $13,753 $14,138 $15,734 $18,842 $21,620 $10,716 $11,413
Costs and expenses...................... 11,546 11,806 13,053 15,525 17,587 8,473 8,817
Earnings before taxes................... 2,207 2,332 2,681 3,317 4,033 2,243 2,596
Net earnings............................ 1,030(1) 1,787 2,006 2,403 2,887 1,581 1,818
Net earnings per share.................. 0.78 1.37 1.56 1.86 2.17 1.19 1.36
Cash dividends per share................ 0.445 0.505 0.565 0.64 0.735 .355 .410
</TABLE>
<TABLE>
<CAPTION>
JAN. 3, JAN. 2, JAN. 1, DEC. 31, DEC. 29, JUNE 29,
1993 1994 1995 1995 1996 1997
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Assets.................................. $11,884 $12,242 $15,668 $17,873 $20,010 $21,005
Long-term debt.......................... 1,365 1,493 2,199 2,107 1,410 1,265
Shareowners' equity..................... 5,171 5,568 7,122 9,045 10,836 11,722
</TABLE>
- ---------------
(1) After cumulative effect of accounting changes of $595 million (net of tax).
11
<PAGE> 15
GYNECARE, INC.
SELECTED FINANCIAL DATA
(ALL FIGURES IN DOLLARS)
<TABLE>
<CAPTION>
FULL YEAR 1994
------------------------------------------
UTERINE BALLOON THERAPY
BUSINESS OPERATIONS OF COMPANY
ORIGIN MEDSYSTEMS, INC. ---------------------- (UNAUDITED)
-------------------------------- MARCH 8, 1994 SIX MONTHS ENDED
YEAR ENDED (DATE OF YEAR ENDED YEAR ENDED -----------------------
DECEMBER 31, JANUARY 1, 1994 TO INCEPTION) TO DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1993 (2) MARCH 7, 1994 (2) DECEMBER 31, 1994 (2) 1995 1996 1996 1997
------------ ------------------ ---------------------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
OPERATIONS DATA
Revenues.......... $ -- $ -- $ -- $ 849,000 $ 962,000 $ 475,000 $ 572,000
Cost of goods
sold............. -- -- -- 799,000 1,657,000 700,000 807,000
--------- --------- ----------- ----------- ----------- ------------ -----------
Gross
profit/(loss)... -- -- -- 50,000 (695,000) (225,000) (235,000)
--------- --------- ----------- ----------- ----------- ------------ -----------
Operating
expenses:
Research and
development.... 883,000 122,000 1,354,000 2,415,000 5,025,000 2,504,000 2,287,000
Selling, general
and
administrative... 97,000 7,000 880,000 2,655,000 5,244,000 2,355,000 3,665,000
--------- --------- ----------- ----------- ----------- ------------ -----------
Total operating
expenses....... 980,000 129,000 2,234,000 5,070,000 10,269,000 4,859,000 5,952,000
--------- --------- ----------- ----------- ----------- ------------ -----------
Loss from
operations....... (980,000) (129,000) (2,234,000) (5,020,000) (10,964,000) (5,084,000) (6,187,000)
Interest income,
net.............. -- -- 165,000 454,000 764,000 430,000 212,000
--------- --------- ----------- ----------- ----------- ------------ -----------
Net loss......... $ (980,000) $ (129,000) $(2,069,000) $(4,566,000) $(10,200,000) $(4,654,000) $(5,975,000)
========= ========= =========== =========== =========== ============ ===========
Net loss per
share............ $ -- $ -- $ (1.25) $ (1.87) $ (1.24) $ (0.57) $ (0.72)
Shares used in
computing net
loss per share... -- -- 1,658,000 2,438,000 8,209,000 8,157,000 8,297,000
</TABLE>
<TABLE>
<CAPTION>
UTERINE BALLOON THERAPY
BUSINESS OPERATIONS OF
ORIGIN MEDSYSTEMS, INC. DECEMBER 31, DECEMBER 31, DECEMBER 31, (UNAUDITED)
DECEMBER 31, 1993 1994 1995 1996 JUNE 30, 1997
------------------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash, cash equivalents and
short-term investments........... $ -- $4,106,000 $22,710,000 $13,071,000 $7,929,000
Working capital.................... (89,000) 3,648,000 23,016,000 12,800,000 6,958,000
Total assets....................... 2,000,000 6,495,000 28,271,000 18,398,000 13,017,000
Long-term debt..................... -- -- 458,000 458,000 384,000
Accumulated deficit................ -- (2,069,000) (6,635,000) (16,835,000) (22,810,000)
Total stockholders' equity......... -- 5,900,000 26,308,000 16,534,000 10,706,000
Origin's net investment............ 1,911,000 -- -- -- --
</TABLE>
- ---------------
(2) The periods beginning March 8, 1994 reflect data of Gynecare. The periods
prior to and including March 7, 1994 reflect data of the Uterine Balloon
Therapy Business Operation of Origin, all of the assets of which were
acquired by Gynecare on March 8, 1994.
12
<PAGE> 16
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Johnson
& Johnson and Gynecare and selected unaudited pro forma financial information
after giving effect to the Merger on a pooling-of-interests basis assuming the
issuance of 0.1431 of a share of Johnson & Johnson Common Stock for each
outstanding share of Gynecare Common Stock and assuming the Merger had occurred
at the beginning of the periods presented. The actual number of shares of
Johnson & Johnson Common Stock to be exchanged for all of the outstanding
Gynecare Common Stock will be determined based on the average per share closing
price of Johnson & Johnson Common Stock during the 20 full trading days
preceding the date of the last full trading day prior to the Special Meeting.
The following data should be read in conjunction with the Selected Historical
Financial Data of Gynecare and the separate historical financial statements of
Johnson & Johnson and Gynecare included elsewhere herein or incorporated herein
by reference. The unaudited pro forma combined per share data are not
necessarily indicative of the operating results that would have been achieved
had the Merger been consummated as of the beginning of the earliest period
presented and should not be construed as representative of future operations or
financial position of Johnson & Johnson. No cash dividends have ever been
declared or paid on Gynecare Common Stock.
<TABLE>
<CAPTION>
AS OF OR FOR THE
AS OF OR FOR THE YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------- ----------------
1994(1) 1995 1996 1996 1997
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
JOHNSON & JOHNSON -- HISTORICAL
Net income per share............................ $ 1.56 $ 1.86 $ 2.17 $ 1.19 $ 1.36
Unaudited book value per share(2)............... 5.54 6.98 8.13 7.68 8.79
Cash dividends per share........................ 0.565 0.640 0.735 0.355 0.410
GYNECARE -- HISTORICAL
Net loss per share.............................. $(1.25) $(1.87) $(1.24) $(0.57) $(0.72)
Unaudited book value per share(2)............... 3.56 10.79 2.01 2.70 1.29
Unaudited pro forma combined net income (loss) per
share:
Per Johnson & Johnson share..................... $ 1.56 $ 1.86 $ 2.16 $ 1.18 $ 1.36
Equivalent per Gynecare share(3)................ 0.22 0.27 0.31 0.17 0.19
Unaudited pro forma combined book value per share:
Per Johnson & Johnson share(2).................. $ 5.54 $ 7.00 $ 8.14 $ 7.69 $ 8.79
Equivalent per Gynecare share(2)(3)............. 0.79 1.00 1.16 1.10 1.26
</TABLE>
- ---------------
(1) Comparative per share data for Gynecare for the year ended December 31, 1994
are for the period from March 8, 1994 (Date of Inception) through December
31, 1994.
(2) Historical book value per share is computed by dividing stockholders' or
shareowners' equity by the number of common shares outstanding at the end of
each period. Johnson & Johnson pro forma combined book value per share is
computed by dividing pro forma shareowners' equity by the pro forma number
of shares of Johnson & Johnson Common Stock which would have been
outstanding had the Merger been consummated as of each balance sheet date.
(3) Gynecare equivalent pro forma combined amounts are calculated by multiplying
the Johnson & Johnson pro forma combined per share amounts by an assumed
Exchange Ratio of 0.1431.
13
<PAGE> 17
THE SPECIAL MEETING
SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to Gynecare stockholders
in connection with the solicitation of proxies by the Gynecare Board for use at
the Special Meeting to be held on November 19, 1997 at 9:30 a.m., local time, at
the principal executive offices of Gynecare located at 235 Constitution Drive,
Menlo Park, California. Only holders of record of Gynecare Common Stock at the
close of business on the Record Date will be entitled to notice of, and to vote
at, the Special Meeting. At the Special Meeting, holders of Gynecare Common
Stock will be asked to consider and vote upon the approval and adoption of the
Merger Agreement, a copy of which is attached as Annex I to this Proxy
Statement/Prospectus, pursuant to which Lima will be merged with and into
Gynecare. Gynecare will be the Surviving Corporation in the Merger and will
become a wholly owned subsidiary of Johnson & Johnson. Holders of Gynecare
Common Stock will also transact such other business as may properly come before
the Special Meeting.
At the Effective Time, each issued and outstanding share of Gynecare Common
Stock, other than shares owned by Johnson & Johnson, Lima or Gynecare, will be
converted into the right to receive that number of fully paid and nonassessable
shares of Johnson & Johnson Common Stock equal to the Exchange Ratio. No
fractional shares of Johnson & Johnson Common Stock will be issued in the
Merger. Each holder of shares of Gynecare Common Stock exchanged pursuant to the
Merger who would otherwise have been entitled to receive a fraction of a share
of Johnson & Johnson Common Stock will receive, in lieu thereof, cash (without
interest) in an amount, less the amount of any withholding taxes which may be
required thereon, equal to such fraction of a share of Johnson & Johnson Common
Stock multiplied by the per share closing price of Johnson & Johnson Common
Stock on the date of the Special Meeting, as such price is reported on the NYSE
Composite Transactions Tape. Johnson & Johnson will make available to the
Exchange Agent (as defined) from time to time, as needed, funds sufficient to
pay cash in lieu of fractional shares.
THE GYNECARE BOARD HAS UNANIMOUSLY DETERMINED THAT THE TERMS OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO, AND IN THE BEST
INTERESTS OF, GYNECARE STOCKHOLDERS. ACCORDINGLY, THE GYNECARE BOARD HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS OF GYNECARE VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
The Executive Committee of the Johnson & Johnson Board of Directors (the
"Johnson & Johnson Board"), acting pursuant to authority delegated to it by the
Johnson & Johnson Board, has approved the Merger and the issuance of Johnson &
Johnson Common Stock in the Merger. Johnson & Johnson, as the sole stockholder
of Lima, and the Board of Directors of Lima have each approved the Merger
Agreement. No approval by stockholders of Johnson & Johnson is required to
effect the Merger.
RECORD DATE; SHARES ENTITLED TO VOTE; VOTE REQUIRED
The close of business on September 25, 1997 has been fixed as the Record
Date for determining the holders of Gynecare Common Stock who are entitled to
notice of and to vote at the Special Meeting. As of the Record Date, there were
8,407,194 shares of Gynecare Common Stock outstanding, of which 4,285,237 shares
(approximately 51.0% of the outstanding shares) of Gynecare Common Stock were
beneficially owned by directors and executive officers of Gynecare and their
affiliates. All such directors and executive officers of Gynecare and their
affiliates have agreed to vote all such shares in favor of the approval and
adoption of the Merger Agreement. The holders of record on the Record Date of
shares of Gynecare Common Stock are entitled to one vote per share of Gynecare
Common Stock on each matter submitted to a vote at the Special Meeting. The
presence in person or by proxy of the holders of shares representing a majority
of Gynecare Common Stock issued and outstanding and entitled to vote is
necessary to constitute a quorum for the transaction of business at the Special
Meeting. Under the DGCL, the affirmative vote of holders of at least a majority
of the outstanding shares of the Gynecare Common Stock is required for
Stockholder Approval. An abstention from voting or a broker non-vote will have
the practical effect of a vote against approval and adoption of the Merger
Agreement since a vote to abstain or a broker non-vote represents one fewer vote
for such approval and adoption. A "broker non-vote" occurs when brokers who hold
shares in street name for customers who are the beneficial owners of such shares
do not give a proxy to vote such customers' shares
14
<PAGE> 18
because the customers have failed to give the broker specific instructions
concerning the voting of the customers' shares.
Pursuant to the terms of the Stockholder Agreement, certain stockholders of
Gynecare have agreed, among other things, to vote (or cause to be voted) their
shares of Gynecare Common Stock in favor of approval and adoption of the Merger
Agreement and each of the other transactions contemplated thereby at the Special
Meeting. Together, such stockholders held on the Record Date 4,210,411 shares
(approximately 50.08% of the outstanding shares) of Gynecare Common Stock.
Consequently, such stockholders together are generally able to control the vote
of all matters submitted to a vote of the Gynecare stockholders, including
approval and adoption of the Merger Agreement. The general effect of the
Stockholder Agreement is to ensure that Stockholder Approval will be obtained.
See "THE MERGER--Interests of Certain Persons in the Merger" and "THE MERGER
AGREEMENT--The Stockholder Agreement."
PROXIES; PROXY SOLICITATION
Shares of Gynecare Common Stock represented by properly executed proxies
received at or prior to the Special Meeting that have not been revoked will be
voted at the Special Meeting in accordance with the instructions contained
therein. Shares of Gynecare Common Stock represented by properly executed
proxies for which no instruction is given will be voted FOR approval and
adoption of the Merger Agreement. Gynecare stockholders are requested to
complete, sign and return promptly the enclosed proxy card in the enclosed
postage-prepaid envelope to ensure that their shares are voted at the Special
Meeting. A Gynecare stockholder may revoke a proxy by submitting at any time
prior to the vote on the approval and adoption of the Merger Agreement a later
dated proxy with respect to the same shares, by delivering written notice of
revocation to the Secretary of Gynecare at any time prior to such vote or by
attending the Special Meeting and voting in person. Mere attendance at the
Special Meeting will not in and of itself revoke a proxy. If a Gynecare
stockholder is not the registered direct holder of his or her shares, such
stockholder must obtain appropriate documentation from the registered holder in
order to be able to vote the shares in person.
If the Special Meeting is postponed or adjourned for any reason, at any
subsequent reconvening of the Special Meeting all proxies will be voted in the
same manner as such proxies would have been voted at the original convening of
the meeting (except for any proxies which have therefore effectively been
revoked or withdrawn), notwithstanding that they may have been effectively voted
on the same or any other manner at a previous meeting.
In addition to solicitation by mail, directors, officers and employees of
Johnson & Johnson and Gynecare may solicit proxies by telephone, telegram or
otherwise. Such directors, officers and employees of Johnson & Johnson and
Gynecare will not be additionally compensated for such solicitation but may be
reimbursed for out-of-pocket expenses incurred in connection therewith.
Brokerage firms, fiduciaries and other custodians who forward soliciting
material to the beneficial owners of shares of Gynecare Common Stock held of
record by them will be reimbursed for their reasonable expenses incurred in
forwarding such material.
THE MERGER
BACKGROUND OF THE MERGER
In September 1996, the Gynecare Board and senior management of Gynecare
began discussing various approaches to expand commercial introduction of the
ThermaChoice Uterine Balloon Therapy system internationally by potentially
entering into a strategic relationship with a major medical device company for
marketing, sales and distribution. During the period from October 1996 through
May 1997, representatives of Gynecare held discussions with representatives of
several medical device companies to explore their interest in international
distribution of Gynecare's products.
On December 6, 1996, Gynecare entered into a confidentiality agreement with
Ethicon containing customary terms and conditions. Representatives of Gynecare
and J&J met to discuss J&J's interest in a potential international distribution
arrangement for Gynecare's products. These conversations were conducted at
Gynecare's Menlo Park facility and were general in nature and did not lead to
any specific proposals.
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On January 23, 1997, management of Gynecare reviewed with the Gynecare
Board various alternatives for raising capital needed to finance future
operations, including potential investments by a distribution partner and a
private placement of debt or equity securities of Gynecare. Gynecare and J&J
representatives continued their discussions on February 11, 1997, focusing on a
potential product distribution relationship. In March and April 1997, the
Gynecare Board and senior management of Gynecare reviewed the progress of
discussions with major medical device companies for establishing international
marketing, sales and distribution relationships and reviewed discussions with
potential private placement agents. The Gynecare Board determined that Gynecare
management should continue discussions with J&J regarding a potential
international product distribution relationship. On April 29, 1997,
representatives of Gynecare and J&J discussed a term sheet from Gynecare
regarding a potential international product distribution agreement. However,
these discussions ended without the parties coming to any agreement regarding
international product distribution through J&J.
On May 19, 1997, representatives of Gynecare and J&J met to discuss the
possibility of a merger of Gynecare with Johnson & Johnson, rather than merely a
product distribution arrangement. Subsequent discussions between Gynecare and
J&J focused exclusively on a merger of Gynecare with Johnson & Johnson. On May
21, 1997, the Gynecare Board held a special meeting to consider strategic
options for the Company and the desirability of engaging an investment banker to
evaluate Gynecare's strategic options, both as a stand-alone entity and a merged
entity.
On May 27, 1997, representatives of Gynecare and J&J discussed the terms
and conditions of a proposed merger including, among other things, the tax and
accounting treatment of the proposed merger and the amount and nature of the
consideration to be paid to Gynecare stockholders. On May 28, 1997, the Gynecare
Board met to consider and discuss J&J's current indication of interest and the
strategic fit of Gynecare's business with J&J. The Gynecare Board directed its
management to negotiate an engagement letter with Alex. Brown to act as the
Company's investment banker and directed management to continue discussions with
J&J and to continue to pursue other potential strategic transactions. At the
same board meeting, Gynecare's management updated the Gynecare Board on
alternative financing options as a stand-alone entity, including potential
private placements.
Gynecare executed an engagement letter with Alex. Brown on June 5, 1997.
During the period from June 5, 1997 through July 6, 1997, representatives of
Gynecare and J&J, their respective legal advisors and Alex. Brown held numerous
meetings and teleconferences to discuss and review the terms and conditions of a
proposed merger. On July 7, 1997, the Gynecare Board held a special meeting to
discuss a revised indication of interest from J&J and the terms of the proposed
merger. The Gynecare Board directed Gynecare management to continue discussions
with J&J and to continue to negotiate with placement agents for a private
placement.
During the period from July 8, 1997 through July 28, 1997, representatives
of Gynecare, J&J, their respective legal advisors and representatives of Alex.
Brown held numerous meetings and teleconferences to continue discussions on
specifics of the proposed merger, including, but not limited to, the terms and
conditions thereof, the tax and accounting treatment of the proposed merger,
credit agreement arrangements in the event of termination of the proposed
merger, and the amount and nature of the consideration to be paid to Gynecare
stockholders in the proposed merger.
On July 29, 1997, the Gynecare Board held a special meeting to consider the
terms of the proposed merger and reviewed with legal counsel and representatives
of Alex. Brown provisions of the draft merger agreement and draft stockholder
agreement. The Gynecare Board discussed with management and legal counsel the
draft agreements and proposed changes thereto. Representatives of Alex. Brown
then delivered a preliminary analysis regarding the financial terms of the
proposed merger. See "--Opinion of Financial Advisor."
From July 29, 1997 through July 31, 1997, Gynecare management, along with
legal counsel and representatives of Alex. Brown, continued to negotiate the
terms and conditions of the draft agreements with
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respect to the proposed merger. On July 31, 1997, the Gynecare Board held a
special meeting at which revised versions of the draft agreements as then
negotiated were discussed and reviewed with management and legal counsel and
representatives of Alex. Brown.
On August 3, 1997, the Gynecare Board held two special meetings. Legal
counsel reviewed for the Gynecare Board the proposed definitive merger
agreement, stockholder agreement and credit agreement, which now incorporated
the changes that had been agreed to in principle during the preceding meetings.
Alex. Brown then gave a presentation regarding the financial terms of the
proposed merger and other analyses described under "-- Opinion of Financial
Advisor," and then rendered its opinion that the Exchange Ratio was fair to the
stockholders of Gynecare from a financial point of view.
After additional discussion, including consideration of the factors set
forth below, the Gynecare Board unanimously approved the Merger Agreement and
the related agreements with Johnson & Johnson and unanimously resolved to
recommend that the stockholders of Gynecare vote to approve and adopt the Merger
Agreement.
The Merger Agreement and the Stockholder Agreement were executed by all
parties on August 4, 1997, and a joint public announcement of the proposed
transaction was made on August 4, 1997.
On September 19, 1997, Gynecare and Ethicon entered into a distribution
agreement by which Ethicon will serve as a non-exclusive distributor for
Gynecare's VersaPoint and ThermaChoice products in the United States for a
period of six months. The distribution agreement was negotiated on an
arm's-length basis and may be terminated by either party for any reason by
giving the other party 30 days' notice.
RECOMMENDATION OF THE GYNECARE BOARD AND REASONS FOR THE MERGER
The Gynecare Board has unanimously determined that the terms of the Merger
Agreement and the transactions contemplated thereby are fair to, and in the best
interests of, Gynecare stockholders. Accordingly, the Gynecare Board has
unanimously approved the Merger Agreement and unanimously recommends that the
stockholders of Gynecare vote FOR approval and adoption of the Merger Agreement.
In reaching its determination, the Gynecare Board consulted with Gynecare's
management, as well as its legal counsel, accountants and financial advisor, and
gave significant consideration to a number of factors bearing on its decision.
The Gynecare Board did not consider it practical to, nor did it attempt to,
quantify or otherwise assign relative weight to the factors it considered in
reaching its decision.
The factors considered by the Gynecare Board included:
- Analysis of the financial performance and condition, businesses and
prospects of Johnson & Johnson and Gynecare, including, but not limited
to, information with respect to their respective recent and historic
stock prices and earnings performance. The Gynecare Board also considered
the detailed financial analyses, pro forma and other information with
respect to Johnson & Johnson and Gynecare presented by Alex. Brown and
Gynecare's management, as well as the Gynecare Boards's own knowledge of
Johnson & Johnson, Gynecare and their respective businesses, and the
current economic, financial and business climate.
- The effect on Gynecare stockholders of Gynecare continuing as a
stand-alone entity compared to the effect of combining with Johnson &
Johnson in light of the factors summarized below with respect to the
financial condition and prospects of Gynecare on a stand-alone basis. In
particular, the Gynecare Board considered that Gynecare competes in a
limited segment of the medical device market (devices to treat certain
gynecological conditions) with only two current products and does not
have an established direct sales force in the United States and has only
limited international distribution arrangements, which have resulted in
historic volatility in Gynecare sales and contributed to volatility in
the market price of Gynecare Common Stock. In addition, the Gynecare
Board considered the fact that substantial additional capital resources,
in the form of future equity or debt financings, would be required for
Gynecare to expand its distribution capabilities, develop and introduce
new products and implement its long term business strategy. The Gynecare
Board also believes that Gynecare currently
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has a limited ability to raise such additional capital on attractive
terms and that the market for medical devices to treat gynecological
conditions will become even more competitive in the future.
- The greater financial, manufacturing, personnel, sales and distribution
and supply resources of Johnson & Johnson and the likelihood that such
resources would enable Gynecare to accelerate its long-term growth
strategy, achieve greater market penetration for its two current products
and to generally compete more effectively in its targeted markets.
- The view of Gynecare's management that the medical device industry has
recently experienced increased consolidation as participants have sought
to broaden product lines and gain market share, increase international
market penetration and enable bundling and capitation arrangements with
hospitals and managed care organizations, which are increasingly entering
into purchasing arrangements with, and taking other actions that favor,
medical device companies offering large and cost-effective product
portfolios, such as Johnson & Johnson.
- The fact that Johnson & Johnson already has strong product offerings of
other complementary Ob/Gyn products.
- The written opinion of Alex. Brown that based upon and subject to the
various qualifications and assumptions described therein, the Exchange
Ratio was fair, from a financial point of view, to the stockholders of
Gynecare. See "--Opinion of Financial Advisor."
- The Exchange Ratio and the other terms of the Merger Agreement. See
"--Background of the Merger" and "--Merger Consideration."
- The expectation that the Merger will be a tax-free transaction to
Gynecare and its stockholders and will be accounted for as a pooling of
interests transaction. See "--Material Federal Income Tax Consequences"
and "--Anticipated Accounting Treatment."
- Such other matters as the Gynecare Board deemed necessary or appropriate
in considering the Merger.
OPINION OF FINANCIAL ADVISOR
Gynecare retained Alex. Brown on June 5, 1997, to act as Gynecare's
financial advisor in connection with the Merger including rendering its opinion
to the Gynecare Board as to the fairness, from a financial point of view, of the
Exchange Ratio to Gynecare's stockholders.
At the August 3, 1997 meeting of the Gynecare Board, representatives of
Alex. Brown made a presentation with respect to the Merger and rendered to the
Board its opinion that, as of such date, and subject to the assumptions made,
matters considered and limitations set forth in such opinion and summarized
below, and based on the facts and circumstances as they existed at the time, the
Exchange Ratio was fair, from a financial point of view, to Gynecare's
stockholders. No limitations were imposed upon Alex. Brown with respect to the
investigations made or procedures followed by it in rendering its opinion.
The full text of Alex. Brown's written opinion dated August 3, 1997 (the
"Alex. Brown Opinion"), which sets forth, among other things, assumptions made,
matters considered and limitations on the review undertaken, is attached hereto
as Annex III and is incorporated herein by reference. Gynecare stockholders are
urged to read the Alex. Brown Opinion in its entirety. The Alex. Brown Opinion
is directed to the Gynecare Board, addresses only the fairness of the Exchange
Ratio to Gynecare's stockholders from a financial point of view and does not
constitute a recommendation to any Gynecare stockholder as to how such
stockholder should vote at the Special Meeting. The Alex. Brown Opinion was
rendered to the Gynecare Board for its consideration in determining whether to
approve the Merger Agreement. Alex. Brown did not recommend to the Gynecare
Board that any specific exchange ratios constituted the appropriate Exchange
Ratio for the Merger. The discussion of the Alex. Brown Opinion in this Proxy
Statement/Prospectus is qualified in its entirety by reference to the full text
of the Alex. Brown Opinion.
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In connection with the Alex. Brown Opinion, Alex. Brown reviewed certain
publicly available financial information and other information concerning
Gynecare and Johnson & Johnson and certain internal analyses and other
information furnished to Alex. Brown by Gynecare. Alex. Brown also held
discussions with the members of the senior managements of Gynecare and Johnson &
Johnson regarding the businesses and prospects of their respective companies. In
addition, Alex. Brown (i) reviewed the reported prices and trading activity for
the common stock of both Gynecare and Johnson & Johnson, (ii) compared certain
financial and stock market information for Gynecare and Johnson & Johnson with
similar information for certain other companies whose securities are publicly
traded, (iii) reviewed the financial terms of certain recent business
combinations which it deemed comparable in whole or in part, (iv) reviewed the
terms of the Merger Agreement and certain related documents, and (v) performed
such other studies and analyses and considered such other factors as it deemed
appropriate.
In conducting its review and arriving at its opinion, Alex. Brown assumed
and relied upon, without independent verification, the accuracy, completeness
and fairness of the information furnished to or otherwise reviewed by or
discussed with it for purposes of rendering its opinion. With respect to the
financial projections of Gynecare and other information relating to the
prospects of Gynecare provided to Alex. Brown by Gynecare, Alex. Brown assumed
that such projections and other information were reasonably prepared and
reflected the best currently available judgments and estimates of the management
of Gynecare as to the likely future financial performance of Gynecare. The
financial projections of Gynecare that were provided to Alex. Brown were
utilized and relied upon by Alex. Brown in the Analysis of Certain Other
Publicly Traded Companies, the Analysis of Selected Mergers and Acquisitions,
the Analysis Based on Multiple to Projected 2001 Net Income, and the Discounted
Cash Flow Analysis summarized below. Alex. Brown did not receive projections
prepared by the management of Johnson & Johnson. However, Johnson & Johnson's
management confirmed to Alex. Brown, and Alex. Brown relied upon such
confirmation, that the publicly available financial estimates for Johnson &
Johnson were generally consistent with the expectations of Johnson & Johnson's
management. Alex. Brown assumed, with the consent of Gynecare, that the Merger
will qualify for pooling-of-interests accounting treatment and as a tax-free
transaction for the stockholders of Gynecare. Alex. Brown did not make and it
was not provided with an independent evaluation or appraisal of the assets of
Gynecare, nor has Alex. Brown been furnished with any such evaluations or
appraisals. The Alex. Brown Opinion is based on market, economic and other
conditions as they existed and could be evaluated as of the date of the opinion
letter.
In rendering its opinion, Alex. Brown was not asked to consider, and did
not address, the relative merits of the Merger as compared to any alternative
business transactions with third parties that might exist for Gynecare or the
effect of any such other transaction in which Gynecare might engage.
The following is a summary of the report (the "Alex. Brown Report")
presented by Alex. Brown in connection with rendering the Alex. Brown Opinion to
the Gynecare Board on August 3, 1997.
Historical and Projected Financial Position. Alex. Brown reviewed and
analyzed the historical and current financial condition of Gynecare which
included (i) an assessment of Gynecare's recent financial statements; (ii) an
analysis of Gynecare's revenue, growth and operating performance trends; and
(iii) an analysis of Gynecare's projected financial results through 2001. The
analysis showed that since 1995, the first year considered for this analysis,
Gynecare has had negative operating income and that Gynecare does not project
positive operating income until 2000. Additionally, Alex. Brown noted that
current Wall Street research estimates for Gynecare's revenue, operating income
and earnings per share ("EPS") were significantly lower than those estimates
published shortly following Gynecare's Initial Public Offering in November 1995.
Historical Stock Price Performance. Alex. Brown reviewed the daily closing
per share market prices and trading volume for Gynecare Common Stock from
November 22, 1995 to August 1, 1997. Alex. Brown also reviewed the daily closing
per share market prices of Gynecare Common Stock and compared the movement of
such daily closing prices with the movement of the Nasdaq composite average over
the period from January 1, 1997 to July 30, 1997. Alex. Brown noted that, on a
relative basis, Gynecare generally underperformed the Nasdaq composite average
except for the last two weeks of July in which it outperformed
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the Nasdaq composite average. Alex. Brown also reviewed the daily closing per
share market prices of Gynecare Common Stock and compared the movement of such
closing prices over the period from January 1, 1997 to July 30, 1997, with the
movement over the same period of a medical device composite average consisting
of the following early stage medical device companies deemed comparable to
Gynecare ("Selected Companies"): Conceptus, Inc., Cytyc Corporation, FemRx,
Inc., Neopath Inc., Urologix, Inc., UroMed Corporation, UroQuest Medical
Corporation and VidaMed, Inc. Alex. Brown noted that, on a relative basis,
Gynecare generally outperformed this medical device composite average. This
information was presented to give the Gynecare Board background information
regarding the stock price of Gynecare over the periods indicated.
Analysis of Certain Other Publicly Traded Companies. Alex. Brown analyzed
Gynecare's public market valuation as compared to the public market valuation of
the Selected Companies and compared certain financial information (based on the
valuation measurements described below) relating to Gynecare to certain
corresponding information from the Selected Companies. Such financial
information included total market capitalization adjusted for debt and cash
("Enterprise Value") and ratios of Enterprise Value to 1999 projected revenues
and 2000 projected revenues. The financial information used in connection with
the multiples provided below with respect to Gynecare and the Selected Companies
was based on closing market prices of Gynecare and the Selected Companies as of
August 1, 1997, and, in the case of Gynecare, projected revenue based on
Gynecare management projections, and, in the case of the Selected Companies,
projected revenue based on currently available Wall Street analyst projections.
Alex. Brown noted that at the transaction value of $8.46 per share to be paid in
the Merger to the Gynecare stockholders ("Per Share Transaction Value"), the
multiple of Enterprise Value to 1999 projected revenue was 2.8x for Gynecare,
compared to a range of 0.5 to 1.8x and a mean of 1.3x for the Selected
Companies, excluding Cytyc Corporation. Alex. Brown further noted that at the
Per Share Transaction Value, the multiple of Enterprise Value to 2000 projected
revenue was 1.4x for Gynecare, compared to a range of 0.3x to 1.1x and a mean of
0.7x for the Selected Companies, excluding Cytyc Corporation. As a result of the
foregoing procedures, Alex. Brown noted that the current public market multiples
and the proposed transaction multiples based on the Per Share Transaction Value
for Gynecare were higher than the mean, and above the high end of the ranges, of
the multiples for the Selected Companies. Alex. Brown then applied the multiple
ranges and the mean multiples of the Selected Companies, excluding Cytyc
Corporation, for Enterprise Value to 1999 and 2000 projected revenues to
Gynecare's projected revenue for 1999 and 2000 to derive implied Enterprise
Values for Gynecare. Alex. Brown then adjusted for Gynecare's cash and debt as
of June 30, 1997, plus cash from future option exercise proceeds, to derive
implied aggregate equity values and per share values for Gynecare. From the
analysis based on 1999 revenue multiples, Alex. Brown derived implied aggregate
equity values of $24.4 million to $55.5 million with a mean of $43.1 million,
and per share values of $2.61 to $5.94 with a mean of $4.61 as compared to the
Per Share Transaction Value of $8.46. From the analysis based on 2000 revenue
multiples, Alex. Brown derived implied aggregate equity values of $26.2 million
to $62.7 million with a mean of $44.3 million, and per share values of $2.81 to
$6.72 with a mean of $4.74 as compared to the Per Share Transaction Value of
$8.46.
Analysis of Selected Mergers and Acquisitions. Alex. Brown reviewed the
financial terms, to the extent publicly available, of eight proposed, pending or
completed mergers and acquisitions since August 1994 in the medical device
industry involving the acquisition of early stage medical device companies that
were in the product development stage and had not yet realized substantial
revenue from the sale of products (the "Selected Early Stage Transactions").
Alex. Brown assessed the offer value for the equity of each of the Selected
Early Stage Transactions, as well as the equity offer value adjusted for cash
and debt at the time of the transactions, or transaction value. The eight
Selected Early Stage Transactions reviewed, in reverse chronological order of
public announcement, were: Urohealth Systems, Inc./Imagyn Medical, Inc. (July
1997); Guidant Corporation/NeoCardia, Inc. (May 1997); Pfizer, Inc./Vesta
Medical, Inc. (June 1996); Boston Scientific Corporation/MinTec Inc. (May 1996);
Pfizer, Inc./Corvita Corporation (April 1996); Medtronic, Inc./AneuRx, Inc.
(April 1996); Medtronic, Inc./Micro Interventional Systems (November 1995);
Boston Scientific Corporation/Cardiovascular Imaging Systems, Inc. (August
1994). Alex. Brown noted that the average equity offer value of the Selected
Early Stage Transactions was $70.3 million with a range of $30.0 million to
$101.9 million. Alex. Brown further noted that the average
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transaction value of the Selected Early Stage Transactions was $62.7 million
with a range of $17.2 million to $85.8 million. All financial information for
the Selected Early Stage Transactions was based on public information regarding
such transactions, without taking into account differing market and other
conditions during the three-year period during which the Selected Early Stage
Transactions occurred.
Alex. Brown also reviewed the premiums to market price paid in 21 proposed,
pending and completed transactions in the medical device industry since May 1990
(the "Selected Medical Device Transactions"). Alex. Brown noted that the
Selected Medical Device Transactions were effected at a range of premiums paid
to the target companies' market prices on the day prior to the announcement of
- -6.4% to 63.6%, with a mean of 24.7%, to market prices four weeks prior to
announcement of 5.9% to 141.9%, with a mean of 45.0%, and to market prices three
months prior to announcement of -3.3% to 125.6%, with a mean of 58.5%. Alex.
Brown further noted that the Selected Medical Device Transactions were effected
at premiums to the target companies' highest market prices for the twelve months
prior to the transactions of -24.0% to 31.6%, with a mean of 4.1% and at
premiums to the target companies' lowest market prices for the twelve months
prior to the transactions of 63.5% to 185.4%, with a mean of 112.5%. Alex. Brown
then applied these premiums to Gynecare's per share price three months prior,
four weeks prior and one day prior to the August 4 announcement of the proposed
Merger in addition to the highest and lowest Gynecare per share price in the
twelve months prior to the announcement of the Merger. This analysis yielded a
range of implied Gynecare per share values of $5.62 to $15.12 as compared to the
Per Share Transaction Value of $8.46. Additionally, Alex. Brown calculated the
proposed premium based on the Per Share Transaction Value of $8.46 to be -0.5%
to the day prior to the announcement of the Merger, 35.3% to four weeks prior to
the announcement and three months prior to the announcement, -15.4% to the
highest price of Gynecare Common Stock in the 12 months prior to the
announcement and 146.1% to the lowest price of Gynecare Common Stock in the 12
months prior to the announcement.
Analysis Based on Multiple to Projected 2001 Net Income. Alex. Brown
performed an analysis of the aggregate equity value of Gynecare in 2001 based on
the financial projections provided by Gynecare management and, assuming for this
purpose, two equity financings over the next two years raising approximately $37
million. In deriving potential aggregate equity values in 2001, Alex. Brown
applied to Gynecare's 2001 net income estimate a range of current year net
income multiples of 25.0x to 30.0x. These multiples were derived from Alex.
Brown's review of the current year net income multiples, based on 1997 EPS
estimates as obtained from the Institutional Brokers Estimating System ("IBES"),
of a group of publicly traded mature medical device companies including Boston
Scientific, Guidant Corporation, Medtronic, Inc., U.S. Surgical Corporation, St.
Jude Medical, Inc. and C.R. Bard, Inc. (collectively, the "Selected Mature
Medical Device Companies"). Alex. Brown then discounted the resulting future
equity values at discount rates of 20.0% to 35.0%. Alex. Brown arrived at such
discount rates based on its judgment of the weighted average cost of capital of
the Selected Companies. Alex. Brown then estimated that the two equity
financings assumed for purposes of this analysis would reduce the current
stockholders' equity position in Gynecare to 64.7%. Alex. Brown then applied
this 64.7% equity position to the discounted equity values to derive a range of
equity values attributable to the Gynecare Common Stock held by current
stockholders. These equity values ranged from $54.8 million to $105.3 million.
Alex. Brown then applied these equity values to the Gynecare Common Stock and
options currently outstanding to derive a per share equity value of $5.86 to
$11.27 as compared to the Per Share Transaction Value of $8.46.
Discounted Cash Flow Analysis. Alex. Brown performed a discounted cash
flow analysis for Gynecare. The discounted cash flow approach values a business
based on the current value of the future cash flow that the business will
generate. To establish a current value under this approach, future cash flow
must be estimated and an appropriate discount rate determined. Alex. Brown used
estimates of projected financial performance for Gynecare for the year 1997
through 2001 prepared by Gynecare management. Alex. Brown aggregated the present
value of the cash flows through 2001 with the present value of a range of
terminal values. Alex. Brown discounted these cash flows at discount rates
ranging from 20.0% to 35.0%. The terminal value was computed based on projected
revenue in 2001 and a range of terminal multiples of 2.0x to 4.0x. Alex. Brown
arrived at such discount rates based on its judgment of the weighted average
cost of capital of the Selected Companies, and arrived at such terminal values
based on its review of the trading characteristics of
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the common stock of the Selected Mature Medical Device Companies. This analysis
indicated a range of values for Gynecare Common Stock of $2.91 to $11.75 per
share as compared to the Per Share Transaction Value of $8.46.
Review of Johnson & Johnson. In addition to the foregoing analyses, Alex.
Brown reviewed certain publicly available information regarding Johnson &
Johnson. Alex. Brown reviewed the daily closing per share market prices and
trading volume for Johnson & Johnson Common Stock from July 3, 1996 to August 1,
1997. Alex. Brown further analyzed the daily closing per share market prices and
trading volume for Johnson & Johnson Common Stock from July 28, 1992 to August
1, 1997. Alex. Brown noted that the compound annual growth rate for Johnson &
Johnson Common Stock during this period was approximately 20.5%. In addition,
Alex. Brown reviewed recent Wall Street analyst research reports regarding
Johnson & Johnson. Finally, Alex. Brown examined Johnson & Johnson's valuation
in the public market as compared to the valuation in the public market of other
selected publicly traded companies. Alex. Brown compared certain financial
information (based on the commonly used valuation measurements described below)
relating to certain corresponding information from (i) the Selected Mature
Medical Device Companies and (ii) a group of eight publicly traded
pharmaceutical companies with market capitalizations in excess of $20 billion
consisting of Warner-Lambert Company, Eli Lilly & Company, Schering-Plough
Corporation, Pfizer, Inc., Pharmacia & Upjohn, Inc., Merck and Company, Inc.,
American Home Products Corporation and Bristol-Myers Squibb Company
(collectively, the "Selected Pharmaceutical Companies"). Such financial
information included, among other things, (i) total market capitalization; (ii)
capitalization ratios; (iii) operating performance; (iv) ratios of Enterprise
Value to revenues, earnings before interest expense and income taxes ("EBIT"),
and earnings before interest expense, income taxes, depreciation and
amortization ("EBITDA"), each for the latest reported quarterly period as
derived from publicly available information; and (v) ratios of common equity
market prices per share to earnings per share. The EPS information was based on
actual EPS for the trailing twelve months and estimated EPS for calendar years
1997 and 1998 as reported by IBES. Alex. Brown noted that the Johnson & Johnson
ratios were generally lower than the mean multiples but were within the range as
compared to the mean ratio and ranges for the various ratios for both the
Selected Mature Medical Device Companies and the Selected Pharmaceutical
Companies.
No company used in the analysis of other publicly traded companies nor any
transaction used in the analysis of selected mergers and acquisitions summarized
above is identical to Gynecare, Johnson & Johnson or the Merger. Accordingly,
such analyses must take into account differences in the financial and operating
characteristics of the Selected Companies, the Selected Mature Medical Device
Companies, the Selected Pharmaceutical Companies and the acquired companies in
the Selected Early Stage Transactions and Selected Medical Device Transactions
analyses and other factors that would affect the public trading value and
acquisition value of the Selected Companies, the Selected Mature Medical Device
Companies, the Selected Pharmaceutical Companies, and the acquired companies in
the Selected Early Stage Transactions and Selected Medical Device Transactions
analyses, respectively.
While the foregoing summary describes all analyses and factors in the Alex.
Brown Report, it is not a comprehensive description of all analyses and factors
considered by Alex. Brown. The preparation of a fairness opinion is a complex
process involving various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Alex. Brown believes that its analyses must
be considered as a whole and that selecting portions of its analyses and of the
factors considered by it, without considering all analyses and factors, would
create an incomplete view of the evaluation process underlying the Alex. Brown
Report and the Alex. Brown Opinion. In performing its analyses, Alex. Brown
considered general economic, market and financial conditions and other matters,
many of which are beyond the control of Gynecare and Johnson & Johnson. The
analyses performed by Alex. Brown are not necessarily indicative of actual
values or future results, which may be significantly more or less favorable than
those suggested by such analyses. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. Additionally, analyses relating
to the value of a business do not purport to be appraisals or to reflect the
prices at which the business actually may be sold. Furthermore, no opinion is
being expressed as to the prices at which shares of Johnson & Johnson Common
Stock may trade at any future time.
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Pursuant to a letter agreement dated June 5, 1997, between Gynecare and
Alex. Brown, Gynecare agreed to pay Alex. Brown a transaction fee of $1,153,400
(assuming a total Merger consideration of $79,000,000) payable upon consummation
of the Merger. In addition, Gynecare paid Alex. Brown $50,000 upon the execution
of the letter agreement and $350,000 upon the delivery of the Alex. Brown
Opinion, which amounts will be credited against any transaction fee.
The Gynecare Board retained Alex. Brown to act as its advisor based upon
Alex. Brown's qualifications, reputation, experience and expertise. Alex. Brown
is an internationally recognized investment banking firm and, as a customary
part of its investment banking business, is engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, private placements and valuations for corporate and
other purposes. Alex. Brown may actively trade the equity securities of Gynecare
and Johnson & Johnson for its own account and for the account of its customers
and accordingly may at any time hold a long or short position in such
securities. Alex. Brown regularly publishes research reports regarding the
medical device industry and the businesses and securities of publicly traded
companies in the medical device industry.
EFFECTIVE TIME
The Merger will become effective at such time as a Certificate of Merger is
duly filed with the Secretary of State of the State of Delaware, or at such
later time as is specified in such Certificate of Merger. The Merger Agreement
provides that Johnson & Johnson and Gynecare will cause a Certificate of Merger
to be filed as soon as practicable on or after the Closing Date. See "THE MERGER
AGREEMENT-- Conditions to the Consummation of the Merger."
MERGER CONSIDERATION
At the Effective Time, each issued and outstanding share of Gynecare Common
Stock, other than shares owned by Johnson & Johnson, Lima or Gynecare, will be
converted into the right to receive that number of fully paid and nonassessable
shares of Johnson & Johnson Common Stock equal to the Exchange Ratio. For
purposes of illustration only, based on the average per share closing price of
Johnson & Johnson Common Stock during the 20 full trading day period ended
October 14, 1997, each share of Gynecare Common Stock would be converted into
the right to receive approximately 0.1431 of a share of Johnson & Johnson Common
Stock. There can be no assurance that the Exchange Ratio will be equal to the
0.1431 of a share of Johnson & Johnson Common Stock set forth in the
illustration in the preceding sentence since the market price of Johnson &
Johnson Common Stock can be expected to vary due to changes in the business
operations or prospects of Johnson & Johnson, general and economic conditions
and other factors. As of the Effective Time, all shares of Gynecare Common Stock
will no longer be outstanding and will automatically be canceled and retired and
will cease to exist, and each holder of a certificate which immediately prior to
the Effective Time represented any such shares of Gynecare Common Stock will
cease to have any rights with respect thereto, except the right to receive
shares of Johnson & Johnson Common Stock and any cash in lieu of fractional
shares of Johnson & Johnson Common Stock to be issued or paid in consideration
therefor upon surrender of such certificate, without interest.
Any shares of Gynecare Common Stock owned by Johnson & Johnson, Lima or
Gynecare will be canceled and retired and will cease to exist and no
consideration will be delivered in exchange therefor.
EXCHANGE AGENT; EXCHANGE PROCEDURES; DIVIDENDS; NO FURTHER OWNERSHIP RIGHTS
IN GYNECARE COMMON STOCK; NO FRACTIONAL SHARES
Exchange Agent. The Merger Agreement requires Johnson & Johnson to deposit
as of the Effective Time, with First Chicago Trust Company of New York or such
other bank or trust company of similar size designated by Johnson & Johnson (the
"Exchange Agent"), for the benefit of the holders of shares of Gynecare Common
Stock, certificates representing the shares of Johnson & Johnson Common Stock
issuable in exchange therefor.
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Exchange Procedures. As soon as reasonably practicable after the Effective
Time, but in any event within 10 days thereafter, Johnson & Johnson will cause
the Exchange Agent to mail to each holder of record of a certificate or
certificates, which immediately prior to the Effective Time represented
outstanding shares of Gynecare Common Stock (the "Certificates") whose shares
were converted into the right to receive shares of Johnson & Johnson Common
Stock pursuant to the Merger Agreement, (i) a letter of transmittal (which will
specify that delivery will be effected, and risk of loss and title to the
Certificates will pass, only upon delivery of the Certificates to the Exchange
Agent and will be in such form and have such other provisions as Johnson &
Johnson may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing shares
of Johnson & Johnson Common Stock. Upon surrender of a Certificate for
cancelation to the Exchange Agent, together with such letter of transmittal,
duly executed, and such other documents as may reasonably be required by the
Exchange Agent, the holder of such Certificate will be entitled to receive in
exchange therefor a certificate representing that number of whole shares of
Johnson & Johnson Common Stock which such holder has the right to receive after
taking into account all the shares of Gynecare Common Stock then held by such
holder under all such Certificates so surrendered, cash in lieu of fractional
shares of Johnson & Johnson Common Stock to which such holder is entitled and
any dividends or other distributions to which such holder is entitled, and the
Certificate so surrendered will forthwith be canceled. In the event of a
transfer of ownership of Gynecare Common Stock which is not registered in the
transfer records of Gynecare, a certificate representing the proper number of
shares of Johnson & Johnson Common Stock may be issued to a person other than
the person in whose name the Certificate so surrendered is registered, if, upon
presentation to the Exchange Agent, such Certificate will be properly endorsed
or otherwise be in proper form for transfer and the person requesting such
issuance will pay any transfer or other taxes required by reason of the issuance
of shares of Johnson & Johnson Common Stock to a person other than the
registered holder of such Certificate or establish to the reasonable
satisfaction of Johnson & Johnson that such tax has been paid or is not
applicable. Until surrendered, each Certificate will be deemed at any time after
the Effective Time to represent only the right to receive upon such surrender
the certificate representing shares of Johnson & Johnson Common Stock, cash in
lieu of any fractional shares of Johnson & Johnson Common Stock and any
dividends or other distributions to which such holder is entitled. No interest
will be paid or will accrue on any cash payable pursuant to the exchange
provisions of the Merger Agreement.
GYNECARE STOCKHOLDERS SHOULD NOT FORWARD GYNECARE STOCK CERTIFICATES TO THE
EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS. GYNECARE STOCKHOLDERS
SHOULD NOT RETURN GYNECARE STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
Dividends. No dividends or other distributions with respect to Johnson &
Johnson Common Stock with a record date after the Effective Time will be paid to
the holder of any unsurrendered Certificate with respect to the shares of
Johnson & Johnson Common Stock represented thereby and no cash payment in lieu
of fractional shares will be paid to any such holder until the holder of record
of such Certificate surrenders such Certificate. Following surrender of any such
Certificate, there will be paid to the record holder of the certificate
representing whole shares of Johnson & Johnson Common Stock issued in exchange
therefor, without interest, (i) at the time of such surrender, the amount of any
cash payable in lieu of a fractional share of Johnson & Johnson Common Stock to
which such holder is entitled and the amount of dividends or other distributions
with a record date after the Effective Time theretofore paid with respect to
such whole shares of Johnson & Johnson Common Stock, and (ii) at the appropriate
payment date, the amount of dividends or other distributions with a record date
after the Effective Time but prior to such surrender, and a payment date
subsequent to such surrender payable with respect to such whole shares of
Johnson & Johnson Common Stock.
No Further Ownership Rights in Gynecare Common Stock. All shares of
Johnson & Johnson Common Stock issued upon the surrender for exchange of shares
of Gynecare Common Stock in accordance with the terms of the Merger Agreement
(including any cash paid) will be deemed to have been issued (and paid) in full
satisfaction of all rights pertaining to such shares of Gynecare Common Stock,
subject, however, to the Surviving Corporation's obligation to pay any dividends
or make any other distributions with a record date prior to the Effective Time
which may have been declared or made by Gynecare on such shares of Gynecare
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Common Stock in accordance with the terms of the Merger Agreement or prior to
the date of the Merger Agreement and which remain unpaid at the Effective Time,
and there will be no further registration of transfers on the stock transfer
books of the Surviving Corporation of the shares of Gynecare Common Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation or the
Exchange Agent for any reason, they will be canceled and exchanged as described
herein.
No Fractional Shares. No certificates or scrip representing fractional
shares of Johnson & Johnson Common Stock will be issued upon the surrender for
exchange of Certificates, and such fractional share interests will not entitle
the owner thereof to vote or to any rights of a stockholder of Johnson &
Johnson. Each holder of shares of Gynecare Common Stock exchanged pursuant to
the Merger who would otherwise have been entitled to receive a fraction of a
share of Johnson & Johnson Common Stock will receive, in lieu thereof, cash
(without interest) in an amount, less the amount of any withholding taxes which
may be required thereon, equal to such fraction of a share of Johnson & Johnson
Common Stock multiplied by the per share closing price of Johnson & Johnson
Common Stock on the date of the Special Meeting, as such price is reported on
the NYSE Composite Transactions Tape.
STOCK EXCHANGE LISTING
It is a condition to each party's obligation to effect the Merger that the
shares of Johnson & Johnson Common Stock issuable to Gynecare stockholders
pursuant to the Merger Agreement will have been approved for listing on the
NYSE, subject to official notice of issuance. The shares of Johnson & Johnson
Common Stock to be issued pursuant to, and as a result of the transactions
contemplated by, the Merger Agreement are treasury shares that have been
approved for listing on the NYSE.
EXPENSES
The Merger Agreement provides that all fees and expenses incurred in
connection with the Merger and the Merger Agreement and the transactions
contemplated by the Merger Agreement will be paid by the party incurring such
fees or expenses, whether or not the Merger is consummated, except that expenses
incurred in connection with filing, printing and mailing this Proxy
Statement/Prospectus and the Registration Statement will be shared equally by
Johnson & Johnson and Gynecare.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material Federal income tax
considerations relevant to the conversion of shares of Gynecare Common Stock
into Johnson & Johnson Common Stock pursuant to the Merger that are generally
applicable to holders of Gynecare Common Stock. This discussion is based on
currently existing provisions of the Code, existing and proposed Treasury
Regulations thereunder and current administrative rulings and court decisions,
all of which are subject to change. Any such change, which may or may not be
retroactive, could affect the continuing validity of this discussion.
Gynecare stockholders should be aware that this discussion does not deal
with all Federal income tax considerations that may be relevant to particular
Gynecare stockholders in light of their particular circumstances, such as
stockholders who are dealers in securities, who are subject to the alternative
minimum tax provisions of the Code, who are foreign persons, who do not hold
their Gynecare Common Stock as capital assets or who acquired their shares in
connection with stock option or stock purchase plans or in other compensatory
transactions. In addition, the following discussion does not address the tax
consequences of the Merger under foreign, state or local tax laws, the tax
consequences of transactions effectuated prior or subsequent to, or concurrently
with, the Merger (whether or not any such transactions are undertaken in
connection with the Merger), including without limitation any transaction in
which shares of Gynecare Common Stock are acquired or shares of Johnson &
Johnson Common Stock are disposed. ACCORDINGLY, GYNECARE STOCKHOLDERS ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF
THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES.
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The Merger is intended to constitute a "reorganization" within the meaning
of Section 368(a) of the Code (a "Reorganization"), in which case, subject to
the limitations and qualifications referred to herein, the Merger will generally
result in the following Federal income tax consequences:
(a) No gain or loss will be recognized by holders of Gynecare Common
Stock solely as a result of the conversion of their shares of Gynecare
Common Stock into shares of Johnson & Johnson Common Stock in the Merger.
(b) The aggregate tax basis of the Johnson & Johnson Common Stock
received by Gynecare stockholders in the Merger will be the same as the
aggregate tax basis of the Gynecare Common Stock converted pursuant to the
Merger (except for the tax basis attributable to fractional shares).
(c) Cash payments in lieu of fractional shares will be treated as if a
fractional share of Johnson & Johnson Common Stock had been received in the
Merger and then redeemed by Johnson & Johnson. A Gynecare stockholder
receiving such cash will generally recognize gain or loss upon such payment
equal to the difference (if any) between such stockholder's basis in the
fractional share and the amount of cash received.
(d) The holding period of the Johnson & Johnson Common Stock received
by each Gynecare stockholder in the Merger will include the period for
which the Gynecare Common Stock surrendered in exchange therefor was
considered to be held, provided that the Gynecare Common Stock so
surrendered is held as a capital asset at the time of the Merger.
(e) Neither Johnson & Johnson nor Gynecare will recognize any gain
solely as a result of the Merger.
The parties are not requesting a ruling from the Internal Revenue Service
("IRS") in connection with the Merger. Instead, Gynecare has received an opinion
from its tax counsel, Wilson Sonsini Goodrich & Rosati Professional Corporation
and Johnson & Johnson has received an opinion from its tax counsel, Cravath,
Swaine & Moore, in each case to the effect that, for Federal income purposes,
the Merger will qualify as a Reorganization within the meaning of Section 368(a)
of the Code. These opinions will neither bind the IRS nor preclude the IRS from
adopting a contrary position. In addition, these opinions are subject to certain
assumptions and qualifications and will be based on the continuing truth and
accuracy of certain representations made by Johnson & Johnson, Lima and
Gynecare, including representations made by the respective managements of
Johnson & Johnson, Lima, Gynecare and certain stockholders of Gynecare.
A successful IRS challenge to the Reorganization status of the Merger would
result in Gynecare stockholders recognizing taxable gain or loss with respect to
each share of Gynecare Common Stock surrendered equal to the difference between
such stockholder's basis in such share and the fair market value, as of the
Effective Time, of the Johnson & Johnson Common Stock received in exchange
therefor. In such event, the stockholder's aggregate basis in the Johnson &
Johnson Common Stock so received would equal its fair market value, and the
stockholder's holding period for such stock would begin the day after the
Merger.
ANTICIPATED ACCOUNTING TREATMENT
Johnson & Johnson intends to treat the Merger as a pooling of interests for
accounting and financial reporting purposes.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Gynecare Board with respect to the
approval and adoption of the Merger Agreement and the transactions contemplated
thereby, stockholders of Gynecare should be aware that certain members of the
management of Gynecare and the Gynecare Board may have certain interests in the
Merger that are different from, or in addition to, the interests of Gynecare
stockholders generally.
General. Gynecare will be the Surviving Corporation in the Merger and,
following the Merger, will be a wholly owned subsidiary of Johnson & Johnson.
The officers of Gynecare will be the officers of the Surviving Corporation.
Following the Merger, the current directors of Gynecare will cease to be
directors of the Surviving Corporation. As of the Record Date, directors and
executive officers of Gynecare and their affiliated entities owned (i) 4,183,803
shares of Gynecare Common Stock for which they will receive the same
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consideration as other Gynecare stockholders and (ii) 608,389 unexercised Stock
Options which will be treated as described below.
Gynecare Stock Options. Under the terms of the Merger Agreement, each
outstanding Stock Option will be amended and converted into an option to
acquire, on the same terms and conditions as were applicable under the Stock
Option, the number of shares of Johnson & Johnson Common Stock (rounded down to
the nearest whole share) determined by multiplying the number of shares of
Gynecare Common Stock subject to the Stock Option by the Exchange Ratio at a
price per share of Johnson & Johnson Common Stock (rounded down to the nearest
whole cent) equal to (a) the aggregate exercise price for the shares of Gynecare
Common Stock otherwise purchasable pursuant to the Stock Option divided by (b)
the aggregate number of shares of Johnson & Johnson Common Stock deemed
purchasable pursuant to such Stock Option.
Pursuant to the terms of the 1994 Stock Plan, all outstanding Stock Options
granted under such plan shall be assumed by Johnson & Johnson on the same terms
and conditions as the original grants, except that the number of shares and
exercise price shall be adjusted as set forth in the preceding paragraph.
Pursuant to the terms of the 1995 Director Option Plan, all outstanding
Stock Options held by current directors of Gynecare granted under such plan will
automatically become fully vested and exercisable following the Effective Date.
At the Record Date, Stock Options to purchase an aggregate of 35,000 shares were
outstanding under such plan. In addition, options to purchase an aggregate of
400,000 shares of Gynecare Common Stock granted to Roseanne Hirsch, the
President and Chief Executive Officer of Gynecare, in connection with and as a
condition to her acceptance of employment with Gynecare, will, pursuant to their
terms, become fully vested and exercisable at the Effective Time. See "SECURITY
OWNERSHIP OF GYNECARE."
Stockholder Agreement. The Stockholders listed in Schedule A of the
Stockholder Agreement, including certain directors (in their capacities as
stockholders), officers (in their capacities as stockholders) and certain
entities with which such directors and officers are associated have entered into
the Stockholder Agreement. The general effect of the Stockholder Agreement is to
ensure that Stockholder Approval will be obtained. See "THE MERGER
AGREEMENT--The Stockholder Agreement."
Indemnification Pursuant to the Merger Agreement. Johnson & Johnson has
agreed that, from and after the consummation of the Merger, Johnson & Johnson
will, and will cause the Surviving Corporation to, fulfill and honor in all
respects the obligations of Gynecare pursuant to (i) each indemnification
agreement in effect at such time between Gynecare and each person who is or was
a director or officer of Gynecare at or prior to the Effective Time and (ii) any
indemnification provisions under the Gynecare Certificate of Incorporation or
Gynecare By-laws as each was in effect on the date of the Merger Agreement (such
persons to be indemnified are referred to as, individually, the "Indemnified
Party"). The Certificate of Incorporation and By-laws of the Surviving
Corporation will contain the provisions with respect to indemnification and
exculpation from liability set forth in the Gynecare Certificate of
Incorporation and the Gynecare By-laws on the date of the Merger Agreement,
which provisions will not be amended, repealed or otherwise modified for a
period of six years after the Effective Time in any manner that would adversely
affect the rights thereunder of any Indemnified Party.
RESALE OF JOHNSON & JOHNSON COMMON STOCK
The Johnson & Johnson Common Stock issued pursuant to the Merger will be
transferable under the Securities Act except for shares issued to any Gynecare
stockholder who may be deemed to be an affiliate of Gynecare (an "Affiliate")
for purposes of Rule 145 under the Securities Act. An Affiliate is defined
generally as including, without limitation, directors, certain executive
officers and beneficial owners of 10% or more of a class of common stock of a
company. Gynecare has agreed to use its reasonable efforts to cause each
Affiliate to deliver to Johnson & Johnson on or prior to the Closing Date, a
written agreement providing, among other things, that such Affiliate will not
transfer any Johnson & Johnson Common Stock received in the Merger, except in
compliance with the Securities Act, and the Merger Agreement provides that
Johnson & Johnson's obligation to consummate the Merger is subject to Johnson &
Johnson receiving such written agreements from such Affiliates. This Proxy
Statement/Prospectus does not cover resales of shares of Johnson & Johnson
Common Stock received by any person who may be deemed to be an Affiliate.
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THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, which is attached as Annex I to this Proxy Statement/Prospectus and
is incorporated herein by reference. Such summary is qualified in its entirety
by reference to the Merger Agreement.
THE MERGER
The Merger. The Merger Agreement provides that, following the approval and
adoption of the Merger Agreement by the stockholders of Gynecare and the
satisfaction or waiver of the other conditions to the Merger, Lima will be
merged with and into Gynecare (with Gynecare being the Surviving Corporation).
The Effective Time will occur upon the filing with the Secretary of State of the
State of Delaware of a duly executed Certificate of Merger or at such later time
as is specified in such Certificate of Merger.
Certificate of Incorporation and By-laws. The Merger Agreement provides
that the Certificate of Incorporation of Lima as in effect immediately prior to
the Effective Time will be the Certificate of Incorporation of the Surviving
Corporation until thereafter changed or amended as provided therein or by
applicable law except that the name of the Surviving Corporation will be changed
to be "Gynecare" in such Certificate of Incorporation. The By-laws of Lima as in
effect immediately prior to the Effective Time will be the By-laws of the
Surviving Corporation until thereafter changed or amended as provided therein or
by applicable law. The Merger Agreement provides that Johnson & Johnson will
cause the Surviving Corporation to fulfill and honor and maintain certain
indemnification provisions of the Gynecare Certificate of Incorporation and the
Gynecare By-laws. See "THE MERGER--Interests of Certain Persons in the Merger."
Conversion of Gynecare Common Stock in the Merger. At the Effective Time,
each issued and outstanding share of Gynecare Common Stock, other than shares of
Gynecare Common Stock owned by Johnson & Johnson, Lima or Gynecare, all of which
will be canceled, will be converted into the right to receive such number of
fully paid and nonassessable shares of Johnson & Johnson Common Stock equal to
the Exchange Ratio. Cash will be paid to Gynecare stockholders in lieu of
fractional shares of Johnson & Johnson Common Stock and any dividends or other
distributions to which such holder is entitled. See "THE MERGER--Exchange Agent;
Exchange Procedures; Dividends; No Further Ownership Rights in Gynecare Common
Stock; No Fractional Shares."
REPRESENTATIONS AND WARRANTIES
The Merger Agreement includes various customary representations and
warranties of the parties thereto. The Merger Agreement includes representations
and warranties by Gynecare as to, among other things, (i) the organization,
standing and corporate power of Gynecare; (ii) the absence of subsidiaries of
Gynecare; (iii) Gynecare's capital structure; (iv) the authorization, execution,
delivery, performance and enforceability of the Merger Agreement and related
matters, the Merger Agreement's noncontravention of any agreement, law, or
charter or by-law provision and the absence of the need for governmental or
third-party filings, consents, approvals or actions with respect to any
transaction contemplated by the Merger Agreement (except for certain filings
specified in the Merger Agreement); (v) compliance as to form of, and the
accuracy of information contained in, documents filed with the SEC; (vi) the
accuracy of information supplied by Gynecare in connection with this Proxy
Statement/Prospectus and the Registration Statement; (vii) the absence of
certain material changes or events since the date of the most recent financial
statements filed with the SEC (except as disclosed in documents filed with the
SEC and publicly available prior to the date of the Merger Agreement), including
the absence of any material adverse change in Gynecare, any declaration, setting
aside or payment of a dividend or other distribution, any split, combination or
reclassification of capital stock or any issuance or the authorization of any
issuance of any securities in respect of, in lieu of or in substitution for
shares of capital stock, certain increases in compensation, severance or
termination pay, entry into certain employment, severance or termination
agreements, any materially adverse damage, destruction or loss, any materially
adverse change in accounting methods, principles or practices and any materially
adverse tax election or settlements or compromises of any material income tax
liability; (viii) absence of material litigation or investigations; (ix)
disclosure of material contracts; (x) compliance with laws applicable to the
business of Gynecare, including environmental laws; (xi) the absence of certain
changes in the Benefit Plans (as defined in the Merger Agreement) or labor
relations; (xii) the compliance with applicable laws of the Benefit Plans and
certain other matters relating to the Employee Retirement Income Security Act of
1974, as
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amended; (xiii) the filing of tax returns and payment of taxes; (xiv) the
absence of parachute payments; (xv) good and valid title to, or valid leasehold
interests in, all material property and assets used or useful in the conduct of
the Gynecare business; (xvi) ownership of or the right to use, and no
infringement of others' rights to, and lack of licensing of, the intellectual
property which are material to the conduct of Gynecare's business as a whole;
(xvii) the voting requirements for the approval of the Merger; (xviii)
compliance with applicable state takeover statutes; (xix) certain broker's or
advisor's fees; (xx) the receipt of an opinion of Alex. Brown; (xxi) the absence
of actions taken or agreed to be taken that to Gynecare's knowledge would
prevent pooling of interests accounting treatment for the Merger; and (xxii)
certain matters with respect to contracts or agreements relating to the
third-party distribution, sale, licensing or marketing of Gynecare's products.
The Merger Agreement also includes representations and warranties by
Johnson & Johnson and Lima as to, among other things, (i) the corporate
organization, standing and power of Johnson & Johnson and Lima; (ii) the
authorization, execution, delivery, performance and enforceability of the Merger
Agreement and (in the case of Johnson & Johnson) the Stockholder Agreement and
related matters, the Merger Agreement's and (in the case of Johnson & Johnson)
the Stockholder Agreement's noncontravention of any agreement, law, or charter
or by-law provision and the absence of the need for governmental or third-party
filings, consents, approvals or actions with respect to any transaction
contemplated by the Merger Agreement or the Stockholder Agreement (except for
certain filings specified in the Merger Agreement); (iii) compliance as to form
of, and the accuracy of information contained in, documents filed with the SEC;
(iv) the accuracy of information supplied by Johnson & Johnson or Lima in
connection with this Proxy Statement/Prospectus and the Registration Statement;
(v) the absence of certain material changes or events since the date of the most
recent financial statements filed with the SEC (except as disclosed in documents
filed with the SEC and publicly available prior to the date of the Merger
Agreement) including the absence of any material adverse change in Johnson &
Johnson, any declaration, setting aside or payment of any dividend or other
distribution (other than regular quarterly cash dividends), any split,
combination or reclassification of capital stock or any issuance or the
authorization of any issuance of any securities in respect of, in lieu of or in
substitution for shares of capital stock; (vi) the absence of prior activities
of Lima; and (vii) the absence of actions taken or agreed to be taken that to
Johnson & Johnson's knowledge would prevent pooling of interests accounting
treatment for the Merger.
BUSINESS OF GYNECARE PENDING THE EFFECTIVE TIME OF THE MERGER
Gynecare has agreed that, prior to the Effective Time, it will carry on its
business in the ordinary course consistent with prior conduct, use reasonable
efforts to comply in all material respects with all applicable laws and
regulations, to the extent consistent therewith, use commercially reasonable
efforts to preserve intact its current business organization, keep available the
services of its current officers and employees and preserve its relationships
with customers, suppliers, licensors, licensees, distributors and others having
business dealings with it. Gynecare has also agreed that, prior to the Effective
Time, without Johnson & Johnson's consent, it will not, among other things: (i)
(x) declare, set aside or pay any dividends on, or make any other distributions
(whether in cash, stock or property), in respect of, any of its capital stock,
(y) split, combine or reclassify any of its capital stock or issue or authorize
the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock (other than the issuance of shares
of Gynecare Common Stock upon the exercise of Stock Options outstanding on the
date of the Merger Agreement and in accordance with their then present terms or
as contemplated by the Merger Agreement or (z) purchase, redeem or otherwise
acquire any shares of its capital stock or any other securities of Gynecare or
any rights, warrants or options to acquire any such shares or other securities
except for repurchases from employees following their termination pursuant to
the terms of their existing stock option or purchase agreements; (ii) issue,
deliver, sell, pledge or otherwise encumber any shares of its capital stock, any
other voting securities or any securities convertible into, or any rights,
warrants or options to acquire, any such shares, voting securities or
convertible securities (other than the issuance of shares of Gynecare Common
Stock upon the exercise of Stock Options outstanding on the date of the Merger
Agreement and in accordance with their then present terms or as contemplated by
the Merger Agreement; (iii) amend the Gynecare Certificate of Incorporation or
Gynecare By-laws; (iv) acquire or agree to acquire (x) by merging or
consolidating with, or by purchasing a substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership, joint
venture, association or other business organization or division thereof or (y)
any assets which, individually, is in excess
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of $25,000 or, in the aggregate, are in excess of $100,000, except purchases of
inventory, components and raw materials in the ordinary course of business
consistent with past practice and except for capital expenditures (which are
covered by clause (vii) below); (v) sell, lease, license, mortgage or otherwise
encumber or subject to any Lien (as defined in the Merger Agreement) or
otherwise dispose of any of its properties or assets, except sales of inventory
or used equipment in the ordinary course of business consistent with past
practice; (vi) (y) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person (other than pursuant to Gynecare's existing
line of credit with Silicon Valley Bank or any similar replacement line of
credit in an aggregate amount (including amounts outstanding on the date of the
Merger Agreement) not to exceed $1.3 million), issue or sell any debt securities
or warrants or other rights to acquire any debt securities of Gynecare,
guarantee any debt securities of another person, enter into any "keep well" or
other agreement to maintain any financial statement condition of another person
or enter into any arrangement having the economic effect of any of the
foregoing, except for short-term borrowings incurred in the ordinary course of
business consistent with past practice or (z) make any loans, advances or
capital contributions to, or investments in, any other person, other than (I) as
provided for under any current Benefit Plan or other current benefit plan of
Gynecare in the ordinary course of business consistent with past practice and
(II) for advances to customers and employees, in each case in the ordinary
course of business consistent with past practice; (vii) make or agree to make
any new capital expenditure or expenditures which, individually, is in excess of
$25,000 or, in the aggregate, are in excess of $100,000; (viii) pay, discharge,
settle or satisfy any claims, liabilities or obligations (absolute, accrued,
asserted or unasserted, contingent or otherwise), other than the payment,
discharge, settlement or satisfaction in the ordinary course of business
consistent with past practice or in accordance with their terms, of claims,
liabilities or obligations reflected or reserved against in the most recent
financial statements (or the notes thereto) of Gynecare filed with the SEC or
incurred since the date of such financial statements in the ordinary course of
business consistent with past practice, or waive any material benefits of, or
agree to modify in any materially adverse respect, any confidentiality,
standstill or similar agreements to which Gynecare is a party; (ix) except in
the ordinary course of business, modify, amend or terminate any material
contract or agreement to which Gynecare is a party or waive, release or assign
any material rights or claims thereunder; (x) enter into any contracts,
agreements, binding arrangements or understandings relating to the distribution,
sale, license or marketing by third parties of Gynecare's products or products
licensed by Gynecare, other than pursuant to any such contracts, agreements,
arrangements or understandings currently in place in accordance with their terms
as of the date of the Merger Agreement; (xi) except as otherwise contemplated by
the Merger Agreement or as required to comply with applicable law or agreements,
plans or arrangements existing on the date of the Merger Agreement, (A) adopt,
enter into, terminate or amend any collective bargaining agreement or Benefit
Plan for the benefit or welfare of any current or former officer, director or
employee, (B) increase in any manner the compensation or fringe benefits of, or
pay any bonus to, any officer, director or employee (except for normal increases
of cash compensation or cash bonuses in the ordinary course of business
consistent with past practice), (C) pay any benefit not provided for under any
Benefit Plan or any other benefit plan or arrangement of Gynecare, (D) increase
in any manner the severance or termination pay of any officer or employee, (E)
enter any employment, consulting (other than in the ordinary course of business
consistent with past practice), severance, termination or indemnification
agreement with any current or former employee, officer or director, (F) grant
any awards under any bonus, incentive, performance or other compensation plan or
arrangement or Benefit Plan (including the grant of stock options, stock
appreciation rights, stock based or stock related awards, performance units or
restricted stock or the removal of existing restrictions in any Benefit Plans or
agreements or awards made thereunder), (G) take any action to fund or in any
other way secure the payment of compensation or benefits under any employee
plan, agreement, contract or arrangement or Benefit Plan or (H) take any action
to accelerate the vesting of payment of any compensation or benefit under any
Benefit Plan; (xii) except as otherwise contemplated by the Merger Agreement,
enter into any agreement of a nature that would be required to be filed as an
exhibit to Form 10-K under the Exchange Act, other than contracts for the sale
of Gynecare's products in the ordinary course of business; (xiii) form any
subsidiary of Gynecare; (xiv) except as required by generally accepted
accounting principles, make any change in accounting methods, principles or
practices; or (xv) authorize any of, or commit or agree to take any of, the
foregoing actions.
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<PAGE> 34
Gynecare has agreed to promptly notify Johnson & Johnson of receipt of any
written notice from any Governmental Entity of any violation of any
Environmental Laws (as defined in the Merger Agreement) or the institution or
pendency of any suit, action, claim, proceeding or investigation by any
Governmental Entity or any third party in connection with any alleged violation
of Environmental Laws.
Gynecare also has agreed to (i) file all tax returns and reports
("Post-Signing Returns") required to be filed by it (after taking into account
any extensions); (ii) timely pay all taxes due and payable with respect to such
Post-Signing Returns that are so filed; (iii) accrue a reserve in its books and
records and financial statements in accordance with past practice for all taxes
payable by Gynecare for which no Post-Signing Return is due prior to the
Effective Time; (iv) promptly notify Johnson & Johnson of any action, suit,
proceeding, claim or audit (collectively, "Actions") pending against or with
respect to Gynecare in respect of any tax where there is a reasonable
possibility of a determination or decision which would have a material adverse
effect on Gynecare's tax liabilities or tax attributes, and will not settle or
compromise any such Action without Johnson & Johnson's consent; and (v) will not
make any material tax election without Johnson & Johnson's consent.
Gynecare also has agreed to promptly (i) notify Johnson & Johnson of
receipt by it or its licensor of any communication or correspondence of any kind
(whether written or oral) from the United States Patent and Trademark Office
relating to an identified patent action and (ii) provide Johnson & Johnson with
a copy of such communication or correspondence, or if any such communication or
correspondence shall have been made orally, a summary thereof in writing.
EFFECT ON GYNECARE BENEFIT PLANS AND STOCK OPTIONS
The Merger Agreement provides that as soon as practicable following the
date of the Merger Agreement, the Gynecare Board (or, if appropriate, any
committee administering the Stock Plans, as defined below) will adopt such
resolutions or take such other actions, if any, as may be reasonably required to
(i) adjust the terms of all outstanding Stock Options granted to current or
former officers, directors, employees or consultants of Gynecare (the "Stock
Plans"), whether vested or unvested, as necessary to provide that, at the
Effective Time, each Stock Option outstanding immediately prior to the Effective
Time will be amended and converted into an option to acquire, on the same terms
and conditions as were applicable under the Stock Option, the number of shares
of Johnson & Johnson Common Stock (rounded down to the nearest whole share)
determined by multiplying the number of shares of Gynecare Common Stock subject
to the Stock Option by the Exchange Ratio, at a price per share of Johnson &
Johnson Common Stock (rounded up to the nearest whole cent) equal to (A) the
aggregate exercise price for the shares of Gynecare Common Stock otherwise
purchasable pursuant to the Stock Option divided by (B) the aggregate number of
shares of Johnson & Johnson Common Stock deemed purchasable pursuant to such
Stock Option and (ii) make such other changes to the Stock Plans as Gynecare and
Johnson & Johnson may agree are appropriate to give effect to the Merger.
The Merger Agreement further provides that Gynecare will terminate the 1995
Employee Stock Purchase Plan (the "ESPP") by having the Gynecare Board amend the
ESPP as necessary to provide that (i) any shares to be purchased under the ESPP
shall be purchased on a new "Exercise Date" (as defined in the ESPP) set by the
Gynecare Board, which Exercise Date will be on the last trading day immediately
prior to the Effective Time, or such earlier time as the Gynecare Board may
specify and (ii) immediately following such purchase of shares, the ESPP will
terminate.
With the exception of the provisions described above, the Merger will not
affect Gynecare's benefit plans.
See "THE MERGER--Interests of Certain Persons in the Merger."
CONDITIONS TO THE CONSUMMATION OF THE MERGER
Conditions to Each Party's Obligations to Effect the Merger. The
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver of the following conditions: (i) the Merger Agreement
having received Stockholder Approval; (ii) the shares of Johnson & Johnson
Common Stock issuable to Gynecare stockholders pursuant to the Merger Agreement
having been approved for listing on the NYSE, subject to official notice of
issuance; (iii) the waiting period (and any extensions thereof) under the HSR
Act applicable to the Merger having expired or having been terminated; (iv)
there not being in effect any
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<PAGE> 35
temporary restraining order, preliminary or permanent injunction or other order
of any court of competent jurisdiction or other legal restraint or prohibition
(collectively, "Restraints") preventing the consummation of the Merger; and (v)
the Registration Statement having become effective under the Securities Act and
not being the subject of any stop order or any proceeding seeking such a stop
order.
Conditions to the Obligations of Johnson & Johnson and Lima. The
obligations of Johnson & Johnson and Lima to effect the Merger are further
subject to the following conditions: (i) the representations and warranties of
Gynecare contained in the Merger Agreement that are qualified as to material
adverse effect being true and correct, and the representations and warranties of
Gynecare contained in the Merger Agreement that are not so qualified being true
and correct except where the failure to be so true and correct would not have a
material adverse effect on Gynecare, in each case as of the date of the Merger
Agreement and as of the Closing Date (except to the extent such representations
and warranties expressly relate to an earlier date, in which case as of such
earlier date) as though made on the Closing Date (or such earlier date); (ii)
Gynecare having performed in all material respects all material obligations
required to be performed by it under the Merger Agreement at or prior to the
Closing Date; (iii) Johnson & Johnson having received from each affiliate of
Gynecare for purposes of Rule 145 under the Securities Act an executed letter in
the form of Exhibit A to the Merger Agreement; (iv) there being no pending suit
by, action by or proceeding by any Governmental Entity, (a) challenging the
acquisition by Johnson & Johnson or Lima of any shares of Gynecare Common Stock,
seeking to restrain or prohibit the consummation of the Merger, or seeking to
place limitations on the ownership of shares of Gynecare Common Stock (or shares
of common stock of the Surviving Corporation) by Johnson & Johnson or Lima, (b)
seeking to prohibit or materially limit the ownership or operation by Gynecare,
Johnson & Johnson or any of Johnson & Johnson's subsidiaries of any material
portion of any business or of any assets of Gynecare, Johnson & Johnson or any
of Johnson & Johnson's subsidiaries, or to compel Gynecare, Johnson & Johnson or
any of Johnson & Johnson's subsidiaries to dispose of or hold separate any
material portion of any business or of any assets of Gynecare, Johnson & Johnson
or any of Johnson & Johnson's subsidiaries, as a result of the Merger or (c)
seeking to prohibit Johnson & Johnson or any of its subsidiaries from
effectively controlling in any material respect the business or operations of
Gynecare; (v) any material adverse change in Gynecare not having occurred (or if
one shall have occurred, it shall not have been cured) at any time on or after
the date of the Merger Agreement; and (vi) Johnson & Johnson and Gynecare shall
have received letters, respectively, from Coopers & Lybrand L.L.P., dated as of
the Closing Date, addressed to Johnson & Johnson and Gynecare, stating in
substance (x) that Coopers & Lybrand L.L.P. concurs with the conclusion of the
management of Johnson and Johnson and Gynecare, respectively, that as of such
date, no conditions exist that would preclude accounting for the Merger as a
pooling of interests transaction and (y) that the basis for such a concurrence
is Coopers & Lybrand L.L.P.'s belief that the criteria for such accounting
treatment have been met.
Conditions to the Obligations of Gynecare. The obligation of Gynecare to
effect the Merger is further subject to the following conditions: (i) the
representations and warranties of Johnson & Johnson and Lima contained in the
Merger Agreement that are qualified as to material adverse effect being true and
correct, and the representations and warranties of Johnson & Johnson and Lima
contained in the Merger Agreement that are not so qualified being true and
correct except where the failure to be so true and correct would not have a
material adverse effect on Johnson & Johnson, in each case as of the date of the
Merger Agreement and as of the Closing Date (except to the extent such
representations and warranties expressly relate to an earlier date, in which
case as of such earlier date) as though made on the Closing Date (or such
earlier date); (ii) Johnson & Johnson and Lima having performed in all material
respects all obligations required to be performed by them under the Merger
Agreement at or prior to the Closing Date; (iii) the tax opinions of Wilson
Sonsini Goodrich & Rosati, counsel to Gynecare, and Cravath, Swaine & Moore,
counsel to Johnson & Johnson, having been delivered to Gynecare and Johnson &
Johnson, respectively, in form and substance reasonably satisfactory to
Gynecare; and (iv) at any time on or after the date of the Merger Agreement,
there not having occurred any material adverse change in Johnson & Johnson (or,
if one shall have occurred, it having not been cured).
Under the Merger Agreement, none of Gynecare, Johnson & Johnson or Lima may
rely on the failure of any condition to such party's obligation to effect the
Merger to be satisfied if such failure was caused by such
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<PAGE> 36
party's failure to use reasonable efforts to consummate the Merger and the other
transactions contemplated by the Merger Agreement.
NO SOLICITATION
The Merger Agreement provides that Gynecare will not, nor will it authorize
or permit any of its officers, directors or employees or any investment banker,
attorney or other advisor or representative retained by it to, directly or
indirectly, (i) solicit, initiate or encourage the submission of any Takeover
Proposal or (ii) participate in any discussions or negotiations regarding, or
furnish to any person any non-public information with respect to, or take any
other action to facilitate any inquiries or the making of any proposal that
constitutes any Takeover Proposal. Under the Merger Agreement, any violation of
the restrictions set forth in the preceding sentence by any officer, director or
employee of Gynecare or any investment banker, attorney or other advisor or
representative of Gynecare will be deemed to be a breach of the no solicitation
provisions of the Merger Agreement by Gynecare. Under the Merger Agreement,
"Takeover Proposal" means any inquiry, proposal or offer from any person
relating to any direct or indirect acquisition or purchase of a substantial
amount of assets of Gynecare (other than the purchase of Gynecare's products in
the ordinary course of business) or more than a 20% interest in the total voting
securities of Gynecare or any tender offer or exchange offer that if consummated
would result in any person beneficially owning 20% or more of the total voting
securities of Gynecare or any merger, consolidation, business combination, sale
of substantially all the assets, recapitalization, liquidation, dissolution or
similar transaction involving Gynecare, other than the transactions contemplated
by the Merger Agreement or the Stockholder Agreement.
Gynecare has also agreed that neither the Gynecare Board nor any committee
thereof will (i) withdraw or modify, or propose publicly to withdraw or modify,
in a manner adverse to Johnson & Johnson or Lima, the approval or recommendation
by the Gynecare Board or any such committee of the Merger Agreement or the
Merger, (ii) approve or recommend, or propose to approve or recommend, any
Takeover Proposal or (iii) cause Gynecare to enter into any letter of intent,
agreement in principle, acquisition agreement or other similar agreement with
respect to any Takeover Proposal.
Gynecare has also agreed that it will promptly advise Johnson & Johnson
orally and in writing of any request for non-public information which Gynecare
reasonably believes would lead to a Takeover Proposal or of any Takeover
Proposal, or any inquiry with respect to or which Gynecare reasonably believes
would lead to any Takeover Proposal, the material terms and conditions of such
request, Takeover Proposal or inquiry, and the identity of the person making any
such request, Takeover Proposal or inquiry. Gynecare will keep Johnson & Johnson
informed in all material respects of the status and details (including material
amendments or proposed amendments) of any such request, Takeover Proposal or
inquiry.
TERMINATION, AMENDMENT AND WAIVER
The Merger Agreement may be terminated, and the Merger contemplated thereby
may be abandoned, at any time prior to the Effective Time, whether before or
after receipt of Stockholder Approval (i) by mutual written consent of Johnson &
Johnson, Lima and Gynecare; (ii) by either Johnson & Johnson or Gynecare: (a) if
the Merger shall not have been consummated by November 30, 1997 for any reason;
provided however, that the right to terminate the Merger Agreement pursuant to
the provision in the Merger Agreement described in this clause (a) will not be
available to any party whose action or failure to act has been a principal cause
of or resulted in the failure of the Merger to occur on or before such date and
such action or failure to act constitutes a breach of the Merger Agreement; (b)
if any Restraint having any of the effects described above in clause (iv) of
"--Conditions to the Obligations of Johnson & Johnson and Lima," shall be in
effect and shall have become final and nonappealable; or (c) if the Stockholder
Approval shall not have been obtained at the Special Meeting duly convened
therefor or at any adjournment or postponement thereof or by written consent;
(iii) by Gynecare, upon a breach of any representation, warranty, covenant or
agreement on the part of Johnson & Johnson set forth in the Merger Agreement, or
if any such representation or warranty of Johnson & Johnson shall have become
inaccurate, in either case such that the conditions described above in clause
(i) or (ii) under "--Conditions to the Obligations of Gynecare," would not be
satisfied as of the time of such breach or as of the time such representation or
warranty shall have become inaccurate; provided, that if such inaccuracy in
Johnson & Johnson's representations and warranties or breach by Johnson &
Johnson is curable by Johnson & Johnson through the exercise of its reasonable
efforts, then (a) Gynecare may not
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<PAGE> 37
terminate the Merger Agreement pursuant to the provision in the Merger Agreement
described in this clause (iii) with respect to a particular breach or inaccuracy
prior to or during the 45-day period commencing upon delivery by Gynecare of
written notice to Johnson & Johnson describing such breach or inaccuracy,
provided Johnson & Johnson continues to exercise reasonable efforts to cure such
breach or inaccuracy and (b) Gynecare may not, in any event, terminate the
Merger Agreement pursuant to the provisions described in this clause (iii) if
such inaccuracy or breach shall have been cured in all material respects during
such 45-day period; and, provided further that Gynecare may not terminate the
Merger Agreement pursuant to the provisions described in this clause (iii) if it
shall have wilfully and materially breached the Merger Agreement; or (iv) by
Johnson & Johnson, upon a breach of any representation, warranty, covenant or
agreement on the part of Gynecare set forth in the Merger Agreement, or if any
such representation or warranty of Gynecare shall have become inaccurate, in
either case such that the conditions described above in clause (i) or (ii) under
"--Conditions to the Obligations of Johnson & Johnson and Lima," would not be
satisfied as of the time of such breach or as of the time such representation or
warranty shall have become inaccurate; provided, that if such inaccuracy in
Gynecare's representations and warranties or breach by Gynecare is curable by
Gynecare through the exercise of its reasonable efforts, then (a) Johnson &
Johnson may not terminate the Merger Agreement pursuant to the provisions
described in this clause (iv) with respect to a particular breach or inaccuracy
prior to or during the 45-day period commencing upon delivery by Johnson &
Johnson of written notice to Gynecare describing such breach or inaccuracy,
provided Gynecare continues to exercise reasonable efforts to cure such breach
or inaccuracy and (b) Johnson & Johnson may not, in any event, terminate the
Merger Agreement pursuant to the provisions described in this clause (iv) if
such inaccuracy or breach shall have been cured in all material respects during
such 45-day period; and provided further that Johnson & Johnson may not
terminate the Merger Agreement pursuant to the provisions described in this
clause (iv) if it shall have wilfully and materially breached the Merger
Agreement.
In the event the Merger Agreement is terminated (other than pursuant to the
provisions described in clause (ii)(c) of the preceding paragraph or clause (iv)
of the preceding paragraph if Gynecare shall have wilfully and intentionally
breached the Merger Agreement and such breach shall have given rise to Johnson &
Johnson's right to terminate under the provisions described in such clause
(iv)), Johnson & Johnson and Gynecare have agreed to enter into the Credit
Agreement. See "THE MERGER AGREEMENT--The Credit Agreement" and "OTHER
MATTERS--Regulatory Approvals Required."
Subject to applicable law, (i) the Merger Agreement may be modified or
amended by written agreement executed and delivered by the respective duly
authorized officers of Johnson & Johnson, Lima and Gynecare (except that after
Stockholder Approval has been obtained, no amendment may be made which requires
the approval by such stockholders without the further approval of such
stockholders) and (ii) the parties, by written agreement signed by each party,
may extend the time for performance of any of the obligations or other acts of
the other parties to the Merger Agreement, waive inaccuracies in representations
and warranties or waive compliance with any of the agreements or conditions of
the other parties contained in the Merger Agreement.
THE STOCKHOLDER AGREEMENT
The following is a brief summary of certain provisions of the Stockholder
Agreement, which is attached hereto as Annex II and incorporated herein by
reference; such summary is qualified in its entirety by reference to the
Stockholder Agreement.
On August 4, 1997, Johnson & Johnson entered into the Stockholder Agreement
with certain affiliated stockholders of Gynecare (the "Stockholder Parties").
The Stockholder Parties are listed on Schedule A of the Stockholder Agreement,
including certain directors (in their capacity as stockholders), officers (in
their capacity as stockholders) and certain entities with which such directors
and officers are associated. Together, the Stockholder Parties held at the
Record Date 4,210,411 shares (approximately 50.08% of the outstanding shares) of
Gynecare Common Stock. Consequently, such stockholders together are generally
able to control the vote of all matters submitted to a vote of the Gynecare
stockholders, including approval and adoption of the Merger Agreement. The
general effect of the Stockholder Agreement is to ensure that Stockholder
Approval will be obtained.
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Pursuant to the terms of the Stockholder Agreement, each Stockholder Party
has agreed to vote (or cause to be voted), at the Special Meeting or in any
other circumstances upon which a vote, consent or other approval with respect to
the Merger and the Merger Agreement is sought his, her or its shares of Gynecare
Common Stock (together, the "Subject Shares") in favor of approval and adoption
of the Merger Agreement and each of the other transactions contemplated thereby.
Each Stockholder Party also has irrevocably granted to, and appointed,
Johnson & Johnson and two of Johnson & Johnson's officers, in their capacities
as officers of Johnson & Johnson, and each of them individually, such
Stockholder Party's proxy and attorney-in-fact (with full power of
substitution), for and in the name, place and stead of such Stockholder Party,
to vote such Stockholder Party's Subject Shares, or grant a consent or approval
in respect of such Subject Shares, in favor of approval and adoption of the
Merger Agreement.
Further, each Stockholder Party has agreed: (i) not to, directly or
indirectly, except as contemplated by the Stockholder Agreement, grant any
proxies or powers of attorney with respect to the Subject Shares, deposit the
Subject Shares into a voting trust or enter into a voting agreement with respect
to the Subject Shares; and (ii) that the Stockholder Agreement and the
obligations thereunder will attach to such Stockholder's Subject Shares and will
be binding upon any person or entity to which legal or beneficial ownership of
such Subject Shares passes, whether by operation of law or otherwise, including
such Stockholder Party's heirs, guardians, administrators or successors.
The Stockholder Agreement will terminate on the earlier of the Effective
Time or the date on which the Merger Agreement is terminated.
THE CREDIT AGREEMENT
The following is a brief summary of certain provisions of the Credit
Agreement, which is attached as Exhibit B to the Merger Agreement attached
hereto as Annex I and incorporated herein by reference; such summary is
qualified in its entirety by reference to the Credit Agreement.
In the event the Merger Agreement is terminated for any reason other than
(x) a failure to obtain Stockholder Approval at the Special Meeting or (y) due
to an uncured breach of a representation, warranty, covenant or agreement of
Gynecare if Gynecare has wilfully and intentionally breached the Merger
Agreement, Johnson & Johnson and Gynecare have agreed to enter into the Credit
Agreement under which Gynecare would be able to borrow up to $5,000,000 in
draw-down loans (each a "Loan") not to exceed $1,000,000 per month. The Loans
would bear interest, payable semiannually, at a rate equal to one percent over
the prime rate reported from time to time during the term of the Loan in The
Wall Street Journal. The principal of all Loans shall be due, with all accrued
interest, on the three year anniversary of the date of the Credit Agreement. The
Loans may be prepaid in whole or in part at the discretion of Gynecare, and must
be prepaid under certain circumstances where Gynecare obtains additional debt or
equity financing. The Loans will be secured by all of the assets of Gynecare,
subject to the senior secured position of Silicon Valley Bank on the fixed
assets of Gynecare under credit facilities in place as of the date of the Merger
Agreement.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
Directors and Officers. The directors of Lima immediately prior to the
Effective Time will become the directors of the Surviving Corporation until
their respective successors have been duly elected and qualified or until their
earlier resignation or removal. As a result, the current directors of Gynecare
will not be directors of the Surviving Corporation. The officers of Gynecare at
the Effective Time will be the officers of the Surviving Corporation until their
respective successors have been duly appointed and qualified or until their
earlier resignation or removal.
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COMPARATIVE STOCK PRICES AND DIVIDENDS
Johnson & Johnson Common Stock (symbol: JNJ) is listed for trading on the
NYSE and Gynecare Common Stock (symbol: GYNE) is quoted on the Nasdaq National
Market. The following table sets forth, for the periods indicated, the high and
low sale prices per share of Johnson & Johnson Common Stock on the NYSE
Composite Transactions Tape and of Gynecare Common Stock on the Nasdaq National
Market and the quarterly cash dividends per share paid by Johnson & Johnson on
shares of Johnson & Johnson Common Stock. Gynecare Common Stock was not publicly
traded prior to the fourth quarter of 1995, and Gynecare has never paid cash
dividends on shares of Gynecare Common Stock. In addition, the Merger Agreement
and Gynecare's bank line of credit restrict Gynecare's ability to pay cash
dividends between the date of the Merger Agreement and the Effective Time.
<TABLE>
<CAPTION>
JOHNSON &
JOHNSON
GYNECARE COMMON CASH DIVIDENDS
COMMON STOCK STOCK(1) -----------------
--------------- -------------- JOHNSON & JOHNSON
HIGH LOW HIGH LOW COMMON STOCK(1)
---- ---- ---- --- -----------------
<S> <C> <C> <C> <C> <C>
1994
First Quarter......................... N/A N/A $22 7/8 $18 $ 0.130
Second Quarter........................ N/A N/A 22 1/2 18 0.145
Third Quarter......................... N/A N/A 26 1/4 21 1/8 0.145
Fourth Quarter........................ N/A N/A 28 1/4 24 3/4 0.145
1995
First Quarter......................... N/A N/A 31 1/2 26 3/4 0.145
Second Quarter........................ N/A N/A 35 5/8 29 1/4 0.165
Third Quarter......................... N/A N/A 37 1/2 32 1/4 0.165
Fourth Quarter........................ $10 1/4(2) $6 1/4(2) 46 1/4 36 5/8 0.165
1996
First Quarter......................... 11 1/4 7 5/8 50 1/4 41 5/8 0.165
Second Quarter........................ 10 1/4 7 3/4 50 3/4 42 7/8 0.190
Third Quarter......................... 7 1/2 3 1/2 53 3/8 44 1/8 0.190
Fourth Quarter........................ 9 1/16 5 3/8 54 47 1/8 0.190
1997
First Quarter......................... 8 1/8 5 3/8 62 3/4 48 5/8 0.190
Second Quarter........................ 6 9/16 5 1/2 66 7/8 51 1/8 0.220
Third Quarter......................... 8 1/2 6 65 1/2 561/6 0.220
Fourth Quarter through October 16,
1997)............................... 8 5/8 8 1/8 62 1/8 573/16 N/A
</TABLE>
- ---------------
(1) Per share amounts for, and cash dividends paid on, Johnson & Johnson Common
Stock have been restated to retroactively reflect a two-for-one stock split
effected in June 1996.
(2) High and low prices for Fourth Quarter 1995 were obtained since November 2,
1995, the date Gynecare Common Stock commenced trading.
The following table sets forth the last reported sales prices per share of
Johnson & Johnson Common Stock on the NYSE Composite Transactions Tape and of
Gynecare Common Stock on the Nasdaq National Market on August 1, 1997, the last
trading day before announcement of the Merger Agreement, and on October 16,
1997, the last trading day prior to the date of this Proxy Statement/Prospectus:
<TABLE>
<CAPTION>
JOHNSON & JOHNSON GYNECARE
COMMON STOCK COMMON STOCK
----------------- ------------
<S> <C> <C>
August 1, 1997.............................................. $611/16 $81/2
October 16, 1997............................................ 587/8 85/16
</TABLE>
GYNECARE STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR
JOHNSON & JOHNSON COMMON STOCK AND GYNECARE COMMON STOCK IN CONNECTION WITH
VOTING THEIR SHARES.
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BUSINESS OF JOHNSON & JOHNSON
Johnson & Johnson, organized in the State of New Jersey in 1887, employs
approximately 89,300 people worldwide and is engaged in the manufacture and sale
of a broad range of products in the health care field in many countries of the
world. Johnson & Johnson's primary interest, both historically and currently,
has been in products related to health and well-being. Johnson & Johnson's
worldwide business is divided into three segments: consumer, pharmaceutical and
professional. The consumer segment's principal products are personal care and
hygienic products, including oral and baby care products, first aid products,
nonprescription drugs, sanitary protection products and adult skin and hair
products; the pharmaceutical segment's principal worldwide franchises are in the
allergy, antibacterial, antifungal, biotech, central nervous system,
contraceptive, dermatology, gastrointestinal and immunobiology fields; and the
professional segment's products include suture and mechanical wound closure
products, minimally-invasive surgical instruments, diagnostic products, medical
equipment and devices, disposable contact lenses, surgical instruments, joint
replacements and products for wound management and infection prevention. See
"AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
The principal executive offices of Johnson & Johnson are located at One
Johnson & Johnson Plaza, New Brunswick, New Jersey 08933. The telephone number
is (908) 524-0400.
BUSINESS OF GYNECARE, INC.
OVERVIEW
Gynecare designs, develops and markets minimally invasive and
cost-effective medical devices for the treatment of uterine disorders.
Gynecare's first product, the ThermaChoice Uterine Balloon Therapy system, is
used to treat women who experience dysfunctional uterine bleeding. The
ThermaChoice system is designed as a minimally invasive procedure that can be
performed in eight minutes in a clinic or physician's office. The system is
currently under clinical investigation in the U.S. and approved for marketing in
Canada and in over 30 other countries. Gynecare's PMA application for the
ThermaChoice system has been filed by the FDA. On October 6, 1997, the Ob/Gyn
Devices Advisory Panel of the FDA recommended to the FDA that it approve
Gynecare's PMA application, subject to certain conditions. The FDA will consider
the Advisory Panel's recommendation in its final review of Gynecare's PMA
application. The ThermaChoice system is not approved for marketing in the United
States and the Advisory Panel's recommendation does not imply that a decision
about the approvability of the application has been made by the FDA. Gynecare
submitted its PMA application for the ThermaChoice system to the FDA on June 17,
1997.
Gynecare's second product, the VersaPoint Bipolar Electrosurgery system, is
used to treat women diagnosed with benign uterine pathologies including
fibroids, polyps, adhesions and divided septa. The VersaPoint microelectrode
vaporizes, cuts and desiccates tissue through the use of proprietary bipolar
technology. In November 1996, Gynecare received 510(k) clearance from the FDA to
market the VersaPoint system in the United States.
Based on a World Health Organization study and Gynecare's market research,
Gynecare believes that approximately 19 percent of all menstruating women age 30
to 50 who live in the United States, Europe, Canada and Japan perceive their
menstrual bleeding to be excessive. Women who perceive their menstrual bleeding
to be excessive, including women who are clinically diagnosed with dysfunctional
or excessive menstrual bleeding ("menorrhagia"), may seek treatment if this
condition interferes with their work, family and social commitments and sexual
activity. Based on Gynecare's market research and industry sources, it is
estimated that benign uterine pathologies, such as fibroids, occur in 20 to 30
percent of women age 30 and older. Symptoms of benign uterine pathologies
include increased menstrual bleeding, pain or pressure in the abdomen, and
infertility problems.
Existing treatment options for dysfunctional uterine bleeding and fibroids
have been limited to long-term drug therapy, temporary treatment by dilatation
and curettage ("D&C") and procedures such as surgical ablation, surgical
resection or hysterectomy.
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Gynecare's proprietary ThermaChoice Uterine Balloon Therapy system consists
of a disposable balloon catheter which is inserted vaginally into the uterus to
ablate the endometrial lining to a depth sufficient to inhibit its regrowth
during the menstrual cycle, thereby reducing or eliminating dysfunctional
uterine bleeding. The catheter is designed to be approximately 5 millimeters in
diameter, enabling insertion into the uterus through the cervix without
dilation, in most cases. This design enables physicians in many cases to treat
patients in an outpatient setting using local anesthesia and intravenous ("IV")
sedation. The system also includes a controller that continuously monitors
pressure, regulates fluid temperature and controls therapy time.
In June 1994, Gynecare initiated international clinical trials to treat
patients with dysfunctional uterine bleeding using the ThermaChoice Uterine
Balloon Therapy system. In October 1995, the FDA granted Gynecare an
Investigational Device Exemption ("IDE") to begin a multi-center, randomized,
comparative clinical trial to treat approximately 250 patients diagnosed with
menorrhagia. A twelve month follow-up with additional patient contact after 24
and 36 months is required for all patients. Gynecare began its U.S. clinical
trials in January 1996 and completed the patient treatment phase in October
1996. Gynecare's PMA application for the ThermaChoice system has been filed by
the FDA. On October 6, 1997, the Ob/Gyn Devices Advisory Panel of the FDA
recommended to the FDA that it approve Gynecare's PMA application, subject to
certain conditions. The FDA will consider the Advisory Panel's recommendation in
its final review of Gynecare's PMA application. The ThermaChoice system is not
approved for marketing in the United States and the Advisory Panel's
recommendation does not imply that a decision about the approvability of the
application has been made by the FDA. Gynecare submitted its PMA application for
the ThermaChoice system to the FDA on June 17, 1997.
Gynecare's proprietary VersaPoint system consists of a bipolar
electrosurgical generator and a disposable microelectrode, which is inserted
vaginally to cut, desiccate or vaporize uterine fibroids, polyps, adhesions and
divided septa. The microelectrodes are designed to be used with a 5 millimeter
operative hysteroscope which can be inserted into the uterus through the cervix
without having to dilate the cervix, in most cases. This design enables
physicians in many cases to treat patients in an outpatient setting using local
anesthesia and IV sedation. Additionally, the VersaPoint Bipolar Electrosurgery
system operates in a normal saline solution, thus reducing the risk associated
with certain fluids used with conventional monopolar electrosurgery of
electrolyte imbalance in the patient's bloodstream. In November 1996, Gynecare
received 510(k) marketing clearance from the FDA. Gynecare plans to begin
marketing the system in the United States during 1997. This paragraph contains
forward looking statements reflecting current expectations of Gynecare involving
risks and uncertainties and Gynecare's actual marketing plans for the VersaPoint
system may differ materially from those contained in this paragraph as a result
of any inability of Gynecare to establish U.S. distribution for the VersaPoint
system, any inability to obtain third party reimbursement for the VersaPoint
system, any intellectual property challenges to the VersaPoint system and the
other factors listed in "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF GYNECARE--Other Factors Affecting Future
Results."
On September 19, 1997, Gynecare and Ethicon entered into a distribution
agreement by which Ethicon will serve as a non-exclusive distributor for
Gynecare's VersaPoint and ThermaChoice products in the United States for a
period of six months. The distribution agreement was negotiated on an arm's
length basis and may be terminated by either party for any reason by giving the
other party 30 days' notice.
In connection with Gynecare's incorporation in March 1994, Origin assigned
to Gynecare its license to patents and technology covering the ThermaChoice
Uterine Balloon Therapy system developed through the date of assignment.
Guidant, through Origin, owned approximately 31% of the outstanding shares of
Gynecare Common Stock at July 31, 1997. In July 1995, Gynecare entered into an
exclusive license and OEM supply agreement with Gyrus Medical, Ltd. ("Gyrus") of
Cardiff, Wales, for the VersaPoint system for hysteroscopic applications in
gynecology. This agreement was extended to include the field of laparoscopy
during the first quarter of 1996.
The principal executive offices of Gynecare are located at 235 Constitution
Drive, Menlo Park, California. The telephone number is (415) 614-2500.
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BACKGROUND
Menstruation. The normal menstrual cycle, which is controlled by the
pituitary and ovarian hormones, begins at the onset of menstruation (typically
between the ages of 11 and 14) and ends at the onset of menopause (typically
between the ages of 45 and 55). The endometrial lining of the uterus builds up
each month in preparation for pregnancy, sheds if no pregnancy occurs, and then
regenerates for another 28 day cycle. Shedding of the endometrial lining of the
uterus results in menstrual bleeding which usually lasts four to seven days
within a 28 day cycle. Normal blood loss during menstruation is considered to be
25 to 79 milliliters per cycle.
Excessive Menstrual Bleeding. Abnormal menstrual bleeding includes
menstrual bleeding in excess of the normal amount, prolonged bleeding beyond
seven days duration at the expected time of menstruation or bleeding more
frequently than 24-day intervals. Menstrual irregularities occur across the
entire age span of menstruating women. From the onset of menstruation to
menopause, menorrhagia is most often due to hormonal imbalances or uterine
fibroids. Excessive menstrual bleeding, or menorrhagia, is clinically defined as
total blood loss exceeding 80 milliliters per cycle. Any bleeding in
postmenopausal women is abnormal and is commonly a side effect of hormone
replacement therapy.
Women who perceive their menstrual bleeding to be excessive, including
women who are clinically diagnosed with menorrhagia, may seek treatment if this
condition interferes with their work, family and social commitments and sexual
activity. A World Health Organization survey of menstrual perceptions and
patterns among 5,322 women in ten countries found that approximately 19% of
women consider their menstruation to be abnormally heavy. Additionally, based on
its United States survey of 400 women over the age 30, Gynecare believes that
19% of women in the United States also perceive their menstrual bleeding to be
excessive.
Fibroids and Other Benign Uterine Pathology. A fibroid is the most common
benign pathology found inside a woman's pelvis. Based on Gynecare's market
research and industry sources, it is estimated that fibroids occur in 20-30% of
women age 30 and older. A fibroid is a benign growth made up of fibrous and
muscular tissue and occurs in the wall of the uterus (intramural), on the inside
wall of the uterus (submucosal), or on the outside wall of the uterus (serosal).
A polyp is a small, benign mass of tissue that projects out of the uterine
lining. An adhesion is a band of fibrous scar tissue adhering to the endometrial
lining, which may interfere with fertility or pregnancy. A divided septate is a
uterus in which the septum (a thin wall) abnormally divides the uterus into two
separate cavities, thereby preventing a normal pregnancy. Benign uterine
pathology can cause increased menstrual bleeding, pain or pressure in the
abdomen, and infertility problems.
Current Therapies and Their Limitations. Successful treatment for
dysfunctional uterine bleeding is usually defined by gynecologists as a
reduction from a condition of excessive menstrual bleeding to normal bleeding
("eumenorrhea"), light bleeding or spotting ("hypomenorrhea") or no bleeding at
all ("amenorrhea"). Success in the treatment of benign uterine pathology is
defined as relief of the symptoms experienced by the patient, such as menstrual
bleeding, pain or pressure in the abdomen or infertility. Current therapy for
dysfunctional uterine bleeding and fibroids typically begins with drug therapy.
For patients who do not respond to or cannot tolerate the side effects of drug
therapy, a second treatment option is frequently D&C. In cases where drug
therapy and D&C are not effective in reducing menstrual flow, surgical ablation,
surgical resection or hysterectomy are the only therapeutic alternatives.
Drug Therapy. Drug therapy using estrogen-progesterone medications, such
as oral contraceptives, or other drugs such as GnRH agonists, is the most widely
prescribed medical treatment for dysfunctional uterine bleeding and fibroids.
Estrogen-progesterone medications are used to regulate the menstrual cycle and
to reduce bleeding. GnRH agonists shrink the size of fibroids, thereby
alleviating symptoms and reducing the amount of bleeding from fibroids. However,
drug therapy is effective only in approximately 60% of patients. In addition, an
estimated 40% of patients on drug therapy experience adverse side effects. Drug
therapy may be prescribed by any physician, is normally reimbursable by third
parties and does not result in infertility or involve the disadvantages of a
surgical procedure. Side effects from drug therapy include nausea, bloating,
weight gain, depression and mood swings. In many instances, drug therapy must
continue until the onset of menopause.
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Dilatation and Curettage. Dilitation and curettage is generally used in
conjunction with drug therapy and is performed as a diagnostic or therapeutic
procedure in which the uterine contents are either scraped away by an instrument
or removed through vacuum aspiration. The 15 to 30 minute procedure is typically
performed in a hospital operating room or outpatient surgery center using a
general anesthetic or, less frequently, a local anesthetic which may be combined
with IV sedation. The patient is usually discharged from the hospital or clinic
on the day of surgery. Gynecare estimates that the average third-party
reimbursement for hospital and physician charges for a D&C in the United States
ranges from approximately $1,600 to $2,900. Based on its 1995 survey of 200
gynecologists in the United States, Gynecare believes that over 90% of
gynecologists are trained to perform the procedure. Based on the same survey,
Gynecare believes that D&C is effective in reducing bleeding in approximately
43% of cases. The procedure must be repeated periodically, as it is usually
effective only during the first few menstrual cycles after the procedure, and
consequently subjects the patient to the risks of uterine perforation, infection
and the complications of general anesthesia each time it is performed.
Surgical Ablation and Resection. Surgical ablation is a less invasive
monopolar electrosurgical procedure using a resectoscope, a video monitor, a
fluid distention medium such as glycine or sorbitol, and a surgical ablation
device such as a rollerball electrode or laser to surgically ablate the
endometrial lining of the uterus. Surgical resection is a monopolar
electrosurgical procedure that involves cutting the benign uterine tissue, such
as a fibroid, with an electrode loop and removing the pieces. Resection produces
fibroid "chips," which can obstruct the physician's field of vision. The
physician must repeatedly withdraw the resectoscope utilized in the procedure to
remove the resected tissue, which results in increased procedure time. These
procedures require approximately 30 to 60 minutes to complete in a hospital or
outpatient surgery center, typically under general anesthesia, and can result in
patient infertility. Hospitalization frequently lasts one to two days with full
patient recovery ranging from several days to several weeks. Gynecare believes
that in the United States average third-party reimbursement is approximately
$2,000 to $4,200 for hospital and physician charges.
Surgical ablation for dysfunctional uterine bleeding and resection for
fibroids are effective treatments in 70% to 90% of cases, with the success rate
being highly dependent upon the surgeon's skill level. Since their introduction
in the mid-1980s, these procedures have only been adopted by a small number of
highly trained surgical gynecologists. Adoption has been limited due to the high
surgeon skill level required and the risks and complications associated with the
procedure. This highly technique-dependent procedure may require the physician
to complete over 100 cases to reach proficiency.
The rate of complications from surgical ablation and resection is
approximately 6.5%. Uterine perforation is one of the most commonly recorded
complications and is serious when it results in damage to the internal iliac
vessels, ureter, bowel or bladder. Other complications include major
hemorrhaging from uterine vessels, air embolus from gas-cooled lasers,
post-operative intrauterine or tubal infection, complications associated with
general anesthesia and fluid overload due to use of glycine and sorbitol.
Hysterectomy. The most common surgical procedure for definitive treatment
of dysfunctional uterine bleeding or fibroids is hysterectomy, the surgical
removal of the uterus through the vagina or abdominal wall, which results in
permanent infertility. Hysterectomy is the second most commonly performed major
surgical procedure for women in the United States. Approximately 50% of the
estimated 600,000 procedures in the United States each year are performed to
treat dysfunctional uterine bleeding and fibroids. A hysterectomy involves
surgical risk, hospitalization, a lengthy recovery period and significant
expense. Minimally invasive surgery techniques, such as laparoscopically
assisted vaginal hysterectomy, are also being used in a small percentage of
cases in the United States.
A hysterectomy typically requires between 30 to 90 minutes in the operating
room under general anesthesia, three to four days of hospitalization, and two to
eight weeks of recovery time, depending on the type of hysterectomy performed.
The average third-party reimbursement for hospital and physician charges in the
United States for hysterectomy ranges from approximately $5,100 to $10,200.
The rate of serious complications from hysterectomy is approximately 3%.
Such complications include hemorrhaging requiring blood transfusions, injury to
the bowel or bladder, intestinal obstruction, life-threatening cardiopulmonary
events and death. Other minor complications, which occur in up to 40% of
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patients, include post-operative fever and infections. The range of long-term
adverse effects of hysterectomy include urinary dysfunction, surgically induced
menopause, constipation, fatigue, changes in sexual interest and function,
depression and other psychiatric morbidity.
STRATEGY
Gynecare's goal is to become a worldwide leader in developing and marketing
minimally invasive and cost-effective medical devices to treat uterine
disorders. Gynecare initially plans to establish the ThermaChoice Uterine
Balloon Therapy system as the preferred therapy for treating women who
experience dysfunctional uterine bleeding, and the VersaPoint system as the
preferred therapy for treating women diagnosed with benign pathology including
fibroids, polyps, adhesions and divided septa. In order to achieve this goal,
Gynecare's marketing strategy is designed to promote the safety, efficacy,
cost-effectiveness and ease of use of its products. A key element of this
strategy is to employ patient and physician educational programs designed to
increase awareness of Gynecare's products in both the female and physician
population as alternatives to drug therapy and surgery. Additionally, Gynecare
plans to market its products initially to surgical gynecologists who can serve
as reference centers and who could publish papers on the clinical benefits of
the procedures.
THE THERMACHOICE UTERINE BALLOON THERAPY SYSTEM
Gynecare's ThermaChoice Uterine Balloon Therapy system includes a
disposable balloon catheter and a controller that ablate the endometrial lining
of the uterus using a patented process known as thermal balloon ablation. The
disposable balloon catheter, which contains heating and sensing elements, is
connected to a controller that continuously monitors and displays catheter
pressure, regulates fluid temperature and controls therapy time.
ThermaChoice Uterine Balloon Therapy is designed as an eight minute,
outpatient procedure that most gynecologists will be able to perform without
specialized training. The physician inserts the flexible, small diameter balloon
catheter vaginally, through the cervix and into the uterus without first
dilating the cervix in most cases. Next the physician inflates the balloon with
a small amount of sterile fluid from a syringe until the pressure reaches
approximately 160-170 millimeters of mercury. The elastic balloon material is
designed to enable the inflated balloon surface to conform to the shape of each
patient's uterus. Once the balloon is properly inflated, the physician presses
the start button on the controller and a heating element inside the balloon
automatically raises the temperature of the fluid to approximately 87 degrees
Celsius and maintains it at such temperature for approximately eight minutes.
The controller continuously monitors and displays catheter pressure,
regulates fluid temperature and controls therapy time throughout the procedure.
To ensure patient safety, if any of the preset parameters are exceeded, the
device is automatically deactivated and the procedure immediately terminated.
When the controller indicates that the treatment is complete, the physician
deflates the balloon by withdrawing the fluid and removes the disposable balloon
catheter.
Gynecare's thermal balloon ablates the endometrial lining to a depth
sufficient to inhibit its regrowth during the menstrual cycle, thereby reducing
or eliminating excessive menstrual bleeding. Similar to a hysterectomy or
surgical ablation and surgical resection, the procedure will likely result in
infertility.
CLINICAL AND REGULATORY STATUS OF THERMACHOICE UTERINE BALLOON THERAPY SYSTEM
Since June 1994, Gynecare has conducted international clinical trials at 14
clinical sites in Australia, Canada and Europe. As of December 1996, physicians
in these centers had treated over 300 patients, with no intraoperative
complications and approximately 2% of patients reporting minor post-operative
complications. In these international studies, success for ThermaChoice Uterine
Balloon Therapy has been defined in substantially the same manner that
gynecologists define success of other current therapies, which is reducing
menstrual bleeding from a condition of excessive bleeding to normal bleeding,
light bleeding or spotting or no bleeding at all. As of December 1996,
clinicians conducting Gynecare's clinical trials reported a 90% success rate in
the 251 patients who had at least six months follow-up.
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In October 1995, Gynecare received FDA approval to begin a multi-center
clinical trial to treat approximately 250 patients diagnosed with menorrhagia.
This trial was conducted at 12 sites in the United States and two in Canada and
will require 12 month follow-up on all patients, with additional patient contact
after 24 and 36 months. Patient treatment began in January 1996 and was
completed in October 1996. The randomized clinical trial compared ThermaChoice
Uterine Balloon Therapy to surgical ablation using a rollerball electrode.
Successful treatment is defined in the protocol as a reduction in menstrual
blood loss to somewhat less than normal bleeding and overall improvement in
lifestyle and, as such, is not the same measure of success defined in the
international studies. Gynecare's PMA application for the ThermaChoice system
has been filed by the FDA. On October 6, 1997, the Ob/Gyn Devices Advisory Panel
of the FDA recommended to the FDA that it approve Gynecare's PMA application,
subject to certain conditions. The FDA will consider the Advisory Panel's
recommendation in its final review of Gynecare's PMA application. These
conditions include: completion of one-year follow-up data on all patients
treated in the U.S. clinical trial; revision of professional and patient
labeling; resolution of certain software and minor engineering issues;
monitoring of patients treated with ThermaChoice for two years after premarket
approval; and collaboration with the FDA to resolve certain physician training
issues. The ThermaChoice system is not approved for marketing in the United
States and the Advisory Panel's recommendation does not imply that a decision
about the approvability of the application has been made by the FDA. Gynecare
submitted its PMA application for the ThermaChoice system to the FDA on June 17,
1997.
THE VERSAPOINT BIPOLAR ELECTROSURGERY SYSTEM
Gynecare's VersaPoint Bipolar Electrosurgery system consists of a bipolar
electrosurgical generator and a disposable microelectrode used to cut, desiccate
or vaporize benign uterine pathologies including fibroids, polyps, adhesions and
divided septa. This disposable microelectrode is connected to the
electrosurgical generator which delivers energy to the microelectrode, enabling
it to vaporize tissue on contact. Throughout therapy, the bipolar
electrosurgical generator displays the power and electrosurgical mode of action.
The VersaPoint system is designed as a safe, minimally invasive treatment
for benign uterine pathology. The physician passes the microelectrode through a
5 millimeter operative hysteroscope which is inserted into the uterus through
the cervix without first dilating the cervix, in most cases. Next, the physician
distends the uterus with normal saline solution in order to form a working space
in the uterine cavity. Using the hysteroscope, the physician then visualizes the
fibroid and activates the microelectrode. Through the delivery of energy to the
microelectrode from the bipolar electrosurgical generator, the VersaPoint system
enables the physician to vaporize, cut or dessicate the fibroid tissue. This
process is continued until the entire fibroid is vaporized or removed.
The VersaPoint product's bipolar technology allows the use of normal
saline, which is generally considered the optimal medium for hysteroscopic
procedures because it does not affect normal blood chemistry and reduces the
risk of developing electrolyte imbalance. Unlike monopolar electrosurgical tools
which require that a return pad be placed on the patient's thigh or buttock in
order to create an electrical path to the return electrode, the VersaPoint
system localizes energy by positioning the active and return electrode on the
same axis. This proprietary technology prevents any "stray" current from
traveling through the patient's body by drawing the electricity back to the
return electrode through saline, which acts as an electrical conductor.
Once the fibroid has been vaporized, the physician removes the
microelectrode and withdraws the saline from the uterus. The hysteroscope is
then removed, and after a short recovery period, the patient is able to return
home the same day and can typically resume normal activity within one or two
days.
OTHER INDICATIONS
Gynecare has identified three additional potential indications for the
ThermaChoice Uterine Balloon Therapy system: treatment of women age 30 to 50
whose menstrual bleeding adversely affects their lifestyle, treatment of
postmenopausal women who experience uterine bleeding as a side effect of hormone
replacement therapy and treatment of women who have excessive menstrual bleeding
caused by small submucosal uterine fibroids. In 1996, Gynecare completed a small
study involving nine patients in Canada who were treated with the ThermaChoice
Uterine Balloon Therapy system for excessive or prolonged uterine bleeding
caused by
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hormone replacement therapy ("HRT"). There were no clinically significant
complications from the procedure. Gynecare plans to expand this study in 1997 to
include up to 30 patients. Additionally, Gynecare plans to conduct pilot
international clinical studies in 1997 to explore using the ThermaChoice Uterine
Balloon Therapy system to treat patients for lifestyle indications. This
paragraph contains forward looking statements reflecting current expectations of
Gynecare involving risks and uncertainties and Gynecare's actual plans for
additional clinical studies may differ materially from those described in this
paragraph for a number of reasons, including the time required to obtain
regulatory approval for expanded clinical indications of the ThermaChoice
system, the progress of current and future clinical trials, the data generated
in current and future clinical trials, the availability of capital resources to
conduct such trials and the other risks factors contained in "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
GYNECARE--Other Factors Affecting Future Results."
Clinical trials for safety and efficacy, and a PMA would be required before
Gynecare could market its products for each of these indications in the United
States. There can be no assurance that Gynecare will conduct the required
clinical trials and receive a PMA for these indications, or any other
indications, on a particular schedule or at all.
VersaPoint Bipolar Electrosurgery System. During the first quarter of
fiscal 1996, Gynecare extended its license and OEM supply agreement with Gyrus
to include use of the VersaPoint technology in the field of laparoscopy. Under
the terms of the new agreement, Gynecare intends to develop the VersaPoint
system for laparoscopic use in the treatment of gynecological conditions such as
serosal uterine fibroids and endometriosis, as well as general surgical
indications. Gynecare intends to develop the VersaPoint system for laparoscopic
indications and, based on the results of this research, may submit a 510(k)
application to the FDA for clearance to market the VersaPoint system in the
United States for laparoscopic indications. This paragraph contains forward
looking statements reflecting current expectations of Gynecare involving risks
and uncertainties and the actual timing of development of the VersaPoint system
for laparoscopic use may differ materially from the statements made in this
paragraph for a number of reasons, including the time required to obtain
regulatory approval of laparoscopic uses of the VersaPoint system, the
availability of capital resources to fund development of the VersaPoint system
for laparoscopic use, the progress of any clinical trials following such
development and the other risk factors contained in "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF GYNECARE-- Other
Factors Affecting Future Results."
RESEARCH AND DEVELOPMENT
Gynecare's primary research and development programs involve developing new
generations of the ThermaChoice Uterine Balloon Therapy system including new
catheter configurations and new versions of the controller in order to increase
the efficacy of the procedure, increase manufacturing reliability and reduce
manufacturing costs. Gynecare is also engaged in the ongoing development of the
VersaPoint system, including research for laparoscopic use in the treatment for
gynecological applications, such as serosal uterine fibroids and endometriosis,
as well as general surgical indications. In addition, Gynecare is exploring the
use of a radio frequency ("RF") balloon catheter to ablate endometrial tissue
using a technology licensed exclusively to Gynecare for such application.
Research and development expenses were $5,025,000 in fiscal 1996, $2,415,000 in
fiscal 1995 and $1,476,000 in fiscal 1994.
SALES AND MANUFACTURING
The ThermaChoice Uterine Balloon Therapy system's disposable balloon
catheter is currently manufactured in-house at Gynecare's facility in Menlo
Park, California. Gynecare believes that production of this balloon catheter
in-house may improve control of and flexibility in product supply and cost.
Although most of the components of the disposable balloon catheter are available
from more than one vendor, certain of the components used in manufacturing the
disposable balloon catheter have relatively few alternative sources of supply
and establishing additional or replacement suppliers for such components cannot
be accomplished quickly. Although Gynecare maintains sufficient levels of
inventory to avoid any material disruption resulting from the scale-up of its
facility and utilization of in-house manufacturing, no assurance can be given
that Gynecare will be able to manufacture and supply sufficient products to meet
its anticipated demand.
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Gynecare's controller is currently manufactured pursuant to a supply
agreement with SeaMED Corporation ("SeaMED"). Pursuant to the agreement,
Gynecare issues purchase orders to SeaMED for controllers at fixed prices, which
prices are subject to review on a periodic basis. The term of the agreement
currently extends through January 1998 and can be automatically renewed for
additional one-year periods unless notice is given by either party. Gynecare
believes that alternative suppliers are available for the controller and plans
to qualify additional suppliers and to begin to evaluate the benefits of
manufacturing the controller at its facility as production volumes increase.
Gynecare's VersaPoint system, including the bipolar electrosurgical
generator and disposable microelectrodes, is currently manufactured pursuant to
an OEM supply and manufacturing agreement with Gyrus. Pursuant to this
agreement, Gynecare obtained an exclusive, worldwide, royalty-free license to
use and sell products with the licensed technology for hysteroscopic
applications. Subject to the terms and conditions of the agreement, Gyrus
manufactures the bipolar generator and microelectrodes of the VersaPoint system
and sells them to Gynecare at prices based on a formula set forth in the
agreement. If, at any time and subject to certain conditions, Gyrus is unable to
support Gynecare's product requirements, Gynecare may manufacture the products
under a worldwide royalty-free license. The supply and manufacturing agreement
continues until the later of the expiration date of the last patent, whose
rights Gynecare has obtained under the agreement, to expire, or the abandonment
of the last patent application included in the patent rights obtained by
Gynecare. In the first quarter of 1996, Gynecare extended its license and OEM
supply agreement with Gyrus to include the field of laparoscopy. The development
of laparoscopic products is a collaborative effort with Gyrus which involves the
completion of a series of milestones. A $400,000 deposit on this OEM agreement
was made in March 1996, and additional deposits of up to $600,000 will be due
upon completion of certain milestones by Gyrus, which are currently expected to
be completed within the next 12 to 24 months.
Gynecare commenced international sales of the ThermaChoice Uterine Balloon
Therapy system in March 1995. To date, the ThermaChoice Uterine Balloon Therapy
system has been shipped to approximately 22 countries. Distributors in such
countries then sell the system to customers. For the six months ended June 30,
1997, Guidant Canada, FemCare and Inter-Medical A/S accounted for 24%, 14% and
11%, respectively, of Gynecare's sales. Only limited shipments of the VersaPoint
system have been made to Canada and the UK in the last quarter of fiscal 1996
and the first half of fiscal 1997. In general, Gynecare has chosen to operate
through small distribution companies because of its belief that these companies
will devote greater attention to Gynecare's products. There are no formal
written agreements with many of such distributors. Instead, Gynecare ships
product to them based on purchase orders. In addition, certain of these sales to
distributors have not yet resulted in sales to customers. Sales to distributors
are made on open credit terms and may include volume purchase discounts and
extended payment terms. Therefore, distributors may purchase several months of
inventory at one time to take advantage of discounts and extended payment terms.
On an ongoing basis Gynecare reviews the performance of such distributors and
may terminate distributors who are not in performance of their obligations. On
September 19, 1997, Gynecare and Ethicon entered into a distribution agreement
by which Ethicon will serve as a non-exclusive distributor for Gynecare's
VersaPoint and ThermaChoice products in the United States for a period of six
months. The distribution agreement was negotiated on an arm's-length basis and
may be terminated by either party for any reason by giving the other party 30
days' notice.
During 1996, Gynecare began implementation of a targeted marketing program
in three European countries and Canada. In each country, Gynecare has engaged a
territory manager to work with local gynecologists and distributors to develop
the market for the ThermaChoice Uterine Balloon Therapy system. Gynecare plans
to begin a similar targeted marketing program in the United States for the
VersaPoint system during 1997 and has identified five key metropolitan areas in
which to focus initial sales and marketing efforts for the VersaPoint system.
The success of these targeted marketing efforts and the timing of FDA approval
for the ThermaChoice Uterine Balloon Therapy system in the United States will
determine how quickly Gynecare expands its targeted marketing efforts in the
United States and Europe.
Gynecare's marketing strategy is designed to promote the safety, efficacy,
cost-effectiveness and ease of use of the ThermaChoice Uterine Balloon Therapy
and VersaPoint systems. Gynecare also intends to increase the awareness in the
female population and the physician community of ThermaChoice Uterine Balloon
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<PAGE> 48
Therapy and VersaPoint treatment as alternatives to drug therapy and surgery. In
order to achieve these objectives, Gynecare employs patient and physician
educational programs including pamphlets, brochures and video tapes, articles in
physician journals, women's magazines and the popular press, and news releases
on network and local television both in the United States and internationally.
To date, substantially all of Gynecare's sales have been outside the United
States, and Gynecare anticipates that a significant portion of its revenues for
the next year will continue to be derived from international sales. Gynecare
currently markets and sells its products internationally through a network of
distributors. Gynecare's international sales are dependent upon the marketing
efforts of, and sales by, these distributors. Gynecare may also rely on these
distributors to assist it in obtaining reimbursement approvals from both
government and private insurers in certain international markets. Gynecare's use
of small distributors increases the risks associated with financial instability,
which includes the risk that distributors will cease operations or will be
unable to satisfy financial obligations to Gynecare. If a distributor were to
fail to invest adequate capital promoting Gynecare's products or were to cease
operations, Gynecare would likely be unable to achieve significant sales in the
territory. To market its products in the United States, Gynecare will need to
establish a distribution network which may consist of direct sales
representatives, independent sales representatives, independent distributors, or
a combination of these. Gynecare has only recently hired two direct sales
representatives in the United States. There can be no assurance that Gynecare
will establish U.S. distribution networks for the ThermaChoice Uterine Balloon
Therapy and VersaPoint systems in a timely manner. The failure to establish such
distribution would have a material adverse effect on Gynecare's business,
financial condition and results of operations.
A number of other risks are inherent in international operations and
transactions. 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 and fluctuations in foreign currency exchange rates.
There can be no assurance that Gynecare will be able to successfully
commercialize the ThermaChoice Uterine Balloon Therapy system, VersaPoint
system, or any future product in any market.
LICENSES, PATENTS AND PROPRIETARY TECHNOLOGY
Gynecare's success depends in part on its ability to retain licenses,
obtain patent protection for products and processes and preserve its trade
secrets and proprietary technology. Gynecare's policy is to protect its
proprietary position by, among other methods, filing United States and foreign
patent applications to protect technology, inventions and improvements that are
important to the development of its business. Gynecare holds one issued United
States patent and an exclusive license to three issued United States patents
covering the ThermaChoice Uterine Balloon Therapy system and has either filed
for or acquired rights under a number of patent applications for the
ThermaChoice Uterine Balloon Therapy system and other products in the United
States. Corresponding applications have been filed in certain foreign countries.
Gynecare's one issued United States patent was assigned to Gynecare by Origin
pursuant to a royalty-bearing agreement covering potential future modifications
to the ThermaChoice Uterine Balloon Therapy system. Additionally, pursuant to
such agreement, Gynecare granted to Origin a non-exclusive, royalty-free license
under such patent for use in fields other than gynecology. In addition to
royalty obligations, Gynecare paid Origin a one-time fee of $45,000. Gynecare's
policy is to generally file patent applications in foreign countries where
rights are available and Gynecare believes it is commercially advantageous to do
so. The three licensed patents relate to the design of Gynecare's disposable
balloon catheter and method of thermal ablation of the endometrial lining of the
uterus. In connection with the formation of Gynecare, Origin assigned to
Gynecare its license to patents, applications and confidential information
developed through the assignment date relating to the ThermaChoice Uterine
Balloon Therapy system. Origin retained the exclusive right to use the assigned
technology for ablation of the gall bladder worldwide unless Origin had not
initiated development of a gall bladder ablation system by March 1999. In August
1997, Origin transferred this right back to Gynecare for fair value. The
exclusive, worldwide license assigned to Gynecare requires Gynecare to make
certain minimum royalty payments and to pay a royalty based on net sales of
products using the technology to the original inventors of the technology.
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<PAGE> 49
The validity and breadth of claims covered in medical device technology
patents involve complex legal and factual questions and, therefore, may by
highly uncertain. No assurance can be given that any patents will be issued from
pending patent applications or from any future patent applications, that the
scope of any patent protection will exclude competitors or provide competitive
advantages to Gynecare, that any of Gynecare's patents will be held valid if
subsequently challenged or that others will not claim rights in or ownership of
the patents and other proprietary rights held by Gynecare. For example, one of
Gynecare's competitors filed a third party observation investigating prior art
patents as they relate to a European patent application licensed to Gynecare for
the ThermaChoice product. As a result, the claims were amended and the patent
was issued. This competitor has filed a similar action in connection with
Gynecare's prosecution of corresponding patents in Australia. As a result, the
claims have been amended and a patent will be issued. Further, Gynecare believes
such competitor recently filed in the U.S. Patent Trademark Office a request for
re-examination of two issued patents related to Gynecare's ThermaChoice product
which request for re-examination has been granted by the Patent Trademark Office
based on certain prior art references presented to such office, certain of which
were the subject of the European observation. One of the patents has been upheld
as valid with amended claims proposed by Gynecare. The other patent remains
subject to re-examination and there can be no assurance that this remaining
patent will be held valid after the re-examination proceeding or, that if held
invalid, such invalidity would not have a material adverse effect on Gynecare's
business, financial condition or results of operations.
In July 1995, Gynecare entered into an exclusive, worldwide, royalty-free
license to certain pending patent applications and a supply and development
agreement with Gyrus. The agreement requires Gynecare to make certain minimum
payments and to purchase quantities of products based on a rolling forecast.
Under the agreement, Gyrus retained the rights to use the invention and
associated technology for applications other than uterine fibroid and tissue
removal. During the first quarter of fiscal 1996, Gynecare extended its license
and OEM supply agreement with Gyrus for the VersaPoint technology to include the
field of laparoscopy.
In December 1994, Gynecare obtained an exclusive, worldwide,
royalty-bearing license from Stuart D. Edwards to certain patents relating to a
device and method of use of RF energy to perform endometrial ablation. The
license requires Gynecare to make certain minimum payments and to pay a royalty
based on net sales of products utilizing the licensed technology. This license
extends for the life of the patents unless terminated earlier in the event of
Gynecare's breach of certain covenants or agreements, including failure to
market the device within specified periods after obtaining regulatory approval.
Under the license, Mr. Edwards retained the rights to use the invention and
associated technology for use outside the field of gynecology.
Gynecare believes that it is currently in compliance with the terms of
these licenses. In the event of a material breach of Gynecare's license
agreements, including the failure to purchase minimum quantities under one of
such agreements, the licensed rights revert back to the licensors. The reversion
of rights under Gynecare's license agreements could have a material adverse
effect on Gynecare's business and results of operations.
In addition to patents, Gynecare relies on trade secrets and proprietary
know-how, which it seeks to protect, in part, through proprietary information
agreements with employees, consultants and advisors, including members of the
medical advisory board. Gynecare's proprietary information agreements with its
employees and consultants contain industry standard provisions requiring such
individuals to assign to Gynecare without additional consideration any
inventions conceived or reduced to practice by them while employed or retained
by Gynecare, subject to customary exceptions. There can be no assurance that
proprietary information agreements with employees, consultants and advisors will
not be breached, that Gynecare will have adequate remedies for any breach or
that Gynecare's trade secrets will not otherwise become known to or
independently developed by competitors.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. Litigation, which
could result in substantial cost to and diversion of effort by Gynecare, may be
necessary to enforce patents issued or licensed to Gynecare, protect trade
secrets or know-how owned by Gynecare, defend Gynecare against claimed
infringement of the rights of others or determine the ownership, scope or
validity of the proprietary rights of Gynecare and others. An adverse
determination in any such
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litigation could subject Gynecare to significant liabilities to third parties,
require Gynecare to seek licenses from third parties and prevent Gynecare from
manufacturing, selling or using its products, any of which could have a material
adverse effect on Gynecare's business, financial condition and results of
operations. In the event of such an adverse determination, there can be no
assurance whether a license would be offered on terms acceptable to Gynecare, or
at all.
GOVERNMENT REGULATION
The manufacture and sale of medical devices, including the ThermaChoice
Uterine Balloon Therapy and VersaPoint systems, are subject to extensive
regulation by numerous government authorities in the United States and other
countries. The ThermaChoice Uterine Balloon Therapy system is regulated as a
medical device and is also subject to the FDA's PMA requirements. As a result,
Gynecare will not be able to commence marketing and commercial sales of the
ThermaChoice Uterine Balloon Therapy system in the United States unless and
until it receives a PMA for marketing of such product from the FDA. The first
step in the PMA process is the submission to the FDA an IDE which includes the
results of bench tests and laboratory studies, a complete description of the
device and its components, and a detailed description of the methods, facilities
and controls used for manufacturing, including the method of sterilization and
its assurance. Upon receiving approval of the IDE, Gynecare can conduct a
clinical study to collect safety and efficacy data. Upon completion of the
clinical study under an IDE, Gynecare can submit a PMA application to the FDA to
receive approval to market the product in the United States. After completion of
the FDA's preliminary review of the PMA submission, the submission is sent to an
FDA selected scientific advisory panel composed of physicians and scientists
with expertise in the particular field. The FDA scientific advisory panel issues
a recommendation to the FDA that includes conditions for approval of the PMA.
Toward the end of the PMA review process, the FDA will conduct an inspection of
the manufacturer's facilities to ensure that they are in compliance with the
applicable GMP requirements. If the FDA evaluation of both the PMA application
and the manufacturing facilities is favorable, the FDA will issue an approval
letter, which usually contains a number of conditions which must be met in order
to secure final approval. If those conditions have been fulfilled to the
satisfaction of the FDA, the agency will issue a PMA authorizing commercial
marketing of the device. The PMA review and approval process generally requires
more than a year to complete from the date of filing.
In 1996, Gynecare received an IDE from the FDA to conduct a study of the
ThermaChoice Uterine Balloon Therapy system and completed the patient treatment
phase of its U.S. clinical trials in the October 1996. Gynecare's PMA
application for the ThermaChoice system has been filed by the FDA. On October 6,
1997, the Ob/Gyn Devices Advisory Panel of the FDA recommended to the FDA that
it approve Gynecare's PMA application, subject to certain conditions. The FDA
will consider the Advisory Panel's recommendation in the final review of
Gynecare's PMA application. These conditions include: completion of one-year
follow-up data on all patients treated in the U.S. clinical trial; revision of
professional and patient labeling; resolution of certain software and minor
engineering issues; monitoring of patients treated with ThermaChoice for two
years after premarket approval; and collaboration with the FDA to resolve
certain physician training issues. The ThermaChoice system is not approved for
marketing in the United States and the Advisory Panel's recommendation does not
imply that a decision about the approvability of the application has been made
by the FDA. Gynecare submitted its PMA application for the ThermaChoice system
to the FDA on June 17, 1997. There can be no assurance as to whether Gynecare
will receive a PMA for any of its products. In addition, if approval is
received, there can be no assurance that it will not be for a more limited
indication than Gynecare has requested, which could limit the addressable market
of the ThermaChoice Uterine Balloon Therapy system and have a material adverse
effect on Gynecare's business, financial condition and results of operations.
There can be no assurance that Gynecare will not be required to conduct
additional clinical trials for the ThermaChoice Uterine Balloon Therapy system
which may result in substantial cost and delays. In addition, changes in
existing regulations or adoption of new government regulations or policies could
prevent or delay regulatory approval of Gynecare's products. Furthermore, if a
PMA is granted, subsequent modifications to the approved device or manufacturing
process may require a supplemental PMA or may require the submission of a new
PMA application, which could require substantial additional clinical efficacy
data and FDA review. Failure to obtain a PMA or to obtain such approval on a
timely basis would have
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a material adverse effect on Gynecare's business, financial condition and
results of operations. In addition, FDA enforcement policy strictly prohibits
the marketing of approved medical devices for unapproved uses. Failure to comply
with applicable regulatory requirements, including marketing products for
unapproved uses, could result in, among other things, FDA warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, refusal of the government to grant premarket
clearance or premarket approval for devices, withdrawal of approvals and
criminal prosecution, which would have a material adverse effect on Gynecare's
business, financial condition and results of operations.
In the United States, the VersaPoint system is also regulated as a medical
device and is subject to extensive regulation by numerous government authorities
in the United States and other countries. Gynecare received notification of FDA
clearance to market the system in the United States for fibroids, polyps,
adhesions and divided septa. However, if Gynecare wished to propose
modifications or enhancements to the VersaPoint system or use the system for
other indications such as laparoscopic indications, and such major changes could
affect the safety or effectiveness of the device, a new 510(k) submission would
be required. If Gynecare believes that its modifications to the device do not
require the submission of a new 510(k) notice, there can be no assurance that
the FDA will agree with any of Gynecare's determinations not to submit a new
510(k) notice for any of the changes. If the FDA requires Gynecare to submit a
new 510(k) notice for any product modification, Gynecare may be prohibited from
marketing the modified product until the 510(k) notice is cleared by the FDA.
Such a prohibition could have a material adverse effect on Gynecare's business,
financial condition and results of operations.
Every company that manufactures or assembles medical devices is required to
register with the FDA and adhere to applicable FDA regulations regarding Good
Manufacturing Practices ("GMP") and similar regulations in other countries,
which include testing, control and documentation requirements. Ongoing
compliance with GMP and other regulatory requirements will be monitored through
periodic inspections by state and federal agencies, including the FDA. Gynecare
believes that its design, manufacturing and quality control procedures will
comply with the FDA's GMP regulations. In addition, marketed products are
subject to continuing FDA scrutiny for compliance with the FDA's requirements
relating to promotional activities. Gynecare has obtained a license as a medical
device manufacturer from the Food and Drug Branch of the California Department
of Health Services. State agencies' regulations impose certain procedural and
documentation requirements upon Gynecare with respect to manufacturing and
quality assurance activities. In 1995, Gynecare implemented policies and quality
systems which allowed Gynecare to receive ISO 9001 and EN 46001 certification.
These standards for certification have been developed to ensure that companies
know, on a worldwide basis, the standards of quality to which they will be held.
The European Union has promulgated rules which require that medical products
receive a CE mark by mid-1998, an international symbol of quality and compliance
with applicable European medical device directives. EN 46001 certification is
one of the CE mark certification requirements. Beginning in November 1995,
Gynecare's quality assurance systems were audited by TUV, a European
Community-approved notified body. Upon a satisfactory review by TUV in January
1996, Gynecare was awarded EN 46001, ISO 9001 and CE mark certification for the
ThermaChoice Uterine Balloon Therapy system. To retain such certification,
Gynecare must adequately maintain its quality assurance systems and undergo an
annual audit by TUV. In August 1996, Gynecare passed a TUV surveillance
inspection to extend the validity of its ISO certificate until February 1999.
Gynecare's success will depend in part on its ability to manufacture its
products in compliance with GMP and EN 46001 and other regulatory requirements,
in sufficient quantities and in a timely manner, while maintaining product
quality and acceptable manufacturing costs. Failure to increase production
volumes in a timely or cost-effective manner or to maintain compliance with GMP
and EN 46001 and other regulatory requirements could have a material adverse
effect on Gynecare's business, financial condition and results of operations.
Regulatory approvals, if granted, may include significant limitations on
the indicated uses for which the products may be marketed. FDA enforcement
policy strictly prohibits the marketing of approved medical devices for
unapproved uses. Failure to comply with applicable regulatory requirements,
including marketing products for unapproved uses, could result in, among other
things, FDA warning letters, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, refusal of the
government to grant premarket clearance or premarket approval or devices,
withdrawal of approvals and criminal prosecution,
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which would have a material adverse effect on Gynecare's business, financial
condition and results of operations.
Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary widely from country to country.
The requirements for approval for sale internationally differ from those
required for FDA approval. In 1996, Gynecare obtained the CE mark for the
ThermaChoice Uterine Balloon Therapy system. Gynecare will need to obtain CE
mark certification for Europe in order to sell the VersaPoint system within the
European Economic Area. There can be no assurance, however, that Gynecare will
be able to achieve or maintain compliance required for CE marking. Failure to do
so would mean that Gynecare cannot sell the VersaPoint system in the European
Economic Area, which could have a material adverse effect upon Gynecare's
business, financial condition and results of operations.
THIRD-PARTY REIMBURSEMENT
In the United States, health care providers, such as hospitals and
physicians that purchase medical devices for treatment of their patients,
generally rely on third-party payors, principally Medicare, Medicaid and private
health insurance plans, to reimburse all or part of the costs and fees
associated with the procedures performed with these devices.
Gynecare's success will be dependent upon, among other things, its ability
to obtain satisfactory reimbursement from health care payors for the
ThermaChoice Uterine Balloon Therapy and VersaPoint systems. Gynecare does not
expect that third-party reimbursement will be available, if at all, for use of
the ThermaChoice Uterine Balloon Therapy system in the United States unless and
until FDA approval is received. If FDA approval is received, third-party
reimbursement for the ThermaChoice Uterine Balloon Therapy system will be
dependent upon decisions by the Health Care Financing Administration ("HCFA")
for Medicare, as well as by individual health maintenance organizations, private
insurers and other payors. While Gynecare believes the ThermaChoice Uterine
Balloon Therapy procedure may be reimbursed in the United States under existing
procedure codes for surgical ablation and the VersaPoint procedure may be
reimbursed under existing procedure codes for surgical resection, there can be
no assurance that this will occur or that the reimbursement under these codes
will be adequate. Given the efforts to control and decrease health care costs in
recent years, there can be no assurance that any reimbursement will be
sufficient to ensure profitability.
Reimbursement systems in international markets vary significantly by
country, and by region within some countries, and reimbursement approvals must
be obtained on a country by country basis. Many international markets have
government managed health care systems that govern reimbursement for new devices
and procedures. In most markets, there are private insurance systems as well as
government managed systems. Large scale market acceptance of the ThermaChoice
Uterine Balloon Therapy and VersaPoint systems will depend on the availability
and level of reimbursement in international markets targeted by Gynecare. Only
recently has Gynecare's ThermaChoice Uterine Balloon Therapy system obtained
reimbursement for a small number of cases in several countries internationally.
The VersaPoint system has not yet been approved for reimbursement in any
international market. Obtaining reimbursement approvals can require 12 to 18
months or longer. There can be no assurance that Gynecare will continue to
receive reimbursement in the several countries in which it has recently received
reimbursement or that it will obtain reimbursement in any other countries within
a particular time, for a particular amount, or at all.
Regardless of the type of reimbursement system, Gynecare believes that
physician advocacy of the ThermaChoice Uterine Balloon Therapy and VersaPoint
systems will be required to obtain reimbursement. Availability of reimbursement
will depend not only on the clinical efficacy and procedure cost, but also on
the duration of the relief provided by the procedure. There can be no assurance
that reimbursement for Gynecare's products will be available in the United
States or in international markets under either government or private
reimbursement systems, or that physicians will support and advocate
reimbursement for use of the ThermaChoice Uterine Balloon Therapy and VersaPoint
systems. Failure by physicians, hospitals and other users of Gynecare's products
to obtain sufficient reimbursement from health care payors or adverse changes in
government and private third-party payors' policies toward reimbursement for
procedures employing Gynecare's products would have a material adverse effect on
Gynecare's business, financial condition and results of operations.
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COMPETITION
At present, Gynecare considers its primary competition to be current
therapies for the treatment of uterine disorders, including drug therapy, D&C,
surgical ablation, surgical resection and hysterectomy. Gynecare will also
compete against other minimally invasive techniques under development for the
treatment of dysfunctional uterine bleeding, including other ablation techniques
which employ thermal fluid, RF energy or freezing techniques ("cryoablation").
The ThermaChoice Uterine Balloon Therapy system may compete with other systems
manufactured and marketed by companies outside of the United States, although
such products are not currently approved by the FDA for marketing in the United
States.
There are many large companies with significantly greater financial,
manufacturing, marketing, distribution and technical resources and clinical
experience than Gynecare. Such companies are developing and marketing devices
for surgical removal of the uterus, uterine fibroids, the endometrial lining of
the uterus and other uterine tissue or non-surgical methods such as drug
therapy. Additionally, there are companies developing alternative methods of
uterine tissue ablation that compete with Gynecare. These include the Valley Lab
division of Pfizer, Inc., U.S. Surgical Corporation, FemRx, Inc. and Wallsten
Medical. There can be no assurance that these companies will not succeed in
developing technologies and products that are more effective than any which have
been or are being developed by Gynecare or that would render Gynecare's
technologies or products obsolete or non-competitive. Gynecare also competes
with such other companies for clinical sites to conduct trials. Such competition
could have a material and adverse effect on Gynecare's business, financial
condition and results of operations.
As a result of the entry of large and small companies into the market,
Gynecare expects competition for devices and systems used to treat uterine
disorders to increase. Gynecare believes that the primary competitive factors in
the market for treatment of uterine disorders are safety, efficacy, ease of use,
reliability and cost-effectiveness. Gynecare believes that ThermaChoice Uterine
Balloon Therapy and VersaPoint systems will be substantially less costly than
highly-invasive, traditional surgical procedures and may ultimately replace
these procedures in some applications. Gynecare's products may also enable the
physician to perform procedures less invasively with reduced patient trauma in a
shorter period of time. As a result, Gynecare believes that its products compete
favorably with respect to these factors, although no assurance can be given that
it will be able to continue to do so.
EMPLOYEES
As of July 31, 1997, Gynecare employed 50 individuals, of which 14 are
engaged directly in research, development and regulatory activities, 13 in
manufacturing and 23 in marketing, sales and administrative positions. Gynecare
is dependent on its ability to attract and retain qualified scientific,
technical and key management personnel. None of Gynecare's employees are covered
by a collective bargaining agreement. Gynecare believes that it maintains good
relations with its employees.
PRODUCT LIABILITY AND INSURANCE
Gynecare's business involves the risk of product liability claims. Gynecare
has not experienced any product liability claims to date. Although Gynecare
maintains product liability insurance with coverage limits of $3,000,000 per
occurrence and an annual aggregate maximum of $3,000,000, there can be no
assurance that product liability claims will not exceed such insurance coverage
limits, which could have a material adverse effect on Gynecare, or that such
insurance will continue to be available on commercially reasonable terms or at
all.
PROPERTIES
Gynecare occupies a facility consisting of approximately 24,000 square feet
in Menlo Park, California pursuant to a lease expiring in September 2001. The
lease has a three-year renewal option exercisable at Gynecare's discretion. This
facility is expected to accommodate Gynecare's planned growth for several years.
Gynecare has obtained a manufacturing license from the State of California in
order to manufacture its
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products and has registered this facility with the FDA in order to commence
commercial product sales of the VersaPoint system within the United States.
LITIGATION
On September 3, 1997, Gynecare was served with a complaint filed by John A.
Aronica, a former shareholder of Origin, in the United States District Court for
the District of Connecticut. The complaint names Gynecare, Eli Lilly & Company,
Inc., Origin and a former officer and a current officer of Origin. The complaint
alleges fraud, breach of the duty of good faith and fair dealing, breach of
fiduciary duties of officers and directors of Origin and fraudulent conveyance
arising from the original formation transactions of Origin and Gynecare and
seeks unspecified damages. Gynecare filed a motion to dismiss the complaint on
October 6, 1997. While Gynecare believes that the complaint is without merit,
the litigation is at an early stage and there can be no assurance that Gynecare
will prevail.
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SELECTED HISTORICAL FINANCIAL DATA OF GYNECARE
The information set forth below for Gynecare should be read in conjunction
with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF GYNECARE" and the Financial Statements of Gynecare and Notes
thereto included elsewhere in this Proxy Statement/Prospectus. The selected
financial data as of December 31, 1993 and for the year then ended and for the
period from January 1, 1994 to March 7, 1994 are derived from audited financial
statements of the Uterine Balloon Therapy Business Operations of Origin that
have been included elsewhere herein and is qualified by reference to such
Financial Statements of Gynecare and Notes thereto. Certain costs and expenses
presented in the statement of operations of the Uterine Balloon Therapy Business
Operations of Origin represent allocations and management estimates. As a
result, the statements of operations presented for periods prior to March 8,
1994 are not strictly comparable to those of subsequent periods and may not be
indicative of the results of operations that would have been achieved had the
Uterine Balloon Therapy Business Operations of Origin operated as a
non-affiliated entity during such period. The selected financial data set forth
below with respect to Gynecare's Statements of Operations for the period from
March 8, 1994 (Date of Inception) to December 31, 1994 and for the years ended
December 31, 1995 and 1996 and the balance sheets at December 31, 1994, 1995 and
1996 are derived from audited financial statements of Gynecare that have been
included elsewhere herein and are qualified by reference to such Financial
Statements of Gynecare and Notes related thereto. The Gynecare selected
historical financial information at and for the six month periods ended June 30,
1996 and 1997 are derived from the unaudited historical financial statements of
Gynecare, which are included elsewhere herein and, in the opinion of the
management of Gynecare, include all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the information for such
periods. The unaudited results of operations for the six months ending June 30,
1997 are not indicative of the results of operations for fiscal 1997 or for any
other period.
<TABLE>
<CAPTION>
FULL YEAR 1994
----------------------------------------
UTERINE BALLOON THERAPY
BUSINESS OPERATIONS OF ORIGIN COMPANY
MEDSYSTEMS, INC. -------------------- (UNAUDITED)
-------------------------------- MARCH 8, 1994 SIX MONTHS ENDED
YEAR ENDED (DATE OF YEAR ENDED YEAR ENDED -------------------------
DECEMBER 31, JANUARY 1, 1994 TO INCEPTION) TO DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1993(1) MARCH 7, 1994(1) DECEMBER 31, 1994(1) 1995 1996 1996 1997
------------ ------------------ -------------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
OPERATIONS DATA
Revenues......... $ -- $ -- $ -- $ 849,000 $ 962,000 $ 475,000 $ 572,000
Cost of goods
sold............ -- -- -- 799,000 1,657,000 700,000 807,000
-------- -------- ---------- ---------- ----------- ---------- ----------
Gross
profit/(loss)... -- -- -- 50,000 (695,000) (225,000) (235,000)
-------- -------- ---------- ---------- ----------- ---------- ----------
Operating
expenses:
Research and
development... 883,000 122,000 1,354,000 2,415,000 5,025,000 2,504,000 2,287,000
Selling, general
and
administrative... 97,000 7,000 880,000 2,655,000 5,244,000 2,355,000 3,665,000
-------- -------- ---------- ---------- ----------- ---------- ----------
Total operating
expenses...... 980,000 129,000 2,234,000 5,070,000 10,269,000 4,859,000 5,952,000
-------- -------- ---------- ---------- ----------- ---------- ----------
Loss from
operations...... (980,000) (129,000) (2,234,000) (5,020,000) (10,964,000) (5,084,000) (6,187,000)
Interest income,
net............. -- -- 165,000 454,000 764,000 430,000 212,000
-------- -------- ---------- ---------- ----------- ---------- ----------
Net loss......... $ (980,000) $ (129,000) $ (2,069,000) $(4,566,000) $(10,200,000) $(4,654,000) $(5,975,000)
======== ======== ========== ========== =========== ========== ==========
Net loss per
share........... $ -- $ -- $ (1.25) $ (1.87) $ (1.24) $ (0.57) $ (0.72)
Shares used in
computing net
loss per
share........... -- -- 1,658,000 2,438,000 8,209,000 8,157,000 8,297,000
</TABLE>
(1) The periods beginning March 8, 1994 reflect data of Gynecare. The periods
prior to and including March 7, 1994 reflect data of the Uterine Balloon
Therapy Business Operation of Origin, all of the assets of which were
acquired by Gynecare on March 8, 1994.
52
<PAGE> 56
<TABLE>
<CAPTION>
UTERINE BALLOON
THERAPY BUSINESS
OPERATIONS OF ORIGIN
MEDSYSTEMS, INC. (UNAUDITED)
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1993 1994 1995 1996 1997
-------------------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash, cash equivalents and
short-term investments........ $ -- $4,106,000 $22,710,000 $13,071,000 $7,929,000
Working capital................. (89,000) 3,648,000 23,016,000 12,800,000 6,958,000
Total assets.................... 2,000,000 6,495,000 28,271,000 18,398,000 13,017,000
Long-term debt -- -- 458,000 458,000 384,000
Accumulated deficit............. -- (2,069,000) (6,635,000) (16,835,000) (22,810,000)
Total stockholders' equity...... -- 5,900,000 26,308,000 16,534,000 10,706,000
Origin's net investment......... 1,911,000 -- -- -- --
</TABLE>
- ---------------
The following table combines 1994 data for the Uterine Balloon Therapy
Business Operations of Origin (for the period from January 1, 1994 to March 7,
1994) and Gynecare (for the period from March 8, 1994 to December 31, 1994) in
order to facilitate management's discussion of financial results. Certain costs
and expenses presented in the statements of operations of the Uterine Balloon
Therapy Business Operations of Origin represent allocations and management
estimates. As a result, the statements of operations presented for periods prior
to March 8, 1994 are not strictly comparable to those of subsequent periods and
may not be indicative of the results of operations that would have been achieved
had the Uterine Balloon Therapy Business Operations of Origin operated as a
non-affiliated entity during such period.
<TABLE>
<CAPTION>
UTERINE BALLOON
THERAPY BUSINESS
OPERATIONS OF
ORIGIN
MEDSYSTEMS, INC.
YEAR ENDED COMBINED
DECEMBER 31, YEAR ENDED
1993 DECEMBER 31, 1994
---------------- -----------------
<S> <C> <C>
Net revenues........................................... $ -- $ --
Cost of goods sold..................................... -- --
---------- ----------
Gross profit......................................... -- --
---------- ----------
Operating expenses
Research and development............................. 883,000 1,476,000
Selling, general and administrative.................. 97,000 887,000
---------- ----------
Total operating expenses........................ 980,000 2,363,000
---------- ----------
Loss from operations................................... (980,000) (2,363,000)
Interest income, net................................... -- 165,000
---------- ----------
Net loss........................................ $ (980,000) $(2,198,000)
========== ==========
</TABLE>
53
<PAGE> 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF GYNECARE
THIS SECTION OF THIS PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. GYNECARE'S ACTUAL RESULTS MAY
DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED ABOVE IN "BUSINESS OF GYNECARE" AND BELOW UNDER "--
OTHER FACTORS AFFECTING OPERATING RESULTS".
RESULTS OF OPERATIONS--COMPARISON OF 1996, 1995 AND 1994
Year Ended December 31, 1996 Compared to Year Ended December 31,
1995. Revenues for the year ended December 31, 1996 increased 13% to $962,000
from $849,000 in fiscal 1995. Substantially all of the revenues to-date have
been generated from international sales of the ThermaChoice Uterine Balloon
Therapy system. The increase in revenues from those in fiscal 1995 was primarily
the result of the continued expansion of international sales of the ThermaChoice
Uterine Balloon Therapy system.
Cost of goods sold increased 107% from $799,000 in fiscal 1995 to
$1,657,000 in fiscal 1996. This increase was primarily the result of excess
capacity incurred in Gynecare's new manufacturing facility in Menlo Park,
California and the cost of non-revenue generating product shipped to support
Gynecare's ongoing efforts to achieve third-party reimbursement in international
markets.
The ThermaChoice controller and the VersaPoint system, including the
generator and microelectrodes, are manufactured by contract manufacturers under
OEM supply agreements. Gynecare currently manufactures the disposable balloon
catheter component of the ThermaChoice Uterine Balloon Therapy system at its
headquarters in Menlo Park, California. For the foreseeable future, Gynecare
expects that manufacturing start-up and overhead costs spread over low
production volumes combined with the cost of using contract manufacturers to
produce the ThermaChoice controller and VersaPoint system will continue to have
an adverse effect on gross margins.
Gynecare's research and development expenses increased 108% from $2,415,000
in fiscal 1995 to $5,025,000 in fiscal 1996. This increase was principally due
to the costs of the U.S. clinical trials of the ThermaChoice Uterine Balloon
Therapy system, which began in January 1996, increased expenditures associated
with the continuing development of the ThermaChoice Uterine Balloon Therapy
system and the ongoing development of the VersaPoint system, including the costs
of clinical studies and the submission for FDA clearance to market VersaPoint in
the U.S. Such FDA clearance was received in November 1996.
Gynecare's selling, general and administrative expenses increased 98% from
$2,655,000 in fiscal 1995 to $5,244,000 in fiscal 1996. This increase was
primarily the result of Gynecare's increased investment in sales and marketing
activities in 1996 focused on obtaining reimbursement in international markets
and managing the international distributor network for its ThermaChoice Uterine
Balloon Therapy system. Growth in Gynecare's sales and marketing, accounting and
administrative staff from ten employees at December 31, 1995 to seventeen at
December 31, 1996 further contributed to the increase in selling, general and
administrative expenses. Selling, general and administrative expenses are
expected to continue to increase in 1997. The time period during which these
expenses are expected to continue to increase is a forward-looking statement
involving risks and uncertainties, including the rate at which Gynecare
establishes its sales and distribution network and the rate at which sales
increase.
Net interest income increased 68% to $764,000 in fiscal 1996, from $454,000
in fiscal 1995. This increase was primarily the result of the increased level of
cash and investments held by Gynecare compared to that held during fiscal 1995
as a result of the completion of Gynecare's initial public offering in November
1995.
Year Ended December 31, 1995 Compared To Combined Year Ended December 31,
1994. Revenues for the year ended December 31, 1995 were $849,000. No revenues
were recorded for the combined year ended December 31, 1994. All of the revenues
during fiscal 1995 were generated from sales of the ThermaChoice
54
<PAGE> 58
Uterine Balloon Therapy system. For the year ended December 31, 1995, cost of
goods sold was $799,000, resulting in gross profit of $50,000 and gross profit
as a percentage of revenue of 6%.
Gynecare's research and development expenses increased to $2,415,000 for
the year ended December 31, 1995 from $1,476,000 for the combined year ended
December 31, 1994, primarily due to an increase in the research and development
staff, an increase in expenditures associated with the continuing development of
the ThermaChoice Uterine Balloon Therapy system, investigation into several
other potential products licensed by Gynecare and increased cost of clinical
trials.
Gynecare's selling, general and administrative expenses increased to
$2,655,000 for the year ended December 31, 1995 from $887,000 for the combined
period ended December 31, 1994. The increase was primarily the result of
increases in sales and marketing, accounting and administrative staff, and
increased marketing and sales activities associated with the international sales
of the ThermaChoice Uterine Balloon Therapy system which commenced in March
1995.
Interest income increased to $454,000 for the year ended December 31, 1995
from $165,000 for the combined period ended December 31, 1994. The increase was
primarily the result of the increased level of cash, cash equivalents and
short-term investments held by Gynecare during 1995 compared to 1994 as a result
of the sale of preferred stock of Gynecare ("Preferred Stock") to investors in
May 1995 and the completion of Gynecare's initial public offering in November
1995.
Combined Year Ended December 31, 1994 Compared to Uterine Balloon Therapy
Business Operations of Origin Medsystems, Inc. for the Year Ended December 31,
1993. The combined research and development expenses for the year ended
December 31, 1994 were $1,476,000 compared to $883,000 for the year ended
December 31, 1993. This 67% increase was due to an increase in research and
development staff, increased expenditures related to the continuing development
of the ThermaChoice Uterine Balloon Therapy system following Gynecare's
acquisition of the technology and costs of clinical trials.
Selling, general and administrative expenses increased to $887,000 for the
combined year ended December 31, 1994 from $97,000 for the year ended December
31, 1993. The increase was primarily the result of increases in sales and
marketing, accounting and administrative staff following Gynecare's acquisition
of the technology.
Interest income increased to $165,000 for the combined year ended December
31, 1994. There was no interest income for the year ended December 31, 1993. The
increase was primarily the result of the increased level of cash and cash
equivalents held by Gynecare during 1994 as a result of the sale of preferred
stock of Gynecare to investors in March 1994.
RESULTS OF OPERATIONS--PERIODS ENDED JUNE 30, 1997 COMPARED TO THE PERIODS ENDED
JUNE 30, 1996
Revenues increased 39% to $303,000 in the second quarter of fiscal 1997 and
20% to $572,000 in the first half of fiscal 1997 from $218,000 and $475,000 in
the corresponding periods of fiscal 1996. Substantially all of the revenues
to-date have been generated from international sales of the ThermaChoice Uterine
Balloon Therapy system. The growth in revenues over the corresponding periods of
fiscal 1996 was primarily the result of increased sales of the ThermaChoice
catheter, as an increasing number of ThermaChoice procedures were performed
internationally, and shipments of the VersaPoint system during the first quarter
of 1997.
Cost of goods sold increased 8% to $409,000 in the second quarter of fiscal
1997 and 15% to $807,000 in the second half of fiscal 1997 from $379,000 and
$700,000 in the corresponding periods of fiscal 1996. These increases were
primarily the result of the increased level of revenues during the related
periods.
Gynecare's research and development expenses decreased 19% to $1,085,000
and 9% to $2,287,000 for the quarter and six month period ended June 30, 1997
from $1,343,000 and $2,504,000 for the corresponding periods of fiscal 1996.
This decrease was principally due to decreased expenditures resulting from the
completion of the U.S. clinical trials of the ThermaChoice Uterine Balloon
Therapy system, which commenced in January 1996 and ended in early October 1996,
and the absence of costs associated with the
55
<PAGE> 59
clinical studies and submission for FDA clearance to market VersaPoint in the
U.S. Such FDA clearance was received in November 1996.
Gynecare's selling, general and administrative expenses increased 43% to
$1,854,000 and 56% to $3,665,000 for the second quarter and first half of fiscal
1997 from $1,296,000 and $2,355,000 for the corresponding periods of fiscal
1996. The increase was primarily the result of Gynecare's increased investment
in sales and marketing activities including retention of direct marketing
personnel in Canada and several other European countries, Gynecare's ongoing
efforts to obtain reimbursement in international markets, and managing the
international distributor network. Growth in Gynecare's sales and marketing,
accounting and administrative staff from sixteen employees at June 30, 1996 to
twenty-three at June 30, 1997 further contributed to the increase in selling,
general and administrative expenses.
Net interest income decreased to $94,000 and $212,000 for the quarter and
six month period ended June 30, 1997 from $194,000 and $430,000 for the
corresponding periods of fiscal 1996. The decrease is primarily the result of
the decreased level of cash and investments held by Gynecare during the second
quarter and first half of fiscal 1997 compared to those held during the
corresponding periods of fiscal 1996. This decreased level of cash and
investments is the result of expending such resources to fund continuing
operations.
As a result of all of the above factors, Gynecare's total net loss
increased to $2,951,000 and $5,975,000 for the quarter and six month period
ended June 30, 1997 from $2,606,000 and $4,654,000 for the corresponding periods
of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Gynecare's cash expenditures have significantly exceeded
its revenues, resulting in an accumulated deficit of $22,810,000 at June 30,
1997. Gynecare has funded its operations primarily through the private placement
of equity securities aggregating $15,361,000 during 1994 and 1995 and the
completion of its initial public offering in November 1995 aggregating net
proceeds of $15,223,000.
Cash used by Gynecare's operations was $5,038,000 for the six months ended
June 30, 1997 as compared to $4,719,000 for the corresponding period in fiscal
1996. Cash was used during the first half of fiscal 1997 primarily to fund the
expansion of marketing programs for the ThermaChoice Uterine Balloon Therapy
system in the U.S. and in international markets, the costs of obtaining
reimbursement in existing markets, the ongoing development of the ThermaChoice
Uterine Balloon Therapy and VersaPoint systems, and increased general and
administrative expenses to support expanded operations.
Gynecare's capital expenditures for the first half of fiscal 1997 and for
the corresponding period in fiscal 1996 were $161,000 and $330,000,
respectively. The decreased level of capital expenditures during the first half
of fiscal 1997 compared to the corresponding period in fiscal 1996 was due
primarily to reduced capital requirements to support U.S. clinical studies of
the ThermaChoice Uterine Balloon Therapy system which commenced in January 1996.
The patient treatment phase of this study ended in October 1996.
During the first quarter of fiscal 1996, Gynecare exercised its option to
extend its license and OEM supply agreement with Gyrus to include use of the
VersaPoint technology in the field of laparoscopy. A $400,000 deposit on this
OEM supply agreement was made in March 1996. Additional deposits of up to
$600,000 will be due over the next 12 to 24 months.
At June 30, 1997, Gynecare had outstanding borrowings totaling $739,000
under two secured credit facilities. Borrowings bear interest at the bank's
prime rate plus 1.25%-1.50% per annum, are required to be repaid in monthly
installments over 30 months, and are secured by a pledge of all of Gynecare's
equipment and fixtures.
Gynecare believes that its cash, cash equivalents and investments together
with interest thereon will be sufficient to fund its operations and capital
requirements through December 31, 1997. The estimate of this time period is a
forward-looking statement involving risks and uncertainties, including the
timing of FDA approval of the ThermaChoice Uterine Balloon Therapy system and
demand for and market acceptance of
56
<PAGE> 60
Gynecare's products, the progress of Gynecare's clinical research and product
development programs, the receipt of and the time required to obtain other
regulatory clearances and approvals, the resources Gynecare devotes to
developing, manufacturing and marketing its products, the resources required to
hire and develop a direct sales force in the United States, the resources
required to expand manufacturing capacity and facilities requirements, the costs
of obtaining reimbursement for use of Gynecare's ThermaChoice Uterine Balloon
Therapy and VersaPoint systems in new and existing markets, and other factors.
As such, there can be no assurance that Gynecare will not require additional
financing prior to the end of 1997. Additional funding may not be available when
needed or on terms acceptable to Gynecare, which would have a material adverse
effect on Gynecare's business, financial condition and results of operations.
Recent Accounting Pronouncements. In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" (SFAS 128), which specifies the computation,
presentation and disclosure requirements for earnings per share. SFAS 128
supersedes Accounting Principles Board Opinion No. 15 and is effective for
financial statements issued for periods ending after December 15, 1997. SFAS 128
requires restatement of all prior-period earnings per share data presented after
the effective date. SFAS 128 will not have a material impact on Gynecare's
financial position, results of operations or cash flows.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. SFAS 130 is
effective for fiscal years beginning after December 15, 1997, and
reclassification of financial statements for earlier periods provided for
comparative purposes is required. SFAS 130 is not expected to have a material
impact on Gynecare's financial position, results of operations or cash flows.
In June 1997, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131). SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. SFAS 131 generally supersedes
Statement of Financial Accounting Standards No. 14 "Financial Reporting for
Segments of a Business Enterprise." SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997, and restatement of
comparative information for earlier years is required. However, SFAS 131 is not
required to be applied to interim financial statements in the initial year of
application. SFAS 131 will not have a material impact on Gynecare's financial
position, results of operations or cash flows.
OTHER FACTORS AFFECTING OPERATING RESULTS
Gynecare operates in a rapidly changing environment that involves a number
of uncertainties, some of which are beyond Gynecare's control. In addition to
the uncertainties described above in "Business of Gynecare" and elsewhere in
this Proxy Statement/Prospectus these uncertainties include:
Dependence on a Limited Number of Products. Currently, the ThermaChoice
Uterine Balloon Therapy and VersaPoint systems are the only products being
marketed by Gynecare. Gynecare will be required to obtain regulatory approvals,
including PMA approval from the FDA, before the ThermaChoice Uterine Balloon
Therapy system can be marketed in the United States and in certain foreign
countries, including Japan. There can be no assurance that Gynecare's efforts
will be successful or that the ThermaChoice Uterine Balloon Therapy system will
be safe or effective, capable of being manufactured in commercial quantities at
acceptable costs, approved by appropriate regulatory or reimbursement
authorities or successfully marketed. Gynecare's VersaPoint system has only
recently received FDA clearance for marketing in the United States, and Gynecare
has made limited shipments of the system. Furthermore, because the ThermaChoice
Uterine Balloon Therapy and VersaPoint systems represent Gynecare's principal
near-term focus, Gynecare could be
57
<PAGE> 61
required to cease operations if these products are not successfully
commercialized. In addition, the continuing follow-up phase of the U.S. clinical
trials of the ThermaChoice Uterine Balloon Therapy system may identify
significant technical or other obstacles to be overcome prior to obtaining
necessary regulatory or reimbursement approvals. Although there has been a
significant success rate in the patients treated to date under the current
protocol for the ThermaChoice Uterine Balloon Therapy system, there is only
limited follow-up data for such patients. As a result, there can be no assurance
that the success rate of the procedure will be sustainable or will not decrease
over time. If the ThermaChoice Uterine Balloon Therapy system does not prove to
be safe and effective in the long-term follow up of clinical trials, there would
be a material adverse effect on Gynecare's business, financial condition and
results of operations.
Limited Operating History and Revenues; Anticipated Future
Losses. Gynecare has generated only limited revenues to date and has
experienced net losses since its inception. As of June 30, 1997, Gynecare had an
accumulated deficit of $22.8 million. Gynecare expects its operating losses to
continue for at least the next several years. In addition, Gynecare expects that
it will continue to expend substantial resources to fund clinical trials in
support of regulatory and reimbursement approvals, expansion of marketing and
sales activities and research and development. There can be no assurance that
the ThermaChoice Uterine Balloon Therapy and VersaPoint systems will be
successfully commercialized or that Gynecare will achieve significant revenues
from either international or domestic sales. In addition, there can be no
assurance that Gynecare will achieve or sustain profitability in the future.
Uncertainty of Market Acceptance. Gynecare's success is dependent upon
acceptance of the ThermaChoice Uterine Balloon Therapy and VersaPoint systems by
the medical community as reliable, safe and cost-effective treatments for
dysfunctional uterine bleeding and benign pathology. Gynecare is unable to
predict how quickly, if at all, its products will be accepted by the medical
community or, if accepted, the number of procedures that will be performed. The
medical indications that can be treated with the ThermaChoice Uterine Balloon
Therapy and VersaPoint systems can also be treated by surgery, drugs or other
medical devices. Although Gynecare believes that its products have certain
advantages over competing products and technologies, Gynecare does not have
long-term clinical data demonstrating such advantages. There can be no assurance
that any such advantages will be clinically significant. The ThermaChoice
Uterine Balloon Therapy and VersaPoint systems are designed to be used with a
local anesthetic in a clinic or physician's office. If physicians recommend or
require that the procedures using the ThermaChoice or VersaPoint systems be
performed under general anesthesia in a hospital or outpatient surgery center
instead of under local anesthesia in a clinic or physician's office, market
acceptance of the products would be adversely affected, which would have a
material adverse effect on Gynecare's business, financial condition and results
of operations. Although Gynecare believes that the ThermaChoice system may be
adaptable to other uterine bleeding disorders, there can be no assurance that
the product will be clinically effective for any other indications, that
regulatory approval of the product for such other indications could be obtained,
that treatment of such conditions would be commercially feasible or that
additional markets for any such indications will develop. Obtaining FDA approval
to market the ThermaChoice Uterine Balloon Therapy system for other indications
is likely to require a long period of time and considerable expense. Patient
population estimates are subject to inherent uncertainties, and Gynecare is
unable to determine with any degree of certainty the number of patients for any
indication or the number of patients who are suitable for treatment.
Potential Fluctuations in Future Quarterly Results. Gynecare expects that
its operating results will fluctuate significantly from quarter to quarter in
the future and will depend on a number of factors, many of which are outside
Gynecare's control. These factors include actions relating to regulatory and
reimbursement matters, the extent to which Gynecare's products gain market
acceptance, the rate at which Gynecare establishes its network of distributors
and direct sales personnel in the U.S. and internationally, the timing and size
of customer purchases, which may be influenced by volume purchase discounts and
extended payment terms, and competition.
Limited Manufacturing Experience; Dependence on Single Contract
Manufacturers and Sole Source Suppliers; Scale-up Risk. Gynecare currently
manufactures certain components of its products and depends on contract
manufacturers for the production of certain components of the ThermaChoice
Uterine Balloon
58
<PAGE> 62
Therapy system and the entire VersaPoint system. Gynecare expects to continue to
depend on such manufacturers for the foreseeable future. The integration of
Gynecare's operations into new facilities, which occurred in November 1995, has
resulted and may continue to result in inefficiencies. Specifically,
manufacturers often encounter difficulties in production of new products,
including problems involving production yields, quality control and assurance,
component supply and shortages of qualified personnel. Gynecare may experience a
shortage of manufacturing capacity if the new facility fails to operate as
planned. Although Gynecare intends to maintain sufficient levels of inventory to
avoid any material disruption resulting from the continuing scale-up of
Gynecare's facility, there can be no assurance that Gynecare will be able to
manufacture and supply sufficient quantities of products to meet product
requirements for commercial sales. Additionally, any delay or difficulty in
continuing manufacturing activities at its facility, or the inability of
Gynecare's contract manufacturers to supply required materials and Gynecare
subsequently not being able to successfully find an alternative source of supply
in a timely manner, may have a material adverse effect on Gynecare's business,
financial condition and results of operations. For the foreseeable future,
Gynecare expects that manufacturing and overhead costs spread over low
production volumes combined with the cost of using contract manufacturers to
produce the ThermaChoice controller and VersaPoint system will continue to have
an adverse effect on gross margins.
Potential Volatility of Stock Price. The securities markets have, from
time to time, experienced significant price and volume fluctuations that may be
unrelated to the operating performance of particular companies. The market
prices of the common stock of many publicly-held medical device companies have
in the past been, and can in the future be expected to be, especially volatile.
Announcements of technological innovations or new products by Gynecare or its
competitors, developments or disputes concerning patents or proprietary rights,
regulatory developments, the issuance of new or changed stock market analyst
reports and recommendations, and economic and other external factors, as well as
period-to-period fluctuations in Gynecare's financial results, have had and may
continue to have in the future a significant impact on the market price of
Gynecare Common Stock.
Future Capital Needs. Gynecare's capital requirements depend on a number
of factors, including the timing of FDA approval of the ThermaChoice Uterine
Balloon Therapy system, and demand for and market acceptance of Gynecare's
products, the progress of Gynecare's clinical research and product development
programs, the receipt of and the time required to obtain regulatory clearances
and approvals, the resources Gynecare devotes to developing, manufacturing and
marketing its products, the resources required to hire and develop a direct
sales force in the United States, the resources required to expand manufacturing
capacity and facilities requirements, the costs of obtaining reimbursement for
use of Gynecare's ThermaChoice Uterine Balloon Therapy and VersaPoint systems in
new and existing markets, and other factors. While Gynecare believes that its
cash, cash equivalents and short-term investments together with interest thereon
will be sufficient to fund its operations and capital requirements through
December 31, 1997, there can be no assurance that Gynecare will not require
additional financing prior to the end of 1997. The estimate of this time period
is a forward-looking statement involving risks and uncertainties and actual
results may differ materially as a result of a number of factors including those
noted above. Should additional be required, such funding may not be available
when needed or on terms acceptable to Gynecare, which would have a material
adverse effect on Gynecare's business, financial condition and results of
operations.
Control by Directors and Executive Officers. The directors and executive
officers of Gynecare, and certain of their affiliates, beneficially owned
approximately 51% of the outstanding shares of Gynecare Common Stock as of
September 25, 1997. Accordingly, these persons, individually and as a group, may
be able to effectively control Gynecare and direct its affairs and business,
including any determination with respect to the acquisition or disposition of
assets by Gynecare, future issuances of Gynecare Common Stock or other
securities by Gynecare, declaration of dividends on Gynecare Common Stock and
the election of directors. Such concentration of ownership may also have the
effect of delaying, deferring or preventing a change in control of Gynecare.
59
<PAGE> 63
EXECUTIVE OFFICERS OF GYNECARE FOLLOWING THE MERGER
The following table sets forth certain information as of September 25, 1997
regarding the executive officers of Gynecare, who will become officers of the
Surviving Corporation as of the Effective Time of the Merger.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- -----------------------------------------------
<S> <C> <C>
Roseanne Hirsch...................... 50 President and Chief Executive Officer
Roddy Clark.......................... 51 Vice President of Sales
Malcolm M. Farnsworth, Jr............ Vice President, Chief Financial Officer and
45 Secretary
Augustine Y. Lien.................... 52 Vice President of Operations
Milton B. McColl, M.D................ 38 Vice President and Medical Director
</TABLE>
MS. HIRSCH has been a director as well as President and Chief Executive
Officer of Gynecare since April 1997. From February 1995 to April 1997, she was
President and Chief Executive Officer of Luxar Corporation, a manufacturer of
laser surgery tools for cosmetic, medical and dental applications. From 1992 to
1995, Ms. Hirsch served as Vice-President and General Manager of the Hemo
Tech-Cardiac Surgery Division of Medtronic, Inc., a major manufacturer,
developer and distributor of medical products, and from 1990 to 1992 she was
Director, Custom Products for the Cardiopulmonary Group of Medtronic, Inc. She
received an M.S. in Systems Management from the University of Southern
California.
MR. CLARK joined Gynecare in June 1997 as Vice President of Sales. Prior to
joining Gynecare, Mr. Clark was President and Chief Operating Officer of
Myelotec, Inc., a developer of micro-minimally invasive imaging and therapeutic
products for chronic lower back pain. From 1993 until 1996, he was Chief
Operating Officer of Horizon Medical Products, Inc., a medical product supplier,
and from 1992 until 1993, he was President of Holomedics Consulting, a
self-owned medical marketing firm. He is a graduate of Mercer University.
MR. FARNSWORTH has served as Vice President, Chief Financial Officer and
Secretary of Gynecare since its inception in March 1994. From December 1991 to
December 1994, he was Vice President and Chief Financial Officer of Origin, a
manufacturer of minimally invasive surgical devices. From March 1994 to December
1994, he served as an officer of both Gynecare and Origin. From August 1990 to
December 1991, Mr. Farnsworth was a consultant to several medical device
companies including Cardiac Pathways, Inc., Cardiometrics, Inc., and Origin. Mr.
Farnsworth, a certified public accountant, holds an M.B.A. degree from the
University of California at Berkeley.
MR. LIEN joined Gynecare in March 1995 as Vice President of Operations.
From 1989 until joining Gynecare, he was Vice President of Operations for Menlo
Care, Inc., a manufacturer of critical care catheters. From 1985 to 1989, Mr.
Lien was employed as Director of Operations of Nellcor, Inc., a manufacturer of
high performance electronic patient monitoring systems. Mr. Lien holds an M.S.
degree in Operations Research from Stanford University and an M.B.A. degree from
the University of Santa Clara.
DR. MCCOLL joined Gynecare in April 1994 as Vice President and Medical
Director. From 1989 until joining Gynecare, he served as Director of Marketing
for Origin. From 1981 to 1988, Dr. McColl was a member of the National Football
League's San Francisco 49ers. Dr. McColl holds an M.D. from Stanford University
Medical School and three issued U.S. patents in the medical device field.
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SECURITY OWNERSHIP OF GYNECARE
The following table sets forth the beneficial ownership of Gynecare Common
Stock as of September 25, 1997 of (i) each person known by Gynecare to
beneficially own more than 5% of Gynecare Common Stock, (ii) each director,
(iii) each executive officer of Gynecare and (iv) all directors and executive
officers as a group.
<TABLE>
<CAPTION>
SHARES OF GYNECARE
COMMON STOCK
BENEFICIALLY OWNED
----------------------------
SHARES OF
COMMON PERCENT OF
NAME OF BENEFICIAL OWNER STOCK OWNED TOTAL
- ------------------------------------------------------------------ ----------- ----------
<S> <C> <C>
Guidant Corporation(1)............................................ 2,535,458 30.2%
c/o F. Thomas Watkins III
135 Constitution Drive
Menlo Park, CA 94025
Mayfield Fund(2).................................................. 1,364,660 16.2%
c/o A. Grant Heidrich
2800 Sand Hill Road
Menlo Park, CA 94025
Delphi Ventures(3)................................................ 784,295 9.3%
3000 Sand Hill Road
Building 1, Suite 135
Menlo Park, CA 94025
New Enterprise Associates(4)...................................... 640,962 7.6%
Suite 1025, Russ Building
235 Montgomery Street
San Francisco, CA 94104
Roseanne Hirsch(5)................................................ 86,458 1.0%
Roddy Clark....................................................... -- *
Malcolm M. Farnsworth, Jr.(6)..................................... 107,501 1.3%
Augustine Y. Lien(7).............................................. 61,802 *
Milton B. McColl, M.D.(8)......................................... 56,670 *
A. Lad Burgin, Ph.D.(9)........................................... 29,167 *
Elizabeth Connell, M.D.(10)....................................... 13,685 *
Alan Levy, Ph.D.(11).............................................. 15,110 *
Mary Lake Polan, M.D., Ph.D.(12).................................. 14,726 *
William M. Hunter(13)............................................. 107,373 1.3%
Steve Adams(14)................................................... 36,567 *
Vahid Saadat(15).................................................. 32,828 *
All directors and current executive officers as a group(16)....... 4,285,237 51.0%
</TABLE>
- ---------------
Except pursuant to applicable community property laws or as indicated in the
footnotes to this table, to Gynecare's knowledge, each stockholder identified in
the table possesses sole voting and investment power with respect to all shares
of Gynecare Common Stock shown as beneficially owned by such stockholder.
(1) Constitutes (i) options to purchase 4,583 shares held by Mr. Watkins
exercisable within sixty days of September 25, 1997, (ii) 2,520,348 shares
held by Origin for which Mr. Watkins disclaims beneficial ownership and
(iii) 10,527 shares held by Mr. Watkins. Of the shares held by Mr. Watkins,
4,825 shares are subject to a right of repurchase by Gynecare within 60
days of September 25, 1997. Guidant Corporation is a manufacturer of
medical devices.
(2) Constitutes (i) 78,003 shares held by Mayfield Associates Fund II of which
Mr. Heidrich is general partner, (ii) options to purchase 4,583 shares held
by Mr. Heidrich and exercisable within 60 days of September 25, 1997, and
(iii) 1,282,074 shares held by Mayfield VII. Of such shares, 4,167 shares
are
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<PAGE> 65
subject to a right of repurchase by Gynecare within 60 days of September
25, 1997. Mr. Heidrich and William D. Unger are general partners of
Mayfield VII Management Partners, which is the general partner of Mayfield
VII and Mayfield Associates Fund II. Mr. Heidrich and Mr. Unger disclaim
beneficial ownership of these shares except to the pecuniary interest they
will derive from these shares. Mayfield Fund is a venture capital
partnership.
(3) Delphi Ventures is a venture capital partnership.
(4) New Enterprise Associates is a venture capital partnership.
(5) Includes options to purchase 36,458 shares exercisable within 60 days of
September 25, 1997.
(6) Includes (i) options to purchase 1,667 shares exercisable within 60 days of
September 25, 1997, and (ii) 31,469 shares held by Mr. Farnsworth as to
which Gynecare has a right to repurchase as of 60 days from September 25,
1997.
(7) Includes (i) options to purchase 3,070 shares exercisable within 60 days of
August 29, 1997, and (ii) 20,224 shares held by Mr. Lien as to which
Gynecare has a right to repurchase as of 60 days from September 25, 1997.
(8) Includes (i) options to purchase 7,500 shares exercisable within 60 days of
September 25, 1997 and (ii) 9,211 shares held by Dr. McColl as to which
Gynecare has a right to repurchase as of 60 days from September 25, 1997.
(9) Constitutes options to purchase 29,167 shares exercisable within 60 days of
September 25, 1997.
(10) Includes (i) options to purchase 5,021 shares exercisable within 60 days of
September 25, 1997, and (ii) 1,755 shares held by Dr. Connell as to which
Gynecare has a right to repurchase as of 60 days from September 25, 1997.
(11) Includes (i) options to purchase 4,583 shares exercisable within 60 days of
September 25, 1997, and (ii) 3,509 shares held by Dr. Levy as to which
Gynecare has a right to repurchase as of 60 days from September 25, 1997.
(12) Includes (i) options to purchase 4,802 shares exercisable within 60 days of
September 25, 1997, and (ii) 3,290 shares held by Dr. Polan as to which
Gynecare has a right to repurchase as of 60 days from September 25, 1997.
(13) Constitutes shares acquired upon exercise of options on August 8, 1996. Mr.
Hunter resigned as President and Chief Executive Officer effective July 11,
1996.
(14) Constitutes shares acquired upon exercise of options on July 5, 1995. Mr.
Adams resigned as Vice President of International Sales effective June 2,
1997.
(15) Mr. Saadat resigned as Vice President of Research and Development effective
July 25, 1997.
(16) Includes (i) options to purchase 101,434 shares exercisable within 60 days
of September 25, 1997, and (ii) 78,450 shares as to which Gynecare has a
right to repurchase as of 60 days from September 25, 1997.
* Less than 1%.
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<PAGE> 66
EXECUTIVE COMPENSATION OF GYNECARE
The following table sets forth certain information regarding compensation
paid by Gynecare for services rendered during fiscal 1996 by the former Chief
Executive Officers of Gynecare, and each of the four additional current or
former executive officers of Gynecare whose total compensation in fiscal 1996
equaled or exceeded $100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#)
- --------------------------------------------- ---- -------- ---------- ------------
<S> <C> <C> <C> <C>
A. Lad Burgin(1)............................. 1996 $150,000 -- 15,000
1995 -- -- --
William M. Hunter(2)......................... 1996 $164,689 -- --
1995 160,000 -- --
Steve Adams.................................. 1996 $150,000 $ 17,296 --
Vice President of International Sales(3) 1995 125,000 60,526
Malcolm M. Farnsworth, Jr.................... 1996 $128,400 -- --
Vice President and Chief Financial Officer 1995 120,000 107,894
Augustine Y. Lien............................ 1996 $124,900 -- --
Vice President of Operations 1995 120,000 57,104
Vahid Saadat................................. 1996 $114,400 -- --
Vice President of Research and Development 1995 110,000 -- 63,158
</TABLE>
- ---------------
(1) Dr. Burgin was appointed President and Chief Executive Officer of Gynecare
effective July 11, 1996. Dr. Burgin resigned from such position effective
April 21, 1997. Effective as of such date, Roseanne Hirsch was appointed as
Gynecare's new President and Chief Executive Officer. Ms. Hirsch's salary
on an annualized basis is $200,000 per year.
(2) Mr. Hunter resigned from his position as President and Chief Executive
Officer of Gynecare on July 11, 1996.
(3) Mr. Adams resigned effective June 2, 1997. Effective June 23, 1997, Roddy
Clark was appointed Vice President of Sales. Mr. Clark's salary on an
annualized basis is $140,000 per year.
OPTION GRANTS IN FISCAL 1996
The following table sets forth information as to the options granted to the
Named Executive Officers during the fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE PRICE
OPTIONS EMPLOYEES IN PER SHARE EXPIRATION
NAME GRANTED (#)(1) FISCAL YEAR ($) DATE
- ------------------------------------- -------------- ------------ -------------- ----------
<S> <C> <C> <C> <C>
A. Lad Burgin........................ 7,500 4% $5 3/8 07/18/06
7,500 4% $7 11/21/06
</TABLE>
- ---------------
(1) All options were granted under Gynecare's 1994 Stock Option Plan. Such
options have an exercise price equal to the fair market value of Gynecare
Common Stock on the date of grant. In fiscal 1997, Roseanne Hirsch and
Roddy Clark, President and Chief Executive Officer and Vice President of
Sales, respectively, were granted options to purchase an aggregate of
450,000 shares and 75,000 shares, respectively, of Gynecare Common Stock.
The option exercise price for Ms. Hirsch's options is $5.75 per share and
the option exercise price for Mr. Clark's options is $6.56 per share.
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<PAGE> 67
AGGREGATE STOCK OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR-END VALUES
The following table sets forth information as to the option exercises and
holdings of the Named Executive Officers during the fiscal year ended December
31, 1996.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES DECEMBER 31, 1996 DECEMBER 31, 1996(1)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ----------- -------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
A. Lad Burgin............... -- -- 10,000 5,000 $9,688 $ 2,500
William M. Hunter(2)........ 23,000 $198,260 -- -- -- --
107,373 $455,798
</TABLE>
- ---------------
(1) Calculated by determining the difference between the closing price as
reported on the Nasdaq National Market of Gynecare Common Stock on December
31, 1996, the last day of trading for 1996, underlying the options and the
exercise price.
(2) William Hunter resigned from his position as President and Chief Executive
Officer of Gynecare on July 11, 1996. In accordance with the terms of a
Settlement Agreement and Mutual Release between Gynecare and Mr. Hunter,
the vesting on a portion of Mr. Hunter's options was accelerated such that
a total of 107,373 shares were exercisable as of the date of his
termination.
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<PAGE> 68
CERTAIN TRANSACTIONS OF GYNECARE
On January 1, 1995, Gynecare and Origin entered into a Supply Agreement
under which Origin manufactures Gynecare's disposable balloon catheter. For the
fiscal year ended December 31, 1995, Gynecare paid Origin approximately $410,000
for the product supplied under the agreement. The agreement was terminated in
December 1995 as Gynecare began manufacturing its disposable balloon catheter in
its new facility.
In May 1995, Gynecare sold 1,178,366 shares of Series C Preferred Stock at
a purchase price of $7.96 per share. Origin, Mayfield Fund, Delphi Ventures and
New Enterprise Associates, all of which are greater than 5% stockholders of
Gynecare, purchased 125,612, 628,060, 62,805 and 125,612 shares, respectively,
of Series C Preferred Stock. In July 1995, Gynecare sold an additional 5,262
shares of Series C Preferred Stock to Steve Adams, a former executive officer of
Gynecare, at a purchase price of $7.96 per share. Each share of Series C
Preferred Stock was automatically converted into one share of Gynecare Common
Stock upon the closing of Gynecare's initial public offering in November 1995.
Such holders have rights to demand registration under the Securities Act of
shares of Gynecare Common Stock issued upon conversion of shares of preferred
stock previously held by them (including Gynecare Common Stock issuable upon
conversion of Series A Preferred Stock and Series B Preferred Stock previously
held by them and converted into Gynecare Common Stock) on two occasions
beginning in November 1996. In addition, in the event Gynecare proposes to
register any of its securities under the Securities Act, such persons will have
rights, subject to certain exceptions and limitations, to have shares of such
Gynecare Common Stock included in such registration statement. Each share of
Series A Preferred Stock and Series B Preferred Stock was automatically
converted into one share of Gynecare Common Stock upon the closing of Gynecare's
initial public offering.
Origin is a wholly-owned subsidiary of Guidant, a publicly traded medical
device company. F. Thomas Watkins, III, a Director of Gynecare, is the President
of Origin and a Vice President of Guidant. On March 25, 1994, Gynecare and
Origin entered into a Management Services Agreement. Under the agreement, Origin
provides office space, utilities, telephone service, maintenance and security
services at hourly rates, payable monthly. Payments to Origin under this
agreement for the fiscal year ended December 31, 1995 were approximately
$1,089,000. The agreement terminated on December 31, 1995.
In June 1995, Gynecare and Origin Canada entered into an agreement whereby
Origin Canada obtained exclusive rights to market Gynecare's products in Canada.
Sales to Origin Canada for the fiscal year ended December 31, 1996 totaled
approximately $119,000. In April 1997, Gynecare and Origin Canada extended the
agreement for an additional two years.
In October 1995, Gynecare and Origin entered into an Assignment Agreement
pursuant to which Origin assigned to the Company an issued United States patent
and rights to certain foreign applications in consideration for approximately
$45,000. This royalty-bearing agreement covers potential future modifications to
the Uterine Balloon Therapy system. Additionally, pursuant to such agreement,
Gynecare granted to Origin a non-exclusive, royalty-free license under such
patent for use in fields other than gynecology.
Gynecare entered into an Employment Agreement with Roseanne Hirsch,
effective as of April 21, 1997, pursuant to which Ms. Hirsch serves as
Gynecare's President and Chief Executive Officer and receives a base salary of
$200,000 per year. In addition, in the event Ms. Hirsch is terminated without
cause (including not being assigned a position comparable to her Chief Executive
Officer position following any merger of Gynecare), she shall be entitled to
receive her full salary for a period of 12 months after such termination.
Pursuant to her Employment Agreement, Ms. Hirsch was granted options to purchase
an aggregate of 450,000 shares of Gynecare Common Stock, of which options to
purchase an aggregate of 50,000 shares of Gynecare Common Stock were fully
vested on the date of grant and an aggregate of 400,000 shares of Gynecare
Common Stock shall, pursuant to the terms of such options, become fully vested
and exercisable at the Effective Time.
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<PAGE> 69
Effective June 2, 1997, Gynecare entered into a Severance Agreement with
Steve Adams, former Vice President of Sales, pursuant to which Mr. Adams
received an additional six months of salary and six months of vesting of his
stock options.
In July 1997, Roddy Clark, Vice President of Sales of Gynecare, was granted
options to purchase an aggregate of 75,000 shares of Gynecare Common Stock, all
of which become fully vested and exercisable, if, following the merger or sale
of Gynecare, Mr. Clark's employment is terminated without cause or Mr. Clark
terminates for good reason.
In connection with the formation of Gynecare, Origin assigned to Gynecare
its license to patents, applications and confidential information developed
through the date of assignment relating to the ThermaChoice Uterine Balloon
Therapy system. Origin retained the exclusive right to use the assigned
technology for ablation of the gall bladder worldwide. In August 1997, Origin
released this right back to Gynecare. The exclusive, worldwide license assigned
to Gynecare requires Gynecare to make certain minimum royalty payments and to
pay a royalty based on net sales of products using ThermaChoice Uterine Balloon
Therapy technology to the original inventors of the technology.
DESCRIPTION OF CAPITAL STOCK OF GYNECARE
The authorized capital stock of Gynecare consists of 30,000,000 shares of
Gynecare Common Stock, par value $0.001 per share, and 5,000,000 shares of
Preferred Stock, par value $0.001 per share of Gynecare ("Preferred Stock"). As
of the Record Date, there were 8,407,194 shares of Gynecare Common Stock
outstanding held of record by approximately 94 stockholders and no shares of
Preferred Stock outstanding.
GYNECARE COMMON STOCK
Holders of Gynecare Common Stock are entitled to one vote per share in all
matters to be voted on by the stockholders, except that the Gynecare By-laws
provide that at a stockholders' meeting at which directors are to be elected, a
stockholder will be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes which such stockholder normally
is entitled to cast) if the candidates' names have been placed in nomination
prior to commencement of the voting and the stockholder has given notice prior
to commencement of the voting of the stockholder's intention to cumulate votes.
Subject to preferences that may be applicable to any Preferred Stock outstanding
at the time, holders of Gynecare Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Gynecare
Board out of funds legally available therefor. In the event of a liquidation,
dissolution or winding up of Gynecare, holders of Gynecare Common Stock are
entitled to share ratably in all assets remaining after payment of Gynecare's
liabilities and the liquidation preference, if any, of any outstanding shares of
Preferred Stock. Holders of Gynecare Common Stock have no preemptive rights and
no rights to convert their Gynecare Common Stock into any other securities, and
there are no redemption provisions with respect to such shares. All of the
outstanding shares of Gynecare Common Stock are fully paid and non-assessable.
PREFERRED STOCK
The Gynecare Board has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, without any further
vote or action by the stockholders. The issuance of Preferred Stock could
adversely affect the voting power of holders of Gynecare Common Stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control of Gynecare.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Anti-Takeover Law. Gynecare is subject to the provisions of Section 203 of
the Delaware General Corporation Law. In general, Section 203 prohibits a
publicly-held Delaware corporation from engaging in a
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<PAGE> 70
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner
or unless the interested stockholder acquired at least 85% of the corporation's
voting stock (excluding shares held by certain designated stockholders) in the
transaction in which it became an interested stockholder. For purposes of
Section 203, a "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder.
Subject to certain exceptions, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within the previous three
years did own, 15% or more of the corporation's voting stock.
Limitation of Director and Officer Liability. The Gynecare Certificate of
Incorporation and the Gynecare Bylaws contain certain provisions relating to the
limitation of liability and indemnification of directors and officers. The
Gynecare Certificate of Incorporation provides that directors of Gynecare may
not be held personally liable to Gynecare or its stockholders for monetary
damages for a breach of fiduciary duty, except for liability (i) for any breach
of the director's duty of loyalty to Gynecare or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL, relating to
prohibited dividends, distributions and repurchases or redemptions of stock, or
(iv) for any transaction from which the director derives an improper benefit.
However, such limitation does not limit the availability of non-monetary relief
in any action or proceeding against a director. In addition, the Gynecare
Certificate of Incorporation and the Gynecare Bylaws provide that Gynecare shall
indemnify its directors and officers to the fullest extent authorized by
Delaware law. Finally, Gynecare has entered into indemnification agreements with
its executive officers and directors which provide for indemnification of such
persons by Gynecare to the fullest extent permitted by Delaware law.
Classified Board of Directors. The Gynecare Certificate of Incorporation
provides that, so long as the Gynecare Board consists of more than two
directors, the Gynecare Board will be divided into three classes of directors
serving staggered three-year terms. As a result, one-third of the Gynecare Board
is elected each year.
No Stockholder Action by Written Consent. The Gynecare Certificate of
Incorporation provides that stockholders can take action only at a duly called
annual or special meeting of stockholders. Stockholders of Gynecare are,
therefore, not able to take action by written consent in lieu of a meeting.
These provisions may have the effect of deterring hostile takeovers or delaying
changes in control of management of Gynecare.
See "COMPARISON OF RIGHTS OF COMMON STOCKHOLDERS OF JOHNSON &
JOHNSON AND GYNECARE."
COMPARISON OF RIGHTS OF COMMON STOCKHOLDERS OF
JOHNSON & JOHNSON AND GYNECARE
The rights of Johnson & Johnson stockholders are governed by Johnson &
Johnson's Restated Certificate of Incorporation (the "Johnson & Johnson
Certificate of Incorporation"), its By-laws (the "Johnson & Johnson By-laws")
and the New Jersey Business Corporation Act (the "NJBCA"). The rights of
Gynecare stockholders are governed by the Gynecare Certificate of Incorporation,
the Gynecare By-laws and the DGCL. After the Effective Time, the rights of
Gynecare stockholders who become Johnson & Johnson stockholders will be governed
by the Johnson & Johnson Certificate of Incorporation, the Johnson & Johnson
By-laws and the NJBCA.
The following is a summary of the material differences between the rights
of Johnson & Johnson stockholders and the rights of Gynecare stockholders. This
summary is not intended to be complete and is qualified in its entirety by
reference to applicable provisions of the NJBCA and the DGCL and to the
Certificate of Incorporation and By-laws of each of Johnson & Johnson and
Gynecare.
Size and Classification of the Board of Directors.
Johnson & Johnson. The Johnson & Johnson Certificate of Incorporation and
the Johnson & Johnson By-laws provide that the total number of Johnson & Johnson
directors shall be not less than nine nor more than 18 as determined by the
Johnson & Johnson Board from time to time. Johnson & Johnson currently has
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<PAGE> 71
13 directors. Directors are elected at each annual meeting of stockholders to
serve until the next annual meeting. The Johnson & Johnson Board is not
classified.
Gynecare. The Gynecare Certificate of Incorporation provides that the
number of directors which constitutes the whole Gynecare Board shall be
designated in the Gynecare By-laws. The Gynecare By-laws currently provide that
the Gynecare Board shall consist of not less than four nor more than seven.
Gynecare currently has a classified Board of seven directors, consisting of two
directors whose term expires in 1998, three directors whose term expires in 1999
and two directors whose term expires in 2000. The members of a single class are
elected at each annual meeting of stockholders to serve until the expiration of
the term for which they were elected.
Cumulative Voting
Johnson & Johnson. Neither the Johnson & Johnson Certificate of
Incorporation nor the Johnson & Johnson By-laws provide for cumulative voting
with respect to the election of directors.
Gynecare. The Gynecare By-laws provide that at a stockholders' meeting at
which directors are to be elected, a stockholder will be entitled to cumulate
votes (i.e., cast for any candidate a number of votes greater than the number of
votes which such stockholder normally is entitled to cast) if the candidates'
names have been placed in nomination prior to commencement of the voting and the
stockholder has given notice prior to commencement of the voting of the
stockholder's intention to cumulate votes. If any stockholder has given such a
notice, then every stockholder entitled to vote may cumulate votes for
candidates in nomination either (i) by giving one candidate a number of votes
equal to the number of directors to be elected multiplied by the number of votes
to which that stockholder's shares are normally entitled or (ii) by distributing
the stockholder's votes on the same principle among any or all of the
candidates, as the shareholder thinks fit. The candidates receiving the highest
number of affirmative votes, up to the number of directors to be elected, will
be elected.
Removal of Directors.
Johnson & Johnson. The Johnson & Johnson Certificate of Incorporation and
the Johnson & Johnson By-laws provide that directors of Johnson & Johnson may be
removed, with cause, by a majority vote of the stockholders entitled to vote
thereon.
Gynecare. The Gynecare By-laws provide that any or all of the directors of
Gynecare may be removed, with or without cause, by the holders of a majority of
the outstanding shares of Gynecare then entitled to vote.
Special Meeting of Stockholders; Action by Written Consent.
Johnson & Johnson. Under the Johnson & Johnson By-laws, a special meeting
of the stockholders may be called at any time by the Chairman of the Board, a
Vice-Chairman of the Board, the Chairman of the Executive Committee, a
Vice-Chairman of the Executive Committee, the President or by a majority of the
directors of the Board, and may be held on such business day and at such time
and at such place within or without the State of New Jersey as is stated in the
notice of the meeting.
Pursuant to the NJBCA, any action required or permitted to be taken at a
meeting of the Johnson & Johnson stockholders generally may be taken without a
meeting if all the stockholders entitled to vote thereon consent thereto in
writing.
Gynecare. Under the Gynecare By-laws, a special meeting of stockholders
may be called at any time by the Gynecare Board, by the Chairman of the Gynecare
Board, by the President or by one or more stockholders holding shares in the
aggregate entitled to cast not less than ten percent of the votes at such
meeting.
Pursuant to the Gynecare Certificate of Incorporation, Gynecare
stockholders may not take any action by written consent in lieu of a meeting.
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Stockholder Inspection Rights; Stockholder Lists.
Johnson & Johnson. Pursuant to the NJBCA, a stockholder who has been a
stockholder for at least six months or who holds, or is authorized in writing by
holders of, at least five percent of the outstanding shares of any class or
series of stock of Johnson & Johnson upon at least five days' written demand has
the right for any proper purpose to inspect in person or by agent or attorney
the minutes of the proceedings of Johnson & Johnson's stockholders and Johnson &
Johnson's record of stockholders. Irrespective of the period such stockholder
has held his or her stock or the amount of stock such stockholder holds, a court
is empowered, upon proof of proper purpose, to compel production for examination
by the stockholder of the books and records of account, minutes and record of
stockholders of Johnson & Johnson.
Gynecare. Pursuant to the DGCL and Gynecare's By-laws, any stockholder, in
person or by attorney or other agent, may, upon written demand given under oath
and stating the purpose thereof, inspect for any proper purpose Gynecare's stock
ledger, a list of its stockholders and its other books and records. A proper
purpose is a purpose reasonably related to such person's interest as a
stockholder. A list of stockholders is to be open to the examination of any
stockholder, for any purpose germane to a meeting of stockholders, for a period
of at least 10 days prior to such meeting. The list is also to be produced and
kept at the place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
Amendment of Governing Documents.
Johnson & Johnson. Under the NJBCA, a proposed amendment to a
corporation's certificate of incorporation requires approval by the board of
directors and an affirmative vote of a majority of the votes cast by the holders
of shares entitled to vote thereof, unless a specific provision of the NJBCA or
the certificate of incorporation provides otherwise. The Johnson & Johnson
Certificate of Incorporation provides that if any class or series of shares is
entitled to vote thereon as a class, the affirmative vote of a majority of the
votes cast in each class is required. The Johnson & Johnson Certificate of
Incorporation also provides that the affirmative vote of the holders of not less
than 80% of the votes entitled to be cast by the holders of all then outstanding
shares of voting stock, voting together as a single class, and the affirmative
vote of a majority of the combined votes entitled to be cast by "disinterested
stockholders" voting together as a single class is required to amend, repeal or
adopt provisions inconsistent with Article Eighth of the Johnson & Johnson
Certificate of Incorporation (relating to business combinations with interested
parties); however, this 80% vote shall not be required for any such amendment,
repeal or adoption which is unanimously recommended by the Johnson & Johnson
Board if all its directors are independent directors.
Pursuant to the NJBCA, the Johnson & Johnson Certificate of Incorporation
and the Johnson & Johnson By-laws, the provisions of the Johnson & Johnson
By-laws generally may be amended, added to, altered, changed or repealed in
whole or in part (i) by the vote of the stockholders at a regular or special
meeting of the stockholders or (ii) by the Johnson & Johnson Board at a regular
or special meeting of the Johnson & Johnson Board, if notice of the proposed
amendment is contained in the notice of such meeting, except that a By-law
adopted or amended by the Johnson & Johnson Board may be superseded by
stockholder action and such stockholder action may preempt any further action by
the Johnson & Johnson Board.
Gynecare. Pursuant to the DGCL, a proposed amendment to a corporation's
certificate of incorporation requires a resolution adopted by the board of
directors and, unless otherwise provided in the certificate of incorporation,
the affirmative vote of the holders of a majority of the outstanding stock
entitled to vote thereon and the affirmative vote of the holders of a majority
of the outstanding stock of each class entitled to vote thereon as a class. If
any such amendment would adversely affect the rights of any holders of shares of
a class or series, the vote of the holders of a majority of all outstanding
shares of such class or series, voting as a class, is also necessary to
authorize such amendment.
The Gynecare Certificate of Incorporation provides that any changes to
Article Eleventh (regarding the classified Board), Article Thirteenth (regarding
action by written consent) and Article Fourteenth (regarding the voting
requirement described in this paragraph) require the affirmative vote of
two-thirds of the combined voting power of all of the then outstanding shares of
Gynecare entitled to vote.
69
<PAGE> 73
The DGCL provides that a corporation's by-laws may be adopted, amended or
repealed by the stockholders, and if authorized in the corporation's certificate
of incorporation or by-laws, by such corporation's Board of Directors. The
Gynecare Certificate of Incorporation provides that the Gynecare Board may
amend, alter, change or repeal the Gynecare By-laws. The Gynecare By-laws
provide that the Gynecare Board may adopt, amend or repeal the Gynecare By-laws,
other than a by-law or an amendment of a by-law changing the authorized number
of directors (except to fix the authorized number of directors pursuant to a
by-law providing for a variable number of directors).
Corporation's Best Interest.
Johnson & Johnson. Under the NJBCA, the director of a New Jersey
corporation, in discharging his or her duties to the corporation and in
determining what he or she reasonably believes to be is the best interest of the
corporation may consider any of the following (in addition to the effects of any
action on stockholders): (i) the effects of the action on the corporation's
employees, suppliers, creditors and customers, (ii) the effects of the action on
the community in which the corporation operates and (iii) the long-term as well
as the short-term interests of the corporation and its stockholders, including
the possibility that these interests may best be served by the continued
independence of the corporation. If, on the basis of the foregoing factors, the
Board of Directors determines that any proposal or offer to acquire the
corporation is not in the best interest of the corporation, it may reject such
proposal or offer, in which event the Board of Directors will have no obligation
to facilitate, remove any obstacles to, or refrain from impeding such proposal
or offer.
Gynecare. The DGCL does not include a comparable provision.
Required Vote for Authorization of Certain Actions.
Johnson & Johnson. Under the NJBCA, the consummation of a merger or
consolidation of a New Jersey corporation such as Johnson & Johnson, which was
organized prior to January 1, 1969, requires the approval of such corporation's
Board of Directors and the affirmative vote of two-thirds of the votes cast by
the holders of shares of the corporation entitled to vote thereon, unless such
corporation is the surviving corporation and (i) such corporation's certificate
of incorporation is not amended; (ii) the stockholders of the surviving
corporation whose shares were outstanding immediately before the effective date
of the merger will hold the same number of shares, with identical designations,
preferences, limitations, and rights, immediately after; and (iii) the number of
voting shares and participation shares outstanding after the merger will not
exceed by 40% the total number of voting or participating shares of the
surviving corporation before the merger. Similarly, in the case of a corporation
organized prior to 1969, such as Johnson & Johnson, a sale of all or
substantially all of a New Jersey corporation's assets other than in the
ordinary course of business, or a voluntary dissolution of a New Jersey
corporation, requires the approval of such corporation's Board of Directors and
the affirmative vote of two-thirds of the votes cast by the holders of shares of
the corporation entitled to vote thereon. Furthermore, the Johnson & Johnson
Certificate of Incorporation contains provisions requiring the approval of at
least 80% of the combined voting power of outstanding voting stock, voting
together as a single class, to approve certain business combinations and
transactions involving any five percent stockholder.
Gynecare. The DGCL requires the affirmative vote of a majority of the
Board of Directors of a Delaware corporation and at least a majority of such
corporation's outstanding shares entitled to vote thereon to authorize a merger
or consolidation, unless (i) such corporation is the surviving corporation, (ii)
such corporation's certificate of incorporation is not amended, (iii) each share
of stock of such corporation outstanding immediately prior to the effective date
of the merger is to be an identical outstanding share of such corporation after
the effective date of the merger and (iv) either no shares of common stock of
such corporation and no shares, securities or obligations convertible into such
stock are to be issued or delivered under the plan of merger, or the authorized
unissued shares or the treasury shares of common stock of such corporation to be
issued or delivered under the plan of merger plus those initially issuable upon
conversion of any other shares, securities or obligations to be issued or
delivered under such plan, do not exceed 20% of the shares of common stock of
such corporation outstanding immediately prior to the effective date of the
merger. A sale of all or substantially all of a Delaware corporation's assets or
a voluntary dissolution of a Delaware
70
<PAGE> 74
corporation requires the affirmative vote of a majority of the Board of
Directors and at least a majority of such corporation outstanding shares
entitled to vote thereon.
Business Combinations.
Johnson & Johnson. The NJBCA provides that no corporation organized under
the laws of New Jersey with its principal executive offices or significant
operations located in New Jersey (a "resident domestic corporation") may engage
in any "business combination" (as defined in the NJBCA) with any interested
stockholder (generally, a 10% or greater stockholder) of such corporation for a
period of five years following such interested stockholder's stock acquisition,
unless such business combination is approved by the Board of Directors of such
corporation prior to the stock acquisition. A resident domestic corporation,
such as Johnson & Johnson, cannot opt out of the foregoing provisions of the
NJBCA.
In addition, no resident domestic corporation may engage, at any time, in
any business combination with any interested stockholder of such corporation
other than: (i) a business combination approved by the Board of Directors of
such corporation prior to the stock acquisition, (ii) a business combination
approved by the affirmative vote of the holders of two-thirds of the voting
stock not beneficially owned by such interested stockholder at a meeting called
for such purpose or (iii) a business combination in which the interested
stockholder pays a formula price designed to ensure that all other stockholders
receive at least the highest price per share paid by such interested
stockholder. In connection with business combinations with any five percent
stockholder, the Johnson & Johnson Certificate of Incorporation contains
provisions requiring the approval of at least 80% of the holders of the Johnson
& Johnson Common Stock entitled to vote in the election of directors and
compliance with certain procedural requirements.
Gynecare. In general, Section 203 of the DGCL prohibits an interested
stockholder (generally, a 15% or greater stockholder) of a Delaware corporation
from engaging in a "business combination" (as defined in the DGCL) with such
corporation for three years following the date such person became an interested
stockholder.
The provision is not applicable when (i) prior to the date the stockholder
became an interested stockholder, the Board of Directors of the corporation
approved either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder, (ii) upon consummation of the
transaction that resulted in the stockholder becoming an interested stockholder,
such interested stockholder owned at least 85% of the outstanding voting stock
of the corporation, not including shares owned by directors who are also
officers and by certain employee stock plans or (iii) on or subsequent to the
date that stockholder becomes an interested stockholder, the business
combination is approved by the Board of Directors of the corporation and
authorized at a meeting of stockholders, and not by written consent, by the
affirmative vote of the holders of at least two-thirds of the outstanding voting
stock entitled to vote thereon, excluding shares owned by the interested
stockholder.
The restrictions of Section 203 generally do not apply to business
combinations with an interested stockholder that are proposed subsequent to the
public announcement of, and prior to the consummation or abandonment of, certain
mergers, sales of a majority of a corporation's assets or tender offers for 50%
or more of a corporation voting stock.
The DGCL allows corporations to elect not to be subject to the provisions
of the DGCL. Gynecare has not made such an election.
OTHER MATTERS
REGULATORY APPROVALS REQUIRED
Under the HSR Act and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), certain acquisition transactions may not be consummated
unless notice has been given and certain information has been furnished to the
Antitrust Division of the United States Department of Justice (the "Antitrust
Division") and the FTC and specified waiting period requirements have been
satisfied. Johnson &
71
<PAGE> 75
Johnson and Gynecare each filed with the Antitrust Division and the FTC a
Notification and Report Form with respect to the Merger on August 22, 1997.
Effective September 16, 1997, the waiting period under the HSR Act was
terminated. At any time before or after the Effective Time, the FTC or the
Antitrust Division could take such action under the antitrust laws as it deems
necessary or desirable in the public interest, including seeking to enjoin the
Merger or seeking the divestiture of Gynecare by Johnson & Johnson, in whole or
in part, or the divestiture of substantial assets of Johnson & Johnson, Gynecare
or their respective subsidiaries. State Attorneys General and private parties
may also bring legal action under Federal or state antitrust laws in certain
circumstances. Based on an examination of information available to Johnson &
Johnson and Gynecare relating to the businesses in which Johnson & Johnson,
Gynecare and their respective subsidiaries are engaged, Johnson & Johnson and
Gynecare believe that the consummation of the Merger will not violate the
antitrust laws.
Johnson & Johnson and Gynecare do not believe that any other material
governmental approvals or actions will be required for consummation of the
Merger. See "THE MERGER AGREEMENT-- Conditions to the Consummation of the
Merger."
ABSENCE OF APPRAISAL RIGHTS
Holders of Gynecare Common Stock will not be entitled to appraisal rights
as a result of the Merger. Under Delaware law, appraisal rights are unavailable
to holders of Gynecare Common Stock because Gynecare Common Stock was, on the
Record Date, quoted on the Nasdaq National Market and will be converted into
shares of Johnson & Johnson Common Stock, which at the effective time of the
Merger will be listed on the NYSE.
EXPERTS
The consolidated financial statements and financial statement schedule as
of December 29, 1996 and December 31,1995 and for each of the three fiscal years
in the period ended December 29, 1996 of Johnson & Johnson and subsidiaries
included or incorporated by reference in Johnson & Johnson's Annual Report on
Form 10-K for the fiscal year ended December 29, 1996 have been audited by
Coopers & Lybrand L.L.P., independent accountants, as set forth in their reports
included or incorporated by reference therein and incorporated herein by
reference. Such consolidated financial statements are incorporated herein by
reference in reliance upon such reports given upon the authority of such firm
and experts in accounting and auditing.
The balance sheet as of December 31, 1996 and the statements of operation,
shareholders' equity and cash flows of Gynecare, Inc. for the period from March
8, 1994 (Date of Inception) through December 31, 1996 included in this Proxy
Statement/Prospectus have been included therein in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
The balance sheet as of December 31, 1993 and the statements of operations
and cash flows of the Uterine Balloon Therapy Business Operations of Origin for
the year ended December 31, 1993 and the period from January 1, 1994 to March 7,
1994, have been included herein in reliance on the report, which includes an
explanatory paragraph addressing certain costs and expenses presented in the
financial statements that represent allocations and management estimates of the
costs and services provided by Origin, of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
LEGAL MATTERS
The validity of the shares of Johnson & Johnson Common Stock offered hereby
will be passed upon for Johnson & Johnson by Roger S. Fine, Vice President,
General Counsel of Johnson & Johnson. Mr. Fine is paid a salary by Johnson &
Johnson, is a participant in various employee benefit plans offered to employees
of
72
<PAGE> 76
Johnson & Johnson generally and owns and has options to purchase shares of
Johnson & Johnson Common Stock.
Cravath, Swaine & Moore, counsel for Johnson & Johnson, and Wilson Sonsini
Goodrich & Rosati Professional Corporation, counsel for Gynecare, have delivered
opinions concerning certain Federal income tax consequences of the Merger. See
"THE MERGER--Material Federal Income Tax Consequences" and "THE MERGER
AGREEMENT--Conditions to the Consummation of the Merger."
FUTURE STOCKHOLDER PROPOSALS
If the Merger is not consummated, Gynecare will hold a 1998 Annual Meeting
of Stockholders. If such meeting is held, stockholder proposals intended to be
presented at such meeting must be received by Gynecare on or before December 26,
1997 to be considered for inclusion in Gynecare's proxy materials for such
meeting.
73
<PAGE> 77
INDEX TO FINANCIAL STATEMENTS OF GYNECARE
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Gynecare, Inc. Financial Statements
Condensed Balance Sheets at June 30, 1997 and December 31, 1996 (unaudited)........... F-2
Statements of Operations for the three and six months ended June 30, 1997 and 1996
(unaudited)........................................................................ F-3
Statements of Cash Flows for the six months ended June 30, 1997 and 1996
(unaudited)........................................................................ F-4
Notes to Condensed Financial Statements (unaudited)................................... F-5
Report of Independent Accountants..................................................... F-7
Balance Sheets at December 31, 1996 and 1995.......................................... F-8
Statements of Operations for the years ended December 31, 1996 and 1995 and for the
period from March 8, 1994 (Date of Inception) to December 31, 1994................. F-9
Statements of Stockholders' Equity for the years ended December 31, 1996 and 1995 and
for the period from March 8, 1994 (Date of Inception) to December 31, 1994......... F-10
Statements of Cash Flows for the years ended December 31, 1996 and 1995 and for the
period from March 8, 1994 (Date of Inception) to December 31, 1994................. F-11
Notes to Financial Statements......................................................... F-12
Uterine Balloon Therapy Business Operations of Origin Medsystems, Inc.
Report of Independent Accountants..................................................... F-21
Balance Sheet at December 31, 1993.................................................... F-22
Statements of Operations for the period from January 1, 1994 to March 7, 1994 and for
the year ended December 31, 1993................................................... F-23
Statements of Cash Flows for the period from January 1, 1994 to March 7, 1994 and for
the year ended December 31, 1993................................................... F-24
Notes to Financial Statements......................................................... F-25
</TABLE>
F-1
<PAGE> 78
GYNECARE, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER
JUNE 30, 31,
1997 1996
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 5,592,000 $3,823,000
Short-term investments........................................ 2,337,000 9,248,000
Accounts receivable, net...................................... 371,000 457,000
Inventories................................................... 406,000 424,000
Prepaids and other current assets............................. 179,000 254,000
----------- -----------
Total current assets....................................... 8,885,000 14,206,000
Property and equipment, net................................... 1,360,000 1,419,000
Prepaid royalties............................................. 1,910,000 1,900,000
Other assets, net............................................. 862,000 873,000
----------- -----------
Total assets............................................... $13,017,000 $18,398,000
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable.............................................. $ 1,010,000 $ 481,000
Accrued expenses.............................................. 562,000 634,000
Current portion of long-term debt............................. 355,000 291,000
----------- -----------
Total current liabilities.................................. 1,927,000 1,406,000
Long-term debt, net of current portion........................ 384,000 458,000
----------- -----------
Total liabilities.......................................... 2,311,000 1,864,000
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock.................................................... 8,000 8,000
Additional paid-in capital...................................... 33,815,000 33,748,000
Deferred compensation........................................... (307,000) (387,000)
Accumulated deficit............................................. (22,810,000) (16,835,000)
----------- -----------
Total stockholders' equity................................. 10,706,000 16,534,000
----------- -----------
Total liabilities and stockholders' equity................. $13,017,000 $18,398,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-2
<PAGE> 79
GYNECARE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues............................ $ 303,000 $ 218,000 $ 572,000 $ 475,000
Cost of goods sold.................. 409,000 379,000 807,000 700,000
------------ ------------ ------------ ------------
Gross loss........................ (106,000) (161,000) (235,000) (225,000)
------------ ------------ ------------ ------------
Operating expenses:
Research and development.......... 1,085,000 1,343,000 2,287,000 2,504,000
Selling, general and
administrative................. 1,854,000 1,296,000 3,665,000 2,355,000
------------ ------------ ------------ ------------
Total operating expenses....... 2,939,000 2,639,000 5,952,000 4,859,000
------------ ------------ ------------ ------------
Loss from operations................ (3,045,000) (2,800,000) (6,187,000) (5,084,000)
Interest income, net................ 94,000 194,000 212,000 430,000
------------ ------------ ------------ ------------
Net loss............................ $(2,951,000) $(2,606,000) $(5,975,000) $(4,654,000)
============ ============ ============ ============
Net loss per share.................. $ (0.36) $ (0.32) $ (0.72) $ (0.57)
============ ============ ============ ============
Shares used in computing net loss
per share......................... 8,295,000 8,160,000 8,297,000 8,157,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-3
<PAGE> 80
GYNECARE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................... $(5,975,000) $(4,654,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.............................. 221,000 135,000
Amortization of deferred compensation...................... 80,000 94,000
Provision for doubtful accounts............................ 74,000 32,000
Changes in operating assets and liabilities:
Accounts receivable...................................... 12,000 (139,000)
Inventories.............................................. 18,000 170,000
Prepaids and other current assets........................ 75,000 129,000
Accounts payable......................................... 529,000 (526,000)
Accrued expenses......................................... (72,000) 40,000
------------ ------------
Net cash used in operating activities................. (5,038,000) (4,719,000)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment...................... (161,000) (330,000)
Acquisition of patent rights and related technical
information.............................................. -- (400,000)
Purchase of investments.................................... (1,958,000) (20,444,000)
Maturity of investments.................................... 8,869,000 7,535,000
------------ ------------
Net cash provided by/(used in) investing activities... 6,750,000 (13,639,000)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock..................... 3,000 79,000
Proceeds from issuance of Common Stock pursuant to the 1995
Employee Stock Purchase Plan............................. 91,000 --
Repurchase of shares....................................... (27,000) --
Proceeds from issuance of debt............................. 137,000 --
Payments on debt........................................... (147,000) (146,000)
------------ ------------
Net cash provided by/(used in) financing activities... 57,000 (67,000)
------------ ------------
Net increase/(decrease) in cash and cash equivalents............ 1,769,000 (18,425,000)
Cash and cash equivalents at beginning of period................ 3,823,000 22,330,000
------------ ------------
Cash and cash equivalents at end of period...................... $ 5,592,000 $ 3,905,000
============ ============
Supplemental cash flow information:
Interest paid during the period............................ $ 36,000 $ 38,000
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-4
<PAGE> 81
GYNECARE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial
statements have been prepared by Gynecare in accordance with generally accepted
accounting principles for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission. All
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation have been included. The results of operations for the six
month period ended June 30, 1997 are not necessarily indicative of the results
to be expected for any other interim period or for the entire year.
The financial statements should be read in conjunction with the audited
financial statements and notes thereto included in Gynecare's Annual Report on
Form 10-K, for the year ended December 31, 1996, filed with the Securities and
Exchange Commission pursuant to Section 13 of the Securities Exchange Act of
1934.
2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid investments purchased with an original maturity of ninety
days or less are considered to be cash equivalents. Gynecare accounts for
investments under Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS No.
115), whereby investments that are deemed by management to be held-to-maturity
are reported at amortized cost. All investments as of June 30, 1997 are
classified as held-to-maturity and are carried at amortized cost, which
approximates fair market value.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. The components of inventory are:
<TABLE>
<CAPTION>
DECEMBER
JUNE 30, 31,
1997 1996
------------ --------
<S> <C> <C>
Raw materials................................... $230,000 $121,000
Work-in-process................................. 113,000 105,000
Finished goods.................................. 63,000 198,000
-------- --------
$406,000 $424,000
======== ========
</TABLE>
4. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128),
which specifies the computation, presentation and disclosure requirements for
earnings per share. SFAS 128 supersedes Accounting Principles Board Opinion No.
15 and is effective for financial statements issued for periods ending after
December 15, 1997. SFAS 128 requires restatement of all prior-period earnings
per share data presented after the effective date. SFAS 128 will not have a
material impact on Gynecare's financial position, results of operations or cash
flows.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. SFAS 130 is
F-5
<PAGE> 82
GYNECARE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 1997
(UNAUDITED)
effective for fiscal years beginning after December 15, 1997, and
reclassification of financial statements for earlier periods provided for
comparative purposes is required. SFAS 130 is not expected to have a material
impact on Gynecare's financial position, results of operations or cash flows.
In June 1997, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131). SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. SFAS 131 generally supersedes
Statement of Financial Accounting Standards No. 14, "Financial Reporting for
Segments of a Business Enterprise." SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997, and restatement of
comparative information for earlier years is required. However, SFAS 131 is not
required to be applied to interim financial statements in the initial year of
application. SFAS 131 will not have a material impact on Gynecare's financial
position, results of operations or cash flows.
5. LITIGATION
On September 3, 1997, Gynecare was served with a complaint filed by John A.
Aronica, a former shareholder of Origin, in the United States District Court for
the District of Connecticut. The complaint names Gynecare, Eli Lilly & Company,
Inc., Origin and a former officer and a current officer of Origin. The complaint
alleges fraud, breach of the duty of good faith and fair dealing, breach of
fiduciary duties of officers and directors of Origin and fraudulent conveyance
arising from the original formation transactions of Origin and Gynecare and
seeks unspecified damages. Gynecare filed a motion to dismiss the complaint on
October 6, 1997. While Gynecare believes that the complaint is without merit,
the litigation is at an early stage and there can be no assurance that Gynecare
will prevail. The ultimate outcome of this action cannot be presently
determined. Accordingly, no provision for any liability or loss that may result
from adjudication or settlement thereof has been made in the accompanying
financial statements.
F-6
<PAGE> 83
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Gynecare, Inc.
We have audited the accompanying balance sheets of Gynecare, Inc. as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1996 and
1995 and the period from March 8, 1994 (Date of Inception) through December 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gynecare, Inc. as of
December 31, 1996 and 1995, and the results of operations and its cash flows for
the years ended December 31, 1996 and 1995 and the period from March 8, 1994
(Date of Inception) through December 31, 1994, in conformity with generally
accepted accounting principles.
San Jose, California COOPERS & LYBRAND L.L.P
January 22, 1997
F-7
<PAGE> 84
GYNECARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 3,823,000 $22,330,000
Short-term investments................................. 9,248,000 380,000
Accounts receivable, net of allowance for doubtful
accounts of $151,000 and $90,000 at December 31,
1996 and 1995, respectively......................... 457,000 433,000
Inventories............................................ 424,000 1,034,000
Prepaids and other current assets...................... 254,000 344,000
----------------- -----------------
Total current assets................................ 14,206,000 24,521,000
Property and equipment, net.............................. 1,419,000 1,205,000
Prepaid royalties........................................ 1,900,000 1,951,000
Other assets, net........................................ 873,000 594,000
----------------- -----------------
Total assets........................................ $18,398,000 $28,271,000
============= =============
LIABILITIES
Current liabilities:
Accounts payable....................................... $ 481,000 $ 881,000
Amount due to related party............................ -- 60,000
Accrued expenses....................................... 634,000 294,000
Current portion of long-term debt...................... 291,000 270,000
----------------- -----------------
Total current liabilities........................... 1,406,000 1,505,000
Long-term debt, net of current portion................... 458,000 458,000
----------------- -----------------
Total liabilities................................... 1,864,000 1,963,000
----------------- -----------------
Commitments (Notes 6, 7 and 8)
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value
Authorized: 30,000,000 at December 31, 1996 and 1995;
Issued and outstanding: 8,297,000 and 8,154,000 at
December 31, 1996 and 1995, respectively............ 8,000 8,000
Additional paid-in-capital............................... 33,748,000 33,501,000
Deferred compensation.................................... (387,000) (566,000)
Accumulated deficit...................................... (16,835,000) (6,635,000)
----------------- -----------------
Total stockholders' equity.......................... 16,534,000 26,308,000
----------------- -----------------
Total liabilities and stockholders' equity.......... $18,398,000 $28,271,000
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 85
GYNECARE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
MARCH 8, 1994
YEAR ENDED YEAR ENDED (DATE OF INCEPTION)
DECEMBER 31, 1996 DECEMBER 31, 1995 TO DECEMBER 31, 1994
-------------------- ----------------- --------------------
<S> <C> <C> <C>
Revenues............................. $ 962,000 $ 849,000 $ --
Cost of goods sold................... 1,657,000 799,000 --
------------ ----------- -----------
Gross profit/(loss)................ (695,000) 50,000 --
------------ ----------- -----------
Operating expenses:
Research and development........... 5,025,000 2,415,000 1,354,000
Selling, general and
administrative.................. 5,244,000 2,655,000 880,000
------------ ----------- -----------
Total operating expenses........ 10,269,000 5,070,000 2,234,000
------------ ----------- -----------
Loss from operations................. (10,964,000) (5,020,000) (2,234,000)
Interest income, net................. 764,000 454,000 165,000
------------ ----------- -----------
Net loss............................. $(10,200,000) $(4,566,000) $ (2,069,000)
============ =========== ===========
Net loss per share................... $ (1.24) $ (1.87) $ (1.25)
============ =========== ===========
Shares used in computing net loss per
share.............................. 8,209,000 2,438,000 1,658,000
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 86
GYNECARE, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
SERIES C
CONVERTIBLE
SERIES A CONVERTIBLE SERIES B CONVERTIBLE PREFERRED
PREFERRED STOCK PREFERRED STOCK STOCK
---------------------- ---------------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Issuance of Series A Convertible Preferred Stock during March 1994
in exchange for prepaid royalties................................ 3,289,000 $2,000,000 -- -- --
Issuance of Series B Convertible Preferred Stock during March
1994, net of issuance costs of $31,000........................... -- -- 1,579,000 $5,969,000 --
Net loss.......................................................... -- -- -- -- --
---------- ---------- --------- --------- ---------
Balances, December 31, 1994....................................... 3,289,000 2,000,000 1,579,000 5,969,000 --
Issuance of Series C Convertible Preferred Stock during May and
August 1995, net of issuance costs of $31,000.................... -- -- -- -- 1,184,000
Issuance of Common Stock upon exercise of stock options........... -- -- -- -- --
Conversion of Series A, Series B and Series C Convertible
Preferred Stock to Common Stock in initial public offering....... (3,289,000) (2,000,000) (1,579,000) (5,969,000) (1,184,000)
Issuance of Common Stock in initial public offering, net of
issuance costs of $589,000....................................... -- -- -- -- --
Deferred compensation related to grants of stock options.......... -- -- -- -- --
Amortization of deferred compensation............................. -- -- -- -- --
Net loss.......................................................... -- -- -- -- --
---------- ---------- --------- --------- ---------
Balances, December 31, 1995....................................... -- -- -- -- --
Issuance of Common Stock upon exercise of stock options........... -- -- -- -- --
Issuance of Common Stock under Employee Stock Purchase Plan....... -- -- -- -- --
Amortization of deferred compensation............................. -- -- -- -- --
Cancellation of deferred compensation............................. -- -- -- -- --
Repurchase of common stock........................................ -- -- -- -- --
Stock-based compensation expense.................................. -- -- -- -- --
Net loss.......................................................... -- -- -- -- --
---------- ---------- --------- --------- ---------
Balances, December 31, 1996....................................... -- -- -- -- --
========== ========== ========= ========= =========
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN DEFERRED
AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
--------- --------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Issuance of Series A Convertible Preferred Stock during March 1994
in exchange for prepaid royalties................................ -- -- -- -- --
Issuance of Series B Convertible Preferred Stock during March
1994, net of issuance costs of $31,000........................... -- -- -- -- --
Net loss.......................................................... -- -- -- -- --
----------- ---------- ------ ----------- ---------
Balances, December 31, 1994....................................... -- -- -- -- --
Issuance of Series C Convertible Preferred Stock during May and
August 1995, net of issuance costs of $31,000.................... $9,392,000 -- -- -- --
Issuance of Common Stock upon exercise of stock options........... -- 402,000 -- $ 263,000 --
Conversion of Series A, Series B and Series C Convertible
Preferred Stock to Common Stock in initial public offering....... (9,392,000) 6,052,000 $6,000 17,355,000 --
Issuance of Common Stock in initial public offering, net of
issuance costs of $589,000....................................... -- 1,700,000 2,000 15,221,000 --
Deferred compensation related to grants of stock options.......... -- -- -- 662,000 $ (662,000)
Amortization of deferred compensation............................. -- -- -- -- 96,000
Net loss.......................................................... -- -- -- -- --
----------- ---------- ------ ----------- ---------
Balances, December 31, 1995....................................... -- 8,154,000 8,000 33,501,000 (566,000)
Issuance of Common Stock upon exercise of stock options........... -- 137,000 -- 54,000 --
Issuance of Common Stock under Employee Stock Purchase Plan....... -- 27,000 -- 162,000 --
Amortization of deferred compensation............................. -- -- -- -- 162,000
Cancellation of deferred compensation............................. -- -- -- (17,000) 17,000
Repurchase of common stock........................................ -- (21,000) -- (8,000) --
Stock-based compensation expense.................................. -- -- -- 56,000 --
Net loss.......................................................... -- -- -- -- --
----------- ---------- ------ ----------- ---------
Balances, December 31, 1996....................................... -- 8,297,000 $8,000 $33,748,000 $ (387,000)
=========== ========== ====== =========== =========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- ----------
<S> <C> <C>
Issuance of Series A Convertible Preferred Stock during March 1994
in exchange for prepaid royalties................................ -- $2,000,000
Issuance of Series B Convertible Preferred Stock during March
1994, net of issuance costs of $31,000........................... -- 5,969,000
Net loss.......................................................... $(2,069,000) (2,069,000)
------------ -----------
Balances, December 31, 1994....................................... (2,069,000) 5,900,000
Issuance of Series C Convertible Preferred Stock during May and
August 1995, net of issuance costs of $31,000.................... -- 9,392,000
Issuance of Common Stock upon exercise of stock options........... -- 263,000
Conversion of Series A, Series B and Series C Convertible
Preferred Stock to Common Stock in initial public offering....... -- --
Issuance of Common Stock in initial public offering, net of
issuance costs of $589,000....................................... -- 15,223,000
Deferred compensation related to grants of stock options.......... -- --
Amortization of deferred compensation............................. -- 96,000
Net loss.......................................................... (4,566,000) (4,566,000)
------------ -----------
Balances, December 31, 1995....................................... (6,635,000) 26,308,000
Issuance of Common Stock upon exercise of stock options........... -- 54,000
Issuance of Common Stock under Employee Stock Purchase Plan....... -- 162,000
Amortization of deferred compensation............................. -- 162,000
Cancellation of deferred compensation............................. -- --
Repurchase of common stock........................................ -- (8,000)
Stock-based compensation expense.................................. -- 56,000
Net loss.......................................................... (10,200,000) (10,200,000)
------------ -----------
Balances, December 31, 1996....................................... $(16,835,000) $16,534,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 87
GYNECARE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
YEAR ENDED DECEMBER 31, MARCH 8, 1994
------------------------ (DATE OF INCEPTION)
1996 1995 TO DECEMBER 31, 1994
----------- ---------- --------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................ $(10,200,000) $(4,566,000) $(2,069,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 466,000 182,000 19,000
Amortization of deferred compensation................... 162,000 96,000 --
Compensation expense for issuance of stock options to
outside consultants................................... 56,000 -- --
Provision for doubtful accounts......................... 61,000 90,000 --
Changes in operating assets and liabilities:
Accounts receivable................................... (85,000) (523,000) --
Inventories........................................... 559,000 (974,000) (60,000)
Prepaids and other current assets..................... 90,000 (34,000) (77,000)
Other assets.......................................... 17,000 (649,000) (6,000)
Accounts payable...................................... (460,000) 641,000 300,000
Accrued expenses...................................... 340,000 (1,000) 294,000
----------- ---------- --------------------
Net cash used in operating activities............... (8,994,000) (5,738,000) (1,599,000)
----------- ---------- --------------------
Cash flows from investing activities:
Acquisition of property and equipment................... (474,000) (1,219,000) (64,000)
Acquisition of patent rights and related technical
information........................................... -- (45,000) (200,000)
Deposit on OEM supply agreement......................... (400,000) -- --
Purchases of short-term investments..................... (20,575,000) (380,000) --
Maturities of short-term investments.................... 11,707,000 -- --
----------- ---------- --------------------
Net cash used in investing activities................. (9,742,000) (1,644,000) (264,000)
----------- ---------- --------------------
Cash flows from financing activities:
Proceeds from issuance of Preferred Stock, net of
issuance costs........................................ -- 9,392,000 5,969,000
Proceeds from issuance of Common Stock in initial public
offering, net of issuance costs....................... -- 15,223,000 --
Proceeds from issuance of Common Stock upon exercise of
stock options and pursuant to the 1995
Employee Stock Purchase Plan............................ 216,000 263,000 --
Repurchase of unvested shares upon employee
termination........................................... (8,000) -- --
Proceeds from issuance of debt.......................... 312,000 728,000 --
Payments on debt........................................ (291,000) -- --
----------- ---------- --------------------
Net cash provided by financing activities............. 229,000 25,606,000 5,969,000
----------- ---------- --------------------
Increase (decrease) in cash and cash equivalents.......... (18,507,000) 18,224,000 4,106,000
Cash and cash equivalents at beginning of period.......... 22,330,000 4,106,000 --
----------- ---------- --------------------
Cash and cash equivalents at end of period................ $ 3,823,000 $22,330,000 $4,106,000
============= ============ ===================
Supplemental cash flow information:
Issuance of Preferred Stock in exchange for assignment
of prepaid royalties.................................. -- -- $2,000,000
============= ============ ===================
Interest paid during the period......................... $ 75,000 $ 26,000 --
============= ============ ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE> 88
GYNECARE, INC.
NOTES TO FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY:
Gynecare, Inc. ("Gynecare" or the "Company") was incorporated in California
and commenced business operations on March 8, 1994. The Company designs,
develops, manufactures and markets minimally invasive medical devices for the
treatment of uterine disorders. Gynecare's first product, the ThermaChoice
Uterine Balloon Therapy system, is used to treat women experiencing
dysfunctional uterine bleeding, ("menorrhagia"). The Company began shipping this
product to customers in March 1995, at which time it emerged from the
development stage. Gynecare's second product, the VersaPoint Bipolar
Electrosurgery system for the removal of fibroids growing within the uterus, was
cleared for marketing in the United States in November 1996. The Company plans
to begin marketing the VersaPoint system in the United States in 1997.
The Company's disposable balloon catheter is currently manufactured
in-house at the Company's facility in Menlo Park, California. Although most of
the components of the disposable balloon catheter are available from more than
one vendor, certain of the components used in manufacturing the disposable
balloon catheter have relatively few alternative sources of supply and
establishing additional or replacement suppliers for such components cannot be
accomplished quickly.
Effective November 20, 1995, the Company was reincorporated in Delaware and
each share of each class and series of stock of the predecessor Company was
exchanged for one share of each identical class and series of stock of the
Delaware successor Company having a par value of $0.001 per share for both
Common Stock and Preferred Stock.
Effective November 22, 1995, the Company completed an initial public
offering of 1,700,000 shares of Common Stock at a price of $10.00 per share,
raising net proceeds of $15,223,000. Each share of the Company's outstanding
Convertible Preferred Stock was converted to a share of Common Stock during the
initial public offering.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
STOCK SPLIT:
On October 6, 1995, in connection with the Company's initial public
offering, the Company effected a 1-for-1.9 reverse Common Stock split and a
corresponding change in the Preferred Stock conversion ratios. All Common Stock
data in the accompanying financial statements has been retroactively adjusted to
reflect the reverse stock split.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
All highly liquid investments purchased with an original maturity of ninety
days or less are considered to be cash equivalents. The Company accounts for
investments under Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS No.
115), whereby investments that are deemed by management to be held-to-maturity
are reported at amortized cost. All investments as of December 31, 1996, which
consist entirely of U.S. Treasury notes, are classified as held-to-maturity and
are carried at amortized cost, which approximates fair market value.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments
including cash, cash equivalents, accounts receivable, accounts payable and
other accrued liabilities approximate fair value due to their short maturities.
Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of debt obligations approximates fair value.
F-12
<PAGE> 89
GYNECARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents and
short-term investments and operations in one industry segment. Substantially all
cash, cash equivalents and short-term investments are maintained with one
financial institution in the United States. Deposits in this bank may exceed the
amount of insurance provided on such deposits. Generally, these investments may
be redeemed upon demand and, therefore, bear minimal risk. The Company has not
experienced any losses on its deposits of cash and cash equivalents.
The Company has no operations outside of the United States and operates in
one industry segment. Two customers accounted for approximately 14% and 13% of
sales and three customers each accounted for 10% of sales in 1996. Four
customers accounted for 12%, 11%, 11% and 10% of sales in 1995. The Company
currently markets and sells all of its product internationally to distributors
in 22 countries. The Company performs ongoing credit evaluations of its
customers and provides an allowance for expected losses, but has not experienced
significant losses to date.
PREPAID ROYALTIES:
Prepaid royalties are generally expensed as a percentage of the related net
licensed product sales as determined by specific calculations included in the
royalty agreement.
INVENTORY:
Inventory is valued at the lower of cost (determined on a first in, first
out basis) or market.
PROPERTY AND EQUIPMENT:
Property and equipment is recorded at cost and is depreciated on a
straight-line basis over estimated lives of 18 to 60 months. Amortization of
leasehold improvements is computed using the shorter of the remaining term of
the Company's facilities lease or the estimated useful lives of the
improvements. Maintenance and repairs are charged to operations as incurred.
REVENUE RECOGNITION:
Revenue is generally recognized upon shipment of product to the customer,
net of allowances for discounts and estimated returns which are also provided at
the time of shipment.
NET LOSS PER SHARE:
Net loss per share is computed using the weighted average number of shares
of Common Stock outstanding during the year. Common equivalent shares include
Common Stock issuable upon conversion of the Company's Series A, B and C
Convertible Preferred Stock using the as-if-converted method and the exercise of
stock options using the treasury stock method unless anti-dilutive. Pursuant to
the requirements of the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common and common equivalent shares issued at prices below the
public offering price during the twelve months immediately preceding the initial
filing date have been included in the calculation as if they were outstanding
for all periods prior to the initial filing date (using the treasury stock
method and the anticipated initial public offering price).
INCOME TAXES:
Income taxes are accounted for under the asset and liability method of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial
F-13
<PAGE> 90
GYNECARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS:
Certain reclassifications have been made to the 1995 financial statements
to conform to the December 31, 1996 presentation. Such reclassifications had no
effect on the results of operations or accumulated deficit.
3. INVENTORIES:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Inventories comprise:
Raw materials.................................................. $ 121,000 $ 194,000
Work-in-process................................................ 105,000 462,000
Finished goods................................................. 198,000 378,000
---------- ----------
$ 424,000 $1,034,000
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Property and equipment comprise:
Furniture, fixtures and office equipment....................... $ 632,000 $ 295,000
Computer equipment............................................. 415,000 335,000
Production equipment........................................... 140,000 105,000
Leasehold improvements......................................... 640,000 547,000
---------- ----------
1,827,000 1,282,000
Less accumulated depreciation.................................. (408,000) (77,000)
---------- ----------
$1,419,000 $1,205,000
========== ==========
</TABLE>
F-14
<PAGE> 91
GYNECARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Accrued expenses comprise:
Accrued payroll and related benefits................... $ 96,000 $ 132,000
Accrued legal fees..................................... 47,000 97,000
Accrued royalties...................................... 175,000 --
Deferred insurance..................................... 165,000 --
Other accrued expenses................................. 151,000 65,000
-------- --------
$ 634,000 $ 294,000
======== ========
</TABLE>
6. NOTES PAYABLE:
In July 1995, the Company obtained a $750,000 secured credit facility under
a note payable. At December 31, 1996, the Company had borrowings outstanding of
$437,000 under this facility. Borrowings bear interest at the bank's prime rate
plus 1.5% per annum (9.75% at December 31, 1996).
In December 1996, the Company obtained another secured credit facility
under a $600,000 note payable. At December 31, 1996, borrowings outstanding
under this facility total $312,000 and bear interest at the bank's prime rate
plus 1.25% per annum (9.5% at December 31, 1996). The amount of unused line of
credit of $288,000 is available for drawdowns through December 1997.
Borrowings under both credit facilities are collateralized by all of the
Company's equipment and fixtures and are required to be repaid in monthly
installments over 30 months. The facilities require the Company to maintain
certain financial ratios and covenants including maintenance of minimum working
capital, limitations on changes in capital structure and the restriction of
dividend payments. At December 31, 1996, the Company was in compliance with all
covenants.
At December 31, 1996, principal payments due under both facilities are as
follows:
<TABLE>
<S> <C>
FISCAL YEAR:
1997............................................. $291,000
1998............................................. 235,000
1999............................................. 89,000
2000............................................. 89,000
2001............................................. 45,000
--------
Total payments.............................. $749,000
========
</TABLE>
7. ROYALTY AND LICENSE FEE COMMITMENTS:
On March 8, 1994, 3,289,000 shares of the Company's Series A Preferred
Stock were issued to Origin Medsystems, Inc. ("Origin"), a subsidiary of Guidant
Corporation ("Guidant"). In exchange for these shares, Origin assigned rights to
a license agreement relating to the ThermaChoice Uterine Balloon Therapy system,
assigned rights to prepaid royalties of $2,000,000 and contributed certain
assets which were assigned no value. As part of the agreement, Gynecare also
assumed approximately $285,000 in purchase order commitments which were paid in
full by December 31, 1994.
Under the license agreement acquired from Origin, the Company will be
required to pay a royalty percentage of net sales for all licensed products to
the original inventors of the technology. Royalties are payable each year for
the ten years following written FDA approval with respect to certain products.
With
F-15
<PAGE> 92
GYNECARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
respect to other products, royalties are payable until certain rights expire.
Royalties are calculated based on a formula defined in the license agreement,
subject to minimum amounts and are first applied to the prepaid royalties of
$2,000,000. At December 31, 1996, approximately $100,000 has been applied
against the prepaid royalty. Minimum royalties of $100,000 and $150,000 are
required in January 1997 and 1998, respectively, and $200,000 is required each
January thereafter. Additional royalty payments will not be due and payable
until aggregate royalty payments exceed $2,000,000. The agreement will remain in
effect in perpetuity unless the Company defaults on its obligations or provides
the original inventors with a notice of termination.
In December 1994, the Company entered into a license agreement with an
unrelated party to acquire certain patent rights and related technical
information. The agreement requires the Company to pay license fees of up to
$500,000 and a royalty on all sales of products containing patented technology.
An initial payment of $200,000 was made upon signing of the agreement. An
additional $175,000 was paid in January 1997. The balance will be due only upon
successful completion of several milestones as defined in the agreement. All
payments made to-date constitute prepayment of royalties under the agreement.
Additionally, in July 1995, the Company entered into an exclusive
royalty-free license for certain pending patent applications and a supply and
development agreement. The agreement requires the Company to make a
non-refundable purchase deposit of approximately $400,000 payable in
installments upon the completion of certain milestones. The Company paid all of
the non-refundable purchase deposit in 1995. The agreement also requires the
Company to purchase quantities of products based upon a rolling forecast.
In October 1995, the Company entered into an agreement with Origin to
acquire all rights, title and interest in a related U.S. patent. The agreement
requires the Company to pay a royalty on all sales of products containing the
patented technology. An initial payment of $45,000 was made upon signing of the
agreement.
In March 1996, the Company entered into an agreement to extend the license
acquired in July 1995, to include the field of laparoscopy. The agreement
required the Company to make a non-refundable purchase deposit of $400,000 in
March 1996. Additional deposits of up to an aggregate of $600,000 will be due
over the next 12 to 24 months.
8. COMMITMENTS:
LEASE COMMITMENT:
The Company leases its facilities under an operating lease with a
seven-year term. Under the terms of the lease, the Company is also responsible
for taxes, insurance and utilities and must maintain a letter of credit for
$380,000, which is collateralized by a certificate of deposit. The Company has
an option to extend the lease for an additional three-year term.
The minimum future annual rental payments as of December 31, 1996 under the
lease are as follows:
<TABLE>
<S> <C>
FISCAL YEAR:
1997............................................ $ 241,000
1998............................................ 246,000
1999............................................ 252,000
2000............................................ 258,000
2001............................................ 264,000
Thereafter...................................... 224,000
---------
Total minimum lease payments............... $1,485,000
=========
</TABLE>
F-16
<PAGE> 93
GYNECARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Rent expense was $242,000, $139,000 and $17,000 for the years ended
December 31, 1996 and 1995, and for the period from March 8, 1994 (Date of
Inception) to December 31, 1994, respectively.
9. STOCKHOLDERS' EQUITY:
FIXED STOCK OPTION PLANS
The Company has two fixed option plans. Under the 1994 Stock Plan (the
Plan), the Company may grant both incentive stock options ("ISOs") and
nonqualified stock options ("NSOs") to employees and consultants. All NSOs allow
for the purchase of Common Stock at prices not less than 85% of the fair market
value as determined by the Board of Directors on the date of grant. ISOs allow
for the purchase of Common Stock at prices not less than 100% of the fair market
value as determined by the Board of Directors on the date of grant. If, at the
time the Company grants an option, the optionee owns more than 10% of the total
combined voting power of all the classes of stock of the Company, the option
price shall be at least 110% of the fair value and the term of the option shall
be five years from the date of grant. All options granted before December 1995
are exercisable immediately. During December 1995, the Company amended its
option agreement such that only vested options are exercisable. All options must
be exercised within ten years from the date of grant. Options vest as determined
by the Board of Directors, generally over four years. In the event options are
exercised prior to vesting upon termination of service, the Company has the
right to repurchase the unvested shares of Common Stock at the original issuance
price. Shares are released from this repurchase restriction over periods
consistent with the original options' vesting period. At December 31, 1996,
181,446 shares were subject to repurchase.
Under the 1995 Director Option Plan (the Director Plan), the Company
automatically grants to non-employee directors non-statutory stock options to
purchase Common Stock at the fair market value on the date of grant, which is
the first business day of January each fiscal year except for the first grant to
any newly elected director. Each current director receives an option for 2,500
shares annually. Each newly elected director receives an initial option on the
date of his or her appointment or election for 10,000 shares. The initial grant
will vest on a cumulative monthly basis over a three-year period, and each
subsequent grant will vest on a cumulative monthly basis over one year. The
options expire ten years after the date of grant.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1995:
<TABLE>
<S> <C>
Risk-free Interest Rates................................ 6.20%
Expected Life........................................... 2.42 years
Volatility.............................................. 51.8%
Dividend Yield.......................................... --
</TABLE>
F-17
<PAGE> 94
GYNECARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of the Company's two fixed stock option plans as of
December 31, 1996, 1995 and 1994 and changes during the periods ending on those
dates are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------- --------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- -------------------- -------- ---------------- -------- ---------------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year.............. 415,032 $0.821 373,953 $0.380 -- --
Granted............. 183,700 $7.786 444,395 $1.044 373,953 $0.380
Exercised........... (137,210) $0.394 (402,000) $1.069 -- --
Forfeited........... (102,144) $1.210 (1,316) $0.380 -- --
-------- ----- ------- ----- ------- -----
Outstanding at end
of year........... 359,378 $4.435 415,032 $0.821 373,953 $0.380
Options exercisable
at year-end....... 200,646 $2.318 401,954 $0.610 373,953 $0.380
Weighted-average
fair value of
options granted
during the year... $ 2.877 $ 0.379
Shares available for
grant............. 285,623 367,179 152,363
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- --------------------------------------
NUMBER WEIGHTED AVERAGE NUMBER
RANGE OF OUTSTANDING AT REMAINING WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
EXERCISE PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE
- ---------------- ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.380 --
$ 1.900 173,264 8.28 years $0.891 173,264 $0.891
$5.375 --
$ 7.375 99,614 9.70 years $6.018 13,113 $6.012
$8.500 --
$10.125 86,500 9.22 years $9.709 28,677 $9.250
---------------- ------- ------- --- ----- -------
$0.380 --
$10.125 359,378 8.90 years $4.435 215,054 $2.318
</TABLE>
Through December 31, 1995, stock options were issued to certain employees
and consultants at prices below fair market value. Deferred compensation,
representing the difference between the exercise price and fair market value of
the Company's Common Stock at the date of grant of the stock options, totaled
$662,000 at December 31, 1995 and was recorded as deferred compensation and a
component of stockholders' equity. Of this amount, $162,000 and $96,000 has been
amortized and recognized as expense during fiscal 1996 and 1995, respectively.
The remaining amount of $387,000 will be amortized as the shares and options
vest, generally over a four-year period.
1995 EMPLOYEE STOCK PURCHASE PLAN:
The Company has authorized 150,000 shares of Common Stock for issuance
under the 1995 Employee Stock Purchase Plan (the Purchase Plan). Qualified
employees may elect to have a certain percentage (not to exceed 15%) of their
salary withheld pursuant to the Purchase Plan. The salary withheld is then used
to purchase shares of the Company's Common Stock at a price equal to 85% of the
market value of the stock at the beginning or ending of a six-month offering
period, whichever is lower. Under this plan, 27,000 shares were issued during
fiscal 1996, representing approximately $162,000 in employee contributions.
F-18
<PAGE> 95
GYNECARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Fair value for the purchase rights issued under the Company's Employee
Stock Purchase Plan is determined under the Black-Scholes valuation model using
the following assumptions for 1996:
<TABLE>
<S> <C>
Risk-free Interest Rates................................ 5.46%
Expected Life........................................... 6 months
Volatility.............................................. 51.8%
Dividend Yield.......................................... --
</TABLE>
The weighted average fair value of those purchase rights granted in 1996
was $2.036.
The Company has adopted the disclosure only provisions of the Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation." Accordingly, no compensation cost has been recognized for the
Company's Stock Plans. Had compensation cost for the Stock Plans been determined
based on the fair value at the grant date for awards in 1996 and 1995,
consistent with the provisions of SFAS No. 123, the Company's net loss and net
loss per share for the years ended December 31, 1996 and 1995 would have
increased as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Net loss-as reported..................... $10,200,000 $4,566,000
---------- -----------
Net loss-pro forma....................... $10,392,000 $4,577,000
---------- -----------
Net loss per share-as reported........... $ 1.24 $ 1.87
---------- -----------
Net loss per share-pro forma............. $ 1.27 $ 1.88
---------- -----------
</TABLE>
At December 31, 1996, the Company has reserved the following shares of
authorized but unissued Common Stock:
<TABLE>
<S> <C>
1994 Stock Plan........................................... 645,001
1995 Employee Stock Purchase Plan......................... 123,427
1995 Director Option Plan................................. 100,000
------
868,428
======
</TABLE>
The above pro forma effects on income may not be representative of the
effects on net income for future years as option grants typically vest over
several years and additional options are generally granted each year.
11. EMPLOYEE BENEFIT PLAN:
During 1994, the Company established a Retirement Savings and Investment
Plan (the Plan) under which employees may defer a portion of their salary up to
the maximum allowed under IRS rules. The Company has the discretion to make
contributions to the Plan. To date, no Company contributions have been made to
the Plan.
12. INCOME TAXES:
At December 31, 1996 and 1995, the Company had federal and state net
operating loss carryforwards of approximately $14,930,000 and $4,694,000,
respectively, available to offset future regular and alternative minimum taxable
income. The Company's federal and state net operating loss carryforwards begin
to expire in 2009 and 2002, respectively, if not utilized. The Company's
research and development tax credit carryforwards begin to expire in 2009 if not
utilized.
F-19
<PAGE> 96
GYNECARE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. In the event the Company has had a change in ownership,
utilization of the carryforwards could be restricted.
The tax effects of temporary differences which give rise to deferred tax
assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Capitalized start-up costs.............. $ 339,000 $ 843,000
Research and development credit......... 223,000 98,000
Net operating loss carryforwards........ 5,993,000 1,884,000
Allowances and reserves................. 196,000 88,000
Purchased technology.................... 87,000 83,000
Other................................... 43,000 159,000
------------ ------------
Total deferred tax assets............... 6,881,000 3,155,000
Less valuation allowance................ (6,881,000) (3,155,000)
------------ ------------
Net deferred tax asset.................. $ -- $ --
============ ============
</TABLE>
13. RELATED PARTY TRANSACTIONS:
During the period from March 8, 1994 (Date of Inception) through December
31, 1994, the Company, acting with the approval of the Board of Directors,
entered into a management services agreement with Origin. Under this agreement,
management and administrative services and office and research and development
space were provided by Origin. For the years ended December 31, 1996 and 1995
and the period from March 8, 1994 (Date of Inception) to December 31, 1994, the
Company remitted approximately $76,000, $1,089,000 and $1,122,000, respectively,
to Origin. The balance owed by the Company to Origin at December 31, 1996, 1995
and 1994 was none, $60,000 and $245,000, respectively. On January 1, 1995,
Origin and Gynecare entered together into a Supply Agreement under which Origin
manufactured the Company's disposable balloon catheter. For the year ended
December 31, 1995, the Company paid Origin approximately $410,000 for the
product supplied under the agreement. This agreement was terminated in December
1995 as the Company began manufacturing its disposable balloon catheter in its
new facility. In addition, in June 1995 the Company and Origin Canada entered
into an agreement whereby Origin Canada obtained exclusive rights to market
Gynecare's products in Canada. Sales under this agreement for the years ended
December 31, 1996 and 1995 were $119,000 and $90,000, respectively, with a
corresponding related party receivable of $39,000 and $7,000 included in
accounts receivable at December 31, 1996 and 1995, respectively.
F-20
<PAGE> 97
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Origin Medsystems, Inc.
We have audited the accompanying balance sheet of the Uterine Balloon
Therapy Business Operations of Origin Medsystems, Inc. as of December 31, 1993
and the related statements of operations, and cash flows for the period from
January 1, 1994 to March 7, 1994 and for the year ended December 31, 1993. These
financial statements are the responsibility of the management of the Uterine
Balloon Therapy Business Operations of Origin Medsystems, Inc. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
Certain costs and expenses presented in the financial statements represent
allocations and management's estimates of the cost of services provided to the
Uterine Balloon Therapy Business Operations of Origin Medsystems, Inc. As a
result, the financial statements presented may not be indicative of the
financial position or results of operations that would have been achieved had
the Uterine Balloon Therapy Business Operations of Origin Medsystems, Inc.
operated as non-affiliated entity.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Uterine Balloon Therapy
Business Operations of Origin Medsystems, Inc. as of December 31, 1993 and the
results of its operations and its cash flows for the period from January 1, 1994
to March 7, 1994 and for the year ended December 31, 1993, in conformity with
generally accepted accounting principles.
San Jose, California COOPERS & LYBRAND L.L.P.
November 9, 1995
F-21
<PAGE> 98
UTERINE BALLOON THERAPY BUSINESS OPERATIONS
OF ORIGIN MEDSYSTEMS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1993
------------
<S> <C>
ASSETS
Prepaid royalties............................................................... $2,000,000
----------
Total assets............................................................... $2,000,000
==========
LIABILITIES AND NET INVESTMENT
Accounts payable................................................................ $ 89,000
----------
Total current liabilities.................................................. 89,000
----------
Origin's net investment in the Uterine Balloon Therapy Business Operations...... 1,911,000
----------
Total liabilities and net investment....................................... $2,000,000
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 99
UTERINE BALLOON THERAPY BUSINESS OPERATIONS
OF ORIGIN MEDSYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE YEAR
JANUARY 1, 1994 ENDED
TO MARCH 7, 1994 DECEMBER 31, 1993
------------------- -----------------
<S> <C> <C>
Operating Expenses:
Research and development............................... $ 122,000 $ 883,000
Selling, general and administrative.................... 7,000 97,000
------- -------
Total operating expenses............................ 129,000 980,000
Loss from operations..................................... (129,000) (980,000)
------- -------
Net loss................................................. $(129,000) $(980,000)
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 100
UTERINE BALLOON THERAPY BUSINESS OPERATIONS
OF ORIGIN MEDSYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE YEAR
JANUARY 1, 1994 ENDED
TO MARCH 7, 1994 DECEMBER 31, 1993
------------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (129,000) $ (980,000)
Changes in operating assets and liabilities:
Prepaid royalties..................................... -- (2,000,000)
Accounts payable...................................... (81,000) 89,000
Accrued expenses...................................... 1,000 --
------------------- -----------------
Net cash used in operating activities............... (209,000) (2,891,000)
------------------- -----------------
Cash flows from financing activities:
Origin's investment in the Uterine Balloon Therapy
Business Operations................................... 209,000 2,891,000
------------------- -----------------
Net cash provided by financing activities........... 209,000 2,891,000
------------------- -----------------
Net increase (decrease) in cash and cash equivalents....... -- --
Cash and cash equivalents at beginning of period........... -- --
Cash and cash equivalents at end of period................. -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 101
UTERINE BALLOON THERAPY BUSINESS OPERATIONS OF
ORIGIN MEDSYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY:
Origin Medsystems, Inc. ("Origin") competes in the market defined by a
broad range of disposal surgical devices and equipment used in a multitude of
applications in minimally invasive surgery. The Uterine Balloon Therapy system
is used to treat women experiencing excessive uterine bleeding.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The financial statements of the Uterine Balloon Therapy Business Operations
of Origin Medsystems, Inc. (the "Business") include all necessary personnel
costs and pro rata allocations of overhead from Origin to the Business on a
basis which management believes represents a reasonable allocation of such
costs. These charges, along with amounts expended in transactions related to the
royalty and license fee agreement (See Note 3), comprise Origin's net investment
in the Business.
INCOME TAXES
The Business' operations have historically been included in the
consolidated income tax returns filed by Eli Lilly and Company. Income taxes in
the accompanying financial statements have been computed based on the stand
alone operations of the Business as if such operations had filed separate income
tax returns. Any net operating loss carryforwards generated from the Business
would not be available for use by the Business for federal or state income tax
purposes.
PREPAID ROYALTIES
Prepaid royalties are generally expensed as a percentage of the related net
licensed product sales as determined by specific calculations included in the
royalty agreement.
3. ROYALTY AND LICENSE FEE COMMITMENTS:
In January 1993, Origin entered into a license agreement with the original
inventors of the Uterine Balloon Therapy system. Under the license agreement,
which was assigned to Gynecare on March 8, 1994, Origin was required to pay a
royalty percentage of net sales for all licensed products. Royalties were
payable each year for the ten years following written FDA approval with respect
to certain products. With respect to other products, royalties were payable
until certain rights expire. Royalties were calculated based on a formula
defined in the license agreement, subject to minimum amounts, and were first
applied to the prepaid royalties of $2,000,000. Minimum royalties of $50,000,
$100,000 and $150,000 were required in January 1996, 1997, and 1998,
respectively, and $200,000 was required each January thereafter. Additional
royalty payments were not due and payable until aggregate royalty payments
exceed $2,000,000. The agreement was to remain in effect in perpetuity unless
Origin defaults on its obligations or provides the original inventors with a
notice of termination.
4. SALE OF TECHNOLOGY:
On March 8, 1994, Origin received 3,289,000 shares of Series A Preferred
Stock from Gynecare in exchange for all rights and patents and confidential
information relating to the Business. Additionally, Origin assigned to Gynecare
certain prepaid royalties that were paid to the original inventors of the
Uterine Balloon Therapy system.
F-25
<PAGE> 102
ANNEX I
================================================================================
AGREEMENT AND PLAN OF MERGER
DATED AS OF AUGUST 4, 1997
AMONG
JOHNSON & JOHNSON,
LIMA MERGER CORP.
AND
GYNECARE, INC.
================================================================================
<PAGE> 103
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I
THE MERGER
SECTION 1.01. The Merger............................................................. 1
SECTION 1.02. Closing................................................................ 1
SECTION 1.03. Effective Time......................................................... 1
SECTION 1.04. Effects of the Merger.................................................. 2
SECTION 1.05. Certificate of Incorporation and By-Laws............................... 2
SECTION 1.06. Directors.............................................................. 2
SECTION 1.07. Officers............................................................... 2
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS;
EXCHANGE OF CERTIFICATES
SECTION 2.01. Effect on Capital Stock................................................ 2
SECTION 2.02. Exchange of Certificates............................................... 3
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01. Representations and Warranties of the Company.......................... 5
SECTION 3.02. Representations and Warranties of Parent and Sub....................... 12
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 4.01. Conduct of Business.................................................... 14
SECTION 4.02. No Solicitation........................................................ 16
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.01. Preparation of the Form S-4 and the Proxy Statement; Stockholders 17
Meeting................................................................
SECTION 5.02. Letters of the Company's Accountants................................... 17
SECTION 5.03. Letters of Parent's Accountants........................................ 17
SECTION 5.04. Access to Information; Confidentiality................................. 18
SECTION 5.05. Reasonable Efforts; Notification....................................... 18
SECTION 5.06. Stock Options.......................................................... 19
SECTION 5.07. Indemnification........................................................ 20
SECTION 5.08. Fees and Expenses...................................................... 20
SECTION 5.09. Public Announcements................................................... 20
SECTION 5.10. Affiliates............................................................. 20
SECTION 5.11. Stock Exchange Listing................................................. 21
SECTION 5.12. Pooling of Interests................................................... 21
SECTION 5.13. Stockholder Agreement Legend........................................... 21
SECTION 5.14. Tax Treatment.......................................................... 21
</TABLE>
i
<PAGE> 104
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 5.15. Five Million Dollar Credit Facility.................................... 21
SECTION 5.16.. One Million Dollar Credit Facility..................................... 21
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.01. Conditions to Each Party's Obligation To Effect the Merger............. 22
SECTION 6.02. Conditions to Obligations of Parent and Sub............................ 22
SECTION 6.03 Conditions to Obligation of the Company................................ 23
SECTION 6.04. Frustration of Closing Conditions...................................... 23
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.01. Termination............................................................ 24
SECTION 7.02. Effect of Termination.................................................. 24
SECTION 7.03. Amendment.............................................................. 25
SECTION 7.04. Extension; Waiver...................................................... 25
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.01. Nonsurvival of Representations and Warranties.......................... 25
SECTION 8.02. Notices................................................................ 25
SECTION 8.03. Definitions............................................................ 26
SECTION 8.04. Interpretation......................................................... 26
SECTION 8.05. Counterparts........................................................... 27
SECTION 8.06. Entire Agreement; No Third-Party Beneficiaries......................... 27
SECTION 8.07. Governing Law.......................................................... 27
SECTION 8.08. Assignment............................................................. 27
SECTION 8.09. Enforcement............................................................ 27
SECTION 8.10. Severability........................................................... 27
Exhibit A Form of Company Affiliate Letter
Exhibit B Five Million Dollar Credit Facility
Exhibit C Principal Stockholders
</TABLE>
ii
<PAGE> 105
AGREEMENT AND PLAN OF MERGER dated as of August 4, 1997, among JOHNSON
& JOHNSON, a New Jersey corporation ("Parent"), LIMA MERGER CORP., a
Delaware corporation and a wholly owned subsidiary of Parent ("Sub"), and
GYNECARE, INC., a Delaware corporation (the "Company").
WHEREAS the respective Boards of Directors of Parent, Sub and the Company,
and Parent, acting as the sole stockholder of Sub, have approved the merger of
Sub with and into the Company (the "Merger"), upon the terms and subject to the
conditions set forth in this Agreement, whereby each issued and outstanding
share of common stock, par value $.001 per share, of the Company ("Company
Common Stock"), other than Company Common Stock owned by Parent, Sub or the
Company, will be converted into the right to receive common stock, par value
$1.00 per share, of Parent ("Parent Common Stock");
WHEREAS, substantially concurrently herewith and as a condition and
inducement to Parent's willingness to enter into this Agreement, Parent and
certain affiliate stockholders (the "Principal Stockholders") of the Company set
forth in Exhibit C hereto have entered into a Stockholder Agreement (the
"Stockholder Agreement");
WHEREAS Parent, Sub and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the Merger;
WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for financial accounting purposes, it is intended that the Merger
will be accounted for as a pooling of interests transaction.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties hereto agree
as follows:
ARTICLE I
THE MERGER
SECTION 1.01. The Merger. Upon the terms and subject to the conditions
set forth in this Agreement, and in accordance with the Delaware General
Corporation Law (the "DGCL"), Sub shall be merged with and into the Company at
the Effective Time (as defined in Section 1.03). Following the Merger, the
separate corporate existence of Sub shall cease and the Company shall continue
as the surviving corporation (the "Surviving Corporation") and shall succeed to
and assume all the rights and obligations of Sub in accordance with the DGCL. At
the election of Parent, any direct or indirect wholly owned subsidiary (as
defined in Section 8.03) of Parent may be substituted for Sub as a constituent
corporation in the Merger. In such event, the parties hereto agree to execute an
appropriate amendment to this Agreement in order to reflect such substitution.
SECTION 1.02. Closing. The closing of the Merger (the "Closing") will
take place at 10:00 a.m. on a date to be specified by the parties, which shall
be no later than the second business day after satisfaction or waiver of the
conditions set forth in Article VI (the "Closing Date"), at the offices of
Cravath, Swaine & Moore, Worldwide Plaza, 825 Eighth Avenue, New York, N.Y.
10019, unless another date or place is agreed to in writing by the parties
hereto.
SECTION 1.03. Effective Time. Subject to the provisions of this
Agreement, as soon as practicable on or after the Closing Date, the parties
shall file a certificate of merger or other appropriate documents (in any such
case, the "Certificate of Merger") executed in accordance with the relevant
provisions of the DGCL and shall make all other filings or recordings required
under the DGCL. The Merger shall become effective at such time as the
Certificate of Merger is duly filed with the Delaware Secretary of State, or at
such other time as Parent and the Company shall agree should be specified in the
Certificate of Merger (the time the Merger becomes effective being the
"Effective Time").
1
<PAGE> 106
SECTION 1.04. Effects of the Merger. The Merger shall have the effects
set forth in Section 259 of the DGCL.
SECTION 1.05. Certificate of Incorporation and By-Laws (a) The
Certificate of Incorporation of Sub, as in effect immediately prior to the
Effective Time, shall be the Certificate of Incorporation of the Surviving
Corporation until thereafter changed or amended as provided therein or by
applicable law, subject in all cases to Section 5.07, except that the name of
the Surviving Corporation in such Certificate of Incorporation will be changed
to be "Gynecare, Inc."
(b) The By-Laws of Sub, as in effect immediately prior to the Effective
Time, shall be the By-Laws of the Surviving Corporation until thereafter changed
or amended as provided therein or by applicable law (subject in all cases to
Section 5.07).
SECTION 1.06. Directors. The directors of Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation, until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be.
SECTION 1.07. Officers. The officers of the Company immediately prior to
the Effective Time shall be the officers of the Surviving Corporation, until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS;
EXCHANGE OF CERTIFICATES
SECTION 2.01. Effect on Capital Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of the holder of any
shares of Company Common Stock or any shares of capital stock of Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of
capital stock of Sub shall be converted into and become one validly issued,
fully paid and nonassessable share of common stock, par value $.01 per
share, of the Surviving Corporation.
(b) Cancelation of Treasury Stock and Parent-Owned Stock. Each share
of Company Common Stock that is owned by the Company and each share of
Company Common Stock that is owned by Parent or Sub shall automatically be
canceled and retired and shall cease to exist, and no Parent Common Stock
or other consideration shall be delivered in exchange therefor.
(c) Conversion of Company Common Stock. Subject to Section 2.02(e),
each issued and outstanding share of Company Common Stock (other than
shares to be canceled in accordance with Section 2.01(b)) shall be
converted into the right to receive that number (the "Exchange Ratio") of
fully paid and nonassessable shares of Parent Common Stock equal to the
amount obtained by dividing the Per Share Price (as hereinafter defined) by
the Average Closing Price (as hereinafter defined). The issuance of such
shares of Parent Common Stock shall have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement on Form S-4 (the "Form S4") as described in Section
5.01 hereof. The "Per Share Price" shall mean $8.46. The "Average Closing
Price" shall mean the average per share closing price of Parent Common
Stock for the 20 full trading days preceding the date of the last full
trading day prior to the Stockholders Meeting (as defined in Section 5.01)
or any adjournment or postponement at which the Stockholder Approval (as
defined in Section 3.01(q)) is obtained, as such prices are reported on the
New York Stock Exchange, Inc. ("NYSE") Composite Transactions Tape (as
reported by The Wall Street Journal, or, if not reported thereby, any other
authoritative source). As of the Effective Time, all such shares of Company
Common Stock shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each holder of a
certificate which immediately prior to the Effective Time represented any
such shares of Company Common Stock shall cease to have any rights with
respect thereto, except the right to receive shares of Parent Common Stock
and any cash in lieu of fractional shares of Parent Common
2
<PAGE> 107
Stock to be issued or paid in consideration therefor upon surrender of such
certificate in accordance with Section 2.02, without interest.
Notwithstanding the foregoing, if between the date of this Agreement and
the Effective Time the outstanding shares of Parent Common Stock shall have
been changed into a different number of shares or a different class, by
reason of the occurrence or record date of any stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of
shares or if Parent pays or declares an extraordinary dividend with a
record date prior to the Effective Date, the Exchange Ratio shall be
appropriately adjusted to reflect such stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange or
extraordinary dividend.
SECTION 2.02. Exchange of Certificates. (a) Exchange Agent. As of the
Effective Time, Parent shall deposit with First Chicago Trust Company of New
York or such other bank or trust company of similar size as may be designated by
Parent (the "Exchange Agent"), for the benefit of the holders of shares of
Company Common Stock, for exchange in accordance with this Article II, through
the Exchange Agent, certificates representing the shares of Parent Common Stock
(such shares of Parent Common Stock, together with any dividends or
distributions with respect thereto with a record date after the Effective Time
and any cash payments in lieu of any fractional shares of Parent Common Stock,
being hereinafter referred to as the "Exchange Fund") issuable pursuant to
Section 2.01 in exchange for outstanding shares of Company Common Stock.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, but in any event within 10 business days thereafter, Parent
shall cause the Exchange Agent to mail to each holder of record of a certificate
or certificates which immediately prior to the Effective Time represented
outstanding shares of Company Common Stock (the "Certificates") whose shares
were converted into the right to receive shares of Parent Common Stock pursuant
to Section 2.01(c), (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent and shall be
in such form and have such other provisions as Parent may reasonably specify)
and (ii) instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing shares of Parent Common Stock. Upon
surrender of a Certificate for cancelation to the Exchange Agent, together with
such letter of transmittal, duly executed, and such other documents as may
reasonably be required by the Exchange Agent, the holder of such Certificate
shall be entitled to receive in exchange therefor a certificate representing
that number of whole shares of Parent Common Stock which such holder has the
right to receive pursuant to the provisions of this Article II after taking into
account all the shares of Company Common Stock then held by such holder under
all such Certificates so surrendered, cash in lieu of fractional shares of
Parent Common Stock to which such holder is entitled pursuant to Section 2.02(e)
and any dividends or other distributions to which such holder is entitled
pursuant to Section 2.02(c), and the Certificate so surrendered shall forthwith
be canceled. In the event of a transfer of ownership of Company Common Stock
which is not registered in the transfer records of the Company, a certificate
representing the proper number of shares of Parent Common Stock may be issued to
a person (as defined in Section 8.03) other than the person in whose name the
Certificate so surrendered is registered, if, upon presentation to the Exchange
Agent, such Certificate shall be properly endorsed or otherwise be in proper
form for transfer and the person requesting such issuance shall pay any transfer
or other taxes required by reason of the issuance of shares of Parent Common
Stock to a person other than the registered holder of such Certificate or
establish to the reasonable satisfaction of Parent that such tax has been paid
or is not applicable. Until surrendered as contemplated by this Section 2.02(b),
each Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender the certificate
representing shares of Parent Common Stock, cash in lieu of any fractional
shares of Parent Common Stock as contemplated by Section 2.02(e) and any
dividends or other distributions to which such holder is entitled pursuant to
Section 2.02(c). No interest will be paid or will accrue on any cash payable
pursuant to Sections 2.02(c) or 2.02(e).
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to Parent Common Stock with a record date after
the Effective Time shall be paid to the holder of any unsurrendered Certificate
with respect to the shares of Parent Common Stock represented thereby and no
cash payment in lieu of fractional shares shall be paid to any such holder
pursuant to Section 2.02(e) until the
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holder of record of such Certificate shall surrender such Certificate. Following
surrender of any such Certificate, there shall be paid to the record holder of
the certificate representing whole shares of Parent Common Stock issued in
exchange therefor, without interest, (i) at the time of such surrender, the
amount of any cash payable in lieu of a fractional share of Parent Common Stock
to which such holder is entitled pursuant to Section 2.02(e) and the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Common Stock, and
(ii) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to such
surrender and a payment date subsequent to such surrender payable with respect
to such whole shares of Parent Common Stock.
(d) No Further Ownership Rights in Company Common Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of shares of Company
Common Stock in accordance with the terms hereof (including any cash paid
pursuant to Section 2.02(c) or 2.02(e)) shall be deemed to have been issued (and
paid) in full satisfaction of all rights pertaining to such shares of Company
Common Stock, subject, however, to the Surviving Corporation's obligation to pay
any dividends or make any other distributions with a record date prior to the
Effective Time which may have been declared or made by the Company on such
shares of Company Common Stock in accordance with the terms of this Agreement or
prior to the date of this Agreement and which remain unpaid at the Effective
Time, and there shall be no further registration of transfers on the stock
transfer books of the Surviving Corporation of the shares of Company Common
Stock which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates are presented to the Surviving Corporation or
the Exchange Agent for any reason, they shall be canceled and exchanged as
provided in this Article II.
(e) No Fractional Shares. (i) No certificates or scrip representing
fractional shares of Parent Common Stock shall be issued upon the surrender for
exchange of Certificates, and such fractional share interests will not entitle
the owner thereof to vote or to any rights of a stockholder of Parent.
(ii) Notwithstanding any other provision of this Agreement, each holder of
shares of Company Common Stock exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of Parent Common
Stock (after taking into account all Certificates delivered by such holder)
shall receive, in lieu thereof, cash (without interest) in an amount, less the
amount of any withholding taxes which may be required thereon, equal to such
fractional part of a share of Parent Common Stock multiplied by the per share
closing price of Parent Common Stock on the date of the Stockholders Meeting, as
such price is reported on the NYSE Composite Transactions Tape (as reported by
The Wall Street Journal, or, if not reported thereby, any other authoritative
source).
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of the Certificates for six months after
the Effective Time shall be delivered to Parent, upon demand, and any holders of
the Certificates who have not theretofore complied with this Article II shall
thereafter look only to Parent for, and Parent shall remain liable for, payment
of their claim for Parent Common Stock, any cash in lieu of fractional shares of
Parent Common Stock and any dividends or distributions with respect to Parent
Common Stock.
(g) No Liability. None of Parent, Sub, the Company or the Exchange Agent
shall be liable to any person in respect of any shares of Parent Common Stock
(or dividends or distributions with respect thereto) or cash from the Exchange
Fund in each case delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
(h) Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by Parent, on a daily basis. Any
interest and other income resulting from such investments shall be paid to
Parent.
(i) Lost Certificates. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such person of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it with respect to such
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Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the shares of Parent Common Stock and any cash in lieu of
fractional shares, and unpaid dividends and distributions on shares of Parent
Common Stock deliverable in respect thereof, pursuant to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01. Representations and Warranties of the Company. Except as
set forth on the disclosure schedule delivered by the Company to Parent prior to
the execution of this Agreement (the "Company Disclosure Schedule"), the Company
represents and warrants to Parent and Sub as follows:
(a) Organization, Standing and Corporate Power. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to carry on its business as now being conducted. The Company is
duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership, leasing
or operation of its properties makes such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so
qualified or licensed individually or in the aggregate would not have a
material adverse effect (as defined in Section 8.03) on the Company. The
Company has delivered to Parent complete and correct copies of its Restated
Certificate of Incorporation and Bylaws, in each case as amended to the
date hereof.
(b) Subsidiaries. The Company does not own any capital stock or other
ownership interest in any person.
(c) Capital Structure. The authorized capital stock of the Company
consists of 30,000,000 shares of Company Common Stock and 5,000,000 shares
of preferred stock, par value $.001 per share ("Preferred Stock"). At the
close of business on August 1, 1997, (i) 8,295,693 shares of Company Common
Stock were issued and outstanding, (ii) no shares of Company Common Stock
were held by the Company in its treasury and (iii) 2,034,210 shares of
Company Common Stock were reserved for issuance pursuant to outstanding
Company Stock Plans (as defined in Section 5.06). Except as set forth
above, at the close of business on August 1, 1997, no shares of capital
stock or other voting securities of the Company were issued, reserved for
issuance or outstanding. There are no outstanding stock appreciation rights
or rights (other than Stock Options (as defined in Section 5.06)) to
receive shares of Company Common Stock on a deferred basis granted under
the Company Stock Plans or otherwise. All outstanding shares of capital
stock of the Company are, and all shares which may be issued pursuant to
the Company Stock Plans will be, when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable and
not subject to preemptive rights. There are no bonds, debentures, notes or
other indebtedness of the Company having the right to vote (or convertible
into, or exchangeable for, securities having the right to vote) on any
matters on which stockholders of the Company may vote. Except as set forth
above, there are no securities, options, warrants, calls, rights,
commitments, agreements, arrangements or undertakings of any kind to which
the Company is a party, or by which it is bound, obligating the Company to
issue, deliver or sell, or cause to be issued, delivered or sold,
additional shares of capital stock or other voting securities of the
Company or obligating the Company to issue, grant, extend or enter into any
such security, option, warrant, call, right, commitment, agreement,
arrangement or undertaking. There are not any outstanding contractual
obligations of the Company to repurchase, redeem or otherwise acquire any
shares of capital stock of the Company. As of the date of this Agreement,
the Principal Stockholders are the beneficial owners of a number of shares
of Company Common Stock that in the aggregate constitutes greater than 50%
of the votes entitled to be cast at the Stockholders Meeting, and on or
prior to August 11, 1997, the Principal Stockholders will be the record
owners of a number of shares of Company Common Stock that in the aggregate
constitutes greater than 50% of the votes entitled to be cast at the
Stockholders Meeting.
(d) Authority; Noncontravention. The Company has the requisite
corporate power and authority to execute and deliver this Agreement and,
subject to receipt of the Stockholder Approval, to
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consummate the transactions contemplated by this Agreement. The execution
and delivery of this Agreement by the Company and the consummation by the
Company of the transactions contemplated by this Agreement have been duly
authorized by all necessary corporate action on the part of the Company and
no other corporate proceedings on the part of the Company are necessary to
authorize this Agreement or to consummate the transactions contemplated
hereby, subject, in each case, to receipt of the Stockholder Approval. This
Agreement has been duly executed and delivered by the Company and
constitutes a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms. The execution and
delivery of this Agreement do not, and the consummation of the transactions
contemplated by this Agreement and compliance with the provisions of this
Agreement will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, cancelation or acceleration of any
obligation or to loss of a material benefit under, or result in the
creation of any pledge, claim, lien, charge, encumbrance or security
interest of any kind or nature whatsoever (collectively, "Liens") in or
upon any of the properties or assets of the Company under, any provision of
(i) the Restated Certificate of Incorporation or Bylaws of the Company,
(ii) any loan or credit agreement, bond, note, mortgage, indenture, lease
or other material contract, agreement, instrument, permit, concession,
franchise or license applicable to the Company or its properties or assets
or (iii) subject to the governmental filings and other matters referred to
in the following sentence, any (A) statute, law, ordinance, rule or
regulation or (B) judgment, order or decree, in each case, applicable to
the Company or its properties or assets, other than, in the case of clauses
(ii) and (iii), any such conflicts, violations, defaults, rights or Liens
that individually or in the aggregate would not (x) have a material adverse
effect on the Company, (y) impair in any material respect the ability of
the Company to perform its obligations under this Agreement or (z) prevent
or materially delay the consummation of any of the transactions
contemplated by this Agreement. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Federal,
state or local government or any court, administrative agency or commission
or other governmental authority or agency, domestic or foreign (a
"Governmental Entity"), is required by or with respect to the Company in
connection with the execution and delivery of this Agreement by the Company
or the consummation by the Company of the Merger or the other transactions
contemplated by this Agreement, except for (1) the filing of a premerger
notification and report form by the Company under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (2) the
filing with the Securities and Exchange Commission (the "SEC") of a proxy
statement relating to the approval by the Company's stockholders of this
Agreement (as amended or supplemented from time to time, the "Proxy
Statement") and such reports under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as may be required in connection with this
Agreement and the transactions contemplated by this Agreement, (3) the
filing of the Certificate of Merger with the Delaware Secretary of State
and appropriate documents with the relevant authorities of other states in
which the Company is qualified to do business and (4) such other consents,
approvals, orders, authorizations, registrations, declarations and filings
the failure of which to be obtained or made would not, individually or in
the aggregate, have a material adverse effect on the Company or prevent or
materially delay the consummation of any of the transactions contemplated
by this Agreement.
(e) SEC Documents. The Company has filed all reports, schedules,
forms, statements and other documents with the SEC required to be filed by
the Company since November 22, 1995 (the "SEC Documents"). As of their
respective dates, the SEC Documents complied in all material respects with
the requirements of the Securities Act, or the Exchange Act, as the case
may be; and the rules and regulations of the SEC promulgated thereunder
applicable to such SEC Documents, and none of the SEC Documents at the time
they were filed contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. Except to the extent that
information contained in any SEC Document has been revised or superseded by
a later-filed SEC Document, none of the SEC Documents at the time they were
filed contains any untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading. The
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financial statements of the Company included in the SEC Documents complied
as to form in all material respects with applicable accounting requirements
and the published rules and regulations of the SEC with respect thereto,
have been prepared in accordance with generally accepted accounting
principles ("GAAP") (except, in the case of unaudited statements, as
permitted by Form 10-Q of the SEC) applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and
fairly presented the financial position of the Company as of the dates
thereof and the results of its operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments and the absence of footnotes). Except as set
forth in the Filed SEC Documents (as defined in Section 3.01(g)) or as
incurred in the ordinary course of business since the date of the most
recent financial statements included in the Filed SEC Documents, the
Company has no liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) which would be required under GAAP to be
disclosed on a balance sheet of the Company and which, individually or in
the aggregate, would have a material adverse effect on the Company.
(f) Information Supplied. None of the information supplied or to be
supplied by the Company specifically for inclusion or incorporation by
reference in (i) the Form S-4 will (except to the extent revised or
superseded by amendments or supplements contemplated hereby), at the time
the Form S-4 is filed with the SEC, at any time it is amended or
supplemented and at the time it becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are
made, not misleading and (ii) the Proxy Statement will (except to the
extent revised or superseded by amendments or supplements contemplated
hereby), at the date it is first mailed to the Company's stockholders and
at the time of the meeting of the Company's stockholders held to vote on
approval and adoption of this Agreement, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. The Proxy
Statement will comply as to form in all material respects with the
requirements of the Exchange Act and the rules and regulations thereunder,
except that no representation is made by the Company with respect to
statements made or incorporated by reference therein based on information
supplied by Parent or Sub specifically for inclusion or incorporation by
reference in the Proxy Statement.
(g) Absence of Certain Changes or Events. Except as disclosed in the
SEC Documents filed by the Company and publicly available prior to the date
of this Agreement (the "Filed SEC Documents") and, in the case of clauses
(ii), (iii), (iv), (vi) and (vii) only, until the date hereof, since the
date of the most recent financial statements included in the Filed SEC
Documents, the Company has conducted its business only in the ordinary
course consistent with past practice, and there has not been (i) any
material adverse change (as defined in Section 8.03) in the Company, (ii)
any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to any of
the Company's capital stock, (iii) any split, combination or
reclassification of any of the Company's capital stock or any issuance or
the authorization of any issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, (iv) (x) any
granting by the Company to any officer of the Company of any increase in
compensation, except in the ordinary course of business consistent with
prior practice or as was required under employment agreements in effect as
of the date of the most recent financial statements included in the Filed
SEC Documents, (y) any granting by the Company to any officer of any
increase in severance or termination pay, except as was required under any
employment, severance or termination agreements in effect as of the date of
the most recent financial statements included in the Filed SEC Documents or
(z) any entry by the Company into any employment, severance or termination
agreement with any officer, (v) any damage, destruction or loss, whether or
not covered by insurance, that individually or in the aggregate would have
a material adverse effect on the Company, (vi) any change in accounting
methods, principles or practices by the Company having a material adverse
effect on the Company, except insofar as may have been required by a change
in GAAP or (vii) any tax election that individually or in the aggregate
would have a material adverse effect on the Company or any of its tax
attributes or any settlement or compromise of any material income tax
liability.
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(h) Litigation. There is no suit, action or proceeding pending or, to
the knowledge of the Company, threatened against or affecting the Company
that individually or in the aggregate would have a material adverse effect
on the Company, nor is there any judgment, decree, injunction, rule or
order of any Governmental Entity or arbitrator outstanding against, or, to
the knowledge of the Company, investigation by any Governmental Entity
involving, the Company that individually or in the aggregate would have a
material adverse effect on the Company.
(i) Contracts. Except as disclosed in the Filed SEC Documents as of
the date hereof, there are no contracts or agreements that are of a nature
required to be filed as an exhibit to any Filed SEC Document under the
Exchange Act and the rules and regulations promulgated thereunder. The
Company is not in violation of nor in default under (nor does there exist
any condition which upon the passage of time or the giving of notice or
both would cause such a violation of or default under) any lease, permit,
concession, franchise, license or any other contract, agreement,
obligation, commitment, arrangement or understanding to which it is a party
or by which it or any of its properties or assets is bound, except for
violations or defaults that individually or in the aggregate would not have
a material adverse effect on the Company. The Company has not entered into
any contract, agreement obligation, commitment, arrangement or
understanding with any affiliate (as defined in Section 8.03) of the
Company that is currently in effect other than agreements that are (i)
disclosed in the Filed SEC Documents or (ii) not of a nature required to be
disclosed in the SEC Documents. Except as set forth as exhibits to the
Filed SEC Documents, the Company is not a party to or otherwise bound by
any agreement or covenant not to compete or by any agreement or covenant
restricting in any material respect the development, marketing or
distribution of the Company's products or services.
(j) Compliance with Laws. (i) The Company is in compliance with all
statutes, laws, ordinances, rules, regulations, judgments, orders and
decrees of any Governmental Entity (collectively, "Legal Provisions")
applicable to its business or operations, except for instances of possible
noncompliance that, individually or in the aggregate, would not have a
material adverse effect on the Company or prevent or materially delay the
consummation of any of the transactions contemplated by this Agreement. The
Company has in effect all Federal, state and local, domestic and foreign,
governmental approvals, authorizations, certificates, filings, franchises,
licenses, notices, permits and rights, including all authorizations under
Environmental Laws (as hereinafter defined) ("Permits"), necessary for it
to own, lease or operate its properties and assets and to carry on its
business as now conducted; there has occurred no default under, or
violation of, any such Permit, except for the lack of Permits and for
defaults under, or violations of, Permits which lack, default or violation
individually or in the aggregate would not have a material adverse effect
on the Company; and the Merger, in and of itself, would not cause the
revocation or cancelation of any such Permit, which revocation or
cancelation would have a material adverse effect on the Company.
(ii) The term "Environmental Laws" means any applicable and binding
Federal, state or local, domestic or foreign, statute, law, ordinance,
rule, regulation, Permit, consent, approval, license, judgment, order,
decree or injunction relating to: (A) Releases (as defined in 42 U.S.C.
sec. 9601(22)) or threatened Releases of Hazardous Material (as hereinafter
defined) into the environment, (B) the generation, treatment, storage,
disposal, use, handling, manufacturing, transportation or shipment of
Hazardous Material or (C) the health or safety of employees in the
workplace environment. The term "Hazardous Material" means (1) hazardous
substances (as defined in 42 U.S.C. sec. 9601(14)), (2) petroleum,
including crude oil and any fractions thereof, (3) natural gas, synthetic
gas and any mixtures thereof, (4) asbestos and/or asbestos containing
material, (5) PCBs or materials containing PCBs and (6) any material
regulated as a medical waste or infectious waste.
(iii) During the period of ownership or operation by the Company of
any of its currently or previously owned, leased or operated properties,
there have been no Releases of Hazardous Material in, on, under or
affecting such properties or any surrounding site, and the Company has not
disposed of any Hazardous Material in a manner that has led, or would
reasonably be anticipated to lead to, a Release of Hazardous Material,
except in each case for those Releases and disposals which individually or
in the aggregate would not have a material adverse effect on the Company,
and except as disclosed in the Filed
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SEC Documents. Prior to the period of ownership or operation by the Company
of any of its currently or previously owned, leased or operated properties,
to the knowledge of the Company, no Hazardous Material was generated,
treated, stored, disposed of, used, handled or manufactured at, or
transported shipped or disposed of from, such properties, and, to the
knowledge of the Company, there were no Releases of Hazardous Material in,
on, under or affecting any such property or any surrounding site, except in
each case for the generation, treatment, storage, disposal, use, handling,
manufacturing, transportation or shipment of Hazardous Material and
Releases which, individually or in the aggregate, would not have a material
adverse effect on the Company, and except as disclosed in the Filed SEC
Documents. As of the date hereof, the Company has not received any written
notice of, or entered into or assumed by contract or operation of law any
indemnification obligation, order, settlement or decree relating to: (A)
any violation of any Environmental Laws or the institution or pendency of
any suit, action, claim, proceeding or investigation by any Governmental
Entity or any third party in connection with any alleged violation of
Environmental Laws, (B) the response to or remediation of Hazardous
Material at or arising from any of the Company's properties or any other
properties or (C) payment for any response action relating to or
remediation of Hazardous Material at or arising from any of the Company's
properties or any other properties, except in each case as may be disclosed
in the Filed SEC documents or for any such notices, obligations, orders,
settlements or decrees which individually or in the aggregate would not
have a material adverse effect on the Company.
(k) Absence of Changes in Benefit Plans; Labor Relations. Except as
disclosed in the Filed SEC Documents, since the date of the most recent
financial statements included in the Filed SEC Documents and until the date
hereof, there has not been any adoption or amendment in any material
respect by the Company of any collective bargaining agreement or any
employment, bonus, pension, profit sharing, deferred compensation,
incentive compensation, stock ownership, stock purchase, stock option,
phantom stock, retirement, vacation, severance, disability, death benefit,
hospitalization, medical or other material plan, arrangement or
understanding providing benefits to any current or former officer, director
or employee of the Company (collectively, "Benefit Plans"). Except as
disclosed in the Filed SEC Documents, as of the date hereof there exist no
currently binding employment, severance, termination or indemnification
agreements or material consulting agreements between the Company and any
current officer, director or employee of the Company. There are no
collective bargaining or other labor union agreements to which the Company
is a party or by which it is bound. Since March 8, 1994, the Company has
not encountered any labor union organizing activity, nor had any actual or
threatened employee strikes, work stoppages, slowdowns or lockouts.
(l) ERISA Compliance. (i) Section 3.01(l)(i) of the Company
Disclosure Schedule contains a list of all "employee pension benefit plans"
(as defined in Section 3(2) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA")) (sometimes referred to herein as "Pension
Plans"), "employee welfare benefit plans" (as defined in Section 3(1) of
ERISA) and all other Benefit Plans maintained, or contributed to, by the
Company or any person or entity that, together with the Company, is treated
as a single employer under Section 414(b), (c), (m) or (o) of the Code (a
"Commonly Controlled Entity") for the benefit of any current or former
officers, directors or employees of the Company. The Company has made
available to Parent true, complete and correct copies of (1) each Benefit
Plan (or, in the case of any unwritten Benefit Plans, descriptions
thereof), (2) the most recent annual report on Form 5500 required to be
filed with the Internal Revenue Service (the "IRS") with respect to each
Benefit Plan (if any such report was required), (3) the most recent summary
plan description for each Benefit Plan for which such summary plan
description is required and (4) each trust agreement and group annuity
contract relating to any Benefit Plan. Each Benefit Plan has been
administered in all material respects in accordance with its terms. The
Company and all the Benefit Plans are all in compliance in all material
respects with applicable provisions of ERISA and the Code.
(ii) All Pension Plans have been the subject of determination letters
from the IRS to the effect that such Pension Plans are qualified and exempt
from United States Federal income taxes under Sections 401(a) and 501(a),
respectively, of the Code, and no such determination letter has been
revoked
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nor has any event occurred since the date of its most recent determination
letter or application therefor that would adversely affect its
qualification or materially increase its costs.
(iii) Neither the Company nor any Commonly Controlled Entity has
maintained, contributed or been obligated to contribute to any Benefit Plan
that is subject to Title IV of ERISA.
(iv) With respect to any Benefit Plan that is an employee welfare
benefit plan, there are no understandings, agreements or undertakings,
written or oral, that would prevent any such plan (including any such plan
covering retirees or other former employees) from being amended or
terminated without material liability to the Company on or at any time
after the Effective Time.
(v) Section 3.01(l)(v) of the Company Disclosure Schedule lists all
Stock Options outstanding as of August 1, 1997, showing for each such
option: (1) the number of shares issuable, (2) the number of vested shares,
(3) the date of expiration and (4) the exercise price.
(vi) No employee of the Company will be entitled to any additional
compensation or benefits or any acceleration of the time of payment or
vesting of any compensation or benefits under any Benefit Plan as a result
of the transactions contemplated by this Agreement.
(vii) The deduction of any amount payable pursuant to the terms of the
Benefit Plans will not be subject to disallowances under Section 162(m) of
the Code.
(m) Taxes. The Company has filed all tax returns and reports required
to be filed by it and has paid all material taxes required to be paid by
it, and the most recent financial statements contained in the Filed SEC
Documents reflect an adequate reserve for all taxes payable by the Company
for all taxable periods and portions thereof through the date of such
financial statements. No deficiencies for any taxes have been proposed,
asserted or assessed against the Company, and no requests for waivers of
the time to assess any such taxes are pending. None of the United States
Federal income tax returns of the Company have been examined by the United
States IRS for the fiscal years through December 31, 1996. The Company has
taken no action and knows of no fact or circumstance that is reasonably
likely to prevent the Merger from qualifying as a reorganization within the
meaning of Section 368(a) of the Code. As used in this Agreement, "taxes"
shall include all Federal, state and local, domestic and foreign, income,
property, sales, excise and other taxes, tariffs or governmental charges of
any nature whatsoever, including any interest, penalties or additions with
respect thereto.
(n) No Parachute Payments. No amount will be received (whether in
cash or property or the vesting of property) as a result of any of the
transactions contemplated by this Agreement by any officer, director or
employee of the Company under any employment, severance or termination
agreement, other compensation arrangement or Benefit Plan of the Company.
(o) Title to Properties. (i) The Company has good and marketable
title to, or valid leasehold interests in, all its material properties and
assets except for such as are no longer used or useful in the conduct of
its businesses or as have been disposed of in the ordinary course of
business and except for defects in title, easements, restrictive covenants
and similar encumbrances that individually or in the aggregate would not
have a material adverse effect on the Company. All such material assets and
properties, other than assets and properties in which the Company has a
leasehold interest, are free and clear of all Liens, except for Liens that
individually or in the aggregate would not have a material adverse effect
on the Company.
(ii) The Company has complied in all material respects with the terms
of all material leases to which it is a party and under which it is in
occupancy, and all such leases are in full force and effect, except for
such noncompliance or failure to be in full force and effect as would not
individually or in the aggregate have a material adverse effect on the
Company. The Company enjoys peaceful and undisturbed possession under all
such material leases, except for failures to do so that would not
individually or in the aggregate have a material adverse effect on the
Company.
(p) Intellectual Property. The Company owns, or is validly licensed
or otherwise has the right to use, all patents, patent rights, trademarks,
trademark rights, trade names, trade name rights, service
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marks, service mark rights, copyrights and other proprietary intellectual
property rights and computer programs (collectively, "Intellectual Property
Rights") which are material to the conduct of the business of the Company
taken as a whole. No claims are pending or, to the knowledge of the
Company, threatened that the Company is infringing or otherwise adversely
affecting the rights of any person with regard to any Intellectual Property
Right. To the knowledge of the Company, no person is infringing the rights
of the Company with respect to any Intellectual Property Right. The Company
has not licensed, or otherwise granted, to any third party, any rights in
or to any Intellectual Property Rights.
(q) Voting Requirements. The affirmative vote of the holders of a
majority of the outstanding shares of Company Common Stock at the
Stockholders Meeting or any adjournment or postponement thereof to approve
and adopt this Agreement (the "Stockholder Approval") is the only vote of
the holders of any class or series of the Company's capital stock necessary
to approve and adopt this Agreement and approve the transactions
contemplated hereby.
(r) State Takeover Statutes. The Board of Directors of the Company
has approved the Merger, this Agreement, the Stockholder Agreement and the
other transactions contemplated by this Agreement and the Stockholder
Agreement, and such approval is sufficient to render inapplicable to the
Merger, this Agreement, the Stockholder Agreement and the transactions
contemplated by this Agreement and the Stockholder Agreement, the
provisions of Section 203 of the DGCL to the extent, if any, such Section
would otherwise be applicable to the Merger, this Agreement, the
Stockholder Agreement and the transactions contemplated by this Agreement
and the Stockholder Agreement.
(s) Brokers; Schedule of Fees and Expenses. No broker, investment
banker, financial advisor or other person, other than Alex. Brown & Sons,
the fees and expenses of which will be paid by the Company, is entitled to
any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of the Company. The
Company has delivered to Parent true and complete copies of all agreements
under which any such fees or expenses are payable and all indemnification
and other agreements related to the engagement of the persons to whom such
fees are payable. The fees and expenses of any accountant, broker,
financial advisor, legal counsel, or other person retained by the Company
in connection with this Agreement or the Stockholder Agreement or the
transactions contemplated hereby or thereby incurred or to be incurred by
the Company in connection with this Agreement and the Stockholder Agreement
and the transactions contemplated by this Agreement and the Stockholder
Agreement will not exceed the fees and expenses set forth in Section
3.01(s) of the Company Disclosure Schedule.
(t) Opinion of Financial Advisor. The Company has received the
opinion of Alex, Brown & Sons dated the date hereof, to the effect that, as
of such date, the consideration to be received in the Merger by the
Company's stockholders is fair to the Company's stockholders from a
financial point of view, a signed copy of which opinion has been promptly
delivered to Parent.
(u) Accounting Matters. The Company has not taken nor agreed to take
any action that, to the Company's knowledge, would prevent the business
combination to be effected by the Merger to be accounted for as a pooling
of interests.
(v) Distribution Agreements. Section 3.01(v) of the Company
Disclosure Schedule sets forth a complete list of all contracts or
agreements (whether or not in written form), to which the Company is a
party as of the date hereof relating to the distribution, sale, license or
marketing by third parties of the Company's products. The Company has made
available to Parent and its representatives true and correct copies of all
contracts and agreements to which the Company is a party as of the date
hereof relating to the distribution, sale, license or marketing by third
parties of the Company's products or products licensed by the Company.
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SECTION 3.02. Representations and Warranties of Parent and Sub. Parent
and Sub represent and warrant to the Company as follows:
(a) Organization, Standing and Corporate Power. Each of Parent and
Sub is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction in which it is incorporated and has all
requisite corporate power and authority to carry on its business as now
being conducted. Each of Parent and Sub is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which the nature
of its business or the ownership, leasing or operation of its properties
makes such qualification or licensing necessary, other than in such
jurisdictions where the failure to be so qualified or licensed individually
or in the aggregate would not have a material adverse effect on Parent.
Parent has delivered to the Company complete and correct copies of its
Certificate of Incorporation and By-Laws and the Certificate of
Incorporation and ByLaws of Sub, in each case as amended to the date
hereof.
(b) Authority; Noncontravention. Parent and Sub have all requisite
corporate power and authority to enter into this Agreement (and, in the
case of Parent, the Stockholder Agreement), and to consummate the
transactions contemplated by this Agreement (and, in the case of Parent,
those contemplated by the Stockholder Agreement). The execution and
delivery of this Agreement (and, in the case of Parent, the Stockholder
Agreement) and the consummation of the transactions contemplated by this
Agreement (and, in the case of Parent, those contemplated by the
Stockholder Agreement) have been duly authorized by all necessary corporate
action on the part of Parent and Sub and no other corporate proceedings on
the part of Parent or Sub are necessary to authorize this Agreement (and,
in the case of Parent, the Stockholder Agreement) or to consummate the
transactions contemplated hereby (or, in the case of Parent, those
contemplated by the Stockholder Agreement). This Agreement (and, in the
case of Parent, the Stockholder Agreement) has been duly executed and
delivered by Parent and Sub, as applicable, and constitutes a valid and
binding obligation of Parent and Sub, as applicable, enforceable against
Parent and Sub, as applicable, in accordance with its terms. The execution
and delivery of this Agreement and the Stockholder Agreement do not, and
the consummation of the transactions contemplated by this Agreement and the
Stockholder Agreement and compliance with the provisions of this Agreement
and the Stockholder Agreement will not, conflict with, or result in any
violation of, or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancelation or acceleration
of any obligation or to loss of a material benefit under, or result in the
creation of any Lien upon any of the properties or assets of Parent or any
of its subsidiaries under, any provision of (i) the Certificate of
Incorporation or By-Laws of Parent or Sub or any provision of the
comparable charter or organizational documents of any other subsidiary of
Parent, (ii) any loan or credit agreement, bond, note, mortgage, indenture,
lease or other material contract, agreement, instrument, permit,
concession, franchise or license applicable to Parent, Sub or any other
subsidiary of Parent or their respective properties or assets or (iii)
subject to the governmental filings and other matters referred to in the
following sentence, any (A) statute, law, ordinance, rule or regulation or
(B) judgment, order or decree in each case applicable to Parent, Sub or any
other subsidiary of Parent or their respective properties or assets, other
than, in the case of clauses (ii) and (iii), any such conflicts,
violations, defaults, rights or Liens that individually or in the aggregate
would not (x) have a material adverse effect on Parent, (y) impair in any
material respect the ability of each of Parent and Sub to perform its
obligations under this Agreement or (z) prevent or materially delay the
consummation of any of the transactions contemplated by this Agreement. No
consent, approval, order or authorization of, or registration, declaration
or filing with, any Governmental Entity is required by or with respect to
Parent, Sub or any other subsidiary of Parent in connection with the
execution and delivery of this Agreement (and, in the case of Parent, the
Stockholder Agreement) by Parent and Sub or the consummation by Parent and
Sub of the transactions contemplated by this Agreement (and, in the case of
Parent, those contemplated by the Stockholder Agreement), except for (1)
the filing of a premerger notification and report form under the HSR Act,
(2) the filing with the SEC of the Form S-4 and such reports under the
Exchange Act as may be required in connection with this Agreement or the
Stockholder Agreement and the transactions contemplated by this Agreement
or the Stockholder Agreement, (3) the filing of the Certificate of Merger
with the Delaware Secretary of State and appropriate documents with the
relevant authorities of
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other states in which the Company is qualified to do business, (4) filings
with the NYSE and (5) such other consents, approvals, orders,
authorizations, registrations, declarations and filings (i) as may be
required under the "blue sky" laws of various states or (ii) the failure of
which to be obtained or made would not, individually or in the aggregate,
have a material adverse effect on Parent or prevent or materially delay the
consummation of any of the transactions contemplated by this Agreement.
(c) Parent SEC Documents. Parent has filed all reports, schedules,
forms, statements and other documents with the SEC required to be filed by
Parent since January 1, 1996 (the "Parent SEC Documents"). As of their
respective dates, the Parent SEC Documents complied in all material
respects with the requirements of the Securities Act or the Exchange Act,
as the case may be, and the rules and regulations of the SEC promulgated
thereunder applicable to such Parent SEC Documents, and none of the Parent
SEC Documents at the time they were filed contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Except to the
extent that information contained in any Parent SEC Document has been
revised or superseded by a later-filed Parent SEC Document, none of the
Parent SEC Documents at the time it was filed contains any untrue statement
of a material fact or omits to state any material fact required to be
stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
financial statements of Parent included in the Parent SEC Documents
complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, in the
case of unaudited statements, as permitted by Form 10-Q of the SEC) applied
on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented the financial position
of Parent as of the dates thereof and the results of its operations and
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments and the absence of
footnotes).
(d) Information Supplied. None of the information supplied or to be
supplied by Parent or Sub specifically for inclusion or incorporation by
reference in (i) the Form S-4 will (except to the extent revised or
superseded by amendments or supplements contemplated hereby), at the time
the Form S-4 is filed with the SEC, at any time it is amended or
supplemented and at the time it becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are
made, not misleading, and (ii) the Proxy Statement will (except to the
extent revised or superseded by amendments or supplements contemplated
hereby), at the date it is first mailed to the Company's stockholders and
at the time of the meeting of the Company's stockholders held to vote on
approval and adoption of this Agreement, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. The Form S-4
will comply as to form in all material respects with the requirements of
the Securities Act and the rules and regulations thereunder, except that no
representation is made by Parent or Sub with respect to statements made or
incorporated by reference therein based on information supplied by the
Company specifically for inclusion or incorporation by reference in the
Form S-4.
(e) Absence of Certain Changes or Events. Except as disclosed in the
Parent SEC Documents (as defined in Section 3.02(c)) filed with the SEC by
Parent and publicly available prior to the date of this Agreement ("Filed
Parent SEC Documents"), since the date of the most recent financial
statements included in the Filed Parent SEC Documents and, only in the case
of clauses (ii) and (iii) below, through the date of this Agreement, Parent
has conducted its business only in the ordinary course consistent with past
practice, and there has not been (i) any material adverse change in Parent,
(ii) any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to any of
the Parent's capital stock (except for regular quarterly cash dividends) or
(iii) any split, combination or reclassification of any of its capital
stock or any issuance or the
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authorization of any issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock.
(f) Interim Operations of Sub. Sub was formed solely for the purpose
of engaging in the transactions contemplated hereby, has engaged in no
other business activities and has conducted its operations only as
contemplated hereby.
(g) Accounting Matters. Parent has not taken nor agreed to take any
action that, to Parent's knowledge, would prevent the business combination
to be effected by the Merger to be accounted for as a pooling of interests.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 4.01. Conduct of Business. (a) Conduct of Business by the
Company. During the period from the date of this Agreement to the Effective
Time, the Company shall carry on its businesses in the ordinary course
consistent with the manner as heretofore conducted and use reasonable efforts to
comply in all material respects with all applicable laws and regulations and, to
the extent consistent therewith, use commercially reasonable efforts to preserve
intact its current business organization, keep available the services of its
current officers and employees and preserve its relationships with customers,
suppliers, licensors, licensees, distributors and others having business
dealings with it. Without limiting the generality of the foregoing, other than
as set forth in Section 4.01 of the Company Disclosure Schedule, during the
period from the date of this Agreement to the Effective Time, the Company shall
not without Parent's consent:
(i) (x) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock or property), in respect of, any of
its capital stock, (y) split, combine or reclassify any of its capital
stock or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its capital stock (other
than the issuance of shares of Company Common Stock upon the exercise of
Stock Options outstanding on the date of this Agreement and in accordance
with their present terms or as contemplated by Section 5.06) or (z)
purchase, redeem or otherwise acquire any shares of its capital stock or
any other securities of the Company or any rights, warrants or options to
acquire any such shares or other securities except for repurchases from
employees following their termination pursuant to the terms of their
existing stock option or purchase agreements;
(ii) issue, deliver, sell, pledge or otherwise encumber any shares of
its capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities (other than the
issuance of shares of Company Common Stock upon the exercise of Stock
Options outstanding on the date of this Agreement and in accordance with
their present terms or as contemplated by Section 5.06);
(iii) amend its Restated Certificate of Incorporation or Bylaws;
(iv) acquire or agree to acquire (x) by merging or consolidating with,
or by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, joint venture,
association or other business organization or division thereof or (y) any
assets which, individually, is in excess of $25,000 or, in the aggregate,
are in excess of $100,000, except purchases of inventory, components and
raw materials in the ordinary course of business consistent with past
practice and except for capital expenditures (which are covered by clause
(vii) below);
(v) sell, lease, license, mortgage or otherwise encumber or subject to
any Lien or otherwise dispose of any of its properties or assets, except
sales of inventory or used equipment in the ordinary course of business
consistent with past practice;
(vi) (y) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person (other than pursuant to the Company's
existing line of credit with Silicon Valley Bank or any similar replacement
line of credit in an aggregate amount (including amounts outstanding on the
date
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hereof) not to exceed $1.3 million), issue or sell any debt securities or
warrants or other rights to acquire any debt securities of the Company,
guarantee any debt securities of another person, enter into any "keep well"
or other agreement to maintain any financial statement condition of another
person or enter into any arrangement having the economic effect of any of
the foregoing, except for short-term borrowings incurred in the ordinary
course of business consistent with past practice or (z) make any loans,
advances or capital contributions to, or investments in, any other person,
other than (I) as provided for under any current Benefit Plan or other
current benefit plan of the Company in the ordinary course of business
consistent with past practice and (II) for advances to customers and
employees, in each case in the ordinary course of business consistent with
past practice;
(vii) make or agree to make any new capital expenditure or
expenditures which, individually, is in excess of $25,000 or, in the
aggregate, are in excess of $100,000;
(viii) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge, settlement or satisfaction
in the ordinary course of business consistent with past practice or in
accordance with their terms, of claims, liabilities or obligations
reflected or reserved against in the most recent financial statements (or
the notes thereto) of the Company included in the Filed SEC Documents or
incurred since the date of such financial statements in the ordinary course
of business consistent with past practice, or waive any material benefits
of, or agree to modify in any materially adverse respect, any
confidentiality, standstill or similar agreements to which the Company is a
party;
(ix) except in the ordinary course of business, modify, amend or
terminate any material contract or agreement to which the Company is a
party or waive, release or assign any material rights or claims thereunder;
(x) enter into any contracts, agreements, binding arrangements or
understandings relating to the distribution, sale, license or marketing by
third parties of the Company's products or products licensed by the
Company, other than pursuant to any such contracts, agreements,
arrangements or understandings currently in place in accordance with their
terms as of the date hereof;
(xi) except as otherwise contemplated by this Agreement or as required
to comply with applicable law or agreements, plans or arrangements existing
on the date hereof, (A) adopt, enter into, terminate or amend any
collective bargaining agreement or Benefit Plan for the benefit or welfare
of any current or former officer, director or employee, (B) increase in any
manner the compensation or fringe benefits of, or pay any bonus to, any
officer, director or employee (except for normal increases of cash
compensation or cash bonuses in the ordinary course of business consistent
with past practice), (C) pay any benefit not provided for under any Benefit
Plan or any other benefit plan or arrangement of the Company, (D) increase
in any manner the severance or termination pay of any officer or employee,
(E) enter any employment, consulting (other than in the ordinary course of
business consistent with past practice), severance, termination or
indemnification agreement with any current or former employee, officer or
director, (F) grant any awards under any bonus, incentive, performance or
other compensation plan or arrangement or Benefit Plan (including the grant
of stock options, stock appreciation rights, stock based or stock related
awards, performance units or restricted stock or the removal of existing
restrictions in any Benefit Plans or agreements or awards made thereunder),
(G) take any action to fund or in any other way secure the payment of
compensation or benefits under any employee plan, agreement, contract or
arrangement or Benefit Plan or (H) take any action to accelerate the
vesting of payment of any compensation or benefit under any Benefit Plan;
(xii) except as otherwise contemplated by this Agreement, enter into
any agreement of a nature that would be required to be filed as an exhibit
to Form 10-K under the Exchange Act, other than contracts for the sale of
the Company's products in the ordinary course of business;
(xiii) form any subsidiary of the Company;
(xiv) except as required by GAAP, make any change in accounting
methods, principles or practices; or
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(xv) authorize any of, or commit or agree to take any of, the
foregoing actions.
(b) Notice. Promptly upon receipt thereof, the Company shall notify Parent
of the receipt by it of any written notice from any Governmental Entity of any
violation of any Environmental Laws or the institution or pendency of any suit,
action, claim, proceeding or investigation by any Governmental Entity or any
third party in connection with any alleged violation of Environmental Laws.
(c) Certain Tax Matters. From the date hereof until the Effective Time,
(i) the Company will file all tax returns and reports ("Post-Signing Returns")
required to be filed by it (after taking into account any extensions); (ii) the
Company will timely pay all taxes due and payable with respect to such
Post-Signing Returns that are so filed; (iii) the Company will accrue a reserve
in its books and records and financial statements in accordance with past
practice for all taxes payable by the Company for which no Post-Signing Return
is due prior to the Effective Time; (iv) the Company will promptly notify Parent
of any action, suit, proceeding, claim or audit (collectively, "Actions")
pending against or with respect to the Company in respect of any tax where there
is a reasonable possibility of a determination or decision which would have a
material adverse effect on the Company's tax liabilities or tax attributes and
will not settle or compromise any such Action without Parent's consent; and (v)
the Company will not make any material tax election without Parent's consent.
(d) Patent Action. Promptly upon receipt thereof, and, if reasonably
practicable, no later than two business days after receipt thereof, the Company
shall (i) notify Parent of the receipt by it or its licensor of any
communication or correspondence of any kind (whether written or oral) from the
United States Patent and Trademark Office relating to the Patent Action (as
defined in Section 7.01(d)) and (ii) provide Parent with a copy of such
communication or correspondence, or if any such communication or correspondence
shall have been made orally, a summary thereof in writing.
SECTION 4.02. No Solicitation. (a) The Company shall not, nor shall it
authorize or permit any of its officers, directors or employees or any
investment banker, attorney or other advisor or representative retained by it
to, directly or indirectly, (i) solicit, initiate or encourage the submission of
any Takeover Proposal (as hereinafter defined) or (ii) participate in any
discussions or negotiations regarding, or furnish to any person any non-public
information with respect to, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes any Takeover Proposal.
Without limiting the foregoing, it is understood that any violation of the
restrictions set forth in the preceding sentence by any officer, director or
employee of the Company or any investment banker, attorney or other advisor or
representative of the Company shall be deemed to be a breach of this Section
4.02(a) by the Company. For purposes of this Agreement, "Takeover Proposal"
means any inquiry, proposal or offer from any person relating to any direct or
indirect acquisition or purchase of a substantial amount of assets of the
Company (other than the purchase of the Company's products in the ordinary
course of business) or more than a 20% interest in the total voting securities
of the Company or any tender offer or exchange offer that if consummated would
result in any person beneficially owning 20% or more of the total voting
securities of the Company or any merger, consolidation, business combination,
sale of substantially all the assets, recapitalization, liquidation, dissolution
or similar transaction involving the Company, other than the transactions
contemplated by this Agreement or the Stockholder Agreement.
(b) Neither the Board of Directors of the Company nor any committee thereof
shall (i) withdraw or modify, or propose publicly to withdraw or modify, in a
manner adverse to Parent or Sub, the approval or recommendation by such Board of
Directors or any such committee of this Agreement or the Merger, (ii) approve or
recommend, or propose to approve or recommend, any Takeover Proposal or (iii)
cause the Company to enter into any letter of intent, agreement in principle,
acquisition agreement or other similar agreement with respect to any Takeover
Proposal.
(c) In addition to the obligations of the Company set forth in paragraphs
(a) and (b) of this Section 4.02, the Company promptly shall advise Parent
orally and in writing of any request for non-public information which the
Company reasonably believes would lead to a Takeover Proposal or of any Takeover
Proposal, or any inquiry with respect to or which the Company reasonably
believes would lead to any Takeover Proposal, the material terms and conditions
of such request, Takeover Proposal or inquiry, and the identity of
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the person making any such request, Takeover Proposal or inquiry. The Company
will keep Parent informed in all material respects of the status and details
(including material amendments or proposed amendments) of any such request,
Takeover Proposal or inquiry.
(d) Nothing contained in this Section 4.02 or elsewhere in this Agreement
shall prohibit the Company from (i) taking and disclosing to its stockholders a
position contemplated by Rules 14d-9 and 14e-2(a) promulgated under the Exchange
Act or (ii) making any disclosure to the Company's stockholders if, in the good
faith judgment of the majority of the members of the Board of Directors of the
Company, after consultation with independent counsel, failure to so disclose
would be inconsistent with applicable laws; provided that none of the Company
nor its Board of Directors nor any committee thereof shall withdraw or modify,
or propose publicly to withdraw or modify, its position with respect to this
Agreement or the Merger or approve or recommend, or propose to approve or
recommend, a Takeover Proposal.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.01. Preparation of the Form S-4 and the Proxy Statement;
Stockholders Meeting. (a) As soon as practicable following the date of this
Agreement, the Company and Parent shall prepare and the Company shall file with
the SEC the Proxy Statement and Parent shall prepare and file with the SEC the
Form S-4, in which the Proxy Statement will be included as a prospectus. Each of
the Company and Parent shall use all reasonable efforts to have the Form S-4
declared effective under the Securities Act as promptly as practicable after
such filing. The Company will use its reasonable efforts to cause the Proxy
Statement to be mailed to the Company's stockholders as promptly as practicable
after the Form S-4 is declared effective under the Securities Act. Parent shall
also take any action (other than qualifying to do business in any jurisdiction
in which it is not now so qualified) required to be taken under any applicable
state securities laws in connection with the issuance of Parent Common Stock in
the Merger and under the Company Stock Plans. Each of Parent and the Company
shall furnish all information concerning itself to the other as may be
reasonably requested in connection with any such action and the preparation,
filing and distribution of the Proxy Statement.
(b) The Company will, as soon as practicable following the date of this
Agreement, establish a record date (which will be as soon as practicable
following the date of this Agreement) for, duly call, give notice of, convene
and hold a meeting of its stockholders (the "Stockholders Meeting") for the
purpose of obtaining the Stockholder Approval. The Company will, through its
Board of Directors, recommend to its stockholders approval and adoption of this
Agreement. Without limiting the generality of the foregoing, the Company agrees
that its obligations pursuant to the first sentence of this Section 5.01(b)
shall not be affected by the commencement, public proposal, public disclosure or
communication to the Company of any Takeover Proposal.
SECTION 5.02. Letters of the Company's Accountants. (a) The Company shall
use its reasonable efforts to cause to be delivered to Parent two letters from
Coopers & Lybrand L.L.P., the Company's independent public accountants, one
dated a date within two business days before the date on which the Form S-4
shall become effective and one dated a date within two business days before the
Closing Date, each addressed to Parent, in form and substance reasonably
satisfactory to Parent.
(b) The Company shall use its reasonable efforts to cause to be delivered
to Parent a letter from Coopers & Lybrand L.L.P., addressed to Parent and the
Company, dated as of the Closing Date, stating that (i) Coopers & Lybrand L.L.P.
concurs with management's conclusion that, as of such date, no conditions exist
with respect to the Company which would preclude accounting for the Merger as a
pooling of interests transaction under Opinion 16 of the Accounting Principles
Board and applicable SEC rules and regulations and (ii) the basis for such a
concurrence is Coopers & Lybrand L.L.P.'s belief that the criteria for such
accounting treatment have been met.
SECTION 5.03. Letters of Parent's Accountants. (a) Parent shall use its
reasonable efforts to cause to be delivered to the Company two letters from
Coopers & Lybrand L.L.P., Parent's independent public
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accountants, one dated a date within two business days before the date on which
the Form S-4 shall become effective and one dated a date within two business
days before the Closing Date, each addressed to the Company, in the form
customarily given to underwriters in securities offerings of Parent in the past.
(b) Parent shall use its reasonable efforts to cause to be delivered to the
Company a letter from Coopers & Lybrand L.L.P., addressed to the Company and
Parent, dated as of the Closing Date, stating that (i) Coopers & Lybrand L.L.P.
concurs with management's conclusion that, as of such date, no conditions exist
with respect to Parent which would preclude accounting for the Merger as a
pooling of interests transaction under Opinion 16 of the Accounting Principles
Board and applicable SEC rules and regulations and (ii) the basis for such a
concurrence is Coopers & Lybrand L.L.P.'s belief that the criteria for such
accounting treatment have been met.
SECTION 5.04. Access to Information; Confidentiality. The Company shall
afford to Parent, and to Parent's officers, employees, accountants, counsel,
financial advisors and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time or the termination
of this Agreement to all its properties, books, contracts, commitments,
personnel and records and, during such period, the Company shall make available
to Parent (a) a copy of each report, schedule, registration statement and other
document filed by it during such period pursuant to the requirements of United
States Federal or state securities laws and (b) all other information concerning
its business, properties and personnel as Parent may reasonably request. Except
as required by law, Parent will hold, and will cause its officers, employees,
accountants, counsel, financial advisors and other representatives and
controlled affiliates to hold, any and all information received from the
Company, directly or indirectly, in confidence in accordance with the
Confidentiality Agreement dated as of December 6, 1996, between an affiliate of
Parent and the Company (as it may be amended from time to time, the
"Confidentiality Agreement").
SECTION 5.05. Reasonable Efforts; Notification. (a) Upon the terms and
subject to the conditions set forth in this Agreement, each of the parties
agrees to use all reasonable efforts to take, or cause to be taken, all actions,
and to do, or cause to be done, and to assist and cooperate with the other
parties in doing, all things necessary, proper or advisable to consummate and
make effective, in the most expeditious manner practicable, the Merger and the
other transactions contemplated by this Agreement, including using reasonable
efforts to accomplish the following: (i) the taking of all reasonable acts
necessary to cause the conditions to Closing to be satisfied, (ii) the obtaining
of all necessary actions or nonactions, waivers, consents and approvals from
Governmental Entities and the making of all necessary registrations and filings
(including filings with Governmental Entities, if any) and the taking of all
reasonable steps as may be necessary to avoid an action or proceeding by any
Governmental Entity, (iii) the obtaining of all necessary consents, approvals or
waivers from third parties, (iv) the defending of any lawsuits or other legal
proceedings, whether judicial or administrative, challenging this Agreement or
the consummation of the transactions contemplated hereby, including seeking to
have any stay or temporary restraining order entered by any court or other
Governmental Entity vacated or reversed and (v) the execution and delivery of
any additional instruments necessary to consummate the transactions contemplated
by, and to fully carry out the purposes of, this Agreement. In connection with
and without limiting the foregoing, the Company and its Board of Directors
shall, if any state takeover statute or similar statute or regulation is or
becomes applicable to the Merger, this Agreement or any of the other
transactions contemplated by this Agreement, use all reasonable efforts to
ensure that the Merger and the other transactions contemplated by this Agreement
may be consummated as promptly as practicable on the terms contemplated by this
Agreement and otherwise to minimize the effect of such statute or regulation on
the Merger, this Agreement and the other transactions contemplated by this
Agreement. Nothing in this Agreement shall be deemed to require Parent to
dispose of any significant asset or collection of assets.
(b) The Company shall give prompt notice to Parent of any representation or
warranty made by it contained in this Agreement becoming untrue or inaccurate
such that the condition set forth in Section 6.02(a) would not be satisfied;
provided, however, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Agreement.
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(c) Parent shall give prompt notice to the Company of any representation or
warranty made by it or Sub contained in this Agreement becoming untrue or
inaccurate such that the condition set forth in Section 6.03(a) would not be
satisfied; provided, however, that no such notification shall affect the
representations, warranties, covenants or agreements of the parties or the
conditions to the obligations of the parties under this Agreement.
SECTION 5.06. Stock Options. (a) As soon as practicable following the
date of this Agreement, the Board of Directors of the Company (or, if
appropriate, any committee administering the Company Stock Plans, as defined
below) shall adopt such resolutions or take such other actions as may be
required to effect the following:
(i) adjust the terms of all outstanding options to purchase shares of
Company Common Stock (the "Stock Options") granted under any plan or
arrangement providing for the grant of options to purchase shares of
Company Common Stock to current or former officers, directors, employees or
consultants of the Company (the "Company Stock Plans"), whether vested or
unvested, as necessary to provide that, at the Effective Time, each Stock
Option outstanding immediately prior to the Effective Time shall be amended
and converted into an option to acquire, on the same terms and conditions
as were applicable under the Stock Option, the number of shares of Parent
Common Stock (rounded down to the nearest whole share) determined by
multiplying the number of shares of Company Common Stock subject to such
Stock Option by the Exchange Ratio, at a price per share of Parent Common
Stock equal to (A) the aggregate exercise price for the shares of Company
Common Stock otherwise purchasable pursuant to such Stock Option divided by
(B) the aggregate number of shares of Parent Common Stock deemed
purchasable pursuant to such Stock Option (each, as so adjusted, an
"Adjusted Option"); provided that such exercise price shall be rounded up
to the nearest whole cent; and
(ii) make such other changes to the Company Stock Plans as Parent and
the Company may agree are appropriate to give effect to the Merger.
(b) The adjustments provided herein with respect to any Stock Options that
are "incentive stock options" as defined in Section 422 of the Code shall be and
are intended to be effected in a manner which is consistent with Section 424(a)
of the Code.
(c) At the Effective Time, by virtue of the Merger and without the need of
any further corporate action, Parent shall assume the Company Stock Plans, with
the result that all obligations of the Company under the Company Stock Plans,
including with respect to Stock Options outstanding at the Effective Time shall
be obligations of Parent following the Effective Time.
(d) No later than the Effective Time, Parent shall prepare and file with
the SEC a registration statement on Form S-8 (or another appropriate form)
registering a number of shares of Parent Common Stock equal to the number of
shares subject to the Adjusted Options. Such registration statement shall be
kept effective (and the current status of the prospectus or prospectuses
required thereby shall be maintained) at least for so long as any Adjusted
Options may remain outstanding.
(e) As soon as practicable after the Effective Time, Parent shall deliver
to the holders of Stock Options appropriate notices setting forth such holders'
rights pursuant to the respective Company Stock Plans and the agreements
evidencing the grants of such Stock Options and that such Stock Options and
agreements shall be assumed by Parent and shall continue in effect on the same
terms and conditions (subject to the adjustments required by this Section 5.06
after giving effect to the Merger).
(f) A holder of an Adjusted Option may exercise such Adjusted Option in
whole or in part in accordance with its terms by delivering a properly executed
notice of exercise to Parent, together with the consideration therefor and the
United States Federal withholding tax information, if any, required in
accordance with the related Company Stock Plan.
(g) The Company shall terminate the Company's 1995 Employee Stock Purchase
Plan ("ESPP") by having its Board of Directors amend the ESPP as necessary to
provide that: (i) any shares of Company Common Stock to be purchased under the
ESPP on a new "Exercise Date" (as such term is defined in the
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ESPP) set by the Board of Directors of the Company, which Exercise Date shall be
on the last trading day immediately prior to the Effective Time, or such earlier
time as the Board shall specify, and (ii) immediately following such purchase of
shares of Company Common Stock, the ESPP shall terminate.
(h) Except as otherwise contemplated by this Section 5.06 and except to the
extent required under the respective terms of the Stock Options, all
restrictions or limitations on transfer and vesting with respect to Stock
Options awarded under the Company Stock Plans or any other plan, program or
arrangement of the Company, to the extent that such restrictions or limitations
shall not have already lapsed, shall remain in full force and effect with
respect to such options after giving effect to the Merger and the assumption by
Parent as set forth above.
SECTION 5.07. Indemnification. (a) From and after the consummation of the
Merger, Parent will, and will cause the Surviving Corporation to, fulfill and
honor in all respects the obligations of the Company pursuant to (i) each
indemnification agreement in effect at such time between the Company and each
person who is or was a director or officer of the Company at or prior to the
Effective Time and (ii) any indemnification provisions under the Company's
Restated Certificate of Incorporation or By-laws as each is in effect on the
date hereof (the persons to be indemnified pursuant to the agreements or
provisions referred to in clauses (i) and (ii) of this Section 5.07(a) shall be
referred to as, individually, the "Indemnified Party"). The Certificate of
Incorporation and By-laws of the Surviving Corporation shall contain the
provisions with respect to indemnification and exculpation from liability set
forth in the Company's Certificate of Incorporation and By-laws on the date of
this Agreement, which provisions shall not be amended, repealed or otherwise
modified for a period of six years after the Effective time in any manner that
would adversely affect the rights thereunder of any Indemnified Party.
(b) Notwithstanding anything to the contrary contained in this Agreement,
from and after the date hereof, the Company may enter into indemnification
agreements, or amend existing indemnification agreements, with current directors
and officers of the Company providing for customary provisions under Delaware
law.
(c) This Section 5.07 shall survive the consummation of the Merger at the
Effective Time, is intended to be for the benefit of the Company, Parent, the
Surviving Corporation and each Indemnified Party and such Indemnified Party's
heirs and representatives, and shall be binding on all successors and assigns of
Parent and the Surviving Corporation.
SECTION 5.08. Fees and Expenses. All fees and expenses incurred in
connection with the Merger, this Agreement and the transactions contemplated by
this Agreement shall be paid by the party incurring such fees or expenses,
whether or not the Merger is consummated, except that expenses incurred in
connection with filing, printing and mailing the Proxy Statement and the Form
S-4, shall be shared equally by Parent and the Company.
SECTION 5.09. Public Announcements. Parent and Sub, on the one hand, and
the Company, on the other hand, will, to the extent reasonably practicable,
consult with each other before issuing, and give each other the opportunity to
review and comment upon, any press release or other public statements with
respect to the transactions contemplated by this Agreement, including the
Merger, and shall not issue any such press release or make any such public
statement prior to such consultation, except as may be required by applicable
law, court process or by obligations pursuant to any listing agreement with any
national securities exchange or national securities quotation system. The
parties agree that the initial press release to be issued with respect to the
transactions contemplated by this Agreement shall be in the form heretofore
agreed to by the parties.
SECTION 5.10. Affiliates. (a) Prior to the Closing Date, the Company
shall deliver to Parent a letter identifying all persons who are, in the
Company's reasonable judgment, at the time this Agreement is submitted for
approval and adoption to the stockholders of the Company, "affiliates" of the
Company for purposes of Rule 145 under the Securities Act or for purposes of
qualifying the Merger for pooling of interests accounting treatment under
Opinion 16 of the Accounting Principles Board and applicable SEC rules and
regulations. The Company shall use its reasonable efforts to cause each such
person to deliver to Parent on or prior to the Closing Date a written agreement
substantially in the form attached as Exhibit A hereto.
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(b) Parent shall use reasonable efforts to cause all persons who are, in
Parent's reasonable judgment, "affiliates" of Parent for purposes of qualifying
the Merger for pooling of interests accounting treatment under Opinion 16 of the
Accounting Principles Board and applicable SEC rules and regulations to comply
with the fourth paragraph of Exhibit A hereto.
SECTION 5.11. Stock Exchange Listing. To the extent Parent does not issue
treasury shares in the Merger or under the Company Stock Plans which are already
listed, Parent shall use its reasonable efforts to cause the shares of Parent
Common Stock to be issued in the Merger and under the Company Stock Plans to be
approved for listing on the NYSE, subject to official notice of issuance, prior
to the Closing Date.
SECTION 5.12. Pooling of Interests. Each of the Company and Parent will
use reasonable efforts to cause the transactions contemplated by this Agreement,
including the Merger, to be accounted for as a pooling of interests under
Opinion 16 of the Accounting Principles Board and applicable SEC rules and
regulations, and such accounting treatment to be accepted by each of the
Company's and Parent's independent public accountants, and by the SEC,
respectively, and each of the Company and Parent agrees that it will voluntarily
take no action that would cause (to its knowledge after consultation with its
independent public accountants) such accounting treatment not to be obtained.
SECTION 5.13. Stockholder Agreement Legend. The Company will inscribe
upon any Certificate representing Subject Shares tendered by a Stockholder (as
such terms are defined in the Stockholder Agreement) for such purpose the
following legend: "THE SHARES OF COMMON STOCK, PAR VALUE $.001 PER SHARE, OF
GYNECARE, INC. REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A STOCKHOLDER
AGREEMENT DATED AS OF AUGUST 4, 1997, AND ARE SUBJECT TO TERMS THEREOF. COPIES
OF SUCH AGREEMENT MAY BE OBTAINED AT THE PRINCIPAL EXECUTIVE OFFICES OF
GYNECARE, INC.".
SECTION 5.14. Tax Treatment. Each of Parent and the Company shall not
take any action and shall not fail to take any action or suffer to exist any
condition which action or failure to act or condition would prevent, or would be
reasonably likely to prevent, the Merger from qualifying as a reorganization
within the meaning of Section 368(a) of the Code, and each shall use reasonable
efforts to obtain the opinion of counsel referred to in Section 6.03(c).
SECTION 5.15. Five Million Dollar Credit Facility. In the event of any
termination of this Agreement (other than any termination (x) pursuant to
Section 7.01(b)(iii) or (y) pursuant to Section 7.01(d), provided that the
Company shall have wilfully and intentionally breached this Agreement and such
breach shall have given rise to Parent's right to terminate under such Section
7.01(d)), Parent and the Company shall enter into the credit agreement attached
as Exhibit B hereto (the "Five Million Dollar Credit Facility").
SECTION 5.16 One Million Dollar Credit Facility. In the event the
termination date set forth in Section 7.01(b)(i) hereof is extended pursuant to
the first proviso of such Section, Parent hereby commits to loan to the Company,
upon the termination of this Agreement in accordance with its terms, an
aggregate principal amount of $1 million (the "One Million Dollar Credit
Facility") on the terms and subject to the conditions set forth in the Five
Million Dollar Credit Facility, except that for purposes of the One Million
Dollar Credit Facility, the term "Aggregate Principal Amount" (as defined in the
Five Million Dollar Credit Facility) shall be defined as $1 million; provided,
that notwithstanding the foregoing, Parent's obligation pursuant to this Section
5.16 shall be subject to the condition that the Company shall not have wilfully
and intentionally breached this Agreement as of November 30, 1997; provided
further, that the parties hereto acknowledge and agree that a loan by Parent
pursuant to the One Million Dollar Credit Facility shall in no way obligate
Parent to make a loan to the Company pursuant to the Five Million Dollar Credit
Facility.
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ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.01. Conditions to Each Party's Obligation to Effect the
Merger. The respective obligation of each party to effect the Merger is subject
to the satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Stockholder Approval. This Agreement shall have been approved and
adopted by the affirmative vote of the holders of a majority of the
outstanding shares of Company Common Stock.
(b) NYSE Listing. The shares of Parent Company Stock issuable to the
Company's stockholders in the Merger and under the Company Stock Plans
shall have been approved for listing on the NYSE, subject to official
notice of issuance.
(c) HSR Act. The waiting period (and any extension thereof)
applicable to the Merger under the HSR Act shall have been terminated or
shall have expired.
(d) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition
(collectively, "Restraints") preventing the consummation of the Merger
shall be in effect.
(e) Form S-4. The Form S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order.
SECTION 6.02. Conditions to Obligations of Parent and Sub. The
obligations of Parent and Sub to effect the Merger are further subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Representations and Warranties. The representations and
warranties of the Company contained in this Agreement that are qualified as
to material adverse effect shall be true and correct, and the
representations and warranties of the Company contained in this Agreement
that are not so qualified shall be true and correct except where the
failure to be so true and correct would not have a material adverse effect
on the Company, in each case as of the date of this Agreement and as of the
Closing Date (except to the extent such representations and warranties
expressly relate to an earlier date, in which case as of such earlier date)
as though made on the Closing Date (or such earlier date). Parent shall
have received a certificate signed on behalf of the Company by the chief
executive officer and the chief financial officer of the Company to such
effect.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all material obligations required to be
performed by it under this Agreement at or prior to the Closing Date, and
Parent shall have received a certificate signed on behalf of the Company by
the chief executive officer and the chief financial officer of the Company
to such effect.
(c) Letters from Company Affiliates. Parent shall have received from
each person named in the letter referred to in Section 5.10(a) an executed
copy of an agreement substantially in the form of Exhibit A hereto.
(d) No Governmental Litigation. There shall not be pending any suit
by, action by or proceeding by any Governmental Entity, (i) challenging the
acquisition by Parent or Sub of any shares of Company Common Stock, seeking
to restrain or prohibit the consummation of the Merger, or seeking to place
limitations on the ownership of shares of Company Common Stock (or shares
of common stock of the Surviving Corporation) by Parent or Sub, (ii)
seeking to prohibit or materially limit the ownership or operation by the
Company, Parent or any of Parent's subsidiaries of any material portion of
any business or of any assets of the Company, Parent or any of Parent's
subsidiaries, or to compel the Company, Parent or any of Parent's
subsidiaries to dispose of or hold separate any material portion of any
business or of any assets of the Company, Parent or any of Parent's
subsidiaries, as a result of the Merger or (iii) seeking to prohibit Parent
or any of its subsidiaries from effectively controlling in any material
respect the business or operations of the Company.
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(e) No Material Adverse Change. At any time on or after the date of
this Agreement there shall not have occurred any material adverse change in
the Company (or if one shall have occurred, it shall not have been cured).
(f) Pooling Letters. Parent and the Company shall have received
letters, respectively, from Coopers & Lybrand L.L.P., dated as of the
Closing Date, addressed to Parent and the Company, stating in substance the
matters to be stated by Coopers & Lybrand L.L.P. pursuant to Sections
5.03(b) and 5.02(b), respectively.
SECTION 6.03. Conditions to Obligation of the Company. The obligation of
the Company to effect the Merger is further subject to the satisfaction or
waiver on or prior to the Closing Date of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Parent and Sub contained in this Agreement that are qualified
as to material adverse effect shall be true and correct, and the
representations and warranties of Parent and Sub contained in this
Agreement that are not so qualified shall be true and correct except where
the failure to be so true and correct would not have a material adverse
effect on Parent, in each case as of the date of this Agreement and as of
the Closing Date (except to the extent such representations and warranties
expressly relate to an earlier date, in which case as of such earlier date)
as though made on the Closing Date (or such earlier date). The Company
shall have received a certificate signed on behalf of Parent by an
executive officer of Parent to such effect.
(b) Performance of Obligations of Parent and Sub. Parent and Sub
shall have performed in all material respects all obligations required to
be performed by them under this Agreement at or prior to the Closing Date,
and the Company shall have received a certificate signed on behalf of
Parent by an executive officer of Parent to such effect.
(c) Tax Opinion. The opinions of Wilson Sonsini Goodrich & Rosati,
counsel to the Company, and Cravath, Swaine & Moore, counsel to Parent,
shall be delivered to the Company and Parent, respectively, in form and
substance reasonably satisfactory to the Company, stating that the Merger
will be treated for United States Federal income tax purposes as a
"reorganization" within the meaning of Section 368(a) of the Code and that
Parent, Sub and the Company will each be a party to that reorganization
within the meaning of Section 368(b) of the Code. In rendering such
opinion, such counsel shall be entitled to rely upon (and Parent, Sub and
the Company shall make) customary representations reasonably requested by
such counsel. The opinion shall be dated the date that is two business days
prior to the date the Proxy Statement is first mailed to stockholders of
the Company and shall not have been withdrawn or modified in any material
respect.
(d) No Material Adverse Change. At any time on or after the date of
this Agreement, there shall not have occurred any material adverse change
in Parent (or, if one shall have occurred, it shall not have been cured).
SECTION 6.04. Frustration of Closing Conditions. None of the Company,
Parent or Sub may rely on the failure of any condition set forth in Section
6.01, 6.02 or 6.03, as the case may be, to be satisfied if such failure was
caused by such party's failure to use reasonable efforts to consummate the
Merger and the other transactions contemplated by this Agreement, as required by
and subject to Section 5.05.
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ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.01. Termination. This Agreement may be terminated, and the
Merger contemplated hereby may be abandoned, at any time prior to the Effective
Time, whether before or after the Stockholder Approval:
(a) by mutual written consent of Parent, Sub and the Company;
(b) by either Parent or the Company:
(i) if the Merger shall not have been consummated by November 30,
1997 for any reason; provided, however, that if the Merger shall not
have consummated by such date because the waiting period under the HSR
Act shall not have expired or been terminated, such date shall be
extended to December 31, 1997; provided further, that the right to
terminate this Agreement under this Section 7.01(b)(i) shall not be
available to any party whose action or failure to act has been a
principal cause of or resulted in the failure of the Merger to occur on
or before such date and such action or failure to act constitutes a
breach of this Agreement;
(ii) if any Restraint having any of the effects set forth in
Section 6.02(d) shall be in effect and shall have become final and
nonappealable; or
(iii) if the Stockholder Approval shall not have been obtained at
the Stockholders Meeting duly convened therefor or at any adjournment or
postponement thereof or by written consent;
(c) by the Company, upon a breach of any representation, warranty,
covenant or agreement on the part of Parent set forth in this Agreement, or
if any such representation or warranty of Parent shall have become
inaccurate, in either case such that the conditions set forth in Section
6.03(a) or Section 6.03(b), as the case may be, would not be satisfied as
of the time of such breach or as of the time such representation or
warranty shall have become inaccurate; provided, that if such inaccuracy in
Parent's representations and warranties or breach by Parent is curable by
Parent through the exercise of its reasonable efforts, then (i) the Company
may not terminate this Agreement under this Section 7.01(c) with respect to
a particular breach or inaccuracy prior to or during the 45-day period
commencing upon delivery by the Company of written notice to Parent
describing such breach or inaccuracy, provided Parent continues to exercise
reasonable efforts to cure such breach or inaccuracy and (ii) the Company
may not, in any event, terminate this Agreement under this Section 7.01(c)
if such inaccuracy or breach shall have been cured in all material respects
during such 45-day period; and, provided further that the Company may not
terminate this Agreement pursuant to this Section 7.01(c) if it shall have
wilfully and materially breached this Agreement; or
(d) by Parent, upon a breach of any representation, warranty, covenant
or agreement on the part of the Company set forth in this Agreement, or if
any such representation or warranty of the Company shall have become
inaccurate, in either case such that the conditions set forth in Section
6.02(a) or Section 6.02(b), as the case may be, would not be satisfied as
of the time of such breach or as of the time such representation or
warranty shall have become inaccurate; provided, that if such inaccuracy in
the Company's representations and warranties or breach by the Company is
curable by the Company through the exercise of its reasonable efforts, then
(i) Parent may not terminate this Agreement under this Section 7.01(d) with
respect to a particular breach or inaccuracy prior to or during the 45-day
period commencing upon delivery by Parent of written notice to the Company
describing such breach or inaccuracy, provided the Company continues to
exercise reasonable efforts to cure such breach or inaccuracy and (ii)
Parent may not, in any event, terminate this Agreement under this Section
7.01(d) if such inaccuracy or breach shall have been cured in all material
respects during such 45-day period; and provided further that Parent may
not terminate this Agreement pursuant to this Section 7.01(d) if it shall
have wilfully and materially breached this Agreement.
SECTION 7.02. Effect of Termination. In the event of termination of this
Agreement by either the Company or Parent as provided in Section 7.01, this
Agreement shall forthwith become void and have no
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effect, without any liability or obligation on the part of Parent, Sub or the
Company, other than the provisions of Section 3.01(s), the last sentence of
Section 5.04, Section 5.08, Section 5.09, Section 5.15, this Section 7.02 and
Article VIII and except to the extent that such termination results from the
wilful and material breach by a party of any of its representations, warranties,
covenants or agreements set forth in this Agreement.
Section 7.03. Amendment. This Agreement may be amended by the parties
hereto at any time before or after any required approval of matters presented in
connection with the Merger by the stockholders of the Company; provided,
however, that after any such approval, there shall be made no amendment that by
law requires further approval by such stockholders without the further approval
of such stockholders. This Agreement may not be amended except by an instrument
in writing signed on behalf of each of the parties hereto.
Section 7.04. Extension; Waiver. At any time prior to the Effective Time,
the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties contained herein or in any document delivered
pursuant hereto or (c) subject to the proviso of Section 7.03, waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party to any such extension or waiver shall be valid only if set forth
in an instrument in writing signed on behalf of such party. The failure of any
party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of such rights.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.01. Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 8.01
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
SECTION 8.02. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed given if
delivered personally or sent by overnight courier (providing proof of delivery)
to the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
if to Parent or Sub, to:
Johnson & Johnson
Corporate Headquarters
General Law Department
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933
Attention: Steven M. Rosenberg, Esq.
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Attention: Robert A. Kindler, Esq.
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if to the Company, to:
Gynecare, Inc.
235 Constitution Drive
Menlo Park, CA 94025
Attention: Roseanne Hirsch
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attention: David J. Segre
Marty W. Korman
SECTION 8.03. Definitions. For purposes of this Agreement:
(a) an "affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such first person;
(b) as it relates to the Company, "knowledge" means, with respect to
any matter in question, that any of the Chief Executive Officer, Chief
Financial Officer, Vice President and Medical Director or any other
executive officer of the Company has actual knowledge of such matter, and
as it relates to Parent, the term "knowledge" means, with respect to any
matter in question, that any of the Chief Executive Officer, Chief
Financial Officer, General Counsel or any other executive officer of Parent
has actual knowledge of such matter;
(c) "material adverse change" or "material adverse effect" means, when
used in connection with the Company and Parent, as the case may be, any
change or effect that is materially adverse to the business, properties,
assets or financial condition of either the Company or Parent and its
subsidiaries, taken as a whole, as the case may be; provided, however, that
(i) any occurrences relating to the economy in general or such entity's
industry in general and not specifically relating to such entity shall not
be taken into account in determining whether there has been or would be a
"material adverse change" or a "material adverse effect" on or with respect
to such entity, (ii) the delay or cancelation of orders for the Company's
products from customers or distributors (or other resellers) directly
attributable to the announcement of this Agreement or the pendency of the
Merger shall not be taken into account in determining whether there has
been or would be a "material adverse change" or a "material adverse effect"
on or with respect to the Company, (iii) the lack of or delay in
availability of components or raw materials from the Company's suppliers
directly attributable to the announcement of this Agreement or the pendency
of the Merger shall not be taken into account in determining whether there
has been or would be a "material adverse change" or a "material adverse
effect" on or with respect to the Company and (iv) stockholder litigation
brought or threatened against the Company or any member of the Board of
Directors of the Company in respect of this Agreement or the Merger shall
not be taken into account in determining whether there has been or would be
a "material adverse change" or a "material adverse effect" on or with
respect to the Company;
(d) "person" means an individual, corporation, partnership, joint
venture, association, trust, unincorporated organization or other entity;
(e) a "subsidiary" of any person means another person, an amount of
the voting securities, other voting ownership or voting partnership
interests of which is sufficient to elect at least a majority of its Board
of Directors or other governing body (or, if there are no such voting
interests, 50% or more of the equity interests of which) is owned directly
or indirectly by such first person.
SECTION 8.04. Interpretation. When a reference is made in this Agreement
to a Section, Exhibit or Schedule, such reference shall be to a Section of, or
an Exhibit or Schedule to, this Agreement unless otherwise indicated. The table
of contents and headings contained in this Agreement are for reference
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purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Whenever the words "include", "includes" or "including" are used
in this Agreement, they shall be deemed to be followed by the words "without
limitation".
SECTION 8.05. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
SECTION 8.06. Entire Agreement; No Third-Party Beneficiaries. This
Agreement, the Stockholder Agreement, the Five Million Dollar Credit Agreement
and the Confidentiality Agreement (a) constitute the entire agreement, and
supersede all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter of this Agreement, the
Stockholder Agreement and the Confidentiality Agreement and (b) except for the
provisions of Article II, Section 5.06 and Section 5.07, are not intended to
confer upon any person other than the parties any rights or remedies.
SECTION 8.07. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
SECTION 8.08. Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned, in whole or in part, by
operation of law or otherwise by any of the parties without the prior written
consent of the other parties, except that Sub may assign, in its sole
discretion, any of or all its rights, interests and obligations under this
Agreement to Parent or to any direct or indirect wholly owned subsidiary of
Parent, but no such assignment shall relieve Sub of any of its obligations
hereunder. Subject to the preceding sentence, this Agreement will be binding
upon, inure to the benefit of, and be enforceable by, the parties and their
respective successors and assigns.
SECTION 8.09. Enforcement. The parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or in any Delaware state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (a) consents to submit itself to the
personal jurisdiction of any court of the United States located in the State of
Delaware or of any Delaware state court in the event any dispute arises out of
this Agreement or the transactions contemplated by this Agreement, (b) agrees
that it will not attempt to deny or defeat such personal jurisdiction by motion
or other request for leave from any such court and (c) agrees that it will not
bring any action relating to this Agreement or the transactions contemplated by
this Agreement in any court other than a court of the United States located in
the State of Delaware or a Delaware state court.
SECTION 8.10. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect. Upon such determination that any
term other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible to the fullest
extent permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
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<PAGE> 132
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be signed by their respective officers thereunto duly authorized, all as of
the date first written above.
JOHNSON & JOHNSON,
by /s/ JAMES R. UTASKI
------------------------------------
Name: James R. Utaski
Title: Vice President,
Corporate Development
LIMA MERGER CORP.,
by /s/ FRANK RYAN
------------------------------------
Name: Frank Ryan
Title: President
GYNECARE, INC.,
by /s/ ROSEANNE HIRSCH
------------------------------------
Name: Roseanne Hirsch
Title: Chief Executive Officer
28
<PAGE> 133
EXHIBIT A
TO THE MERGER AGREEMENT
FORM OF AFFILIATE LETTER
Dear Sirs:
The undersigned, a holder of shares of common stock, par value $.001 per
share ("Company Common Stock"), of Gynecare, Inc., a Delaware corporation (the
"Company"), acknowledges that the undersigned may be deemed an "affiliate" of
the Company within the meaning of Rule 145 ("Rule 145") promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), by the Securities and
Exchange Commission (the "SEC") and may be deemed an "affiliate" of the Company
for purposes of qualifying the Merger (as defined below) for pooling of
interests accounting treatment under Opinion 16 of the Accounting Principles
Board and applicable SEC rules and regulations, although nothing contained
herein should be construed as an admission of either such fact. Pursuant to the
terms of the Agreement and Plan of Merger dated as of August 4, 1997, among
Johnson & Johnson, a New Jersey corporation ("Parent"), Lima Merger Corp., a
Delaware corporation and a wholly owned subsidiary of Parent ("Sub"), and the
Company, Sub will be merged with and into the Company (the "Merger"), and in
connection with the Merger, the undersigned is entitled to receive common stock,
par value $1.00 per share ("Parent Common Stock"), of Parent.
If in fact the undersigned were an affiliate under the Securities Act, the
undersigned's ability to sell, assign or transfer the Parent Common Stock
received by the undersigned in exchange for any shares of Company Common Stock
in connection with the Merger may be restricted unless such transaction is
registered under the Securities Act or an exemption from such registration is
available. The undersigned understands that such exemptions are limited and the
undersigned has obtained or will obtain advice of counsel as to the nature and
conditions of such exemptions, including information with respect to the
applicability to the sale of such securities of Rules 144 and 145(d) promulgated
under the Securities Act. The undersigned understands that Parent will not be
required to maintain the effectiveness of any registration statement under the
Securities Act for the purposes of resale of Parent Common Stock by the
undersigned.
The undersigned hereby represents to and covenants with Parent that the
undersigned will not sell, assign or transfer any of the Parent Common Stock
received by the undersigned in exchange for shares of Company Common Stock in
connection with the Merger except (i) pursuant to an effective registration
statement under the Securities Act, (ii) in conformity with the volume and other
limitations of Rule 145 or (iii) in a transaction which, in the opinion of the
general counsel of Parent or other counsel reasonably satisfactory to Parent (it
being expressly agreed that Wilson Sonsini Goodrich & Rosati shall be considered
reasonably satisfactory for all purposes under this Agreement) or as described
in a "no-action" or interpretive letter from the Staff of the SEC specifically
issued with respect to a transaction to be engaged in by the undersigned, is not
required to be registered under the Securities Act.
The undersigned hereby further represents to and covenants with Parent that
the undersigned has not, within the 30 days prior to the Closing Date, sold,
transferred or otherwise disposed of any shares of Company Common Stock held by
the undersigned and that the undersigned will not sell, transfer or otherwise
dispose of any Parent Common Stock received by the undersigned in connection
with the Merger until after such time as results covering at least 30 days of
post-Merger combined operations of the Company and Parent have been published by
Parent, in the form of a quarterly earnings report, an effective registration
statement filed with the SEC, a report to the SEC on Form 10-K, 10-Q or 8-K, or
any other public filing or announcement which includes such combined results of
operations, except as would not otherwise reasonably be expected to adversely
affect the qualification of the Merger as a pooling-of-interests.
In the event of a sale or other disposition by the undersigned of Parent
Common Stock pursuant to Rule 145, the undersigned will supply Parent with
evidence of compliance with such Rule, in the form of a letter in the form of
Annex I hereto (or other reasonably satisfactory documentation evidencing
compliance with Rule
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145) and the opinion of counsel or no-action letter referred to above. The
undersigned understands that Parent may instruct its transfer agent to withhold
the transfer of any Parent Common Stock disposed of by the undersigned, but that
(provided such transfer is not prohibited by any other provision of this letter
agreement) upon receipt of such evidence of compliance, Parent shall cause the
transfer agent to effectuate the transfer of the Parent Common Stock sold as
indicated in such letter.
Parent covenants that it will take all such actions as may be reasonably
available to it to permit the sale or other disposition of Parent Common Stock
by the undersigned under Rule 145 in accordance with the terms thereof.
The undersigned acknowledges and agrees that the legends set forth below
will be placed on certificates representing Parent Common Stock received by the
undersigned in connection with the Merger or held by a transferee thereof, which
legends will be removed by delivery of substitute certificates upon receipt of
an opinion in form and substance reasonably satisfactory to Parent from counsel
reasonably satisfactory to Parent to the effect that such legends are no longer
required for purposes of the Securities Act.
There will be placed on the certificates for Parent Common Stock issued to
the undersigned, or any substitutions therefor, a legend stating in substance:
"The shares represented by this certificate were issued pursuant to a
business combination which is being accounted for as a pooling of
interests, in a transaction to which Rule 145 promulgated under the
Securities Act of 1933 applies. The shares have not been acquired by the
holder with a view to, or for resale in connection with, any distribution
thereof within the meaning of the Securities Act of 1933. The shares may
not be sold, pledged or otherwise transferred (i) until such time as
Johnson & Johnson shall have published financial results covering at least
30 days of combined operations after the Effective Time and (ii) except in
accordance with an exemption from the registration requirements of the
Securities Act of 1933."
The undersigned acknowledges that (i) the undersigned has carefully read
this letter and understands the requirements hereof and the limitations imposed
upon the distribution, sale, transfer or other disposition of Parent Common
Stock and (ii) the receipt by Parent of this letter is an inducement to Parent's
obligations to consummate the Merger.
Very truly yours,
Dated:
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<PAGE> 135
ANNEX I
TO EXHIBIT A
[NAME] [DATE]
On , the undersigned sold the securities of Johnson &
Johnson ("Parent") described below in the space provided for that purpose (the
"Securities"). The Securities were received by the undersigned in connection
with the merger of Lima Merger Corp., a Delaware corporation, with and into
Gynecare, Inc.
Based upon the most recent report or statement filed by Parent with the
Securities and Exchange Commission, the Securities sold by the undersigned were
within the prescribed limitations set forth in paragraph (e) of Rule 144
promulgated under the Securities Act of 1933, as amended (the "Securities Act").
The undersigned hereby represents that the Securities were sold in
"brokers' transactions" within the meaning of Section 4(4) of the Securities Act
or in transactions directly with a "market maker" as that term is defined in
Section 3(a)(38) of the Securities Exchange Act of 1934, as amended. The
undersigned further represents that the undersigned has not solicited or
arranged for the solicitation of orders to buy the Securities, and that the
undersigned has not made any payment in connection with the offer or sale of the
Securities to any person other than to the broker who executed the order in
respect of such sale.
Very truly yours,
[SPACE TO BE PROVIDED FOR DESCRIPTION OF THE SECURITIES.]
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EXHIBIT B
LOAN AND SECURITY AGREEMENT
LOAN AND SECURITY AGREEMENT
DATED AS OF , 1997, BETWEEN
J COMPANY A NEW JERSEY CORPORATION
(THE "LENDER")
AND
G COMPANY, A DELAWARE CORPORATION
(THE "BORROWER")
The Borrower has applied to the Lender for a loan of up to the principal
amount set forth below, the proceeds of which are to be used as described below.
The Lender is willing to make such a loan to the Borrower, and the Borrower is
willing to borrow such funds from the Lender, under the terms and conditions as
set forth in this Loan and Security Agreement.
ARTICLE I.
CERTAIN TERMS AND DEFINITIONS
This Article I sets forth certain significant terms of this Loan and
Security Agreement, as well as the meaning of certain capitalized terms used
herein.
"Aggregate Principal Amount" of the Loan shall be $5,000,000.
"Borrower's Address" is 235 Constitution Drive, Menlo Park, California.
"Collateral" shall mean property of Borrower of any nature whatsoever,
including without limitation, real and personal, tangible and intangible,
together with all present and future attachments, additions and accessories
thereto, replacements and substitutions therefor and proceeds thereof,
including, amounts payable under any insurance policies with respect thereto.
For purposes of this Agreement, the term "intangible" shall be deemed to include
without limitation "accounts", "instruments", "documents", "chattle paper",
"drafts", "checks" and "general intangibles" (including without limitation all
forms of intellectual property), as such terms are defined in the Uniform
Commercial Code.
"Collateral Location" shall be 235 Constitution Drive, Menlo Park,
California.
"Interest Rate" is one percent above the Prime Rate. Each borrowing
hereunder shall bear interest at the Interest Rate in effect on the date of such
borrowing.
"Loan Commitment Expiration Date" shall be the first anniversary of the
date of this Agreement, the date by which all of the funds of the Loan must be
drawn down if they are to be drawn down at all.
"Prime Rate" means the prime rate of interest reported from time to time in
the Wall Street Journal (or, if not published, such other nationally recognized
business periodical as Borrower and Lender shall reasonably agree).
"Purpose of Loan" shall be: Bridge financing of working capital and
ordinary operating expenses pending consummation of alternative financing.
Other capitalized terms used in this Agreement, shall have the respective
meanings assigned to them herein.
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ARTICLE II.
LOAN
2.01 Amount and Terms of Loan. Subject to and upon the terms and
conditions set forth in this Agreement, Lender agrees to loan to Borrower at any
time or from time to time, on or before the Loan Commitment Expiration Date, an
aggregate amount not to exceed the Aggregate Principal Amount (the "Loan"),
which may be drawn down as provided herein. Borrower shall give the Lender at
least three (3) business days prior written notice of each borrowing hereunder
(each such borrowing is referred to herein as a "Draw Down"). Only one Draw Down
shall be permitted in each month. Each such notice shall specify the date on
which Borrower desires to make a Draw Down and the amount of such Draw Down.
Each Draw Down shall be in the amount of at least $100,000, shall be in even
increments of $50,000 and shall not exceed $1,000,000. Each draw down shall be
made on the date specified in such notice, subject to the terms and conditions
of Article IV.
2.02 Note. The Borrower's obligation to pay the principal of, and
interest on, each Draw Down shall be evidenced by a promissory note to the order
of the Lender, in the form of Exhibit A annexed hereto (each such promissory
note is referred to herein as a "Note", and all such promissory notes
outstanding hereunder at any time are referred to collectively as the "Notes"),
which shall
2.03 Payment of Principal and Interest. The principal of and interest on
each Draw Down shall be paid no later than the third anniversary of the date of
this Agreement. Interest shall be paid semi-annually at the Interest Rate in
effect at the date of each Draw Down on the outstanding principal amount of such
Draw Down from the date thereof until maturity (whether by acceleration or
otherwise) and thereafter upon demand. Interest shall be computed on the basis
of the actual number of days elapsed over a year of 365 days. Final payment
under each Note shall be in the amount of the then unpaid balance of principal
and all interest accrued and unpaid thereon.
2.04 Proceeds from future financings. Notwithstanding the foregoing,
Borrower shall pay Lender (i)100% of the proceeds of any debt financing it may
obtain after the date of the Merger Agreement, dated August 4, 1997, between
Borrower and Lender (the "Merger Agreement") (including any draw-down of
additional funds on existing lines of credit but excluding purchase money
equipment financing) in excess of $750,000 outstanding in the aggregate at any
time, and (ii) 30% of the proceeds (net of reasonable transaction costs) of any
equity financing it may obtain (excluding the proceeds of stock option
exercises), until all principal and interest due hereunder and under each Note
shall have been paid in full to Borrower. Such proceeds shall be paid to Lender
directly at the closing of any such financing, rather than being paid to
Borrower for subsequent payment to Lender. The provisions of Section 7.01 shall
not be applicable to such indebtedness as may be incurred in compliance with the
provisions of this Section 2.04
2.05 Overdue Obligations. In the event that the Borrower shall fail to
pay when due (whether at maturity, by reason of acceleration or otherwise) any
principal of, or interest on, the Loan or any other amount owing hereunder or
under any Note, such overdue amounts shall bear (to the extent permitted by
applicable law) interest on demand at a rate per annum equal to the lesser of
(a) two percent (2%) per month and (b) the maximum contract rate permitted under
applicable law, until such unpaid amount has been paid in full (whether before
or after judgment). All interest provided in this Section 2.05 shall be
immediately due and payable.
2.06 Optional Prepayments. Borrower shall have the right at any time, and
from time to time, upon at least 5 days' prior written notice to Lender, to
prepay any Note in whole or in part. Upon such written notice of Borrower to
make such prepayment, the amount therein specified to be prepaid shall be due
and payable on the date therein specified for such prepayment, together with
accrued interest thereon to such date. No amount so prepaid may be reborrowed
under this Agreement.
2.07 Method of Payment. Borrower shall make each payment hereunder or
under any Note by check at the address of Lender set forth below or by wire
transmittal to such account as Lender may direct or to such other place or to
such other account as Lender may direct from time to time in writing.
2.08 Use of Proceeds. The proceeds of the Loan shall be used solely in
furtherance of the Purpose of the Loan.
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ARTICLE III
SECURITY, COLLATERAL AND GUARANTY
3.01 Security Agreement and Collateral. As security for (i) the payment of
principal of, and interest on, the Loan and all other obligations, liabilities
and indebtedness of the Borrower to the Lender, whether now existing or
hereafter arising of every kind or nature whatsoever (collectively, the
"Obligations"), and (ii) the performance of and compliance with all the terms of
this Agreement and all other agreements with the Lender by the Borrower, the
Borrower hereby assigns and grants to the Lender a security interest in the
Collateral. The interests of the Lender in the Collateral may be evidenced by
one or more duly executed security agreements accompanied by such financing
statements, consents and other documents, duly executed, as the Lender may
reasonably request. Notwithstanding the foregoing, the security interests
granted herein shall not extend to and the term "Collateral" shall not include
any property, rights or licenses to the extent the granting of a security
interest therein is found by a court or other body of competent jurisdiction :
(i) to be contrary to applicable law or (ii) to be prohibited by or to
constitute a default under any agreement or document governing such property,
rights or licenses (but only to the extent such prohibition is enforceable under
applicable law).
3.02 Further Assurances. If at any time or times, any item of the
Collateral is lost, destroyed, damaged beyond repair and Borrower does not
replace or repair such item of Collateral within 90 days, then Borrower shall,
at the request and option of the Lender, pay to Lender any net insurance
proceeds received for such loss, destruction or damage to such item of the
Collateral, in each case within 20 days of the request by the Lender therefor,
or as soon thereafter as reasonably practicable. Borrower shall give Lender
prompt written notice in the event any item of the Collateral is lost,
destroyed, or damaged beyond repair.
3.03 Other Documents and Instruments. The Borrower shall, at its cost and
expense, cause all instruments and documents given as security pursuant to this
Agreement to be duly recorded and/or filed in all places necessary, in the
opinion of the Lender, to perfect and protect the lien or security interest of
the Lender in the Collateral. The Borrower hereby authorizes the Lender to file
one or more financing statements in respect of any security interest created
pursuant to this Agreement which may at any time be required or which, in the
opinion of the Lender, may at any time be desirable although the same may have
been executed only by the Lender, or, at the option of the Lender, to sign such
financing statement on behalf of the Borrower and file the same, and the
Borrower hereby irrevocably designates the Lender, its agents, representatives
and designees as agents and attorneys-in-fact for the Borrower for this purpose.
In the event that any re-recording or refilling thereof (or the filing of any
statement of continuation or assignment of any financing statement) is required
to protect and preserve such lien or security interest, the Borrower shall, at
its cost and expense, cause the same to be re-recorded or refiled at the time
and in the manner requested by the Lender.
ARTICLE IV
CONDITIONS TO BORROWING
4.01 Conditions to Borrowing. The commitment of the Lender to allow
Borrower to make each and every Draw Down hereunder (including the initial Draw
Down) shall be subject to satisfaction in full of the following conditions
precedent as of the date of each such Draw Down:
(a) Lender shall have received a Note duly executed by Borrower in the
principal amount of such Draw Down.
(b) Lender shall have received a certificate, dated the date of such
Draw Down, signed by a duly authorized officer of the Borrower stating
that: (i) no Event of Default has occurred and is continuing, and there is
no event or condition which with notice or the passage of time or both
would constitute an Event of Default; (ii) the representations and
warranties made by Borrower in Article V are true and correct on and as of
such date and (iii) the Borrower has duly complied with all of the
covenants and agreements and other terms of this Agreement;
(c) no Event or Default shall have occurred and be continuing and
there shall be no event or condition which with notice or the passage of
time or both would constitute an Event of Default; and
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ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender that, except as may be
expressly set forth on the Schedule of Exceptions annexed hereto:
5.01 Organization, Powers, etc. The Borrower (i) is a corporation, duly
organized, validly existing and in good standing under the laws of the State of
Delaware and (ii) has full right, power and authority to execute and deliver,
and to perform its obligations under, this Agreement and the Note(s).
5.02 Authority, etc. The execution, delivery and performance by the
Borrower of this Agreement and the Note(s) (i) have been duly authorized by all
requisite action and (ii) will not violate any provision of the certificate of
incorporation or by-laws, of the Borrower. The execution, delivery and
performance of this Agreement and the Note(s), and the borrowing hereunder, by
the Borrower will not violate any law or regulation, or any order or decree of
any court or governmental instrumentality or any indenture, agreement or other
instrument to which the Borrower is a party or by which it or any of its
property is or may be bound or affected, or be in conflict with, result in any
breach of or constitute (with due notice or passage of time or both) a default
under any such indenture, agreement or other instrument. This Agreement and the
Note(s) each constitutes the legal, valid and binding obligation of Borrower.
5.03 Financial Statements. The financial statements of the Borrower
furnished to the Lender fairly reflect, in all material respects, the financial
condition of the Borrower in accordance with Generally Accepted Accounting
Principles consistently applied, as of the date thereof.
5.04 Title to Properties, Collateral. The Borrower has good and marketable
title to all its properties and assets reflected on its financial statements
referred to above, including, without limitation, the Collateral. The only
indebtedness of Borrower, is as indicated in such financial statements and as of
the date hereof does not exceed $750,000. Except for the security interest
granted under Article III hereof and the security pledged as collateral for
Borrower's existing indebtedness referred to in the immediately preceding
sentence, the Collateral is free and clear from all liens, claims, security
interests, pledges, mortgages, charges and other encumbrances of all kinds
except Permitted Liens. No financing statement or lien covering any of the
Collateral or any proceeds thereof is on file in favor of any party except
Permitted Liens.
As used herein, "Permitted Liens" means any of the following:
(a) Liens arising from judgments, attachments or similar proceedings
not constituting an Event of Default;
(b) deposits or pledges made in connection with, or to secure payment
of, workmen's compensation, unemployment insurance, old age pensions or
other social security or similar obligations;
(c) Liens of carriers, mechanics and materialmen and other like Liens
in respect of obligations not overdue;
(d) such minor defects, irregularities, encumbrances, easements,
rights of way, and clouds on title as normally exist with respect to
similar properties which do not, individually or in the aggregate,
materially impair the use of the property affected hereby;
(e) Liens of landlords or lessors under leases arising by contract or
operation of law;
(f) Liens arising from purchase money obligations for tangible
personal property used in Borrower's business other than inventory, and
rights of lessors under capital leases; provided that no such Liens shall
extend to any assets of Borrower other than those financed by such a
purchase money obligation or capital lease (and accessions and additions
thereto and replacements and proceeds thereof);
(g) leases and licenses (excluded those related to intellectual
property) granted to third parties the granting of which does not result in
a material adverse effect on the business of Borrower;
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(h) Liens in favor of customs and revenue authorities which secure
payment of customs duties in connection with the importation of goods;
(i) Liens securing reimbursement obligations of Borrower under
documentary letters of credit; provided that such Liens shall attach only
to documents relating to such letters of credit, cash collateral therefor,
goods covered thereby and products and proceeds thereof;
(j) Liens which constitute rights of set-off of a customary nature or
bankers' Liens on amounts on deposit, whether arising by contract or by
operation of law, in connection with arrangements entered into with
depository institutions in the ordinary course of business; and
(k) Liens for taxes, fees, assessments or other governmental charges
or levies, either not delinquent or being contested in good faith by
appropriate proceedings.
5.05 Litigation. There is no action, suit or proceeding at law or in
equity or by or before any governmental instrumentality or other agency or
arbitrator now pending or, to the knowledge of the Borrower, threatened against
or affecting the Borrower which, could reasonably be expected would materially
adversely affect the condition, financial or otherwise, of the Borrower.
5.06 Indebtedness. Except as shown on the financial statements referred to
in Section 5.03 hereof, Borrower has no other existing or outstanding
indebtedness for borrowed monies or funds. No default or event of default or
event or condition which with the giving of notice or passage of time or both,
would constitute such a default or event of default, exist with respect to any
such indebtedness which is an amount in excess of $50,000.
5.07 Taxes. All federal, state and other tax returns of the Borrower
required to be filed have been duly filed, and all federal, state and other
taxes, assessments and other governmental charges or levies upon the Borrower
and its properties, income, profits and assets which are due and payable have
been paid.
5.08 Absence of Defaults. The Borrower is not in default under its
certificate of incorporation or by-laws, and no event has occurred which has not
been remedied, cured or waived, which constitutes an Event of Default hereunder,
or which constitutes, or which with due notice or passage of time or both, would
constitute a default or an event of default by the Borrower under any indenture,
agreement or other instrument to which the Borrower is a party or by which it or
any of its property is or may be bound except where any such default or event of
default could not reasonably be expected to have a material adverse effect on
the condition, financial or otherwise, of Borrower.
5.09 Compliance with Laws. The Borrower is, and has conducted its
business, in accordance with all applicable laws, rules and regulations of the
United States and any state or political subdivision thereof, and Borrower has
no knowledge that any of its properties or assets are in violation of any
applicable law, rule or regulation of the United States or any state or
political subdivision thereof, including, without limitation, any environmental
or hazardous waste law, rule or regulation except where the failure to do so
could not reasonably be expected to have a material adverse effect on the
condition, financial or otherwise, of Borrower.
5.10 Governmental Action. No action of, or filing with, any governmental
or public body or authority is required to authorize, or is otherwise required
in connection with, the execution, delivery and performance of this Agreement or
any Note other than filings necessary to perfect any security interests granted
hereunder.
5.11 Disclosure. None of the certificates, statements, reports or other
documents furnished to the Lender by the Borrower in connection herewith, (taken
together with Borrower's SEC filings) or this Agreement contain any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements contained herein or therein not misleading.
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ARTICLE VI
AFFIRMATIVE COVENANTS
The Borrower hereby agrees that from the date hereof through and until
payment in full of the Obligations and the termination of this Agreement, unless
the Lender shall otherwise expressly consent in writing, the Borrower shall:
6.01 Preservation of Existence and Similar Matters. Preserve and maintain
its existence, rights, franchises, licenses and privileges in the jurisdiction
of its formation; qualify and remain qualified and authorized to do business in
each jurisdiction in which the character of its properties or the nature of its
business requires such qualification and authorization; conduct its business as
currently conducted; keep true and complete books, records and accounts; keeps
its properties in good repair; and maintain adequate insurance against fire and
such other risks as is customary for similar entities similarly situated except
in each case where the failure to do so would not have a material adverse
effect.
6.02 Compliance with Applicable Law. Comply with all applicable laws,
rules, and regulations of the United States and any state or political
subdivision thereof, including, without limitation, all environmental and
hazardous waste laws, rules and regulations except where the failure to do so
could not reasonably be expected to have a material adverse effect on the
condition, financial or otherwise, of Borrower.
6.03 Taxes. Promptly pay all taxes, unless contested in good faith, and
all lawful claims for labor, materials and supplies which, if unpaid, might
become a lien or charge on its property or assets.
6.04 Notice to Lender. Promptly notify the Lender of the occurrence of any
Event of Default or the occurrence of any event or condition which with notice
or the passage of time or both would constitute an Event of Default, or the
commencement of any action, suit or proceeding which could reasonably be
expected to materially adversely affect the condition, financial or otherwise,
of the Borrower.
6.05 Financial Statements. Furnish to the Lender (i) within 90 days after
the end of each fiscal year of the Borrower, financial statements of the
Borrower as at and for the period then ended, certified in a manner and by
independent public accountants reasonably acceptable to the Lender, (ii) within
45 days after the end of each fiscal quarter of the Borrower, financial
statements of the Borrower as at and for the period then ended, certified in a
manner reasonably acceptable to the Lender by the chief financial officer of the
Borrower and (iii) from time to time such other information regarding the
operations and affairs of the Borrower as the Lender may reasonably request.
6.06 Inspection. Subject to reasonable security precautions, allow Lender
(or any representative of the Lender) to visit, enter upon and inspect
Borrower's premises, any of the other properties of the Borrower and any other
location where any of the Collateral may be located, to inspect and examine the
tangible Collateral and the books of account and other records and files of the
Borrower, and to make copies thereof, all at such reasonable times, upon
reasonable notice and as often as the Lender may reasonably request and with the
cooperation and assistance of Borrower; provided, however, that the foregoing
shall not be deemed to give Lender access to the proprietary intellectual
property of Borrower.
6.07 Use of Proceeds. Use the proceeds of the Loan solely for the
specified Purpose of Loan.
6.08 Further Assurances. Upon reasonable request of the Lender, duly
execute and deliver, or cause to be duly executed and delivered, to the Lender
such further instruments and do and cause to be done such reasonable further
acts as may be necessary or proper in the reasonable opinion of the Lender to
carry out more effectively the provisions and purposes of this Agreement. In
furtherance and not in limitation of the foregoing, Borrower will supply to
Lender promptly upon request such additional financial and other information as
Lender may from time to time reasonably request.
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ARTICLE VII
NEGATIVE COVENANTS
The Borrower hereby agrees that from the date hereof through and until
payment in full of the Obligations and the termination of this Agreement, the
Borrower shall not, without the prior written consent of the Lender in each
instance:
7.01 Indebtedness for Borrowed Money. Create, incur, assume or otherwise
become or remained obligated in respect of, or permit or suffer to exist or to
be created, incurred or assumed, any indebtedness for borrowed monies or funds,
except (a) the Loan, (b) any indebtedness existing on the date hereof which has
been disclosed heretofore in writing to the Lender,(c) unsecured current
liabilities and trade debts incurred in the ordinary course of business and (d)
up to $750,000 provided for in Section 2.04, (e) capital leases or indebtedness
incurred solely to purchase equipment which is secured in accordance with clause
(g) of the definition of "Permitted Liens" and is not in excess of the lesser of
the purchase price of such equipment or the fair market value of such equipment
on the date of acquisition, (f) other Indebtedness not otherwise permitted by
this Section 7.01 not exceeding Fifty thousand dollars ($50,000) in the
aggregate outstanding at any time; and extensions, refinancings, modifications,
amendments and restatements of any of items of Permitted Indebtedness (a)
through (e) above, provided that the principal amount thereof is not increased
or the terms thereof are not modified to impose more burdensome terms upon
Borrower.
7.02 Guarantees and Loans. Become or remain liable on or under any
guarantee issued on behalf of any other person, except for any guarantee
existing on the date hereof which has been disclosed heretofore in writing to
the Lender, or extend credit to or make any advance or loan of money or goods to
any person, except for salary and travel advances made to employees in the
ordinary course of business except (a) endorsement of negotiable instruments for
deposit or collection or similar transactions in the ordinary course of
business; (b) notes accepted in connection with transfers of assets otherwise
permitted, (c) employee relations loans in the ordinary course of business, (d)
debt obligations received in connection with the bankruptcy or reorganization or
customers or suppliers and in settlement of delinquent obligations of, and other
disputes with, customers or suppliers arising in the ordinary course of
business; (e) notes receivable of, or prepaid royalties and other credit
extensions, to customers and suppliers (f) extensions of credit in the nature of
deposit accounts maintained in the ordinary course of business; and (g)
guarantees, extensions of credit, loans, and advances not otherwise permitted by
this Section 7.02 not exceeding Fifty thousand dollars ($50,000) in the
aggregate outstanding at any time.
7.03 Liens. Create, incur, assume or permit or suffer to exist any
mortgage, pledge, security interest, encumbrance, lien or charge of any kind
upon or defect in title to or restriction upon the use of any of the Collateral,
whether owned on the date hereof or hereafter acquired.
7.04 Transaction with Affiliates. Enter into any transaction or series of
transactions whether or not related or in the ordinary course of business, with
any affiliate of the Borrower, other than on terms and conditions substantially
as favorable to the Borrower or its business, as would be obtainable by the
Borrower or its business, as the case may be, at the time in a comparable arm's
length transaction with a person not an affiliate thereof.
7.05 Significant Transaction. Enter into any transaction of merger or
consolidation, or transfer, sell or assign, lease or otherwise dispose of (other
than sales of finished products in the ordinary course of business) all or a
substantial part of its properties or assets, or any properties or assets
necessary or desirable for the proper conduct of its business, or change the
nature of its business or wind up, liquidate or dissolve, or agree to do any of
the foregoing unless a condition to the consummation of any such transaction is
the repayment of the Loan in full.
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ARTICLE VIII
COVENANTS WITH RESPECT TO COLLATERAL
8.01 Location of Collateral. Borrower hereby agrees to keep the Collateral
at the location set forth as the Collateral Location in Article I, and notify
Lender promptly in writing of any change in the location of the Collateral
within such State, but not remove the Collateral from such State without the
prior written consent of Lender; provided, however, that the foregoing shall not
apply to Collateral having an aggregate book value of less than $100,000 which
is in the nature of laptop computers, trade show displays and other property
which is moved to other locations from time to time in the ordinary course of
business.
8.02 Affixation, Consents. Borrower and Lender agree that regardless of
the manner of affixation, the Collateral shall remain personal property and not
become part of the real estate. If requested by the Lender, the Borrower shall
use reasonable efforts to provide prior to the advance of any amount hereunder
appropriate landlord and/or mortgagee consents in form satisfactory to the
Lender to permit the Lender to have access to and the right, if permitted under
this Agreement, to remove the Collateral.
8.03 Rights in Collateral. Borrower will not misuse, fail to keep in good
repair, secrete, or without the prior written consent of Lender, and
notwithstanding Lender's claim to proceeds, sell, rent, lend, encumber or
transfer any of the Collateral other than (a) transfers of inventory in the
ordinary course of business, (b) transfers of licensed and similar arrangements
for the use of property or Borrower for which Lender has given its prior written
consent; (c) transfers of worn-out or obsolete equipment, (d) transfers which
constitute liquidation of cash equivalents and (e) other transfers not otherwise
permitted by this Section 8.03 not exceeding Fifty thousand dollars ($50,000) in
the aggregate in any fiscal year. Without the prior written consent of Lender,
the Borrower will not relinquish possession or use of the Collateral or assign
or transfer (by succession or otherwise) any of its rights hereunder except as
permitted by the immediately preceding sentence.
8.04 Indemnification. Borrower will pay when due and will indemnify Lender
against: (i) any and all liabilities, damages, claims, fees and expenses of
every kind and nature whatsoever in any way arising out of the possession,
operation, use, return or other disposition of the Collateral, including,
without limitation, any claims based on strict or absolute liability in tort or
by statute imposed or arising from patent or latent defects in the Collateral
(whether or not discoverable by the Borrower or Lender) but excluding any
liability, damages, claims, fees and expenses, arising out of Lender's gross
negligence or willful misconduct, and (ii) any and all taxes, fees, assessments
and/or other charges of any nature, together with any related interest, fines or
penalties thereon, imposed, levied or assessed by any governmental authority
against the Lender or the Borrower with respect to the Collateral or upon the
purchase, possession, operation, use, return or other disposition of the
Collateral or upon the rents, receipts or earnings arising therefrom or upon or
with respect to this Agreement (but excluding taxes on Lender's net income).
8.05 Use of Collateral. Borrower agrees that the Collateral shall be used
for business and commercial purposes solely, and none of the Collateral shall be
used for personal, family or agricultural purposes.
8.06 Damage to Collateral. In the event that any tangible Collateral is
damaged, but not beyond repair, the Borrower will be responsible for restoring
the Collateral to the condition required by this Agreement unless Borrower
reasonably determines that it would not be in its best interest to do so.
ARTICLE IX
INSURANCE AND RISK OF LOSS
9.01 Insurance Policies. All risk of loss of, damage to or destruction of
the Collateral shall at all times be on Borrower. Borrower will procure
forthwith and maintain fire insurance with extended or combined additional
coverage on the Collateral for the full insurable value thereof for the term of
this Agreement, plus usual and common insurance against public liability for
bodily injury and property damage resulting from the use of the Collateral and
for damage, destruction and loss of use of property of third persons resulting
therefrom. Such insurance policy or policies will (i) name Lender as loss payee
with respect to the property
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coverage and an additional insured with respect to the liability coverage., (ii)
provide that such policies may be altered or canceled only after thirty (30)
days' prior written notice to Lender, (iii) recognize explicitly and include a
consent to the right of Lender to assign its rights thereunder, and (iv) contain
such other provisions as Lender may from time to time reasonably request.
9.02 Certain Rights of Lender. Effective after the occurrence and during
the continuance of an Event of Default, Borrower hereby appoints Lender as
Borrower's attorney-in-fact to make claims for, receive payment of, and execute
and endorse all documents, checks or drafts for, loss or damage under any such
insurance policy. If the Borrower fails to comply with any obligation to obtain
and maintain insurance policies in accordance with this Article, then Lender may
itself comply with any such obligation, and, in such case, Borrower will upon
demand reimburse Lender for the costs and expenses incurred in connection with
Lender's performance of such obligation. Lender is under no duty to determine
the existence of insurance or to advise Borrower of compliance with the above.
ARTICLE X
EVENTS OF DEFAULT AND REMEDIES
10.01 Events of Default. For the purposes of this Agreement, an "Event of
Default" shall mean if any one or more of the following events (each, an "Event
of Default") shall occur for any reason whatsoever, that is to say:
(a) The Borrower shall default in the repayment of principal of the
Loan, payment of interest on the Loan or payment of any other amount
payable hereunder or under any Note, within ten (10) days after any of the
foregoing shall become due;
(b) Default shall be made in the due observance or performance of any
of the covenants contained in Articles VII or VIII;
(c) Default shall be made in the due observance or performance of any
other covenant, condition or agreement to be observed or performed
hereunder and such default shall continue for 30 days after written notice
thereof to the Borrower by the Lender;
(d) Default shall occur (and be continuing after the expiration of any
applicable grace or cure period) with respect to any other indebtedness for
borrowed money (other than Senior Indebtedness, as defined below, to
Silicon Valley Bank) of the Borrower in an aggregate principal amount in
excess of $50,000 or under any other instrument or agreement creating or
evidencing such indebtedness if the effect of such default is to cause or
to permit the holder thereof to cause such indebtedness to become due prior
to its stated maturity;
(e) The Borrower shall: (i) commence a voluntary case under the
federal bankruptcy laws (as now or hereafter in effect); (ii) file a
petition seeking to take advantage of any other laws relating to
bankruptcy, insolvency, reorganization, winding up or composition for
adjustment of debts; (iii) consent to or fail to contest in a timely and
appropriate manner any petition filed against it in an involuntary case
under such bankruptcy or such other laws; (iv) apply for or consent to, or
fail to contest in a timely and appropriate manner, the appointment of, or
the taking of possession by, a trustee, receiver, custodian or liquidator
of itself or of all or a substantial part of its property; (v) admit in
writing its inability to pay its debts as they become due; (vi) make a
general assignment for the benefit of creditors; or (vii) take any
corporate or partnership actions, as applicable, for the purpose of
effecting any of the foregoing;
(f) A case or other proceeding shall be commenced against the
Borrower, in any court of competent jurisdiction, seeking relief under the
federal bankruptcy laws (as now or hereafter in effect) or under any other
laws relating to bankruptcy, insolvency, reorganization, winding up or
adjustment of debts, or the appointment of a trustee, receiver, custodian
or liquidator if itself or of all or a substantial part of its property and
such case or other proceeding is not dismissed within 60 days;
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(g) Any representation or warranty made by Borrower in this Agreement
or in any document, certificate or financial or other statement now or
hereafter furnished to Lender in connection with this Agreement proves to
have been false or misleading in any material respect as of the time when
made;
(h) The Borrower merges into or with any other entity or sells, leases
or otherwise transfers substantially all of its property or assets or if
any person or group of persons owns or controls, after the date hereof,
more than 50% of the voting stock of Borrower.
(i) The Lender's security interest with respect to the Collateral is
terminated, voided or otherwise rendered ineffective other than by an
action of Lender.
10.02 Remedies.
(a) Acceleration, Termination. Upon the occurrence of an Event of Default,
the following provisions shall apply:
(i) Automatic. Upon the occurrence of an Event of Default specified
in Section 10.01, paragraphs (e) or (f), (A) the principal of, and the
interest on, the Loan at the time outstanding and all of the other
obligations of the Borrower hereunder, including, the other amounts owed to
the Lender under this Agreement and all other Obligations shall become
automatically due and payable by the Borrower without presentment, demand,
protest, or other notice of any kind, all of which are hereby expressly
waived by the Borrower (notwithstanding anything contained herein or in any
Note to the contrary) and (B) the obligation of the Lender to lend
hereunder shall immediately and automatically terminate.
(ii) Optional. If any Event of Default (other than an Event of
Default specified in Section 10.01, paragraph (f),(g) or (i)) shall have
occurred and be continuing, then the Lender may, by written notice to the
Borrower: (A) declare to be forthwith due and payable the principal of, and
interest on, the Loan at the time outstanding and all of the other
obligations of the Borrower hereunder, including, the other amounts owed to
the Lender under this Agreement and all other Obligations, whereupon the
same shall immediately become due and payable without presentment, demand,
protest or other notice of any kind, all of which are hereby expressly
waived by the Borrower (notwithstanding anything contained herein or in any
Note to the contrary) and (B) declare its commitment to lend hereunder
terminated, whereupon the obligation of the Lender to lend hereunder shall
immediately terminate.
(b) Remedies as to Collateral. Upon the occurrence of any Event of Default
and at any time thereafter so long as the same continues and has not been
remedied, Lender may, at its option and subject to applicable law, exercise one
or more of the following remedies as Lender, in its sole discretion, may elect:
(i) without notice, liability or legal process, enter into any premises or upon
any land where the Collateral may be or where Lender reasonably believes the
Collateral may be, and using all force permitted by applicable law, disassemble
and render unusable the Collateral, disconnect and separate the Collateral from
any other property connected to the Collateral and/or take possession and remove
all or any item of the Collateral; (ii) sue at law or in equity to enforce
performance of this Agreement or to recover damages for breach thereof; (iii)
sell the Collateral at a private or public sale or release the Collateral; or
(iv) exercise any other right or remedy which may be available to Lender under
the Uniform Commercial Code or other applicable law. In addition, Borrower shall
be liable for any and all unpaid obligations and other amounts due hereunder
before or during the exercise of any of the foregoing remedies and for all
reasonable attorneys' fees and other costs and expenses incurred by reason of
the exercise of Lender's remedies with respect thereto, including, without
limitation, all costs and expenses incurred in connection with placing the
Collateral in the condition required to be in compliance with all statutes,
laws, ordinances, regulations and governmental orders. Any proceeds of sale or
any obligation payments received under a new agreement which relate solely to
the use of the Collateral less reasonable attorneys' fees and all other costs
and expenses incurred by reason of the occurrence of any Event of Default or the
exercise of Lender's remedies with respect thereto will be applied to the
Obligations and Borrower will remain liable for any remaining balance due of the
unpaid Obligations. Borrower's liability will not be reduced by reason of any
failure of Lender to sell or re-let any of the Collateral. To the extent
permitted by applicable law, Borrower hereby waives any rights now or hereafter
conferred by statute or otherwise which may require Lender to mitigate Lender's
damages as set forth in this Article or
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which may otherwise limit or modify any of the Lender's rights and remedies
hereunder. Borrower further agrees that in connection with Lender's exercise of
its remedies under clause (i) above, Borrower will not hinder or delay Lender in
any way and will, if requested, assist Lender in disassembling, taking
possession and/or removing the Collateral.
10.03 Rights and Remedies. In case any one or more Events of Default shall
occur and be continuing, the Lender may proceed to protect and enforce its
rights or remedies either by suit in equity or by action at law, or both,
whether for the specific performance of any covenant, agreement or other
provision contained herein, in the Note(s) or in any other document or
instrument delivered in connection with or pursuant to this Agreement, or to
enforce the payment of the Note(s) or any other legal or equitable right or
remedy.
10.04 Non-Exclusive Remedies. No right or remedy herein conferred upon the
Lender is intended to be exclusive of any other right or remedy contained
herein, in any Note or in any other instrument or document delivered in
connection with or pursuant to this Agreement, and every such right or remedy
shall be cumulative and shall be in addition to every other such right or remedy
contained herein and therein or now or hereafter existing at law or in equity or
by statute, or otherwise.
10.05 Overdue Payments. To the extent that Lender does not exercise any of
the above remedies in connection with any Event of Default arising from the
failure of Borrower to pay to Lender any amounts when due, and without limiting
the right of Lender to exercise any such remedies, Borrower shall pay all
amounts provided to be paid under Section 2.04 hereof.
ARTICLE XI
MISCELLANEOUS
11.01 Assignability. This Agreement and the rights and obligations
hereunder shall extend to, be binding upon and inure to the benefit of the
parties hereto, their respective successors and permitted assigns. The
obligation of the Lender to make the Loan hereunder shall not inure to the
benefit of any successors or permitted assigns of the Borrower. Except as
provided for in the next sentence, the Borrower shall not have the right to
assign this Agreement (or any interest herein or part hereof) except with the
prior written consent of the Lender. The Lender may at any time, with or without
notice to Borrower, sell, assign or otherwise transfer all or any portion of its
rights and benefits under this Agreement and any and all Notes or its rights and
interest in the Collateral , and in the event of any such transfer by the
Lender, all references herein to the Lender shall be deemed a reference to the
Lender's transferee to the extent of its interest. The Borrower hereby consents
to the disclosure of financial or other information received by the Lender
concerning the Borrower to the Lender's transferee (or prospective transferees)
on a confidential basis other than to a competitor of Borrower.
11.02 Nonliability of Lender. The relationship between the Borrower and
the Lender shall be solely that of borrower and lender. The Lender shall not
have any fiduciary responsibilities to the Borrower. The Lender does not
undertake any responsibility to the Borrower to review or inform the Borrower of
any matter in connection with any phase of the Borrower's business or
operations.
11.03 Usury. In no event shall the amount of interest due or payable on
the Loan exceed the maximum rate of interest allowed by applicable law and, in
the event any such payment is paid by the Borrower or received by the Lender,
then such excess sum shall be credited as a payment of principal, unless the
Borrower shall notify the Lender in writing that the Borrower elects to have
such excess sum returned to it forthwith. It is the express intent of the
parties hereto that the Borrower not pay and the Lender not receive, directly or
indirectly, in any manner whatsoever, interest in excess of that which may be
lawfully paid by the Borrower under applicable law.
11.04 Agreement Regarding Interest and Charges. THE PARTIES HERETO HEREBY
AGREE AND STIPULATE THAT THE ONLY CHARGE IMPOSED UPON THE BORROWER FOR THE USE
OF MONEY IN CONNECTION WITH THIS AGREEMENT IS AND SHALL BE THE INTEREST
DESCRIBED IN SECTION 2.03. THE PARTIES HERETO FURTHER AGREE AND STIPULATE THAT
ALL OTHER CHARGES IMPOSED BY THE LENDER ON THE BORROWER
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IN CONNECTION WITH THIS AGREEMENT, INCLUDING ANY AND ALL DEFAULT
CHARGES, LATE CHARGE, ATTORNEYS' FEES AND REIMBURSEMENT FOR COSTS AND EXPENSES
PAID BY THE LENDER TO THIRD PARTIES OR FOR DAMAGES INCURRED BY THE LENDER, ARE
CHARGES MADE TO COMPENSATE THE LENDER FOR ADMINISTRATIVE SERVICES AND COSTS OR
LOSSES PERFORMED OR INCURRED, AND TO BE PERFORMED OR INCURRED, BY THE LENDER IN
CONNECTION WITH THIS AGREEMENT AND SHALL UNDER NO CIRCUMSTANCES BE DEEMED TO BE
CHARGES FOR THE USE OF MONEY. ALL CHARGES OTHER THAN CHARGES FOR THE USE OF
MONEY SHALL BE FULLY EARNED AND NONREFUNDABLE WHEN DUE.
11.05 Litigation.
(a) EACH PARTY HERETO ACKNOWLEDGES THAT ANY DISPUTE OR CONTROVERSY BETWEEN
THE BORROWER AND THE LENDER WOULD BE BASED ON DIFFICULT AND COMPLEX ISSUES OF
LAW AND FACT. ACCORDINGLY, EACH OF THE LENDER AND THE BORROWER HEREBY WAIVES
TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT OR
TRIBUNAL IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST THE BORROWER ARISING
OUT OF THIS AGREEMENT OR ANY NOTE OR IN CONNECTION WITH THE COLLATERAL OR ANY
LIEN OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN THE BORROWER
AND THE LENDER OF ANY KIND OR NATURE.
(b) THE BORROWER AND THE LENDER EACH HEREBY AGREE THAT ANY FEDERAL DISTRICT
COURT LOCATED IN NEW JERSEY OR, AT THE OPTION OF THE LENDER, ANY STATE COURT
LOCATED IN NEW JERSEY, SHALL HAVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS
OR DISPUTES BETWEEN THE BORROWER AND THE LENDER PERTAINING DIRECTLY OR
INDIRECTLY TO THIS AGREEMENT OR ANY NOTE OR TO ANY MATTER ARISING HEREUNDER OR
THEREUNDER OR THE COLLATERAL. THE BORROWER EXPRESSLY SUBMITS AND CONSENTS IN
ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN SUCH
COURTS, HEREBY WAIVING PERSONAL SERVICE OF THE SUMMONS AND COMPLAINT, OR OTHER
PROCESS OR PAPERS ISSUED THEREIN, AND AGREEING THAT SERVICE OF SUCH SUMMONS AND
COMPLAINT, OR OTHER PROCESS OR PAPERS MAY BE MADE BY REGISTERED OR CERTIFIED
MAIL ADDRESSED TO THE BORROWER AT THE BORROWER'S ADDRESS FOR NOTICES. SHOULD THE
BORROWER FAIL TO APPEAR OR ANSWER ANY SUMMONS, COMPLAINT, PROCESS OR PAPERS SO
SERVED WITHIN THIRTY DAYS AFTER THE MAILING THEREOF, IT SHALL BE DEEMED IN
DEFAULT AND AN ORDER AND/OR JUDGMENT MAY BE ENTERED AGAINST IT AS DEMANDED OR
PRAYED FOR IN SUCH SUMMONS, COMPLAINT, PROCESS OR PAPERS. THE CHOICE OF FORUM
SET FORTH IN THIS SECTION SHALL NOT BE DEEMED TO PRECLUDE THE BRINGING OF ANY
ACTION BY THE LENDER OR THE ENFORCEMENT BY THE LENDER OF ANY JUDGMENT OBTAINED
IN SUCH FORUM IN ANY OTHER APPROPRIATE JURISDICTION.
(c) THE FOREGOING WAIVERS HAVE BEEN MADE WITH THE ADVICE OF COUNSEL AND
WITH A FULL UNDERSTANDING OF THE LEGAL CONSEQUENCES THEREOF, AND SHALL SURVIVE
THE REPAYMENT OF THE LOAN AND THE PAYMENT OF ALL OTHER AMOUNTS PAYABLE HEREUNDER
OR UNDER ANY OR ALL OF THE NOTES AND THE TERMINATION OF THIS AGREEMENT.
11.06 Expenses. In the event that the Lender shall attempt to collect,
enforce, protect, maintain, preserve or foreclose its interest with respect to
this Agreement, any Note or any Collateral, the Borrower shall pay all of the
costs and expenses of such collection, enforcement, protection or other action,
including, without limitation, reasonable in-house and outside attorneys' fees
and disbursements, which amounts shall become part of the Obligations.
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11.07 Indemnification. The Borrower shall and hereby agrees to indemnify,
defend and hold harmless the Lender and its directors, officers, agents and
employees from and against any and all losses, claims, damages, liabilities and
expenses (including, without limitation, amounts paid in settlement, court costs
and reasonable attorneys' fees and disbursements) incurred by any of them
(except to the extent that it is finally judicially determined to have resulted
from their own gross negligence or willful misconduct) in connection with any
litigation, investigation, claim or proceeding arising out of this Agreement,
the transactions contemplated hereby or any actual or proposed use by the
Borrower of the proceeds of the Loan. If and to the extent that the obligations
of the Borrower under this Section 11.07 are unenforceable for any reason, the
Borrower hereby agrees to make the maximum contribution to the payment and
satisfaction of such obligations which is permissible under applicable law.
11.08 Survival. All representations and warranties contained in this
Agreement will survive the execution and delivery of this Agreement. All
indemnities and agreements of the Borrower contained in this Agreement or in any
document or certificate delivered by the Borrower pursuant hereto or in
connection herewith, including, without limitation, the obligations of the
Borrower contained in Section 11.06, the indemnities to which the Lender is
entitled under the Section 11.07 and the waiver of jury trial and submission to
jurisdiction contained in Section 11.05, shall survive termination of this
Agreement and payment in full of the Obligations.
11.09 Entire Agreement. This Agreement constitutes the complete agreement
of the parties regarding the subject matter hereof and supersedes any prior or
contemporaneous oral or written representation, warranty or agreement with
respect thereto.
11.10 Waiver. The failure or delay of either party at any time or times to
require performance of any provision hereof or exercise any rights or remedies
hereunder shall in no manner affect such party's rights at a later time to
enforce or exercise the same. No waiver by either party of any provision or
breach of this Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be, or construed as, a further or continuing
waiver of such provision or breach or a waiver of any other provision or breach.
Any waiver shall be in writing and signed by a duly authorized officer of the
Lender, and the same shall then be effective only for the period and on the
conditions and for the specific instances and purposes specified in such
writing.
11.11 Waiver and Protest. The Borrower waives notice of non- payment of
any of the Obligations, demand, presentment, protest and notice thereof with
respect to any and all instruments, notice of acceptance hereof, notice of loans
and advances made or any other action taken in reliance hereon, and all other
demands and notices of any description, except such as are expressly provided
for herein.
11.12 Modifications and Amendments. This Agreement shall not be modified
or otherwise amended except pursuant to an instrument in writing executed and
delivered by each of the parties hereto.
11.13 Notices. Any notice to be given hereunder by either party to the
other party shall be in writing and delivered personally, or sent by national
overnight delivery service or postage pre-paid registered or certified U.S.
mail, and shall be deemed given when delivered:
If to Lender: ___________________
___________________ Attention: President
If to Borrower: Borrower's Address set forth in Article I
or to such other address as either party shall hereafter designate by
notice given in accordance with this Section.
11.14 Governing Law. This Agreement shall be governed by and shall be
construed in accordance with the laws of the State of New Jersey applicable to
agreements made and to be performed therein.
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11.15 Headings. The Article and Section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning and interpretation of this Agreement.
11.16 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original and all of which
shall be deemed to constitute the same Agreement.
11.17 Severability. If and to the extent that any provision (or any part
thereof) of this Agreement is held to be invalid, illegal or unenforceable, such
holding shall in no way affect or impair the validity, legality or
enforceability of the remainder of this Agreement.
11.18 Subordination. The Loan evidenced by the Note(s) is hereby expressly
subordinated, to the extent and in the manner hereinafter set forth, in right of
payment to the prior payment in full in cash of all of Borrower's Senior
Indebtedness. "Senior Indebtedness" shall mean, unless expressly subordinated to
or made on a parity with the Loan, the principal of (and premium, if any),
unpaid interest on and amounts reimbursable, fees, expenses, costs of
enforcement and other amounts due in connection with, (i) indebtedness of
Borrower, to Silicon Valley Bank under that certain Business Loan Agreement
dated as of July 12, 1995, as modified by a Loan Modification Agreement, dated
as of December 17, 1996 and (ii) any such indebtedness or any debentures, notes
or other evidence of indebtedness issued in exchange for such Senior
Indebtedness. No indebtedness incurred by Borrower which causes the aggregate
principal amount of such indebtedness outstanding to exceed $875,000 (but only
to the extent of such excess) or which is incurred at a time when the aggregate
principal amount of such indebtedness outstanding exceeds $875,000 shall be
Senior Indebtedness.
(a) Insolvency Proceedings. If there shall occur any receivership,
insolvency assignment for the benefit of creditors, bankruptcy (voluntary or
involuntary), reorganization, or arrangements with creditors (whether or not
pursuant to bankruptcy or other insolvency laws), sale of all or substantially
all of the assets, dissolution, liquidation, or any other marshaling of the
assets and liabilities of Borrower, (i) the holder(s) of Senior Indebtedness
shall be entitled to receive payment in full in cash of all Senior Indebtedness
(including any interest thereon accruing at the contract rate after the
commencement of any such proceedings, whether or not allowed as a claim in such
proceedings) then outstanding before Lender shall be entitled to receive any
payment or distribution, whether in case, securities or other property, in
respect of the principal of, interest on or other amounts due with respect to
this Agreement and the Notes at the time outstanding, and (ii) any payment or
distribution, whether in cash, securities or other property, (other than
securities of Borrower or any other corporation provided for by a plan of
reorganization or readjustment, the payment of which is subordinated, at least
to the extent provided in this Section 11.18 to the payment of all Senior
Indebtedness at the time outstanding and to any securities issued in respect
thereof under any such plan of reorganization or readjustment), which would
otherwise (but for this Section 11.18) be payable or deliverable in respect of
the amounts due under this Agreement and the Note(s) shall be paid or delivered
directly to the holder(s) of the Senior Indebtedness (ratably according to the
aggregate amounts remaining unpaid on account of the Senior Indebtedness held by
each) or to a trustee or other representative for holder(s) of Senior
Indebtedness.
(b) Permitted Payments Default on Senior Indebtedness. Notwithstanding any
provision to the contrary contained in this Agreement and the Note(s), so long
as there shall not have occurred and be continuing an event of default which has
been declared in writing, or is automatically effective in the case of
bankruptcy or insolvency events, with respect to any Senior Indebtedness (as
such event of default is defined therein or in the instrument under which it is
outstanding), which event of default permits the holder to accelerate the
maturity thereof (a "Senior Default"), Borrower shall be permitted to make, and
Lender to accept and receive, regularly scheduled payments of principal and
accrued interest under this Agreement and the Note(s) and any payment
contemplated by Section 2.4. Notwithstanding anything to the contrary contained
in this Section 11.18, Borrower shall not make and Lender shall not receive any
payment of any kind of amounts payable under this Agreement or the Note(s) after
delivery by a holder of Senior Indebtedness to Borrower and Lender of written
notice that a Senior Default has occurred; provided, however, that such payments
may thereafter be made if such holder of Senior Indebtedness consents to such
payments in writing or agrees in writing that such Senior Default has been cured
or waived.
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<PAGE> 150
(c) Acceleration; Enforcement Rights. Lender, prior to the payment in full
in cash of the Senior Indebtedness shall have no right to accelerate the
maturity of the amounts due under this Agreement and the Note(s) or otherwise
demand payment thereof, enforce any claim with respect to the amounts due under
this Agreement and the Note(s), institute or attempt to institute any bankruptcy
or insolvency proceedings against Borrower or otherwise to take any action
against Borrower or Borrower's property without the prior written consent of
each holder of Senior Indebtedness.
(d) Turnover of Payments. Except for payments permitted under Section
11.18(b), should, after receipt by Lender of written notice of a Senior Default,
any payment or distribution, whether in cash, securities or other property, be
received by Lender upon or with respect to the amounts payable under this
Agreement and the Note(s) by any means, including, without limitation, setoff,
prior to the payment in full in cash of the Senior Indebtedness, Lender shall
receive and hold the same in trust, as trustee, for the benefit of the holder(s)
of the Senior Indebtedness, and shall forthwith deliver the same to the
holder(s) of the Senior Indebtedness (ratably according to the aggregate amounts
remaining unpaid on account of the Senior Indebtedness held by each) or to a
trustee or other representative for holder(s) of Senior Indebtedness in
precisely the form received for application to the Senior Indebtedness (whether
or not it is then due).
(e) Further Assurances. Lender agrees to execute and deliver customary
forms of subordination agreement requested from time to time by holder(s) of
Senior Indebtedness, and as a condition to Lender's rights hereunder, Borrower
may require that Lender execute such forms of subordination agreement; provided
that such forms shall not impose on Lender terms less favorable then those
provided herein.
(f) Other Indebtedness. No indebtedness which does not constitute Senior
Indebtedness shall be senior in any respect to the indebtedness represented by
this Agreement and the Note(s).
(g) Subrogation. Subject to the payment in full in cash of all Senior
Indebtedness and the termination of any commitments to lend under the agreements
or instruments governing such Senior Indebtedness, Lender shall be subrogated to
the rights of the holder(s) of such Senior Indebtedness (to the extent of the
payments or distributions made to the holder(s) of such Senior Indebtedness
pursuant to the provisions of this Section 11.18) to receive payments and
distributions of assets of Borrower applicable to the Senior Indebtedness. No
such payments or distributions applicable to the Senior Indebtedness shall, as
between Borrower and its creditors, other than the holder(s) of Senior
Indebtedness and Lender, be deemed to be a payment by Borrower to or on account
of this Agreement and the Note(s); and for purposes of such subrogation, no
payments or distributions to the holder(s) of Senior Indebtedness to which
Lender would be entitled except for the provisions of this Section 11.18 shall,
as between Borrower and its creditors, other than the holder(s) of Senior
Indebtedness and Lender, be deemed to be a payment by Borrower to or on account
of the Senior Indebtedness.
(g) No Impairment. Subject to the rights, if any, of the holder(s) of
Senior Indebtedness under this Section 11.18 to receive cash, securities or
other properties otherwise payable or deliverable to Lender and the other
restrictions set forth in this Section 11.18, nothing contained in this Section
11.18 shall impair, as between Borrower and Lender, the obligation of Borrower,
subject to the terms and conditions hereof, to pay to Lender the principal
hereof and interest hereon as and when the same become exercising all rights,
powers and remedies provided herein or by applicable law.
(h) Lien Subordination. Any Lien of Lender on any assets or property of
Borrower or any proceeds or revenues therefrom which Lender may have at any time
as security for any amounts due and obligations under this Note shall be
subordinate to all Liens now or hereafter granted to a holder of Senior
Indebtedness by Borrower or by law, notwithstanding the date or order of
attachment or perfection of any such Lien or the provisions of any applicable
law. Until payment in full in cash of all of Borrower's Senior Indebtedness,
Lender agrees that a holder of Senior Indebtedness may dispose of any or all of
the collateral for the Senior Indebtedness held by such holder free and clear of
any and all Liens in favor of Lender in accordance with applicable law including
taking title to such collateral after notice to Lender. Lender agrees that any
such sale or other disposition by a holder of Senior Indebtedness as is
necessary to satisfy in full, all of the principal of, interest on and
reasonable costs of collection of the Senior Indebtedness shall be made free and
clear of any Lien granted to Lender provided the entire proceeds (after
deducting reasonable expenses of sale) are applied
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<PAGE> 151
to reduce the Senior Indebtedness. Upon the request of a holder of Senior
Indebtedness, Lender shall execute and deliver or cause to be executed and
delivered any releases or other documents and agreements that a holder of Senior
Indebtedness may reasonably request to dispose of the collateral for the Senior
Indebtedness free of any Lien of Lender in such collateral.
(i) Continuing Subordination. The subordination effected by these
provisions is a continuing subordination and may not be modified or terminated
by Lender until payment in full in cash of the Senior Indebtedness. At any time
and from time to time, without consent of or notice to Lender or any other
holder of Notes issued under the Note Purchase Agreement and without impairing
or affecting the obligations of Lender hereunder: (i) the time for Borrower's
performance of, or compliance with any agreement relating to Senior Indebtedness
may be modified or extended or such performance may be waived; (ii) a holder of
Senior Indebtedness may exercise or refrain from exercising any rights under any
agreement relating to the Senior Indebtedness; (iii) any agreement relating to
the Senior Indebtedness may be revised, amended or otherwise modified for the
purpose of adding or changing any provision thereof or changing in any manner
the rights of Borrower, any holder of Senior Indebtedness or any guarantor
thereunder; (iv) payment of Senior Indebtedness or any portion thereof may be
accelerated or extended or refunded or any instruments evidencing the Senior
Indebtedness may be renewed in whole or in part; (v) any Person liable in any
manner for payment of the Senior Indebtedness may be released by a holder of
Senior Indebtedness; (vi) a holder of Senior Indebtedness may make loans or
otherwise extend credit to Borrower whether or not any default or event of
default exists with respect to such Senior Indebtedness; and (vii) a holder of
Senior Indebtedness may take and/or release any Lien at any time on any
collateral now or hereafter securing the Senior Indebtedness and take or fail to
take any action to perfect any Lien at any time granted therefor, and take or
fail to take any action to enforce such Liens. Notwithstanding the occurrence of
any of the foregoing, these subordination provisions shall remain in full force
and effect with respect to the Senior Indebtedness, as the same may have been
modified, extended, renewed or refunded. Lender has established adequate,
independent means of obtaining from Borrower on a continuing basis financial and
other information pertaining to Borrower's financial condition.
(j) Lender's Waivers. Lender hereby expressly waives for the benefit of
the holder(s) of Senior Indebtedness (i) all notices not specifically required
pursuant to the terms of this Note whatsoever, including without limitation any
notice of the incurrence of Senior Indebtedness; (ii) any claim which Lender may
now or hereafter have against a holder of Senior Indebtedness arising out of any
and all actions which a holder of Senior Indebtedness in good faith, takes or
omits to take with respect to the Senior Indebtedness (including, without
limitation, (A) actions with respect to the creation, perfection or continuation
of Liens in or on any collateral security for the Senior Indebtedness, (B)
actions with respect to the occurrence of an event of default under any Senior
Indebtedness, (C) actions with respect to the foreclosure upon, sale, release ,
or depreciation of, or failure to realize upon, any of the collateral security
for the Senior Indebtedness and (D) actions with respect to the collection of
any claim for all or any part of the Senior Indebtedness or the valuation, use,
protection or release of any collateral security for the Senior Indebtedness);
and (iii) any right to require holders of Senior Indebtedness to exhaust any
collateral or marshall any assets.
(k) Reliance of Lender(s) of Senior Indebtedness. Lender acknowledges and
agrees that the foregoing subordination provisions are, and are intended to be,
an inducement to and a consideration of each holder of Senior Indebtedness,
whether such Senior Indebtedness was created or acquired before or after the
creation of the indebtedness evidenced by this Agreement and the Note(s), and
each such holder of Senior Indebtedness shall be deemed conclusively to have
relied on such subordination provisions acquiring and holding or continuing to
hold, such Senior Indebtedness.
(l) No other Senior collateral. No Senior Creditor shall have any rights
senior to those of Lender in any property of Borrwer which is not collateral for
Senior Indebtedness as of the date of the Merger Agreement.
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<PAGE> 152
IN WITNESS WHEREOF, the parties hereto intending legally to be bound
hereby, have each caused this Agreement to be duly executed as of the date first
above written.
<TABLE>
<S> <C>
LENDER: BORROWER:
J COMPANY G COMPANY
By: _____________________________ By: _____________________________
Name: ___________________________ Name: ___________________________
Title: __________________________ Title: __________________________
</TABLE>
B-17
<PAGE> 153
EXHIBIT A
PROMISSORY NOTE
$________ ________ __, 199
FOR VALUE RECEIVED, G COMPANY , a Delaware corporation (the "Borrower"),
hereby promises to pay to the order of J COMPANY, a New Jersey corporation (the
"Lender"), its successors and assigns, at U.S. Route 22, Somerville, New Jersey
08876, or at such other place as the holder hereof may designate in writing, in
lawful money of the United States of America, the principal sum of
____________________ Dollars ($__________) on third anniversary of the Loan and
Security Agreement referred to below or on such earlier dates as are set forth
in the Loan and Security Agreement. This Note shall bear interest (computed on
the basis of the actual number of days elapsed over a year of 365 days on the
unpaid principal amount hereof at the Interest Rate, which interest shall be
payable as set forth below, at maturity (whether by acceleration or otherwise)
and thereafter upon demand.
The interest on this Note shall be payable semi-annually. The principal
shall be paid in full on third anniversary of the Loan and Security Agreement or
earlier as provided in the Loan and Security Agreement.
In the event that the Borrower shall fail to pay when due (whether at
maturity, by reason of acceleration or otherwise) any principal of or interest
on this Note, such overdue amounts shall bear (to the extent permitted by
applicable law) interest on demand at a rate per annum equal to the lesser of
(a) two percent (2%) per month in excess of the otherwise applicable rate, until
such unpaid amount has been paid in full (whether before or after judgment).
This Note is one of the promissory notes referred to in and is secured by
the loan and security agreement dated ____________________, 1997 (the "Loan and
Security Agreement") between the Borrower and the Lender, and is subject to
certain terms and conditions set forth therein. Any capitalized terms used and
not defined in this Note shall have the respective meanings set forth in the
Loan and Security Agreement.
Reference is made to the Loan and Security Agreement for certain rights of
the Lender hereunder, including, without limitation, the right of the Lender to
accelerate the principal balance hereof and the interest accrued and unpaid
thereon upon the occurrence of an Event of Default under the Loan and Security
Agreement.
If this Note (or any interest payment hereunder) becomes due and payable on
a Saturday, Sunday, or public or other banking holiday under the laws of the
State of New Jersey or California, the maturity thereof shall be extended to the
next succeeding business day, and interest shall be payable thereon at the rate
herein specified during such extension.
The Borrower hereby waives diligence, demand, presentment, protest and
notice of any kind, all rights of setoff and all rights to interpose
counterclaims and cross-claims in any litigation with respect to this Note, and
assents to extensions of the time of payment, release, surrender or substitution
of security, or forbearance or other indulgence, without notice.
In the event that the Lender or any holder hereof shall refer this Note to
an attorney for enforcement or collection, the Borrower agrees to pay, in
addition to unpaid principal and interest, all the costs and expenses incurred
in attempting or effecting enforcement or collection hereof, including
reasonable attorneys' fees, whether or not suit is instituted.
This Note may not be changed, modified or terminated orally, but only by an
agreement in writing signed by the party to be charged. This Note shall be
binding upon the heirs, executors, administrators, successors and assigns of the
Borrower and inure to the benefit of the Lender, its successors, endorsees and
assigns. If any term or provision of this Note shall be held invalid, illegal or
unenforceable the validity, legality and enforceability of all other terms and
provisions hereof shall in no way be affected thereby.
Each of the Lender and the Borrower hereby waives trial by jury in any
action or proceeding of any kind or nature in any court or tribunal in which any
action may be commenced by or against the Borrower arising
<PAGE> 154
out of this Note. The Borrower and the Lender each hereby agree that any Federal
District Court located in New Jersey, shall have jurisdiction to hear and
determine any claims or disputes between the Borrower and the Lender pertaining
directly or indirectly to this Note. The Borrower expressly submits and consents
in advance to such jurisdiction in any action or proceeding commenced in such
courts.
The foregoing waivers have been made with the advice of counsel and with a
full understanding of the legal consequences thereof, and shall survive the
payment of all amounts payable hereunder.
This Note shall be governed by and construed in accordance with the laws of
the State of New Jersey applicable to agreements made and to performed therein.
BORROWER: J COMPANY
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
2
<PAGE> 155
EXHIBIT C
Guidant Corporation
Mayfield Fund
Roseanne Hirsch
Malcolm M. Farnsworth
Glenn Foy
Augustine Lien
Milton McColl
Lad Burgin
Grant Heidrich
Alan Levy
Mary Lake Polan
F. Thomas Watkins III
Elizabeth Connell
<PAGE> 156
ANNEX II
STOCKHOLDER AGREEMENT dated as of August 4, 1997,
among JOHNSON & JOHNSON, a New Jersey corporation
("Parent"), and the individuals and other parties
listed on Schedule A attached hereto (each, a
"Stockholder" and, collectively, the
"Stockholders").
WHEREAS Parent, Lima Merger Corp., a Delaware corporation and a wholly
owned subsidiary of Parent ("Sub"), and Gynecare, Inc., a Delaware corporation
(the "Company"), propose to enter into an Agreement and Plan of Merger dated as
of the date hereof (as the same may be amended or supplemented, the "Merger
Agreement"; capitalized terms used but not defined herein shall have the
meanings set forth in the Merger Agreement) providing for the merger of Sub with
and into the Company (the "Merger"), upon the terms and subject to the
conditions set forth in the Merger Agreement; and
WHEREAS as of the date hereof each Stockholder beneficially owns the number
of shares of common stock, par value $.001 per share, of the Company ("Company
Common Stock") set forth opposite his or its name on Schedule A attached hereto
(such shares of Company Common Stock, together with any other shares of capital
stock of the Company acquired by such Stockholder after the date hereof and
during the term of this Agreement (including through the exercise of any stock
options, warrants or similar instruments), being collectively referred to herein
as the "Subject Shares"); and
WHEREAS, as a condition to its willingness to enter into the Merger
Agreement, Parent has requested that each Stockholder enter into this Agreement;
NOW, THEREFORE, to induce Parent to enter into, and in consideration of its
entering into, the Merger Agreement, and in consideration of the promises and
the representations, warranties and agreements contained herein, the parties
agree as follows:
1. Representations and Warranties of each Stockholder. Each
Stockholder hereby, severally and not jointly, represents and warrants to
Parent as of the date hereof in respect of himself or itself as follows:
(a) Authority. The Stockholder has all requisite power and
authority to enter into this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly
authorized, executed and delivered by the Stockholder and constitutes a
valid and binding obligation of the Stockholder enforceable against the
Stockholder in accordance with its terms. Except for the expiration or
termination of the waiting periods under the HSR Act and informational
filings with the SEC, the execution and delivery of this Agreement do
not, and the consummation of the transactions contemplated hereby and
compliance with the terms hereof will not, (i) conflict with, or result
in any violation of, or default (with or without notice or lapse of time
or both) under any provision of the Articles of Incorporation or By-laws
(or other comparable organizational documents, if any) of the
Stockholder, any trust agreement, loan or credit agreement, bond, note,
mortgage, indenture, lease or other contract, agreement, obligation,
commitment, arrangement, understanding, instrument, permit, concession,
franchise, license, statute, law, ordinance, rule, regulation, judgment,
order, notice or decree, applicable to the Stockholder or to the
Stockholder's property or assets, (ii) require any filing with, or
permit, authorization, consent or approval of, any Federal, state or
local government or any court, tribunal, administrative agency or
commission or other governmental or regulatory authority or agency,
domestic or foreign or (iii) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to the Stockholder or any
of the Stockholder's properties or assets, including the Subject Shares.
If the Stockholder is a natural person and is married, and the
Stockholder's Subject Shares constitute community property or otherwise
need spousal or other approval for this Agreement to be legal, valid and
binding, this Agreement has been duly authorized, executed and delivered
by, and constitutes a valid and binding agreement of, the Stockholder's
spouse, enforceable against such spouse in accordance with its terms. No
trust of which such Stockholder is a trustee requires the consent of any
beneficiary to the execution and delivery of this Agreement or to the
consummation of the transactions contemplated hereby.
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<PAGE> 157
(b) The Subject Shares. The Stockholder is the beneficial owner
of, and on or prior to August 11, 1997 will be the record owner of, or
is trustee of a trust that is the record holder of, and whose
beneficiaries are the beneficial owners of, and has good and marketable
title to, the Subject Shares set forth opposite his or its name on
Schedule A attached hereto, free and clear of any Liens whatsoever. The
Stockholder does not own, of record or beneficially, any shares of
capital stock of the Company other than the Subject Shares set forth
opposite his or its name on Schedule A attached hereto. The Stockholder
has the sole right to vote such Subject Shares, and none of such Subject
Shares is subject to any voting trust or other agreement, arrangement or
restriction with respect to the voting of such Subject Shares, except as
contemplated by this Agreement.
2. Representations and Warranties of Parent. Parent hereby
represents and warrants to each Stockholder that Parent has all requisite
corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby. This Agreement has been
duly authorized, executed and delivered by Parent and constitutes a valid
and binding obligation of Parent enforceable against Parent in accordance
with its terms. Except for the expiration or termination of the waiting
periods under the HSR Act and informational filings with the SEC, the
execution and delivery of this Agreement do not, and the consummation of
the transactions contemplated hereby and compliance with the terms hereof
will not, conflict with, or result in any violation of, or default (with or
without notice or lapse of time or both) under any provision of, the
Certificate of Incorporation or By-laws of Parent, any trust agreement,
loan or credit agreement, bond, note, mortgage, indenture, lease or other
contract, agreement, obligation, commitment, arrangement, understanding,
instrument, permit, concession, franchise, license, statute, law,
ordinance, rule, regulation, judgment, order, notice or decree applicable
to Parent or to Parent's property or assets.
3. Covenants of each Stockholder. Until the termination of this
Agreement in accordance with Section 7, each Stockholder, severally and not
jointly, agrees as follows:
(a) Without in any way limiting the Stockholder's right to vote the
Subject Shares in its sole discretion on any other matters that may be
submitted to a stockholder vote, consent or other approval (including by
written consent), at any meeting of stockholders of the Company called
to vote upon the Merger and the Merger Agreement or at any adjournment
thereof or in any other circumstances upon which a vote, consent or
other approval (including by written consent) with respect to the Merger
and the Merger Agreement is sought, the Stockholder shall, including by
initiating a written consent solicitation if requested by Parent, vote
(or cause to be voted) the Subject Shares (and each class thereof) in
favor of the Merger, the approval and adoption by the Company of the
Merger Agreement and the approval of the other transactions contemplated
by the Merger Agreement.
(b) The Stockholder shall not, except as contemplated by this
Agreement, directly or indirectly, grant any proxies or powers of
attorney with respect to the Subject Shares, deposit the Subject Shares
into a voting trust or enter into a voting agreement with respect to the
Subject Shares.
(c) If, at the time the Merger Agreement is submitted for approval
to the stockholders of the Company, a Stockholder is an "affiliate" of
the Company for purposes of Rule 145 under the Securities Act or for
purposes of qualifying the Merger for pooling of interests accounting
treatment under Opinion 16 of the Accounting Principles Board and
applicable SEC rules and regulations, such Stockholder shall deliver to
Parent on or prior to the Closing Date a written agreement substantially
in the form attached as Exhibit A to the Merger Agreement.
(d) The Stockholder, and any beneficiary of a revocable trust for
which such Stockholder serves as trustee, shall not take any action to
revoke or terminate such trust or take any other action which would
restrict, limit or frustrate the Stockholder's right to vote the Subject
Shares on behalf of such trust in accordance with this Agreement. Each
such beneficiary hereby acknowledges and agrees to be bound by the terms
of this Agreement applicable to it.
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<PAGE> 158
(e) Each Stockholder shall cause this Agreement to be filed with
the Secretary of the Company.
4. Grant of Irrevocable Proxy; Appointment of Proxy. (a) Without in
any way limiting the Stockholder's right to vote the Subject Shares in its
sole discretion on any other matters that may be submitted to a stockholder
vote, consent or other approval (including by written consent), each
Stockholder hereby irrevocably grants to, and appoints, Parent and Peter S.
Galloway and Steven M. Rosenberg, in their respective capacities as
officers of Parent, and any individual who shall hereafter succeed to any
such office of Parent, and each of them individually, such Stockholder's
proxy and attorney-in-fact (with full power of substitution), for and in
the name, place and stead of such Stockholder, to vote such Stockholder's
Subject Shares, or grant a consent or approval in respect of such Subject
Shares, in favor of adoption of the Merger Agreement.
(b) Such Stockholder represents that any proxies heretofore given in
respect of such Stockholder's Subject Shares are not irrevocable, and that
all such proxies are hereby revoked.
(c) Such Stockholder hereby affirms that the irrevocable proxy set
forth in this Section 4 is given in connection with the execution of the
Merger Agreement, and that such irrevocable proxy is given to secure the
performance of the duties of the Stockholder under this Agreement. Such
Stockholder hereby further affirms that the irrevocable proxy is coupled
with an interest and may under no circumstances be revoked. Such
Stockholder hereby ratifies and confirms all that such irrevocable proxy
may lawfully do or cause to be done by virtue hereof. Such irrevocable
proxy is executed and intended to be irrevocable in accordance with the
provisions of Section 212(e) of the Delaware General Corporation Law (the
"DGCL").
5. Certain Events. (a) Each Stockholder agrees that this Agreement
and the obligations hereunder shall attach to such Stockholder's Subject
Shares and shall be binding upon any person or entity to which legal or
beneficial ownership of such Subject Shares shall pass, whether by
operation of law or otherwise, including such Stockholder's heirs,
guardians, administrators or successors. In the event of any stock split,
stock dividend, merger, reorganization, recapitalization or other change in
the capital structure of the Company affecting the Company Common Stock, or
the acquisition of additional shares of Company Common Stock or other
voting securities of the Company by any Stockholder, the number of Subject
Shares listed in Schedule A beside the name of such Stockholder shall be
adjusted appropriately and this Agreement and the obligations hereunder
shall attach to any additional shares of Company Common Stock or other
voting securities of the Company issued to or acquired by such Stockholder.
(b) Each Stockholder agrees that such Stockholder will tender to the
Company, within 10 business days after the date hereof (or, in the event
Subject Shares are acquired subsequent to the date hereof within 10
business days after the date of such acquisition), any and all certificates
representing such Stockholder's Subject Shares in order that the Company
may inscribe upon such certificates the legend in accordance with Section
5.13 of the Merger Agreement.
6. Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any Stockholder, on
the one hand, without the prior written consent of Parent nor by Parent, on
the other hand, without the prior written consent of the Stockholders,
except that Parent may assign, in its sole discretion, any or all of its
rights, interests and obligations hereunder to any direct or indirect
wholly owned subsidiary of Parent. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns.
7. Termination. This Agreement shall terminate, and the provisions
hereof shall be of no further force or effect, upon the earlier to occur of
(i) the Effective Time or (ii) termination of the Merger Agreement.
A-3
<PAGE> 159
8. General Provisions.
(a) Amendments. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto.
(b) Notice. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed given if
delivered personally or sent by overnight courier (providing proof of
delivery) to Parent in accordance with Section 8.02 of the Merger Agreement
and to the Stockholders at their respective addresses set forth on Schedule
A attached hereto (or at such other address for a party as shall be
specified by like notice).
(c) Interpretation. When a reference is made in this Agreement to a
Section or Schedule, such reference shall be to a Section of or Schedule to
this Agreement unless otherwise indicated. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. Wherever the words
"include", "includes" or "including" are used in this Agreement, they shall
be deemed to be followed by the words "without limitation".
(d) Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement,
and shall become effective when one or more of the counterparts have been
signed by each of the parties and delivered to the other parties.
(e) Entire Agreement; No Third-Party Beneficiaries. This Agreement
(including the documents and instruments referred to herein) (i)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to
the subject matter hereof and (ii) is not intended to confer upon any
person other than the parties hereto any rights or remedies hereunder.
(f) Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Delaware, regardless of the
laws that might otherwise govern under applicable principles of conflicts
of law thereof.
(g) Voidability. If prior to the execution hereof, the Board of
Directors of the Company shall not have duly and validly authorized and
approved by all necessary corporate action, this Agreement, the Merger
Agreement and the transactions contemplated hereby and thereby, so that by
the execution and delivery hereof Parent or Sub would become, or could
reasonably be expected to become an "interested stockholder" with whom the
Company would be prevented for any period pursuant to Section 203 of the
DGCL from engaging in any "business combination" (as such terms are defined
in Section 203 of the DGCL), then this Agreement shall be void and
unenforceable until such time as such authorization and approval shall have
been duly and validly obtained.
9. Enforcement. The parties agree that irreparable damage would occur
in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions of this Agreement in any
court of the United States located in the State of Delaware or in a
Delaware state court, this being in addition to any other remedy to which
they are entitled at law or in equity. Without limiting the generality of
the foregoing, the parties hereto expressly agree that the obligations of
each Stockholder set forth in Section 1(b) hereof shall be subject to the
foregoing provisions of this Section 9. In addition, each of the parties
hereto (i) consents to submit such party to the personal jurisdiction of
any court of the United States located in the State of Delaware or any
Delaware state court in the event any dispute arises out of this Agreement
or any of the transactions contemplated hereby, (ii) agrees that such party
will not attempt to deny or defeat such personal jurisdiction by motion or
other request for leave from any such court, (iii) agrees that such party
will not bring any action relating to this Agreement or the transactions
contemplated hereby in any court other than a court of the United States
located in the State of Delaware or a Delaware state court and (iv) waives
any right to trial by jury with respect to any claim or proceeding related
to or arising out of this Agreement or any of the transactions contemplated
hereby.
A-4
<PAGE> 160
10. Public Announcements. Except as required by law, no Stockholder
shall issue any press release or other public statement with respect to the
transactions contemplated by this Agreement and the Merger Agreement
without the prior written consent of Parent.
11. Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or
public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect. Upon such determination that
any term or other provision is invalid, illegal or incapable of being
enforced, the parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible to the fullest extent permitted by applicable law in an acceptable
manner to the end that the transactions contemplated hereby are fulfilled
to the extent possible.
IN WITNESS WHEREOF, Parent has caused this Agreement to be signed by its
officer thereunto duly authorized and each Stockholder has signed this
Agreement, all as of the date first written above.
JOHNSON & JOHNSON,
By: /s/ JAMES R. UTASKI
----------------------------------
Name: James R. Utaski
Title: Vice President,
Corporate Development
Stockholders
/s/ ROSEANNE HIRSCH
----------------------------------
Roseanne Hirsch
/s/ MALCOLM M. FARNSWORTH, JR.
----------------------------------
Malcolm M. Farnsworth, Jr.
/s/ AUGUSTINE Y. LIEN
----------------------------------
Augustine Y. Lien
/s/ MILTON MCCOLL, M.D.
----------------------------------
Milton McColl, M.D.
/s/ A. LAD BURGIN
----------------------------------
A. Lad Burgin
/s/ ALAN LEVY
----------------------------------
Alan Levy, Ph.D.
/s/ MARY LAKE POLAN
----------------------------------
Mary Lake Polan, M.D., Ph.D.
/s/ F. THOMAS WATKINS III
----------------------------------
F. Thomas Watkins III
A-5
<PAGE> 161
/s/ A. GRANT HEIDRICH
----------------------------------
A. Grant Heidrich
MAYFIELD ASSOCIATES FUND II
By: /s/ A. GRANT HEIDRICH
----------------------------------
Name: A. Grant Heidrich
Title: General Partner
MAYFIELD VII
By: Mayfield VII Management
Partners, its general partner
By: /s/ A. GRANT HEIDRICH
----------------------------------
Name: A. Grant Heidrich
Title: General Partner
ORIGIN MEDSYSTEMS, INC.
By: /s/ RONALD W. DOLLENS
----------------------------------
Name: Ronald W. Dollens
Title: Chairman of the Board and
President and Chief
Executive Officer of
Guidant Corporation
/s/ GLENN FOY
----------------------------------
Glenn Foy
A-6
<PAGE> 162
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMPANY COMMON
STOCK OWNED OR TO
BE OWNED OF
NAME AND ADDRESS OF STOCKHOLDER* RECORD
- --------------------------------------------------------------------------- -----------------
<S> <C>
Guidant Corporation 2,520,348
135 Constitution Drive
Menlo Park, CA 94025
Attention: F. Thomas Watkins III
Mayfield Fund 1,349,550
2800 Sand Hill Road
Suite 200 Menlo Park, CA 94025
Attention: A. Grant Heidrich
Roseanne Hirsch 50,000
Malcolm M. Farnsworth 105,834
Glenn Foy 26,608
Augustine Lien 58,772
Milton McColl 49,170
Lad Burgin 8,666
Grant Heidrich 10,527
Alan Levy 10,527
Mary Lake Polan 9,924
F. Thomas Watkins III 10,527
Elizabeth Connell 8,664
</TABLE>
- ---------------
* Unless an address is otherwise set forth below, the address for such
stockholder shall be the address of the Company set forth in Section 8.02 of the
Merger Agreement.
<PAGE> 163
ANNEX III
August 3, 1997
Board of Directors
Gynecare, Inc.
235 Constitution Drive
Menlo Park, CA 94025
Dear Board of Directors:
Gynecare, Inc. (the "Company") and Johnson & Johnson (the "Buyer") have
entered into an Agreement and Plan of Merger dated as of August 3, 1997 (the
"Agreement"), pursuant to which the Company will be merged with the Buyer in a
transaction (the "Merger") in which each outstanding share of the Company's
common stock, par value $0.001 (the "Company Common Stock"), will be converted
into the right to receive shares of the common stock of the Buyer, par value
$1.00 (the "Buyer Common Stock").
Pursuant to the Agreement, each share of Company Common Stock shall be
converted into the right to receive that fraction of a share of Buyer Common
Stock equal to the Exchange Ratio. The Exchange Ratio will be equal to the
amount obtained by dividing $8.46 by the average per share closing price of
Buyer Common Stock for the 20 full trading days preceding the date of the last
full trading day prior to the stockholders meeting. We have assumed, with your
consent, that the Merger will qualify for pooling-of-interests accounting
treatment and as a tax-free transaction for the stockholders of the Company. You
have requested our opinion as to whether the Exchange Ratio is fair, from a
financial point of view, to the Company's stockholders.
Alex. Brown & Sons Incorporated ("Alex. Brown"), as a customary part of its
investment banking business, is engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and other
purposes. We have acted as financial advisor to the Board of Directors of the
Company in connection with the transaction described above and will receive a
fee for our services, a portion of which is contingent upon the consummation of
the Merger. Alex. Brown regularly publishes research reports regarding the
medical equipment and devices industry and the businesses and securities of
publicly owned companies in the medical equipment and devices industry. In the
ordinary course of business, Alex. Brown may actively trade the securities of
both the Company and the Buyer for our own account and the account of our
customers and, accordingly, may at any time hold a long or short position in
securities of the Company and the Buyer.
In connection with this opinion, we have reviewed certain publicly
available financial information and other information concerning the Company and
Buyer and certain internal analyses and other information furnished to us by the
Company. We have also held discussions with the members of the senior
managements of the Company and Buyer regarding the businesses and prospects of
their respective companies and the joint prospects of the combined company. In
addition, we have (i) reviewed the reported prices and trading activity for the
common stock of both the Company and Buyer, (ii) compared certain financial and
stock market information for the Company and Buyer with similar information for
certain other companies whose securities are publicly traded, (iii) reviewed the
financial terms of certain recent business combinations which we deemed
comparable in whole or in part, (iv) reviewed the terms of the Agreement and
certain related documents, and (v) performed such other studies and analyses and
considered such other factors as we deemed appropriate.
We have not independently verified the information described above and for
purposes of this opinion have assumed the accuracy, completeness and fairness
thereof. With respect to the information relating to the prospects of the
Company, we have assumed that such information reflects the best currently
available judgments and estimates of the management of the Company as to the
likely future financial performance of the Company. In addition, we have not
made nor been provided with an independent evaluation or appraisal of
<PAGE> 164
the assets of the Company or the Buyer, nor have we been furnished with any such
evaluations or appraisals. In rendering this opinion, we have not been asked to
consider, and we do not address, the relative merits of the Merger as compared
to any alternative business transactions with third parties that might exist for
the Company or the effect of any such other transaction in which the Company
might engage. We are not expressing any Opinion as to the price or range of
prices at which Buyer Common Stock may trade subsequent to the consummation of
the Merger. Our opinion is based on market, economic and other conditions as
they exist and can be evaluated as of the date of this letter.
Our advisory services and the opinion expressed herein were prepared for
the use of the Board of Directors of the Company and do not constitute a
recommendation to the Company's stockholders as to how they should vote at the
stockholders' meeting in connection with the Merger. We hereby consent, however,
to the inclusion of this opinion as an exhibit to any proxy or registration
statement distributed in connection with the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the Exchange Ratio is fair, from a financial point of view,
to the Company's stockholders.
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
By: /s/ ALEX. BROWN & SONS
------------------------------------
2
<PAGE> 165
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The New Jersey Business Corporation Act (the "NJBCA") provides that a New
Jersey corporation has the power to indemnify a director or officer against his
or her expenses and liabilities in connection with any proceeding involving the
director or officer by reason of his or her being or having been such a director
or officer, other than a proceeding by or in the right of the corporation, if
such a director or officer acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation; and with respect to any criminal proceeding, such director or
officer had no reasonable cause to believe his or her conduct was unlawful.
The indemnification and advancement of expenses shall not exclude any other
rights, including the right to be indemnified against liabilities and expenses
incurred in proceedings by or in the right of the corporation, to which a
director or officer may be entitled under a certificate of incorporation,
by-law, agreement, vote of shareholders, or otherwise; provided, that no
indemnification shall be made to or on behalf of a director or officer if a
judgment or other final adjudication adverse to the director or officer
establishes that his or her acts or omissions (a) were in breach of his or her
duty of loyalty to the corporation or its shareholders, (b) were not in good
faith or involved a knowing violation or law or (c) resulted in receipt by the
director or officer of an improper personal benefit.
The Registrant's Restated Certificate of Incorporation provides that, to
the full extent that the laws of the State of New Jersey permit the limitation
or elimination of the liability of directors and officers, no director or
officer of the Registrant shall be personally liable to the Registrant or its
stockholders for damages for breach of any duty owed to the Registrant or its
stockholders.
The By-laws of the Registrant provide that to the full extent permitted by
the laws of the State of New Jersey, the Registrant shall indemnify any person
(an "Indemnitee") who was or is involved in any manner (including, without
limitation, as a party or witness) in any threatened, pending or completed
investigation, claim, action, suit or proceeding, whether civil, criminal,
administrative, arbitrative, legislative or investigative (including, without
limitation, any action, suit or proceeding by or in the right of the Registrant
to procure a judgment in its favor) (a "Proceeding"), or who is threatened with
being so involved, by reason of the fact that he or she is or was a director or
officer of the Registrant or, while serving as a director or officer of the
Registrant, is or was at the request of the Registrant also serving as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise (including, without limitation, any employee
benefit plan), against all expenses (including attorneys' fees), judgments,
fines, penalties, excise taxes and amounts paid in settlement actually and
reasonably incurred by the Indemnitee in connection with such Proceeding,
provided that, there shall be no indemnification under such By-laws with respect
to any settlement or other nonadjudicated disposition of any threatened or
pending Proceeding unless the Registrant has given its prior consent to such
settlement or disposition. The right of indemnification created by the By-laws
shall be a contract right enforceable by an Indemnitee against the Registrant,
and it shall not be exclusive of any other rights to which an Indemnitee may
otherwise be entitled. The indemnification provisions of the By-laws shall inure
to the benefit of the heirs and legal representatives of an Indemnitee and shall
be applicable to Proceedings commenced or continuing after he adoption of the
By-laws, whether arising from acts or omissions occurring before or after such
adoption. No amendment, alteration, change, addition or repeal of or to the
By-laws shall deprive any Indemnitee of any rights under the By-laws with
respect to any act or omission of such Indemnitee occurring prior to such
amendment, alteration, change, addition or repeal.
The Registrant enters into indemnification agreements with its directors
and officers and enters into insurance agreements on its own behalf. The
indemnification agreements provide that the Registrant agrees to hold harmless
and indemnify its directors and officers to the fullest extent authorized or
permitted by the NJBCA, or any other applicable law, or by any amendment thereof
or other statutory provisions authorizing or permitting such indemnification
that is adopted after the date hereof. Without limiting the generality of the
foregoing, the Registrant agrees to hold harmless and indemnify its directors
and officers to the fullest extent
II-1
<PAGE> 166
permitted by applicable law against any and all expenses, judgments, fines, and
amounts paid in settlement actually and reasonably incurred by its directors and
officers in connection with the defense of any present or future threatened,
pending, or completed claim, action, suit, or proceeding by reason of the fact
that they were, are, shall be, or shall have been a director or officer of the
Registrant, or are or were serving, shall serve, or shall have served, at the
request of the Registrant, as a director or officer of another corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger dated as of August 4, 1997, among the Registrant, Lima
Merger Corp. and Gynecare, Inc. ("Gynecare"), as amended (included as Annex I to
the Proxy Statement/Prospectus which is a part of this Registration Statement on
Form S-4).
2.2 Stockholder Agreement dated as of August 4, 1997, among the Registrant and certain
affiliated stockholders of Gynecare (included as Annex II to the Proxy
Statement/Prospectus which is a part of this Registration Statement on Form S-4).
3.1* Restated Certificate of Incorporation of the Registrant dated April 26, 1990
(incorporated by reference to Exhibit 3(a) to the Registrant's Form 10-K Annual
Report for the fiscal year ended December 30, 1990).
3.2* Certificate of Amendment to the Restated Certificate of Incorporation of the
Registrant dated May 20, 1992 (incorporated by reference to Exhibit 3(a) to the
Registrant's Form 10-K Annual Report for the fiscal year ended January 3, 1993 (the
"1992 Form 10-K")).
3.3* Certificate of Amendment to the Restated Certificate of Incorporation of the
Registrant dated May 21, 1996 (incorporated by reference to Exhibit 3(a) to the
Registrant's Form 10-K Annual Report for the fiscal year ended December 29, 1996
(the "1996 Form 10-K")).
3.4* By-Laws of the Registrant, as amended April 26, 1990 (incorporated by reference to
Exhibit 3(b) to the 1992 Form 10-K).
4.1* Upon the request of the Securities and Exchange Commission, the Registrant will
furnish a copy of all instruments defining the rights of holders of long term debt
of the Registrant.
5.1 Opinion of Roger S. Fine, Esq. regarding the legality of the securities being
issued.
8.1 Opinion of Cravath, Swaine & Moore regarding certain tax matters.
8.2 Opinion of Wilson Sonsini Goodrich & Rosati regarding certain tax matters.
10.1* Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit
10(a) to the 1996 Form 10-K).
10.2* 1995 Stock Option Plan (as amended) (incorporated by reference to Exhibit 10(a) to
the Registrant's Form 10-K Annual Report for the fiscal year ended December 31,
1995 (the "1995 Form 10-K")).
10.3* 1991 Stock Option Plan (incorporated by reference to Exhibit 4(a) to Registration
Statement No. 33-40294).
10.4* 1986 Stock Option Plan (as amended) (incorporated by reference to Exhibit 10(b) to
the 1992 Form 10-K).
10.5* 1995 Stock Compensation Plan (incorporated by reference to Exhibit 10(e) to the
1995 Form 10-K).
10.6* Executive Incentive Plan (incorporated by reference to Exhibit 10(f) to the 1996
Form 10-K).
10.7* Domestic Deferred Compensation Plan (as amended) (incorporated by reference to
Exhibit 10(g) to the 1996 Form 10-K).
10.8* Deferred Fee Plan for Directors (as amended) (incorporated by reference to Exhibit
10(h) to the 1996 Form 10-K).
</TABLE>
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<PAGE> 167
<TABLE>
<C> <S>
10.9* Executive Income Deferral Plan (incorporated by reference to Exhibit 10(i) to the
1996 Form 10-K).
10.10* Excess Savings Plan (incorporated by reference to Exhibit 10(j) to the 1996 Form
10-K).
10.11* Supplemental Retirement Plan (incorporated by reference to Exhibit 10(h) to the
1992 Form 10-K).
10.12* Executive Life Insurance Plan (incorporated by reference to Exhibit 10(i) to the
1992 Form 10-K).
11.1* Calculation of Earnings Per Share (incorporated by reference to Exhibit 11 to the
1996 Form 10-K and Exhibit 11 to the Registrant's Form 10-Q Quarterly Report for
the quarter ended March 30, 1997).
12.1* Statement of Computation of Ratio of Earnings to Fixed Charges (incorporated by
reference to Exhibit 12 to the 1996 Form 10-K).
13.1* Portions of the Registrant's Annual Report to Shareholders for the fiscal year 1996
(incorporated by reference to Exhibit 13 to the 1996 Form 10-K).
21.1* List of Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to
the 1996 Form 10-K).
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Roger S. Fine, Esq. (included in Exhibit 5.1).
23.4 Consent of Cravath, Swaine & Moore (included in Exhibit 8.1).
23.5 Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 8.2).
23.6 Consent of BT Alex. Brown Incorporated.
24.1 Power of Attorney (included on the signature page of this Registration Statement).
99.1 Form of Proxy for Special Meeting of Stockholders of Gynecare.
</TABLE>
- ---------------
* Incorporated by reference.
(b) Financial Statement Schedules
None
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(a) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement; and
II-3
<PAGE> 168
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
(b) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
(c) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(d) that, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report
pursuant to section 13(a) or section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof;
(e) that prior to any public reoffering of the securities registered
hereunder through the use of a prospectus which is a part of this
Registration Statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), the issuer undertakes that
such reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who may
be deemed underwriters, in addition to the information called for by the
other items of the applicable form;
(f) that every prospectus (i) that is filed pursuant to paragraph (e)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the Registration Statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
(g) insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue;
(h) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request; and
(i) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
II-4
<PAGE> 169
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in New Brunswick, New Jersey on the
eighth day of September, 1997.
JOHNSON & JOHNSON,
by /s/ R. S. LARSEN
------------------------------------
Name: R. S. Larsen
Title: Chairman and Chief
Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Steve Rosenberg, William Doyle and Frank Ryan, and each of them, as his or her
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and all documents relating 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 necessary or advisable to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ---------------------------- -------------------
<C> <S> <C>
/s/ R. S. LARSEN Chairman, Board of Directors September 8, 1997
- ---------------------------------------- and Chief Executive
(R. S. Larsen) Officer, and Director
(Principal Executive
Officer)
/s/ R. J. DARRETTA Vice President, Finance September 8, 1997
- ---------------------------------------- (Principal Financial
(R. J. Darretta) Officer)
/s/ C. E. LOCKETT Controller (Principal September 8, 1997
- ---------------------------------------- Accounting Officer)
(C. E. Lockett)
/s/ G. N. BURROW Director September 8, 1997
- ----------------------------------------
(G. N. Burrow)
/s/ J. G. COONEY Director September 8, 1997
- ----------------------------------------
(J. G. Cooney)
</TABLE>
II-5
<PAGE> 170
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ---------------------------- -------------------
<C> <S> <C>
/s/ J. G. CULLEN Director September 8, 1997
- ----------------------------------------
(J. G. Cullen)
/s/ P. M. HAWLEY Director September 4, 1997
- ----------------------------------------
(P. M. Hawley)
/s/ A. D. JORDAN Director September 8, 1997
- ----------------------------------------
(A. D. Jordan)
/s/ A. G. LANGBO Director September 4, 1997
- ----------------------------------------
(A. G. Langbo)
/s/ J. S. MAYO Director September 5, 1997
- ----------------------------------------
(J. S. Mayo)
/s/ T. S. MURPHY Director September 8, 1997
- ----------------------------------------
(T. S. Murphy)
/s/ P. J. RIZZO Director September 4, 1997
- ----------------------------------------
(P. J. Rizzo)
/s/ M. F. SINGER Director September 8, 1997
- ----------------------------------------
(M. F. Singer)
/s/ R. B. SMITH Director September 4, 1997
- ----------------------------------------
(R. B. Smith)
/s/ R. N. WILSON Director September 8, 1997
- ----------------------------------------
(R. N. Wilson)
</TABLE>
II-6
<PAGE> 171
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger dated as of August 4, 1997, among the Registrant, Lima
Merger Corp. and Gynecare, Inc. ("Gynecare"), as amended (included as Annex I to
the Proxy Statement/Prospectus which is a part of this Registration Statement on
Form S-4).
2.2 Stockholder Agreement dated as of August 4, 1997, among the Registrant and certain
affiliated stockholders of Gynecare (included as Annex II to the Proxy
Statement/Prospectus which is a part of this Registration Statement on Form S-4).
3.1* Restated Certificate of Incorporation of the Registrant dated April 26, 1990
(incorporated by reference to Exhibit 3(a) to the Registrant's Form 10-K Annual
Report for the fiscal year ended December 30, 1990).
3.2* Certificate of Amendment to the Restated Certificate of Incorporation of the
Registrant dated May 20, 1992 (incorporated by reference to Exhibit 3(a) to the
Registrant's Form 10-K Annual Report for the fiscal year ended January 3, 1993 (the
"1992 Form 10-K")).
3.3* Certificate of Amendment to the Restated Certificate of Incorporation of the
Registrant dated May 21, 1996 (incorporated by reference to Exhibit 3(a) to the
Registrant's Form 10-K Annual Report for the fiscal year ended December 29, 1996
(the "1996 Form 10-K")).
3.4* By-Laws of the Registrant, as amended April 26, 1990 (incorporated by reference to
Exhibit 3(b) to the 1992 Form 10-K).
4.1* Upon the request of the Securities and Exchange Commission, the Registrant will
furnish a copy of all instruments defining the rights of holders of long term debt
of the Registrant.
5.1 Opinion of Roger S. Fine, Esq. regarding the legality of the securities being
issued.
8.1 Opinion of Cravath, Swaine & Moore regarding certain tax matters.
8.2 Opinion of Wilson Sonsini Goodrich & Rosati regarding certain tax matters.
10.1* Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit
10(a) to the 1996 Form 10-K).
10.2* 1995 Stock Option Plan (as amended) (incorporated by reference to Exhibit 10(a) to
the Registrant's Form 10-K Annual Report for the fiscal year ended December 31,
1995 (the "1995 Form 10-K")).
10.3* 1991 Stock Option Plan (incorporated by reference to Exhibit 4(a) to Registration
Statement No. 33-40294).
10.4* 1986 Stock Option Plan (as amended) (incorporated by reference to Exhibit 10(b) to
the 1992 Form 10-K).
10.5* 1995 Stock Compensation Plan (incorporated by reference to Exhibit 10(e) to the
1995 Form 10-K).
10.6* Executive Incentive Plan (incorporated by reference to Exhibit 10(f) to the 1996
Form 10-K).
10.7* Domestic Deferred Compensation Plan (as amended) (incorporated by reference to
Exhibit 10(g) to the 1996 Form 10-K).
10.8* Deferred Fee Plan for Directors (as amended) (incorporated by reference to Exhibit
10(h) to the 1996 Form 10-K).
10.9* Executive Income Deferral Plan (incorporated by reference to Exhibit 10(i) to the
1996 Form 10-K).
10.10* Excess Savings Plan (incorporated by reference to Exhibit 10(j) to the 1996 Form
10-K).
10.11* Supplemental Retirement Plan (incorporated by reference to Exhibit 10(h) to the
1992 Form 10-K).
</TABLE>
<PAGE> 172
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<C> <S>
10.12* Executive Life Insurance Plan (incorporated by reference to Exhibit 10(i) to the
1992 Form 10-K).
11.1* Calculation of Earnings Per Share (incorporated by reference to Exhibit 11 to the
1996 Form 10-K and Exhibit 11 to the Registrant's Form 10-Q Quarterly Report for
the quarter ended March 30, 1997).
12.1* Statement of Computation of Ratio of Earnings to Fixed Charges (incorporated by
reference to Exhibit 12 to the 1996 Form 10-K).
13.1* Portions of the Registrant's Annual Report to Shareholders for the fiscal year 1996
(incorporated by reference to Exhibit 13 to the 1996 Form 10-K).
21.1* List of Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to
the 1996 Form 10-K).
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Roger S. Fine, Esq. (included in Exhibit 5.1).
23.4 Consent of Cravath, Swaine & Moore (included in Exhibit 8.1).
23.5 Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 8.2).
23.6 Consent of BT Alex. Brown Incorporated.
24.1 Power of Attorney (included on the signature page of this Registration Statement).
99.1 Form of Proxy for Special Meeting of Stockholders of Gynecare.
</TABLE>
- ---------------
* Incorporated by reference.
<PAGE> 1
EXHIBIT 5.1
October 14, 1997
Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, NJ 08903
Ladies and Gentlemen:
I am Vice President, General Counsel of Johnson & Johnson, a New Jersey
corporation (the "Company"), and I am familiar with the Registration Statement
on Form S-4 (the "Registration Statement") being filed by the Company with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
relating to the proposed issuance of shares of the Company's Common Stock, par
value $1.00 per share, in connection with the merger of Lima Merger Corp., a
Delaware corporation and a wholly owned subsidiary of the Company ("Merger
Sub"), into Gynecare, Inc., a Delaware corporation ("Gynecare"), pursuant to the
terms of the Agreement and Plan of Merger dated as of August 4, 1997 (the
"Merger Agreement") among the Company, Merger Sub and Gynecare.
I have reviewed the Company's Restated Certificate of Incorporation and
By-laws and such other corporate records of the Company and documents and
certificates of public officials and others as I have deemed necessary as a
basis for the opinion hereinafter expressed.
Based on the foregoing and having regard for such legal considerations as I
deem relevant, I am of the opinion that the shares of Common Stock covered by
the Registration Statement when delivered in exchange for shares of Gynecare
common stock pursuant to the Merger Agreement will be duly authorized, validly
issued, fully paid and nonassessable.
I hereby consent to the use of my name under the caption "Legal Matters" in
the Proxy Statement/ Prospectus constituting a part of the Registration
Statement and to the use of this opinion as an Exhibit to the Registration
Statement.
Very truly yours,
/s/ ROGER S. FINE
--------------------------------------
Name: Roger S. Fine
Title: Vice President, General Counsel
<PAGE> 1
EXHIBIT 8.1
[LETTERHEAD OF]
C R A V A T H, S W A I N E & M O O R E
[NEW YORK OFFICE]
AGREEMENT AND PLAN OF MERGER
DATED AS OF AUGUST 4, 1997,
AMONG JOHNSON & JOHNSON,
LIMA MERGER CORP. AND
GYNECARE, INC.
October 17, 1997
Ladies and Gentlemen:
We have acted as special counsel for Johnson & Johnson, a New Jersey
corporation ("Johnson & Johnson"), in connection with the proposed merger (the
"Merger") of Lima Merger Corp., a Delaware corporation and a wholly owned
subsidiary of Johnson & Johnson ("Sub"), with and into Gynecare, Inc., a
Delaware corporation (the "Company"), pursuant to an Agreement and Plan of
Merger dated as of August 4, 1997 (the "Merger Agreement"), among Johnson &
Johnson, Sub and the Company under which each issued and outstanding share of
common stock of the Company not owned by the Company, Johnson & Johnson or Sub
will be exchanged for common stock of Johnson & Johnson.
In that connection, you have requested our opinion regarding the material
Federal income tax consequences of the Merger. In providing our opinion, we have
examined the Merger Agreement, the Proxy Statement/Prospectus of the Company and
Johnson & Johnson to be dated as of October 17, 1997 (the "Proxy
Statement-Prospectus"), and such other documents and corporate records as we
have deemed necessary or appropriate for purposes of our opinion. In addition,
we have assumed that (i) the Merger will be consummated in the manner
contemplated by the Proxy Statement-Prospectus and in accordance with the
provisions of the Merger Agreement, (ii) the representations made to us by (x)
the Company in its letter dated October 16, 1997, and (y) Johnson & Johnson and
Sub in their letter dated October 16, 1997, and delivered to us for purposes of
this opinion are accurate and complete, (iii) the representations made to us by
certain stockholders in their respective letters and delivered to us for
purposes of this opinion are accurate and complete and (iv) all statements,
descriptions and representations contained in any of the documents referred to
herein or otherwise made to us are true and correct in all material respects and
no actions have been (or will be) taken which are inconsistent with such
representations.
Based upon the foregoing, in our opinion, for Federal income tax purposes,
the Merger will constitute a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code"), and the Company,
Johnson & Johnson and Sub will each be a party to such reorganization within the
meaning of Section 368(b) of the Code.
The opinions expressed herein are based upon existing statutory, regulatory
and judicial authority, any of which may be changed at any time with retroactive
effect. In addition, our opinions are based solely on the documents that we have
examined, the additional information that we have obtained, and the statements
contained in the letters from the Company, Johnson & Johnson and Sub, and the
stockholders referred to above, which we have assumed will be true as of the
effective time of the Merger. Our opinions cannot be relied upon if any of the
facts pertinent to the Federal income tax treatment of the Merger stated in such
documents or in such additional information is, or later becomes, inaccurate, or
if any of the statements contained in the letters from the Company, Johnson &
Johnson and Sub, or the stockholders referred to above are, or later become,
inaccurate. Finally, our opinions are limited to the tax matters specifically
covered hereby, and we have not been asked to address, nor have we addressed,
any other tax consequences of the Merger or any other transactions.
<PAGE> 2
This opinion is being provided solely for the benefit of Johnson & Johnson.
No other person or party shall be entitled to rely on this opinion.
Notwithstanding the previous sentence, we hereby consent to the filing of this
opinion as an exhibit to the Registration Statement and further consent to the
use of our name in the Registration Statement in connection with references to
this opinion. In giving this consent, however, we do not hereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended.
Very truly yours,
/s/ CRAVATH, SWAINE & MOORE
--------------------------------------
Cravath, Swaine & Moore
Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
2
<PAGE> 1
EXHIBIT 8.2
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
October 16, 1997
Gynecare, Inc.
235 Constitution Drive
Menlo Park, California 94025
Ladies and Gentlemen:
We have acted as counsel for Gynecare, Inc., a Delaware corporation
("Gynecare"), in connection with the preparation and execution of the Agreement
and Plan of Merger (the "Merger Agreement") dated as of August 4, 1997, among
Johnson & Johnson, a New Jersey corporation ("J & J"), Lima Merger Corp., a
Delaware corporation and wholly-owned subsidiary of J & J ("Newco"), and
Gynecare. This opinion is being delivered to you pursuant to Section 6.03(c) of
the Merger Agreement. Pursuant to the Merger Agreement, Newco will merge with
and into Gynecare and Gynecare will survive as a wholly-owned subsidiary of J &
J (the "Merger"). Unless otherwise defined, capitalized terms referred to herein
have the meanings set forth in the Merger Agreement. All section references,
unless otherwise indicated, are to the Internal Revenue Code of 1986, as amended
(the "Code").
You have requested our opinion regarding certain United States federal
income tax consequences of the Merger. In delivering this opinion, we have
reviewed and relied upon the facts, statements, descriptions and representations
set forth in the registration statement on Form S-4 filed with the Securities
and Exchange Commission (the "Registration Statement"), the Merger Agreement
(including Schedules and Exhibits) and such other documents pertaining to the
Merger as we have deemed necessary or appropriate. We have also reviewed and
relied upon representations of officers of Gynecare and J & J, respectively (the
"Officers' Representations").
In connection with rendering this opinion, we have assumed or obtained
representations (without any independent investigation) that:
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has
been (or will be by the effective time of the Merger (the "Effective
Time")) due execution and delivery of all documents where due execution and
delivery are prerequisites to effectiveness thereof;
2. Any statement made in any of the documents referred to herein, "to
the best of the knowledge" of any person or party is correct without such
qualification;
3. All statements, descriptions and representations contained in any
of the documents referred to herein or otherwise made to us are true and
correct in all material respects and no actions have been (or will be)
taken which are inconsistent with such representations; and
4. The Merger will be reported by Gynecare, and J & J on their
respective federal income tax returns in a manner consistent with the
opinion set forth below.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that, if the Merger is consummated in accordance with the Merger
Agreement (and without any waiver, breach or amendment of any of the provisions
thereof) and the Officers' Representations are true and correct at the Effective
Time, then for federal income tax purposes the Merger will qualify as a
"reorganization" within the meaning of Section 368(a) of the Code.
This opinion represents and is based upon our best judgment regarding the
application of federal income tax laws arising under the Code, existing judicial
decisions, administrative regulations and published rulings and procedures. Our
opinion is not binding upon the Internal Revenue Service or the courts, and
there is no assurance that the Internal Revenue Service will not successfully
assert a contrary position. Furthermore, no assurance can be given that future
legislative, judicial or administrative changes, on either a prospective or
<PAGE> 2
retroactive basis, would not adversely affect the accuracy of the conclusions
stated herein. Nevertheless, we undertake no responsibility to advise you of any
new developments in the application or interpretation of the Federal income tax
laws.
This opinion addresses only the classification of the Merger as a
reorganization under Section 368(a) of the Code, and does not address any other
federal, state, local or foreign tax consequences that may result from the
Merger or any other transaction (including any transaction undertaken in
connection with the Merger).
No opinion is expressed as to any transaction other than the Merger as
described in the Merger Agreement or to any transaction whatsoever, including
the Merger, if all the transactions described in the Merger Agreement are not
consummated in accordance with the terms of such Merger Agreement and without
waiver or breach of any material provision thereof or if all of the
representations, warranties, statements and assumptions upon which we relied are
not true and accurate at all relevant times. In the event any one of the
statements, representations, warranties or assumptions upon which we have relied
to issue this opinion is incorrect, our opinion might be adversely affected and
may not be relied upon.
This opinion has been delivered to you only for the purposes stated. It may
not be relied upon for any other purpose or by any other person or entity and
may not be made available to any other person or entity without our prior
written consent. We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and further consent to the use of our name in the
Registration Statement in connection with references to this opinion and the tax
consequences of the Merger. In giving this consent, however, we do not hereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
/s/ WILSON SONSINI GOODRICH & ROSATI
----------------------------------------
Wilson Sonsini Goodrich & Rosati,
Professional Corporation
2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement
on Form S-4 of our reports dated January 20, 1997, on our audits of the
consolidated financial statements and financial statement schedule of Johnson &
Johnson and subsidiaries, which are included or incorporated by reference in the
Annual Report of Johnson & Johnson and subsidiaries on Form 10-K for the fiscal
year ended December 29, 1996. We also consent to the reference to our firm under
the captions "Certain Financial Data" and "Experts".
/s/ COOPERS & LYBRAND L.L.P
COOPERS & LYBRAND L.L.P.
New York, New York
October 16, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-4 of
(i) our report dated January 22, 1997, on our audit of the financial statements
of Gynecare, Inc. and (ii) our report dated November 9, 1995, on our audit of
the financial statements of the Uterine Balloon Therapy Business Operations of
Origin Medsystems, Inc., which are incorporated by reference in the Annual
Report of Gynecare, Inc. on Form 10-K for the fiscal year ended December 31,
1996. We also consent to the reference to our firm under the caption "Experts".
/s/ COOPERS & LYBRAND L.L.P.
San Jose, California
October 16, 1997
<PAGE> 1
EXHIBIT 23.6
CONSENT OF BT ALEX. BROWN INCORPORATED
BT Alex. Brown Incorporated is the successor to Alex. Brown & Sons
Incorporated, which provided an opinion letter dated August 3, 1997 (the
"Opinion") to the Board of Directors of Gynecare, Inc. ("Gynecare"). We hereby
consent to the use of Annex III containing the Opinion in the Proxy
Statement/Prospectus constituting a part of the registration statement on Form
S-4 relating to the merger of a wholly owned subsidiary of Johnson & Johnson
with and into Gynecare and to the references to the Alex. Brown & Sons
Incorporated name in the Proxy Statement/Prospectus in connection with
references to the Opinion. In giving such consent, we do not thereby admit that
we come within the category of persons whose consent is required under Section 7
of the Securities Act of 1933 or the rules and regulations adopted by the
Securities and Exchange Commission thereunder nor do we admit that we are
experts with respect to any part of such Registration Statement within the
meaning of the term "experts" as used in the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder.
October 17, 1997
BT ALEX. BROWN INCORPORATED
By: /s/ BT ALEX. BROWN INCORPORATED
--------------------------------
Authorized Signatory
<PAGE> 1
EXHIBIT 99.1
DETACH HERE
GYNECARE, INC.
235 CONSTITUTION DRIVE
MENLO PARK, CA 94025
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS OF GYNECARE, INC.
TO BE HELD ON NOVEMBER 19, 1997
P R O X Y
THE UNDERSIGNED HEREBY APPOINTS ROSEANNE HIRSCH AND A. GRANT HEIDRICH, EACH
WITH FULL POWER OF SUBSTITUTION, AS PROXY OF THE UNDERSIGNED, TO ATTEND THE
SPECIAL MEETING OF STOCKHOLDERS OF GYNECARE, INC. (THE "COMPANY") TO BE HELD AT
THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY LOCATED AT 235 CONSTITUTION
DRIVE, MENLO PARK, CALIFORNIA AT 9:30 A.M., LOCAL TIME ON WEDNESDAY, NOVEMBER
19, 1997, AND AT ANY AND ALL ADJOURNMENTS THEREOF, AND TO VOTE ALL COMMON STOCK
OF THE COMPANY, AS DESIGNATED ON THE REVERSE SIDE OF THIS PROXY, WITH ALL
POWERS THE UNDERSIGNED WOULD POSSESS IF PERSONALLY PRESENT AT THE MEETING.
THIS PROXY WILL BE VOTED OR WITHHELD FROM BEING VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS SPECIFIED. WHERE NO CHOICE IS SPECIFIED, THIS PROXY WILL CONFER
DISCRETIONARY AUTHORITY AND WILL BE VOTED FOR APPROVAL OF THE MERGER (AS
DEFINED ON THE REVERSE SIDE). THIS PROXY CONFERS AUTHORITY FOR THE ABOVE NAMED
PERSONS TO VOTE IN HIS DISCRETION WITH RESPECT TO AMENDMENTS OR VARIATIONS TO
THE MATTERS IDENTIFIED IN THE NOTICE OF THE MEETING ACCOMPANYING THIS PROXY AND
SUCH OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE MEETING. A STOCKHOLDER
HAS THE RIGHT TO APPOINT A PERSON, WHO NEED NOT BE A STOCKHOLDER, TO ATTEND AND
ACT ON HIS BEHALF AT THE MEETING, OTHER THAN THE PERSON DESIGNATED IN THIS FORM
OF PROXY, SUCH RIGHT MAY BE EXERCISE BY INSERTING THE NAME OF SUCH PERSON IN
THE BLANK SPACE PROVIDED.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE / SEE REVERSE /
/ SIDE /
<PAGE> 2
DETACH HERE
/x/ Please mark
votes as in
this example.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSAL:
1. Approval and adoption of the Agreement, and Plan of Merger dated as of
August 4, 1997 (as amended, the "Merger, Agreement"), among Johnson & Johnson
("Johnson & Johnson"), Lima Merger Corp., a wholly owned subsidiary of Johnson &
Johnson ("Lima"), and the Company, providing for the merger of Lima with and
into the Company upon the terms and subject to the conditions of the Merger
Agreement (the "Merger").
FOR AGAINST ABSTAIN
/ / / / / /
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT / /
Please sign date and return the proxy card promptly in
the enclosed envelope.
NOTE: Please sign, exactly as name appears hereon. When
signing as executor, administrator, attorney, trustee or
guardian please give your full title as such. If a
corporation, please sign in full corporation name by
president or other authorized officer. If a partnership,
please sign in partnership name by authorized person. If
a joint tenancy, please have both tenants sign.
Signature: ____________ Date: _______ Signature: _____________ Date: _______
