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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 1-9898
Organogenesis Inc.
(Exact name of registrant as specified in its charter)
Delaware 04-2871690
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Dan Road, Canton, MA 02021
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 575-0775
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $.01 value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ( X ) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The approximate aggregate market value of voting stock held by
non-affiliates of the registrant was $442,900,000 based on the last reported
sale price of the company's common stock on the American Stock Exchange as the
close of business on March 3, 2000. There were 31,632,365 shares of common stock
outstanding as of March 3, 2000, excluding treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form
10-K
into which
Document incorporated
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Portions of the Registrant's Definitive Proxy Statement
for its 2000 Annual Meeting of Stockholders .................. III
With the exception of the portions of the Definitive Proxy Statement for
the registrant's 2000 Annual Meeting of Stockholders expressly incorporated into
this Report by reference, such document shall not be deemed filed as a part of
this Annual Report on Form 10-K.
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PART I
This Form 10-K contains forward-looking statements that involve risks and
uncertainties. Forward-looking statements include information on:
o Our business outlook and future financial performance;
o Anticipated profitability, revenues, expenses and capital expenditures;
o Future funding and expectations as to any future events; and
o Other statements that are not historical fact and are forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act of 1995 that involve risks and uncertainties.
Although we believe that our plans, intentions and expectations reflected
in or suggested by such forward-looking statements are reasonable, we can give
no assurance that such plans, intentions or expectations will be achieved. When
considering such forward-looking statements, you should keep in mind the risk
factors and other cautionary statements in this Form 10-K. The risk and other
factors noted throughout this Form 10-K could cause our actual results to differ
materially from the results contained in any forward-looking statements.
Item 1. Business
Organogenesis Inc. - a tissue engineering firm - designs, develops and
manufactures medical products containing living cells and/or natural connective
tissue. We are the developer and manufacturer of the only mass-manufactured
medical product containing living human cells marketed in the US. Our product
development program includes living tissue replacements, cell-based organ assist
devices and other tissue-engineered products. Our lead product, Apligraf(R) skin
construct, was launched in the US in June 1998 by marketer Novartis
Pharmaceuticals Corporation. Our strategy is to commercialize products either by
ourselves or through partners with an established marketing presence.
Organogenesis was organized as a Delaware corporation in 1985. Our
principal offices are located at 150 Dan Road, Canton, Massachusetts 02021. The
telephone number is 781/575-0775.
Products
Organogenesis is utilizing its expertise in living mammalian (e.g., human)
cells and connective tissue in its product development. In addition to Apligraf,
major programs include VITRIX(TM) soft tissue replacement product, an
off-the-shelf vascular graft and a liver assist device. These programs are
profiled on the following pages.
Our portfolio also includes potential licensing opportunities. These
opportunities include: GRAFTPATCH(TM) soft tissue reinforcement product, which
has been cleared for marketing through the FDA 510k process; TESTSKIN(TM) II, an
in vitro testing product; our conditioned medium, a cell culture product found
to stimulate the generation of certain skin cell types; and our proprietary
technology to produce collagen fibrils designed to provide local tissue bulking.
Apligraf(R) is a registered trademark of Novartis.
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On the Market - Apligraf
Product Description - Like human skin, Apligraf has an organized, two-
layered structure. It features the key components of skin - the lower dermal
cells (fibroblasts), the upper epidermal cells (keratinocytes) and its key
structural protein (collagen). Unlike human skin, Apligraf does not contain
structures such as blood vessels, hair follicles and sweat glands or other cell
types such as Langerhans' cells, melanocytes, macrophages or lymphocytes.
Apligraf is mass-produced, available to physicians off-the-shelf and does not
require hospitalization for use. To enable Apligraf to be used on any patient,
cell types that might cause the product to be rejected are omitted from the
manufactured product.
[Photo showing structure of Apligraf compared to Human Skin]
Under the microscope, as shown above, Apligraf has a structure similar to
human skin.
Status - Apligraf is approved and marketed in the US for the treatment of
venous leg ulcers. In December 1999, Organogenesis applied to the FDA for
marketing approval for a second indication - diabetic foot ulcers. In fourth
quarter 1999, Novartis began initial product introduction in Switzerland, the
first of several planned in Europe. Apligraf is also marketed in Canada. Global
Apligraf marketing rights belong to Novartis Pharma AG, which bears all sales
and marketing costs for the product.
Current and Potential Markets -
Chronic wounds: Considered the largest potential market for Apligraf,
chronic wounds can severely impact patient lives, causing pain, reduced mobility
and lost work time. Wounds can lead to serious infection, hospitalization and,
in some cases, amputation. They can also be quite costly to the medical system.
Venous leg ulcers: Apligraf is approved and marketed in the US for the
treatment of venous leg ulcers, a type of chronic wound caused by poor blood
circulation. Venous leg ulcers are estimated to afflict approximately 1,000,000
people in the US alone. Many of these wounds resist healing with traditional
treatments and may be candidates for Apligraf therapy.
Diabetic foot ulcers: Diabetic foot ulcers, another chronic wound type,
affect up to 800,000 people in the US. A leading cause of hospitalization among
diabetics, they can lead to amputation: over 50,000 amputations are performed on
diabetics each year in the US. In December 1999, we submitted to the FDA an
Apligraf PMA supplement for approval for use in diabetic foot ulcers. The basis
of the PMA supplement is the Apligraf diabetic ulcer pivotal trial. In this
multi-center trial, Apligraf was found to heal more patients, faster, than
standard care alone.
Acute wounds: Serious acute wounds, such as those caused by burns or
severe skin disorders, tend to be less common than chronic wounds: in the US,
fewer than 15,000 people yearly are burned sufficiently to require skin
grafting. However, they can affect a large percentage of the body. Better
treatments are needed to improve patient outcome from such wounds. For burns and
other acute wounds, such as skin surgery wounds, there is also a need to improve
the quality of healing, such as reducing scarring. We currently have underway a
pivotal trial designed to assess whether use of Apligraf to treat wounds due to
skin cancer surgery leads to a better cosmetic outcome.
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Data from smaller Apligraf studies, including in donor site wounds, burns
and epidermolysis bullosa (a genetic skin disorder), were published or presented
during 1999 by the Company or by practicing physicians.
In Pilot Human Clinical Trials - VITRIX(TM)
The impetus for VITRIX development was the need for better treatments, for
damaged dermal and other connective tissues. For example, the body does not
regenerate dermal tissue - skin's lower layer -when it is lost due to injury or
surgery. Without dermal tissue to guide the repair process, humans heal with
scar tissue. Dermal tissue is also important from a practical perspective:
wounds healing over inadequate dermal tissue can have a sunken or puckered
appearance. Other internal connective tissues can also become damaged or
destroyed. These include structural parts of the spine and soft tissue lost with
tumor removal.
VITRIX is composed of the key components of human dermal tissue - dermal
cells (fibroblasts) and dermal proteins (collagen and other matrix molecules) -
in an all-natural tissue. Potential uses for VITRIX include in wound repair, as
well as in orthopedic, general and reconstructive surgery. Organogenesis began
pilot human clinical trials with VITRIX in 1999.
Research and Development Programs
Vascular Graft
Each year in the United States, approximately 375,000 coronary artery
bypass graft (CABG) procedures are performed to restore blood flow in the
arteries that keep the heart alive. Each CABG may require several by-pass grafts
as patients may have multiple blockages. Today, surgeons rely on vein harvested
from the patient for graft material. Use of patient vein, however, has its
drawbacks. The patient may not have sufficient healthy vein available.
Harvesting vein can greatly extend the duration and, thus, cost of the
procedure. It also creates a second wound site, increasing patient discomfort
and risk of complications.
We are developing an off-the-shelf vascular graft designed to provide the
necessary physical properties while becoming converted into living tissue
through population with the patient's own cells. Animal data on this program,
published in the scientific journal, Nature Biotechnology, in November 1999,
showed that our non-living vascular graft had been converted to living tissue
within 90 days of implantation. Our vascular graft is currently in animal
studies.
Liver Assist Device
Today in the United States, approximately 150,000 people yearly are
hospitalized for liver disease and over 43,000 people die from it. Liver
transplantation, currently the only effective treatment for liver failure, has a
number of drawbacks, including limited organ availability, riskiness,
invasiveness and high cost. Patients with acute liver failure risk dying before
a donor liver becomes available, creating a need for a bridge to transplant. A
liver assist device is also expected to enable some patients to avoid
transplantation by providing liver function until their own liver regenerates.
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Organogenesis has a research program to develop a device that will house
living liver cells to process patient blood, providing temporary liver function
using a dialysis-type procedure. We are applying our expertise in cell
procurement, culture and optimization to this program. In 1999, Organogenesis
acquired intellectual property and equipment from Baxter Healthcare Corporation
related to device design and manufacturing.
Our liver assist device program is currently in research. In October 1999,
the program was selected for a $2 million award under the Advanced Technology
Program of the National Institute for Standards and Technology. This two-year
grant is to assist Organogenesis in designing an effective device prototype.
Risk factors
Our Company Has a History of Losses and We Expect to Continue to Incur
Losses
Organogenesis Inc. was founded in 1985. We have incurred operating losses
in every year of our existence. We incurred net losses of $19,807,000 for the
year ended December 31, 1997, $14,031,000 for the year ended December 31, 1998
and $28,350,000 for the year ended December 31, 1999, which losses are
continuing. As of December 31, 1999, we have an accumulated deficit of
$129,367,000. We have not achieved profitability and expect to continue to incur
net losses. The extent of future losses and the time required to achieve
profitability is highly uncertain. Moreover, although our business is not
seasonal in nature, our revenues tend to vary significantly from fiscal quarter
to fiscal quarter.
In Order to Achieve Commercial Success, Our Products Must Gain Market
Acceptance
We manufacture and market one principal product: Apligraf. We have only
recently begun to market Apligraf, which is marketed through Novartis, and to
generate revenues from the commercialization of this product. Products under
development will require additional research and development efforts, including
clinical testing and regulatory approval, prior to commercial use. Our potential
products are subject to the risks of failure inherent in the development of
medical products based on new technologies. These risks include the
possibilities that:
o Our approach will not be successful;
o Our potential products will be found to be unsafe, ineffective or
otherwise will fail to meet applicable regulatory standards or
receive necessary regulatory clearances;
o The potential products, if safe and effective, will be difficult to
develop into commercially-viable products, will be difficult to
manufacture on a large scale, will be uneconomical to market, will
fail or be delayed in gaining acceptable insurance reimbursement or
will fail to obtain acceptance by the medical community;
o Proprietary rights of third parties will preclude us from marketing
such products; or
o Third parties will market superior or equivalent products.
Our business results would be hurt if we are unable to demonstrate to the
medical community the efficacy, relative safety and cost effectiveness of
treating patients with our products or if our products were not accepted as
alternatives to other existing or new therapies.
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Our Markets Are Competitive and Our Competitors Could Develop More
Effective Products
We are engaged in the rapidly evolving and competitive field of tissue
engineering for the treatment of skin wounds and other medical needs. Our
competitors include tissue engineering companies, xenotransplant companies,
wound care divisions of major pharmaceutical companies and other pharmaceutical,
biotechnology and medical products companies using traditional technologies to
develop products for wound care. Some of these companies have much greater
resources, research and development staffs and facilities, experience in
conducting clinical trials and obtaining regulatory approvals and experience in
the manufacturing, marketing and distribution of products than we do. Our
competitive position is based upon our ability to:
o create and maintain scientifically-advanced technology and
proprietary products and processes;
o attract and retain qualified personnel;
o obtain patent or other protection for our products and processes;
o obtain required government approvals on a timely basis;
o manufacture products on a cost-effective basis; and
o successfully market products.
If we are not successful in meeting these goals, our business could be
hurt. Similarly, our competitors may succeed in developing technologies,
products or procedures that are more effective than any that we are developing
or that would render our technology and products obsolete, noncompetitive or
uneconomical.
We Currently Depend Upon Strategic Relationships to Market Our Products
and Our Distributors May Not Be Successful in Marketing Our Products
We currently have limited experience in sales, marketing and distribution
and may need to develop long-term strategic relationships with partners, such as
Novartis, that have marketing and sales forces with technical expertise and
distribution capability. To the extent that we enter into such relationships,
our revenues will depend upon the efforts of third parties who may or may not be
successful. We may not be able to establish or maintain long-term strategic
relationships, and if we do, our collaborators may not be successful in gaining
market acceptance for our products. To the extent that we choose not to or are
unable to negotiate or maintain collaborations, we may need more capital and
resources to undertake a commercialization program at our own expense. In
addition, we may encounter significant delays in introducing our products into
certain markets or find that the commercialization of products in such markets
may be adversely affected by the absence of collaborative agreements. We are
dependent on Novartis for the successful marketing and selling of Apligraf
worldwide. If Novartis does not succeed in marketing and selling Apligraf or
gaining international approvals for the product or if we are unable to meet the
production demand of global commercialization, our operating results will
suffer.
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Our Ability to Commercialize Our Products Depends Upon Our Compliance with
Government Regulations
Our present and proposed activities are subject to extensive and rigorous
regulation by governmental authorities in the US and other countries. To
clinically test, produce and market medical devices for human use, we must
satisfy mandatory procedural and safety and efficacy requirements established by
the FDA and comparable state and foreign regulatory agencies. Typically, such
rules require that products be approved by the government agency as safe and
effective for their intended use prior to being marketed. The approval process
is expensive, time consuming and subject to unanticipated delays. Our product
candidates may not be approved. In addition, our product approvals could be
withdrawn for failure to comply with regulatory standards or due to unforeseen
problems after the product's marketing approval.
Testing is necessary to determine safety and efficacy before a submission
may be filed with the FDA to obtain authorization to market regulated products.
In addition, the FDA imposes various requirements on manufacturers and sellers
of products under its jurisdiction, such as labeling, Good Manufacturing
Practices, record keeping and reporting requirements. The FDA also may require
post-marketing testing and surveillance programs to monitor a product's effects.
Furthermore, changes in existing regulations or the adoption of new regulations
could prevent us from obtaining, or affect the timing of, future regulatory
approvals or could negatively affect the marketing of our existing products. We
would not be able to commercialize our products as planned and our operating
results would be hurt if:
o the regulatory agencies find our testing protocols to be inadequate;
o the appropriate authorizations are not granted on a timely basis, or
at all;
o the process to obtain authorization takes longer than expected or we
have insufficient funds to pursue such approvals;
o we lose previously-received authorizations; or
o we do not comply with regulatory requirements.
Medical and biopharmaceutical research and development involves the
controlled use of hazardous materials, such as radioactive compounds and
chemical solvents. We are subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and waste products. In addition, we handle and dispose of human
tissue. Although we believe that our safety procedures for handling these
materials are adequate, if accidental contamination or injury were to occur, we
could be liable for damages.
We Rely Heavily Upon Our Patents and Proprietary Technology and Any
Future Claims that Our Patents Are Invalid Could Seriously Harm Our
Business
We rely upon our portfolio of patent rights, patent applications and
exclusive licenses to patents and patent applications relating to living tissue
products, organ assist treatments and other aspects of tissue engineering. We
currently have 24 patents issued in the US, 11 pan-European patents issued and
six patents issued in Japan. As part of our continuing interest in protecting
intellectual property rights, we have filed and are prosecuting 16 other patent
applications in the US. We also license some of our technologies under an
exclusive patent license agreement with the Massachusetts Institute of
Technology. The agreement with MIT covers certain US patents and corresponding
patents in Europe and Japan. The earliest patent expiration is in 2006. Pursuant
to the MIT agreement, we have been granted an exclusive, worldwide license to
make, use and sell the products covered by the patents and to practice the
procedures covered by the patents. We are not currently a party in any
infringement claim.
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We expect to aggressively patent and protect our proprietary technologies.
However, we cannot be sure that any additional patents will be issued to us as a
result of our domestic or foreign patent applications or that any of our patents
will withstand challenges by others. Patents issued to or licensed by us may be
infringed or third parties may independently develop either the same or similar
technology. Similarly, our patents may not provide us with meaningful protection
from competitors, including those who may pursue patents which may prevent,
limit or interfere with our products or will require licensing and the payment
of significant fees or royalties by us to such third parties in order to enable
us to conduct our business. We may sue or be sued by third parties regarding
patents and other intellectual property rights. These suits are costly and would
divert funds and management and technical resources from our operations.
We also rely upon unpatented proprietary technology, know-how and trade
secrets and seek to protect them through confidentiality agreements with
employees, consultants and advisors. We request that any corporate sponsor with
which we enter into a collaborative agreement do so as well. If these
confidentiality agreements are breached, we may not have adequate remedies for
the breach. In addition, others may independently develop or otherwise acquire
substantially the same proprietary technology as our technology and trade
secrets.
We have relationships with a number of academic consultants who are not
employed by us. Accordingly, we have limited control over their activities and
can expect only limited amounts of their time to be dedicated to our activities.
These persons may have consulting, employment or advisory arrangements with
other entities that may conflict with or compete with their obligations to us.
Our consultants typically sign agreements that provide for confidentiality of
our proprietary information and results of studies. However, in connection with
every relationship, we may not be able to maintain the confidentiality of our
technology, the dissemination of which could hurt our competitive position and
results of operations. To the extent that our scientific consultants develop
inventions or processes independently that may be applicable to our proposed
products, disputes may arise as to the ownership of the proprietary rights to
such information, and we may not win those disputes.
We Must Be Able to Manufacture Our Products Successfully
The process of manufacturing our products is complex, requiring strict
adherence to manufacturing protocols. We have been producing our lead product,
Apligraf, for commercial sale since the second half of 1997 in adherence with
these manufacturing protocols. However, with increasing demand for Apligraf, we
must further transition from small-scale to full-scale production of our
products. If we do not make the full transition successfully, we will not be
able to satisfy the demands for our products and our results of operations will
be hurt.
We are required to maintain a manufacturing facility in compliance with
Good Manufacturing Practices. Manufacturing facilities and processes pass an
inspection before the FDA issues any product licenses necessary to market
medical therapeutics and are subject to continual review and periodic
inspection. We may not be able to maintain the necessary regulatory approvals
for our manufacturing operations or manufacture our products in a cost-
effective manner. If we were unable to manufacture potential products
independently or obtain or retain third party manufacturing on commercially-
acceptable terms, the submission of products for final regulatory approval and
initiation of marketing would be delayed. This, in turn, may cause us to be
unable to commercialize product candidates as planned, on a timely basis or on a
profitable basis.
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We Must Be Able to Obtain Adequate Sources of Supply
We manufacture Apligraf for commercial sale, as well as for use in
clinical trials, at our Canton, Massachusetts facility. Among the fundamental
raw materials needed to manufacture Apligraf are keratinocyte and fibroblast
cells. Because these cells are derived from donated infant foreskin, they may
contain human-borne pathogens. We perform extensive testing of the cells for
pathogens, including the HIV or "AIDS" virus. Our inability to obtain cells of
adequate purity, or cells that are pathogen-free, would limit our ability to
manufacture sufficient quantities of our products.
Another major material required to produce our products is collagen, a
protein obtained from animal source tissue. We have developed a proprietary
method of procuring our own collagen that we believe is superior in quality and
strength to collagen available from commercial sources. We currently obtain
animal source tissue from US suppliers only. We may not be able to obtain
adequate supplies of animal source tissue to meet our future needs or on a
cost-effective basis. The thermo-formed tray assembly that is used in the
manufacturing process of Apligraf is available to us under a supply arrangement
with only one manufacturing source. Because the FDA approval process requires
manufacturers to specify their proposed materials of certain components in their
applications, FDA approval of a new material would be required if a currently
approved material became unavailable from a supplier. If we are unable to obtain
adequate supplies of thermo-formed tray assemblies to meet future Apligraf
manufacturing needs or if we cannot obtain such assemblies on a cost-effective
basis, our operations would be hurt.
Interruptions in our supply of materials may occur in the future or we may
have to obtain substitute vendors for these materials. Any significant supply
interruption would adversely affect the production of Apligraf. In addition, an
uncorrected impurity or a supplier's variation in a raw material, either unknown
to us or incompatible with our manufacturing process, could hurt our ability to
manufacture products.
The Retention of Key Personnel Is Important to Our Competitive Position
Because of the specialized nature of our business, our success will depend
upon our ability to attract and retain highly qualified personnel and to develop
and maintain relationships with leading research institutions. The competition
for those relationships and for experienced personnel amongst the biotechnology,
pharmaceutical and healthcare companies, universities and non-profit research
institutions is intense. If we are unable to continue to attract and retain such
personnel or relationships, our competitive position could be hurt.
We May Be Subject to Product Liability Suits; Our Insurance May Not Be
Sufficient to Cover Damages
Our business exposes us to potential liability risks that are inherent in
the testing, manufacturing, marketing and sale of medical products. The use of
our products and product candidates, whether for clinical trials or commercial
sale, may expose us to product liability claims or product recall and possible
adverse publicity. Although we have product liability insurance coverage, the
level or breadth of our coverage may not be adequate to fully cover potential
liability claims. In addition, we may not be able to obtain additional product
liability coverage in the future at an acceptable cost. A successful claim or
series of claims brought against us in excess of our insurance coverage and the
effect of product liability litigation upon the reputation and marketability of
our technology and products, together with the diversion of the attention of key
personnel, could negatively affect our business.
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Our Business Is Subject to the Uncertainty of Third-Party Reimbursement
and Health Care Reform Measures Which May Limit Market Acceptance
In both domestic and foreign markets, our ability to commercialize our
product candidates will depend, in part, upon the availability of reimbursement
from third-party payors, such as government health administration authorities,
private health insurers and other organizations. Third-party payors are
increasingly challenging the price and cost-effectiveness of medical products.
If our products are not considered cost-effective, third-party payors may limit
reimbursement. Government and other third-party payors are increasingly
attempting to contain healthcare costs by limiting both coverage and the level
of reimbursement for new therapeutic products approved for marketing by the FDA
and by refusing, in some cases, to provide any coverage for uses of approved
products for disease indications for which the FDA has not granted marketing
approval. If government and third party payors do not provide adequate coverage
and reimbursement levels for uses of our products, the market acceptance of our
products would be limited.
There have been a number of federal and state proposals during the last
few years to subject the pricing of pharmaceuticals to government control and to
make other changes to the health care system of the US. It is uncertain what
legislative proposals will be adopted or what actions federal, state or private
payors for health care goods and services may take in response to any health
care reform proposals or legislation. We cannot predict the effect health care
reforms may have on our business.
Our Stock Price Is Volatile and Can Fluctuate Significantly Based on
Events Not In Our Control and General Industry Conditions
The biotechnology sector seems particularly vulnerable to abrupt changes
in investor sentiment. Stock prices of companies in the biotechnology industry,
including ours, can swing dramatically, with little relationship to operating
performance. Our stock price may be affected by a number of factors including,
but not limited to:
o clinical trial results and other product development events;
o the outcome of litigation;
o decisions relating to intellectual property rights;
o the entrance of competitive products into our market;
o changes in reimbursement policies or other practices related to the
pharmaceutical industry; or
o other industry and market changes or trends.
During the past three years, the price of our common stock, adjusted for
stock splits, has ranged from $6.75 to $35.19 per share. These fluctuations can
occur due to events outside of our control, regulatory actions such as
government approval of products or reimbursements, and general market conditions
affecting the biotechnology sector or the stock market generally.
We will Need to Raise Additional Funds, Your Investment Could Be Adversely
Affected
Based upon our current plans, we believe that common stock issued
subsequent to December 31, 1999, together with existing working capital and
future funds from Novartis, including product and royalty revenue, will be
sufficient to finance operations into 2001. However, this statement is
forward-looking and changes may occur that would significantly decrease
available cash before such time. Factors that may change our cash requirements
include:
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o Delays in obtaining regulatory approvals of products in different
countries, if needed, and subsequent timing of product launches;
o Delays in commercial acceptance and reimbursement when product
launches occur;
o Changes in the progress of research and development programs; and
o Changes in the resources devoted to outside research collaborations
or projects, self-funded projects, proprietary manufacturing methods
and advanced technologies.
Any of these events could adversely impact our capital resources,
requiring us to raise additional funds. Management believes that additional
funds may be available through equity or debt financing, strategic alliances
with corporate partners, capital lease arrangements, or other sources of
financing in the future. There can be no assurances that these funds will be
available when required on terms acceptable to us, if at all. If adequate funds
are not available when needed, we would need to delay, scale back or eliminate
certain research and development programs or license to third parties certain
products or technologies that we would otherwise undertake ourselves, resulting
in a potential material adverse effect on our financial condition and results of
operations.
Our Anti-Takeover Measures May Affect the Value of Our Stock
We, as a Delaware corporation, are subject to the General Corporation Law
of the State of Delaware, including Section 203, an anti-takeover law enacted in
1988. In general, Section 203 restricts the ability of a public Delaware
corporation from engaging in a "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. As a result of the
application of Section 203 and certain provisions in our certificate of
incorporation and bylaws, potential acquirors may be discouraged from attempting
to acquire us, thereby possibly depriving our stockholders of acquisition
opportunities to sell or otherwise dispose of our stock at above- market prices
typical of such acquisitions.
We have also adopted a shareholder rights plan, which gives holders of
common stock the right to purchase shares of our Series B Junior Participating
Preferred Stock if a potential acquiror purchases or plans to make a tender
offer to purchase 15% or more of our outstanding common stock. The existence of
this plan may make it more difficult for a third party to acquire control of us.
We are authorized to issue up to 1,000,000 shares of preferred stock,
$1.00 par value per share and to determine the price, privileges and other terms
of such shares. The issuance of any preferred stock with superior rights to the
common stocks could reduce the value of the common stock. In particular,
specific rights granted to future holders of preferred stock could be used to
restrict our ability to merge with or sell our assets to a third party, thereby
preserving control of Organogenesis by present owners and management and
preventing our holders of common stock from realizing a premium on their shares.
The Value Of Your Securities May Decrease If Other Security Holders
Exercise Their Options and Warrants or Convert Their Debt Into Common
Stock or If Other Stockholders Sell Their Stock
At December 31, 1999, 30,604,019 shares of our common stock are
outstanding (excluding 85,000 treasury shares). We have reserved an additional
12,718,286 shares of common stock for future issuance upon exercise or
conversion of options, warrants, the Series C convertible preferred stock and
the convertible debentures (excluding 3,000,000 shares of common stock reserved
under a shelf registration declared effective on February 14, 2000). We plan to
issue additional options and warrants in the future. If any of these securities
are exercised or converted, investors may experience significant dilution in the
market value and earnings per share of the common stock into which these
securities are convertible.
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We Have No Intention to Pay Cash Dividends
We have never paid any cash dividends on our common stock. We currently
intend to retain all future earnings, if any, for use in our business and do not
expect to pay any cash dividends in the foreseeable future. As a result, an
investor will only recognize an economic gain on an investment in our stock from
an appreciation in the price of our stock.
Collaborative and Other Agreements
In January 1996, we entered into an agreement with Novartis Pharma AG
granting them exclusive global marketing rights to Apligraf. Under the
agreement, Novartis is responsible for Apligraf sales and marketing costs
worldwide, as well as all clinical trials, registrations and patent costs
outside the US. The agreement provides us with up to $40,000,000 in equity
investments and nonrefundable research, development and milestone support
payments. The equity investments made were determined using quoted market prices
over a 30-day period or a premium to market, as in accordance with the contract
terms. The nonrefundable research, development and milestone support payments
were recognized as "Research and development support from related party" revenue
in the year received. All payments received relate to research and development
efforts that had been completed and no future obligations exist relating to
these payments. The table below summarizes all payments received and the year
they were recorded:
<TABLE>
<CAPTION>
1996 1997 1998 1999
---------- ---------- ----------- ------
<S> <C> <C> <C> <C>
Equity investments $5,000,000 $ -- $ 6,000,000 $ --
Research and development support from
related party 6,500,000 2,500,000 6,750,000 --
---------- ---------- ----------- ------
Total $11,500,00 $2,500,000 $12,750,000 $ --
========== ========== =========== ======
</TABLE>
The remaining payments are based upon achievement of specified events.
During March 2000, we received $5,000,000 from Novartis, which represents a
milestone support payment received in advance of achievement of the milestone.
Under the agreement, we supply Novartis' global requirements for Apligraf and
receive revenue consisting of a per unit manufacturing payment and royalty on
net product sales.
During the first quarter of 1999, Novartis agreed to provide funding for
certain programs to be conducted by Organogenesis. We have recorded $572,000 for
the period ended December 31, 1999 relating to the initiation of these programs,
which is included in "Other income".
In 1994, we signed a license agreement with Toyobo Ltd. granting Toyobo a
license to manufacture and market TESTSKIN(TM) in Japan in exchange for royalty
payments. Additionally, Toyobo may, but is not obligated to, purchase collagen
and other products from us. Revenues under this arrangement are included in
other income. This agreement is coterminous with certain patents.
Research Agreements
We have entered into various collaborative research agreements that are
generally funded over a one or two-year period. Each agreement is reviewed at
least annually and the amounts to be funded for the next period are then
determined. Either party may cancel the agreement upon advance written notice.
Total payments under these agreements were $571,000, $648,000 and $662,000 for
1997, 1998 and 1999, respectively. All our research agreements are early stage
today, but have the potential to develop into more material relationships in the
future.
12
<PAGE>
Research and Development
We plan to continue to focus product development efforts on high-quality
cell therapy, connective tissue and other types of tissue-engineered products
for a variety of areas, including wound care, surgery, cardiovascular medicine
and liver disease.
Our research and development staff consists of scientists and laboratory
assistants with technical backgrounds in cell biology, matrix biology, cell
culture, immunology, cryopreservation, molecular biology and clinical medicine.
For 1997, 1998 and 1999, research and development expenses were
$13,854,000, $17,542,000, and $18,166,000, respectively, which include
production costs (except cost of product sales commencing in 1999) and funding
of the research and other agreements noted above. All amounts expended were for
company-sponsored research and development.
Employees
As of March 24, 2000, we had 205 full-time employees. We have established
a stock option plan providing equity incentives, an employee stock purchase plan
and a 401(k) plan for all full-time employees. We believe that, through equity
participation, attractive fringe benefit programs and the opportunity to
contribute to the development and commercialization of new products using new
technology, we will continue to be able to attract highly-qualified personnel.
Scientific Advisory Board
We have a Scientific Advisory Board ("SAB") composed of five physicians,
professors and scientists in various fields of medicine and science. The SAB
meets from time to time to advise and consult with management and our scientific
staff. Each member of the SAB is expected to devote only a portion of his time
to us and may have consulting or other advisory arrangements with other entities
that may conflict or compete with his obligations to us. Members of the SAB have
no formal duties, authority or management obligations.
Item 2. PROPERTIES
We occupy our main offices and manufacturing premises under a facility
lease for 79,500 square feet of space in Canton, Massachusetts at an annual
average base rent of approximately $790,000, plus operating expenses, that
expires on September 30, 2004. This lease has three options to extend the term
for an additional five years per option. Taxes, insurance and operating expenses
are our responsibility under the terms of the lease. In May 1999, we entered
into another facility lease for approximately 62,500 square feet of additional
office and warehouse space in Canton, Massachusetts at an annual average base
rent of approximately $421,875, plus operating expenses, that expires on
December 5, 2004. This lease has three options to extend the term for an
additional five years per option. In total, we currently lease approximately
142,000 square feet of space. We also had a facility lease for warehouse and
office space that expired on December 31, 1999. In January 1999, we entered into
a noncancelable operating lease for certain office equipment.
We believe that current facilities will adequately support manufacturing
needs and research and development activities through the end of 2000 and
beyond.
13
<PAGE>
Item 3. LEGAL PROCEEDINGS
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
14
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the American Stock Exchange under the symbol
ORG. On March 3, 2000, there were 763 shareholders of record of our common
stock. The table below lists the high and low quarterly range of reported
closing prices of our common stock during the past two years.
1998 1999
------------------------ -----------------------
High Low High Low
---- --- ---- ---
First Quarter $ 27 3/16 $ 15 9/16 $ 15 11/16 $ 10 15/16
Second Quarter 35 3/16 19 5/8 13 3/4 8 3/4
Third Quarter 18 15/16 8 7/8 11 9/16 7 1/2
Fourth Quarter 16 3/8 9 3/16 11 7/8 6 3/4
The amounts above have been adjusted to reflect a one-for-four stock split
accounted for as a stock dividend distributed on April 29, 1998 to stockholders
of record as of April 22, 1998. All related data in the consolidated financial
statements reflect this stock dividend for all periods presented, except for the
Statements of Changes in Stockholders' Equity. No cash dividends have been paid
to date on our common stock and we do not anticipate paying cash dividends in
the foreseeable future.
Item 6. SELECTED FINANCIAL DATA (in thousands, except share data and number of
employees)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $ 627 $ 7,527 $ 3,531 $ 8,997 $ 3,578
Net Loss (12,737) (7,499) (19,807) (14,031) (28,350)
Net Loss Per Common Share (0.52) (0.27) (0.70) (0.48) (0.93)
Working Capital 12,886 11,256 4,843 15,541 2,981
Capital Expenditures 319 3,311 1,069 2,464 5,767
Total Assets 19,304 22,436 13,780 26,710 27,305
Total Long-Term Debt -- -- -- -- 22,287
Stockholders' Equity (Deficit) 17,798 18,478 11,523 23,239 (6,974)
Number of Employees 97 115 137 186 208
</TABLE>
15
<PAGE>
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In Management's Discussion and Analysis, we explain the general financial
condition and results of operations for Organogenesis Inc. As you read this
MD&A, referring to our consolidated financial statements that follow may be
helpful. Further information on the Company, our lead product and our pipeline
is contained in the "Business" section of this Form 10-K.
Overview of Organogenesis Inc.
Organogenesis Inc. - a tissue engineering firm - designs, develops and
manufactures medical products containing living cells and/or natural connective
tissue. We are the developer and manufacturer of the only mass-manufactured
medical product containing living human cells marketed in the US. Our product
development program includes living tissue replacements, cell-based organ assist
devices and other tissue-engineered products. Our lead product, Apligraf(R) skin
construct, was launched in the US in June 1998 by marketer Novartis
Pharmaceuticals Corporation. Our strategy is to commercialize products either by
ourselves or through partners with an established marketing presence.
Our Lead Product, Apligraf
Apligraf is approved and marketed in the US for the treatment of venous
leg ulcers. In December 1999, Organogenesis applied to the FDA for marketing
approval for a second indication - diabetic foot ulcers. Novartis Pharma AG has
global Apligraf marketing rights. In fourth quarter 1999, Novartis began initial
product introduction in Switzerland, the first of several planned in Europe.
Novartis also markets Apligraf in Canada.
A pivotal trial is underway designed to assess whether use of Apligraf to
treat wounds due to skin cancer surgery leads to a better cosmetic outcome. Data
from smaller Apligraf studies, including in donor site wounds, burns and
epidermolysis bullosa (a genetic skin disorder), were published or presented
during 1999.
Our Pipeline
Our pipeline includes VITRIX soft tissue replacement product, now in pilot
human clinical trials; our vascular graft program, currently in animal studies;
and our liver assist device program, currently in research. Our portfolio also
includes potential licensing opportunities. These opportunities include:
GraftPatch(TM) soft tissue reinforcement product, which has been cleared for
marketing through the FDA 510k process; TESTSKIN(TM) II, an in vitro testing
product; our conditioned medium, a cell culture product found to stimulate the
generation of certain skin cell types; and our proprietary technology to produce
collagen fibrils designed to provide local tissue bulking.
Results of Operations
With the approval and launch of Apligraf, we began a new era of
operations. We are seeing, as expected, a gradual ramp-up in sales. We expect
production costs to exceed product sales for the near term due to start-up
expenses and the high costs associated with low volume production. However, we
expect production volume to increase.
16
<PAGE>
Revenue
Total revenues for years 1997, 1998 and 1999 consisted of:
1997 1998 1999
---------- ---------- ----------
R&D support from related party $2,500,000 $6,750,000 $ --
Product sales to related party and
others 444,000 1,082,000 1,844,000
Other income 85,000 107,000 832,000
Interest income 502,000 1,058,000 902,000
---------- ---------- ----------
$3,531,000 $8,997,000 $3,578,000
========== ========== ==========
The year-over-year increase in product sales to related party and others
is due to increased unit sales of Apligraf to Novartis. We expect Apligraf
commercial sales to continue to increase. Product sales to others are
insignificant in 1999 and 1998, and are approximately $205,000 in 1997. The
increase in other income is mainly due to Novartis funding of certain programs.
R&D support payments are recognized when earned and are nonrefundable. The year-
over-year changes in interest income are primarily due to the difference in
funds available for investment.
Expenses
Cost of product sales: Our cost of product sales was $3,773,000 in 1999.
All costs of production prior to 1999 were included in research and development
expenses due to insignificant commercial sales and low production volume
associated with early stage commercial launch. Cost of product sales includes
the direct costs to manufacture and package Apligraf and an allocation of our
production related indirect costs. Cost of product sales exceeded product sales
due to the start-up costs of new product introduction and the high costs
associated with low volume production. We expect production volume to increase
and our margins to improve. We expect to continue to expand production
operations during the next 12 months.
Research and development: Our R&D and operations expenses consist of costs
associated with research, development, clinical and operations (excluding cost
of sales in 1999). These expenses increased to $18,166,000 for 1999, from
$17,542,000 in 1998 and $13,854,000 in 1997. The increase in 1999 was primarily
due to: approximately $1,483,000 in personnel costs, outside services,
supplies, and occupancy costs to support our ongoing programs, including VITRIX
and liver assist device, as well as costs to support publications studies and
other sponsored programs; offset by an approximate $596,000 net decrease in
clinical related costs as last year included non-recurring expenses related to
FDA approval and the Apligraf diabetic ulcer pivotal trial was at its peak; and
offset by an approximate $327,000 net decrease in operating related
expenditures. The increase in 1998, which included cost of product sales on
insignificant commercial sales and low volume production, was primarily due to
the following: approximately $881,000 clinical trials activity, including the
Apligraf diabetic ulcer pivotal trial and non-recurring expenses related to FDA
approval; approximately $1,093,000 for progressing preclinical programs,
including VITRIX; and approximately $1,597,000 relating to investing in
manufacturing operations, including personnel additions. We expect to continue
to advance the product pipeline during the next 12 months.
17
<PAGE>
General and administrative expenses: Our G&A expenses include the costs of
our corporate, finance, information technology and human resource functions. G&A
expenses increased to $7,808,000 for 1999 from $5,486,000 in 1998 and $3,929,000
in 1997. The 1999 increase is primarily due to: approximately $1,304,000 for
personnel additions and increased outside and professional fees; approximately
$565,000 relating to occupancy costs and consolidating administrative
facilities; and approximately $411,000 for the estimated fair value of warrants
issued relating to a consulting contract. The 1998 increase of $1,557,000 is
primarily due to adding support staff and higher outside and professional
services, partially relating to regulatory-related activities. We expect the
growth in G&A expenses to increase at a slower rate.
Other costs and expenses: Included in costs and expenses for 1999 is a
non-cash charge of $900,000 relating to the purchase of incomplete technology to
be used specifically in our liver assist device research and development efforts
(refer to the commitments footnote to the Financial Statements for a full
description of this technology). The purchase was made to strengthen our
resources to develop the technology. The charge to expense was due to the early
stage of the technology that has not provided proof of principle. Additionally,
the time and cost to prove this principle is not known. This program is expected
to be a long-term endeavor that will be evaluated periodically to determine
future spending levels. It is expected that development of a liver assist device
will cost millions of dollars and take 8 to 10 years before we could develop a
product, which might be approved for commercial sale. We do not currently have
the resources to fully develop such a product. It is our intent that once proof
of principle is established, we will seek funding or partnership for the
project.
Additionally, in May 1997, we incurred a one-time, non-cash compensation
charge of $5,555,000 relating to the extension of the term of a stock option
held by an officer. Interest expense was $1,281,000 for 1999 due to the issuance
of convertible debentures in March 1999.
Net Income
We incurred a net loss of $28,350,000, or $.93 per share (basic and
diluted) for 1999, compared to a net loss of $14,031,000, or $.48 per share
(basic and diluted) for 1998 and a net loss of $19,807,000, including the
$5,555,000 non-cash charge, or $.70 per share (basic and diluted) for 1997. We
may incur additional losses as expenditures continue to increase due to
expansion of operations and research programs.
For 1997, the net loss per common share (basic and diluted) and weighted
average number of common shares outstanding were adjusted for a one-for-four
stock split accounted for as a stock dividend distributed on April 29, 1998.
After accounting for the one-for-four stock split, the 1997 net loss per common
share (basic and diluted) decreased to $.70 per share as compared to $.87 per
share.
Capital Resources and Liquidity
Funds Used in Operations
At December 31, 1999, we had cash, cash equivalents and investments in the
aggregate amount of $12,439,000 and working capital of $2,981,000 compared to
$17,841,000 and $15,541,000, respectively, at December 31, 1998. Cash
equivalents consist of money market funds, which are highly liquid and have
original maturities of less than three months. Investments consist of marketable
securities that have an A or A1 rating or better with a maximum maturity of two
years. Cash used in operating activities was $23,650,000 in 1999 and $11,587,000
in 1998, primarily for financing our ongoing research, development and
manufacturing operations.
18
<PAGE>
Capital Spending
Capital expenditures were $5,767,000 and $2,464,000 during 1999 and 1998,
respectively, primarily related to further build-out of the current facility to
support Apligraf manufacturing, as well as the acquisition of equipment for
research and development programs and manufacturing. We will continue to utilize
funds during 2000 to expand our current facility in the areas of Apligraf
manufacturing, quality systems labs and packaging.
Novartis Support
The collaborative agreement with Novartis provides us with up to
$40,000,000 in equity investments and nonrefundable research, development and
milestone support payments, of which $0 was received during 1999, $12,750,000 in
1998, and $2,500,000 in 1997, all of which are non refundable. The remaining
payments are based upon achievement of specified events. During March 2000, we
received $5,000,000 from Novartis, which represents a milestone support payment
received in advance of achievement of the milestone. Under the agreement, we
supply Novartis' global requirements for Apligraf and receive revenue consisting
of a per unit manufacturing payment and royalties on product sales.
Financing
From inception, we have financed our operations substantially through
private and public placements of equity securities, as well as receipt of
research support and contract revenues, interest income from investments, sale
of products and receipt of royalties. During 1999, financing activities provided
additional cash and working capital of approximately $24,015,000 primarily from:
the sale of five-year convertible debentures and warrants to purchase common
stock that generated net proceeds of $19,425,000; the issuance of a term loan
that generated proceeds of $4,728,000 and the exercise of stock options of
$813,000, offset by the purchase of treasury stock totaling $951,000. Financing
activities provided cash of approximately $25,747,000 during 1998 from: the sale
of 200 shares of Series C convertible preferred stock that generated net
proceeds of approximately $19,117,000; an equity investment of $6,000,000 from
Novartis; and the exercise of stock options of $1,021,000, partially offset by
the purchase of treasury stock totaling $391,000. The repurchased stock will
provide us with treasury shares for general corporate purposes.
During March 2000, we redeemed in cash all outstanding shares of Series C
convertible preferred stock for approximately $6,180,000. At December 31, 1999,
we had approximately 62 shares of Series C convertible preferred stock
outstanding. In the event that any Series C preferred stock are outstanding on
the mandatory conversion date of March 26, 2000, we have the option of redeeming
any such outstanding Series C preferred stock by: (1) paying cash equal to the
product of the number of Series C preferred stock outstanding multiplied by the
stated value of $100,000 per share; (2) issuing common stock equal to 1.15 of
the stated value divided by the average of the closing bid prices for the 20
consecutive trading days prior to the mandatory conversion date; or (3) any
combination of these methods.
19
<PAGE>
On March 31, 1999, we completed a financing of $20,000,000 through the
private placement of five-year convertible debentures and 400,000 warrants to
purchase common stock. The debentures are convertible at a fixed price of $14.50
per share at any time on or after March 30, 2000. Interest on the debentures
accrues at 7% annually, payable in cash, common stock (at the average trading
price for the twenty trading days preceding the due date) or any combination
thereof, at our option, semi-annually on September 30 and March 31 or on the
date any of the principal outstanding under the notes has been converted into
common stock. At our option, at any time on or after March 30, 2002, the
debentures may be prepaid by conversion of the principal into common stock at
the conversion price of $14.50, cash or any combination thereof and payment of
any accrued interest as described above, provided that the average per share
market value for the twenty consecutive trading days immediately preceding the
date of prepayment equals or exceeds $38.67 per share. The notes mature on March
29, 2004 and are payable in cash. The warrants grant the right to purchase one
share of common stock at the exercise price of $21.75 for each $50.00 in face
value of the convertible notes at any time before March 30, 2004. Approximately
$2,318,000 of the $20,000,000 financing is allocated to the estimated fair value
of the warrants and is included in additional paid in capital. This amount is
amortized as a non-cash charge to interest expense over the life of the
debentures. Debt issuance costs are included in other assets and are amortized
to interest expense over the life of the debentures. In May 1999, we filed a
registration statement for 2,096,333 shares of common stock issuable as follows:
(1) 1,646,333 shares of common stock which may become issuable by reason of the
conversion of the convertible debt, and accrued interest, (2) 400,000 shares
which may become issuable upon the exercise of the warrants issued in the
financing, and (3) 50,000 shares issued in connection with an asset purchase
transaction. All shares have been reserved for issuance. In May 1999, the
Securities and Exchange Commission declared this registration statement
effective.
In 1999, we received notice of grants to support two research projects:
(1) $2,000,000 grant under the Advanced Technology Program of the National
Institute for Standards and Technology ("NIST") to help support our development
of an effective liver assist device prototype, which we expect to receive over
the next two years commencing in December 1999; and (2) $100,000 grant under the
Small Business Innovation Research Program of the National Institutes of Health
to support development of our vascular graft, which we have received $50,000 in
1999 and expect to receive the next $50,000 over the next three months. Both of
these grants require that the federal government can access for its own purposes
technology developed using the funding. A product developed based on the funding
from the NIST grant must be manufactured substantially in the United States. In
addition, we are subject to regular audit and reporting requirements.
In addition, we received notice from the Commonwealth of Massachusetts
that we were selected to receive a workforce training grant for approximately
$162,000 to support employee training, which we have received $40,000 in 1999
and expect to receive the remainder over the next twelve months.
20
<PAGE>
In November of 1999, we entered into a $5,000,000 term loan agreement with
a commercial bank to finance the purchase of certain equipment, leasehold
improvements and other items. Borrowings under the term loan are collateralized
by a security interest in the items financed. The agreement provides repayment
of the principal amount of the loan in 12 equal quarterly installments
commencing December 29, 2000, with final payment due on September 30, 2003. The
loan bears interest at a fluctuating rate per annum that is equal to the prime
rate in effect from time to time, or we may elect that all or any portion of any
term loan be made as a LIBOR loan with an interest period of one month, two
months, three months or six months with the interest rate being equal to LIBOR
plus an applicable margin (175 to 225 basis points). We are required to comply
with certain covenants relating to our outstanding term loans, involving
limitations on future indebtedness, dividends and investments, and to maintain
certain financial covenants pertaining to liquidity, capital base, and debt
service coverage (or, alternatively, maintaining a minimum unencumbered cash
balance). Because we exercised our option to redeem all outstanding shares of
Series C convertible preferred stock for cash subsequent to year end, we did not
maintain compliance with the liquidity covenant as of December 31, 1999. The
bank granted a waiver from this covenant. After raising additional capital
subsequent to year end, we are now in compliance with all covenants. At December
31, 1999, we borrowed approximately $4,728,000 against this term loan to finance
certain research, manufacturing and office equipment and leasehold improvements.
The weighted average interest rate paid during this period was 8.05%. This
borrowing is collateralized by a security interest in the fixed assets financed.
On February 14, 2000, the Securities and Exchange Commission declared
effective a shelf registration for the placement of up to 3,000,000 shares of
common stock with an aggregate offering price not to exceed $50,000,000. In
February 2000, we completed a private placement of 788,925 shares of common
stock at $14.00 per share under this shelf registration yielding net proceeds of
approximately $10,800,000. Gruntal & Co. acted in an agency capacity for this
placement. In March 2000, we completed a private placement of 300,000 shares of
common stock at $17.25 per share under this shelf registration yielding proceeds
of approximately $5,175,000. Additionally, from January 1 through March 29,
2000, we received approximately $10,072,000 from the exercise of employee stock
options.
Liquidity
Based upon our current plans, we believe that common stock issued
subsequent to December 31, 1999, together with existing working capital and
future funds from Novartis, including product and royalty revenue, will be
sufficient to finance operations into 2001. However, this statement is
forward-looking and changes may occur that would significantly decrease
available cash before such time. Factors that may change our cash requirements
include:
o Delays in obtaining regulatory approvals of products in different
countries, if needed, and subsequent timing of product launches;
o Delays in commercial acceptance and reimbursement when product
launches occur;
o Changes in the progress of research and development programs; and
o Changes in the resources devoted to outside research collaborations
or projects, self-funded projects, proprietary manufacturing methods
and advanced technologies.
21
<PAGE>
Any of these events could adversely impact our capital resources,
requiring us to raise additional funds. Management believes that additional
funds may be available through equity or debt financing, strategic alliances
with corporate partners, capital lease arrangements, or other sources of
financing in the future. There can be no assurances that these funds will be
available when required on terms acceptable to us, if at all. If adequate funds
are not available when needed, we would need to delay, scale back or eliminate
certain research and development programs or license to third parties certain
products or technologies that we would otherwise undertake ourselves, resulting
in a potential material adverse effect on our financial condition and results of
operations.
Taxes
At December 31, 1999, we had federal net operating loss and tax credit
carryforwards of approximately $106,211,000 and $3,305,000, and state net
operating loss and tax credit carryforwards of approximately $56,274,000 and
$1,476,000. These losses and tax credits are available to reduce federal and
state taxable income and income taxes, respectively, in future years, if any.
However, the realizability of deferred tax assets is not assured as it depends
upon future taxable income. Accordingly, we have recorded a 100% valuation
allowance against these assets. We are required to recognize all or a portion of
net deferred tax assets, with corresponding increases to net income, when we
believe, given the weight of all available evidence, that it is more likely than
not that all or a portion of the benefits of net operating loss carryforwards
and other credits will be realized. However, there can be no assurance that we
will ever realize any future cash flows or benefits from these losses and tax
credits. Ownership changes may result in future limitations on the utilization
of net operating losses and research and development tax credit carryforwards.
Year 2000
We previously discussed the nature and progress of our plans to become
Year 2000 ready. In late 1999, we completed our remediation and testing of
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believes those systems
successfully responded to the Year 2000 date change. We are not aware of any
material problems resulting from Year 2000 issues, either with our products, our
internal systems, or the products and services of third parties. We will
continue to monitor our mission critical computer applications and those of our
suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
Accounting Pronouncements
In June of 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. We will adopt SFAS No.
133 as required by SFAS No. 137, "Deferral of the Effective Date of SFAS No.
133" in 2001. To date, we have not utilized derivative instruments or hedging
activities and, therefore, the adoption of SFAS No. 133 is not expected to have
a material impact on our financial position or results of operations.
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101), was issued December 1999 and summarizes certain of the
Staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The application of the guidance in SAB 101
will be required by the second quarter of 2000. The effects of applying this
guidance, if any, will be reported as a cumulative effect adjustment resulting
from a change in accounting principle. Our evaluation of SAB 101 is not yet
complete.
22
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ORGANOGENESIS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements included in Item 8:
Report of Independent Accountants .......................................... 24
Consolidated Balance Sheets as of December 31, 1998 and 1999 ............... 25
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 .......................................... 26
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 .......................................... 27
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1998 and 1999 ...................... 28
Notes to Consolidated Financial Statements ................................. 29
23
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of Organogenesis Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Organogenesis Inc. and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. 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 of these statements in accordance with auditing standards generally
accepted in the United States which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 27, 2000
24
<PAGE>
ORGANOGENESIS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
At December 31,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,052 $ 5,727
Investments 12,789 6,712
Inventory 730 906
Receivable from related party 213 985
Other current assets 228 643
--------- ---------
Total current assets 19,012 14,973
Property and equipment, net 7,605 11,731
Other assets 93 601
--------- ---------
Total Assets $ 26,710 $ 27,305
========= =========
Liabilities
Current liabilities:
Accounts payable $ 1,036 $ 1,378
Accrued expenses 2,435 3,438
Other current liabilities -- 996
Series C convertible preferred stock to be redeemed in cash -- 6,180
--------- ---------
Total current liabilities 3,471 11,992
Long-term convertible debt -- 17,953
Term loan -- 4,334
Commitments (see Notes)
Stockholders' Equity (Deficit)
Preferred stock, par value $1.00; authorized 1,000,000 shares:
Series C convertible preferred; designated 200 shares;
62 shares issued and outstanding at December 31, 1998 -- --
Common stock, par value $.01; authorized 80,000,000 shares:
issued and outstanding 30,479,719 and 30,689,019 shares at
December 31, 1998 and 1999, respectively 305 307
Additional paid-in capital 124,342 122,890
Accumulated deficit (101,017) (129,367)
Treasury stock at cost, 40,000 and 85,000 shares at December
31, 1998 and 1999, respectively (391) (804)
--------- ---------
Total stockholders' equity (deficit) 23,239 (6,974)
--------- ---------
Total Liabilities and Stockholders' Equity (Deficit) $ 26,710 $ 27,305
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
25
<PAGE>
ORGANOGENESIS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Research and development support from related party $ 2,500 $ 6,750 $ --
Product sales to related party and others 444 1,082 1,844
Other income 85 107 832
Interest income 502 1,058 902
------------ ------------ ------------
Total Revenues 3,531 8,997 3,578
------------ ------------ ------------
Cost and Expenses:
Cost of product sales to related party and others -- -- 3,773
Research and development 13,854 17,542 18,166
General and administrative 3,929 5,486 7,808
Non-cash purchase of incomplete technology -- -- 900
Non-cash charge for stock option extension 5,555 -- --
Interest expense-net -- -- 1,281
------------ ------------ ------------
Total Costs and Expenses 23,338 23,028 31,928
------------ ------------ ------------
Net Loss $ (19,807) $ (14,031) $ (28,350)
============ ============ ============
Net loss per common share - basic and diluted $ (.70) $ (.48) $ (.93)
============ ============ ============
Weighted average number of common shares outstanding -
basic and diluted 28,360,485 29,453,104 30,484,982
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
26
<PAGE>
ORGANOGENESIS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(19,807) $(14,031) $(28,350)
Adjustments to reconcile net loss to cash flows used in operating
activities:
Depreciation 1,658 1,474 1,741
Issuance of stock options and warrants to consultants 50 -- 432
Non-cash charge for stock option extension 5,555 -- --
Amortization of warrants and deferred debt issuance costs relating to
long-term convertible debt -- -- 338
Issuance of treasury stock for purchase of incomplete technology -- -- 900
Issuance of common stock for interest on convertible debt -- -- 705
Changes in assets and liabilities:
Inventory -- -- (176)
Other current assets and receivable from related party (224) (244) (1,187)
Other assets (4) -- --
Accounts payable (577) 393 342
Accrued expenses and other liabilities (1,081) 849 1,605
Deferred rent payable (43) (28) --
-------- -------- --------
Cash used in operating activities (14,473) (11,587) (23,650)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (1,069) (2,464) (5,767)
Purchases of investments (5,000) (16,224) (23,728)
Sales/maturities of investments 13,229 9,247 29,805
-------- -------- --------
Cash provided by (used in) investing activities 7,160 (9,441) 310
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term convertible debt -- -- 20,000
Deferred debt issuance costs -- -- (575)
Proceeds from issuance of term loan -- -- 4,728
Proceeds from sale of preferred stock - net -- 19,117 --
Proceeds from sale of common stock - net -- 6,000 --
Proceeds from exercise of warrants 4,571 -- --
Proceeds from exercise of stock options 2,676 1,021 813
Purchase of treasury stock -- (391) (951)
-------- -------- --------
Cash provided by financing activities 7,247 25,747 24,015
-------- -------- --------
Increase (decrease) in cash and cash equivalents (66) 4,719 675
Cash and cash equivalents, beginning of year 399 333 5,052
-------- -------- --------
Cash and cash equivalents, end of year $ 333 $ 5,052 $ 5,727
======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid in cash during the year $ -- $ -- $ 28
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
27
<PAGE>
ORGANOGENESIS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
For the years ended December 31, 1997, 1998 and 1999
- --------------------------------------------------------------------------------------------------------------------------
Total
Series C Convertible Additional Stockholders'
Preferred Stock Common Stock Paid-in Accumulated Treasury Stock Equity
Shares Amount Shares Amount Capital Deficit Shares Amount (Deficit)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - 12/31/96 - - 14,292 $143 $ 85,514 $(67,179) - $ - $18,478
- --------------------------------------------------------------------------------------------------------------------------
Issuance of common stock
upon exercise of stock
options and in connection
with employee stock
purchase plan 297 3 2,673 2,676
Issuance of common stock
upon exercise of warrants 357 4 4,567 4,571
Two, one-for-four common
stock dividends 8,214 82 (82)
Issuance of stock options 50 50
Non-cash charge for stock
Option extension 5,555 5,555
Net loss (19,807) (19,807)
- --------------------------------------------------------------------------------------------------------------------------
Balance - 12/31/97 - - 23,160 232 98,277 (86,986) - - 11,523
- --------------------------------------------------------------------------------------------------------------------------
Issuance of common stock
upon exercise of stock
option and in connection
with employee stock
purchase plan 146 2 1,019 1,021
One-for-four common
stock dividend 5,826 58 (58) -
Sale of Series C preferred
stock-net 19,117 19,117
Conversion of Series C
preferred Stock 1,136 11 (11) -
Sale of common stock to
related party 212 2 5,998 6,000
Purchase of treasury stock 40 (391) (391)
Net loss (14,031) (14,031)
- --------------------------------------------------------------------------------------------------------------------------
Balance - 12/31/98 - - 30,480 305 124,342 (101,017) 40 (391) 23,239
- --------------------------------------------------------------------------------------------------------------------------
Issuance of common stock
upon exercise of stock
options and in connection
with employee stock
purchase plan 120 1 812 813
Issuance of warrants with
Convertible debt 2,318 2,318
Series C convertible preferred
stock to be redeemed in cash (6,180) (6,180)
Issuance of common stock
for interest on
convertible debt 89 1 704 705
Issuance of stock options and
warrants to consultants 432 432
Purchase of incomplete
technology 462 (50) 538 1,000
Purchase of treasury stock 95 (951) (951)
Net loss (28,350) (28,350)
- --------------------------------------------------------------------------------------------------------------------------
Balance - 12/31/99 - - 30,689 $307 $122,890 $(129,367) 85 $(804) $ (6,974)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
28
<PAGE>
ORGANOGENESIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nature of Business
Organogenesis Inc. - a tissue engineering firm - designs, develops and
manufactures medical products containing living cells and/or natural connective
tissue. We are the developer and manufacturer of the only mass-manufactured
medical product containing living human cells marketed in the US. Our product
development program includes living tissue replacements, cell-based organ assist
devices and other tissue-engineered products. Our lead product, Apligraf(R) skin
construct, was launched in the US in June 1998 by marketer Novartis
Pharmaceuticals Corporation. Our strategy is to commercialize products either by
ourselves or through partners with an established marketing presence.
Apligraf is approved and marketed in the US for the treatment of venous
leg ulcers. In December 1999, Organogenesis applied to the FDA for marketing
approval for a second indication - diabetic foot ulcers. Novartis Pharma AG has
global Apligraf marketing rights. In fourth quarter 1999, Novartis began initial
product introduction in Switzerland, the first of several planned in Europe.
Novartis also markets Apligraf in Canada.
We have a wholly-owned subsidiary, ECM PharmaTM, Inc. ECM Pharma was
established to discover, develop and commercialize human therapeutics based on
the extracellular matrix. We also have a wholly-owned investment subsidiary, Dan
Capital Corporation, which holds a substantial portion of our cash, cash
equivalents and investments.
We are subject to risks common to entities in the biotechnology industry,
including, but not limited to, the following uncertainties:
o Market acceptance of our products, if and when approved, and
successful marketing and selling of Apligraf by Novartis;
o FDA approval of Apligraf for other indications and successful
registrations of Apligraf outside the US;
o Risk of failure of clinical trials for future indications of
Apligraf and other products;
o Compliance with FDA regulations and similar foreign regulatory
bodies;
o Risk of manufacturing disruptions or production failures;
o Manufacture and sale of products in sufficient volume to realize a
satisfactory margin;
o Continued availability of raw material for products;
o Availability of sufficient product liability insurance;
o Ability to recover the investment in property and equipment;
o Protection of proprietary technology through patents;
o Development by competitors of new technologies or products that are
more effective than ours;
o Adequate third-party reimbursement for products;
o Dependence on and retention of key personnel; and
o Availability of additional capital on acceptable terms, if at all.
Apligraf(R) is a registered trademark of Novartis.
29
<PAGE>
Our ultimate success is dependent upon sale of products, research and
development funding under licensing agreements, our ability to raise capital and
interest income on invested capital. However, our funding requirements may
change depending upon numerous factors, including:
o Delays in obtaining regulatory approvals of products in different
countries, if needed, and subsequent timing of product launches;
o Delays in commercial acceptance and reimbursement when product
launches occur;
o Changes in the progress of research and development programs; and
o Changes in the resources devoted to outside research collaborations
or projects, self-funded projects, proprietary manufacturing methods
and advanced technologies.
While we believe that future capital comprised of product sales, research
and development support payments and debt and equity financings will be
sufficient to fund future operations into 2001, there can be no assurance that
these or any additional funds will be available when required on acceptable
terms. Refer to "Common Stock" note for financing subsequent to year-end.
Summary of Significant Accounting Policies
Principles of Consolidation and Use of Estimates
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany activity has been
eliminated. Certain reclassifications have been made for consistent
presentation. These reclassifications have no impact on financial position or
results of operations. We prepare our financial statements under generally
accepted accounting principles that require us to make estimates and assumptions
that affect amounts reported and the related disclosures. Actual results could
differ from those estimates.
Revenue Recognition
Research and development support revenue under the collaborative agreement
with Novartis is recognized as related expenses are incurred or contractual
obligations are met and is not refundable. Revenue from Apligraf sales is
recognized upon shipment or, in certain cases, after fulfillment of firm
purchase orders in accordance with the Manufacturing and Supply Agreement with
Novartis and when risk of ownership passes to the buyer and we have no
performance obligations. Other product revenues are recognized upon shipment.
Royalty revenue is recorded as earned. Grant revenue is recognized to the extent
of allowable costs incurred. Deferred revenue arises from the difference between
cash received and revenue recognized in accordance with these policies. See note
"Accounting Pronouncements."
Research and Development
All research and development costs aimed at the development of new
products are expensed as incurred. In addition to research and development, this
cost category includes expenses of our production and related operating support
departments, excluding cost of product sales commencing in 1999, our first year
of meaningful commercial product sales. Prior to 1999, commercial sales were not
significant and the full cost of low volume production was included in this
cost category.
Patents
As a result of our research and development programs, we have a
proprietary portfolio of patent rights and patent applications for a number of
patents in the US and abroad. Such patent rights are of significant importance
to protect our products and processes. For financial reporting purposes, all
costs in connection with patent rights and patent applications have been
expensed as incurred.
30
<PAGE>
Income Taxes
Research and development and other tax credits are recognized for
financial reporting purposes when they are realized. Deferred taxes are
determined based on the difference between the financial reporting and the tax
bases of assets and liabilities using enacted income tax rates in effect in the
years in which the differences are expected to reverse. However, the
realizability of these deferred tax assets is not assured as it depends upon
future taxable income. Accordingly, we have recorded a 100% valuation allowance
against these assets. Tax credits will be recorded as a reduction in income
taxes when utilized.
Net Loss Per Common Share
Net loss per common share (basic and diluted) is based on the weighted
average number of common shares outstanding during each period. Potentially
dilutive securities at December 31, 1999 include: stock options outstanding to
purchase 7,449,874 common shares; warrants to purchase 950,000 common shares;
Series C preferred stock convertible into 213,638 common shares; and debt
convertible into 1,957,384 common shares; however, such securities have not been
included in the net loss per common share calculation because their effect would
be antidilutive. For 1997, the net loss per common share (basic and diluted) and
weighted average number of common shares outstanding were adjusted for a
one-for-four stock split accounted for as a stock dividend distributed on April
29, 1998. After accounting for the one-for-four stock split, the 1997 net loss
per common share (basic and diluted) decreased to $.70 per share as compared to
$.87 per share.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and money market funds that are
convertible into a known amount of cash and carry an insignificant risk of
change in value. These investments are highly liquid and have original
maturities of less than three months.
Inventory
Inventory is stated at the lower of cost or market, cost being standard
cost, which approximates the first-in, first-out method of accounting.
Property and Equipment
Equipment, furniture and fixtures, office equipment and leasehold
improvements are stated at cost. Depreciation is provided using the
straight-line method over three to ten years. Leasehold improvements are being
amortized using the straight-line method over the term of the lease.
Construction in progress represents costs incurred to date in connection with
facility expansion activities and are capitalized until such facilities become
operational. These costs are then amortized using the straight-line method over
the remaining lease term. Interest cost incurred during the period of
construction in progress relating to expansion of our main facility is
capitalized. The interest cost capitalized for the period ended December 31,
1999 was $150,000. No interest was capitalized in 1998 or 1997.
Maintenance and repairs are charged to expense as incurred and betterments
are capitalized. Upon retirement or sale, the cost of assets disposed of and
their related accumulated depreciation are removed from the accounts. Any
resulting gain or loss is credited or charged to operations.
Long-Lived Assets
Our policy regarding long-lived assets is to evaluate the recoverability
or usefulness of these assets when the facts and circumstances suggest that
these assets may be impaired. This analysis relies on a number of factors,
including changes in strategic direction or market emphasis, business plans,
regulatory developments, economic and budget projections, and operating results.
The test of recoverability or usefulness is a comparison of the asset value to
its expected cumulative net operating cash flow or the assets usefulness in
research and development programs or operations over the remaining life of the
asset. Any write-downs would be treated as permanent reductions in the carrying
amount of the asset and an operating loss would be recognized.
31
<PAGE>
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," allows us to continue to account for stock-based
compensation arrangements under the provisions of Accounting Principles Board
No. 25, "Accounting for Stock Issued to Employees," and disclose in a footnote
the pro forma effects to net loss and net loss per share assuming the fair value
accounting method of SFAS 123 was adopted. Accordingly, no compensation cost has
been recognized in income from stock-based employee awards. Compensation expense
for stock awards granted to non-employees is determined by assessing the fair
value of the options granted (using an option-pricing model).
Accounting Pronouncements
In June of 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. We will adopt SFAS No.
133 as required by SFAS No. 137, "Deferral of the Effective Date of SFAS No.
133" in 2001. To date, we have not utilized derivative instruments or hedging
activities and, therefore, the adoption of SFAS No. 133 is not expected to have
a material impact on our financial position or results of operations.
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101), was issued December 1999 and summarizes certain of the
Staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The application of the guidance in SAB 101
will be required by the second quarter of 2000. The effects of applying this
guidance, if any, will be reported as a cumulative effect adjustment resulting
from a change in accounting principle. Our evaluation of SAB 101 is not yet
complete.
Investments
The investments held are classified as available-for-sale and are carried
at cost plus accrued interest, which approximates fair market value and,
accordingly, there was no adjustment to stockholders' equity. We use a specific
identification cost method to determine the gross realized gains and losses on
the sale of our securities. We also classify investments in accordance with
their intended use. At December 31, 1999, the intended use of all investments is
to fund working capital and plant expansion in the coming year. We invest excess
cash in securities that have an A or A1 rating or better with a maximum maturity
of two years.
The aggregate cost and fair market value of investments are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999
--------------------------------- --------------------------------
Amortized Market Amortized Market
Maturity Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than one year:
US Government and Agency bonds $ 1,034 $ 1,036 $ 2,082 $ 2,098
Corporate and other debt securities 5,019 5,019 503 503
Certificates of deposit 693 693 1,099 1,094
Greater than one year:
US Government and Agency bonds 3,106 3,110 1,005 972
Corporate and other debt securities 2,937 2,957 2,023 2,013
------- ------- ------- -------
Total Investments $12,789 $12,815 $ 6,712 $ 6,680
======= ======= ======= =======
</TABLE>
32
<PAGE>
Inventory
Inventory, at market value, consisted of the following (in thousands):
December 31, December 31,
1998 1999
------------ ------------
Raw Materials $300 $348
Work in Process 430 558
---- ----
$730 $906
==== ====
Receivable from Related Party
Receivable from related party consisted of amounts due on product sales to
Novartis and funding of certain programs by Novartis.
Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
Estimated Useful ---------------------------
Life (years) 1998 1999
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equipment 3-10 $10,235 11,471
Furniture, fixtures and office equipment 3-5 1,954 2,042
Leasehold improvements Lease term 3,822 4,277
Construction-in-progress 933 5,021
------ -------
16,944 22,811
Less accumulated depreciation (9,339) (11,080)
------ -------
$7,605 $11,731
====== =======
Construction-in-progress will begin to depreciate when it is put into service.
</TABLE>
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1999
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Compensation and employee benefits $ 1,121 $ 1,402
Professional services 535 825
Accrued interest - 361
Other 779 850
------- -------
$ 2,435 $ 3,438
======= =======
</TABLE>
33
<PAGE>
Term Loan Agreement
In November of 1999, we entered into a $5,000,000 term loan agreement with
a commercial bank to finance the purchase of certain equipment, leasehold
improvements and other items. Borrowings under the term loan are collateralized
by a security interest in the items financed. The agreement provides repayment
of the principal amount of the loan in 12 equal quarterly installments
commencing December 29, 2000, with final payment due on September 30, 2003. The
loan bears interest at a fluctuating rate per annum that is equal to the prime
rate in effect from time to time, or we may elect that all or any portion of any
term loan be made as a LIBOR loan with an interest period of one month, two
months, three months or six months with the interest rate being equal to LIBOR
plus an applicable margin (175 to 225 basis points). We are required to comply
with certain covenants relating to our outstanding term loans, involving
limitations on future indebtedness, dividends and investments, and to maintain
certain financial covenants pertaining to liquidity, capital base, and debt
service coverage (or, alternatively, maintaining a minimum unencumbered cash
balance). Because we exercised our option to redeem all outstanding shares of
Series C convertible preferred stock for cash subsequent to year end, we did not
maintain compliance with the liquidity covenant as of December 31, 1999. The
bank granted a waiver from this covenant. After raising additional capital
subsequent to year end, we are now in compliance with all covenants. At December
31, 1999, we borrowed approximately $4,728,000 against this term loan to finance
certain research, manufacturing and office equipment and leasehold improvements.
The weighted average interest rate paid during this period was 8.05%. This
borrowing is collateralized by a security interest in the fixed assets financed.
The current portion of this term loan is $394,000 at December 31, 1999 and
is included in other current liabilities. Long-term future minimum term loan
payments at December 31, 1999 are as follows (in thousands):
2001 $1,576
2002 1,576
2003 1,182
------
$4,334
======
Commitments
Lease Obligations
We occupy our main offices and manufacturing premises under a facility
lease for 79,500 square feet of space in Canton, Massachusetts at an annual
average base rent of approximately $790,000, plus operating expenses, that
expires on September 30, 2004. This lease has three options to extend the term
for an additional five years per option. Taxes, insurance and operating expenses
are our responsibility under the terms of the lease. In May 1999, we entered
into another facility lease for approximately 62,500 square feet of additional
office and warehouse space in Canton, Massachusetts at an annual average base
rent of approximately $421,875, plus operating expenses, that expires on
December 5, 2004. This lease has three options to extend the term for an
additional five years per option. In total, we currently lease approximately
142,000 square feet of space. We also had a facility lease for warehouse and
office space that expired on December 31, 1999. In January 1999, we entered into
a noncancelable operating lease for certain office equipment.
34
<PAGE>
Future minimum lease payments are as follows (in thousands):
2000 $1,077
2001 1,240
2002 1,260
2003 1,245
2004 1,019
Thereafter -
-
------
$5,841
======
Rent of approximately $491,000, $562,000 and $800,000 was charged to
expense during the years ended December 31, 1997, 1998 and 1999, respectively.
Construction-in-Progress
At December 31, 1999, we had $5,021,000 in construction in progress
relating primarily to expansion of our facility. Additionally, we have committed
approximately $1.0 million for further build-out.
Series C Preferred Stock Commitment
At December 31, 1999, we had approximately 62 shares of Series C
convertible preferred stock outstanding. In the event that any Series C
preferred stock are outstanding on the mandatory conversion date of March 26,
2000, we have the option of redeeming any such outstanding Series C preferred
stock by: (1) paying cash equal to the product of the number of Series C
preferred stock outstanding multiplied by the stated value of $100,000 per
share; (2) issuing common stock equal to 1.15 of the stated value divided by the
average of the closing bid prices for the 20 consecutive trading days prior to
the mandatory conversion date; or (3) any combination of these methods. During
March 2000, we redeemed in cash all outstanding shares of Series C convertible
preferred stock for approximately $6,180,000.
35
<PAGE>
Purchase of Technology
In April 1999, we purchased specific equipment and intellectual property,
consisting of patents and laboratory documentation, from Baxter Healthcare
Corporation relating to the research and development for the design and
manufacturing of key mechanical components of an extracorporeal liver assist
device. The purchase price consists of the reissuance of 50,000 shares of common
stock held in treasury. In May 1999, we filed a registration statement
registering all 50,000 of these shares, 25,000 of which are subject to a
one-year lock-up agreement. Additionally, we may be required to make a future
cash payment that is contingent on the average closing price of our common stock
over the twenty consecutive trading days immediately prior to the earlier of the
date we receive FDA approval of an Investigational Device Exemption for a liver
assist device or January 1, 2003. We will have no obligation to make such future
cash payment if at any time during the period between April 2000 and the date
such cash payment is otherwise payable by us, the value of the shares of common
stock issued to Baxter is equal to or greater than $1,000,000. If this
contingent payment is required in the future, such cash payment will reduce the
value of the 50,000 shares issued. Total consideration is $1,000,000, of which
$900,000 was recorded as purchase of incomplete technology and the remaining
$100,000 capitalized to property and equipment. The purchase was made to
strengthen our resources to our liver assist device program. The charge to
purchase of incomplete technology was due to the early stage of the technology
which has not provided proof of principle. Additionally, the time and cost to
prove this principle is not known. Our liver assist device program is expected
to be a long-term endeavor that will be evaluated periodically to determine
future spending levels. It is expected that development of a liver assist device
will cost millions of dollars and take 8 to 10 years before we could develop a
product which might be approved for commercial sale. We do not currently have
the resources to fully develop such a product. It is our intent that once proof
of principle is established, we will seek funding or partnership for the project
to advance our long term research and development efforts in the field of liver
assist device.
Grants
In 1999, we received notice of grants to support two research projects:
(1) $2,000,000 grant under the Advanced Technology Program of the National
Institute for Standards and Technology ("NIST") to help support our development
of an effective liver assist device prototype, which we expect to receive over
the next two years commencing in December 1999; and (2) $100,000 grant under the
Small Business Innovation Research Program of the National Institutes of Health
to support development of our vascular graft, which we have received $50,000 in
1999 and expect to receive the next $50,000 over the next three months. Both of
these grants require that the federal government can access for its own purposes
technology developed using the funding. A product developed based on the funding
from the NIST grant must be manufactured substantially in the United States. In
addition, we are subject to regular audit and reporting requirements.
Income Taxes
At December 31, 1999, we had federal and state net operating loss
carryforwards of approximately $106,211,000 and $56,274,000, respectively, of
which $5,961,000 relate to disqualifying dispositions of qualified incentive
stock options and exercise of nonqualified stock options. The tax benefit of
$2,384,000 related to the stock options will be credited to equity when
realized. At December 31, 1999, we had federal and state tax credit
carryforwards of approximately $3,305,000 and $1,476,000, respectively. The
federal and state net operating loss carryforwards expire beginning in 2000. The
federal and state research and development tax credits expire beginning in 2001
and 2006, respectively.
36
<PAGE>
The approximate tax effect of each type of temporary difference and
carryforward is reflected in the following table. The effective tax rate is
expected to be 40% combined federal and state (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1999
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets and (liabilities):
Net operating loss carryforwards $37,062 $39,507
Research and development credits and other credits 3,774 4,782
Depreciation (349) 8,669
Other 2,455 2,813
------- -------
Net deferred tax assets before valuation allowance 42,942 55,771
Valuation allowance (42,942) (55,771)
------- -------
Net deferred assets after valuation allowance $ 0 $ 0
======= =======
</TABLE>
These losses and tax credits are available to reduce federal and state
taxable income and income taxes, respectively, in future years, if any. The
realizability of deferred tax assets is not assured as it depends upon future
taxable income. Accordingly, we have recorded a 100% valuation allowance against
these assets. We are required to recognize all or a portion of net deferred tax
assets, with corresponding increases to net income, when we believe, given the
weight of all available evidence, that it is more likely than not that all or a
portion of the benefits of net operating loss carryforwards and other credits
will be realized. However, there can be no assurance that we will ever realize
any future cash flows or benefits from these losses and tax credits. Ownership
changes may result in future limitations on the utilization of net operating
losses and research and development tax credit carryforwards.
Collaborative and Other Agreements
In January 1996, we entered into an agreement with Novartis Pharma AG
granting them exclusive global marketing rights to Apligraf. Under the
agreement, Novartis is responsible for Apligraf sales and marketing costs
worldwide, as well as all clinical trials, registrations and patent costs
outside the US. The agreement provides us with up to $40,000,000 in equity
investments and nonrefundable research, development and milestone support
payments. The equity investments made were determined using quoted market prices
over a 30-day period or a premium to market, as in accordance with the contract
terms. The nonrefundable research, development and milestone support payments
were recognized as "Research and development support from related party" revenue
in the year received. All payments received relate to research and development
efforts that had been completed and no future obligations exist relating to
these payments. The table below summarizes all payments received and the year
they were recorded:
<TABLE>
<CAPTION>
1996 1997 1998 1999
----------- ----------- ----------- ------
<S> <C> <C> <C> <C>
Equity investments $ 5,000,000 $ - $ 6,000,000 $ -
Research and development support from related party 6,500,000 2,500,000 6,750,000 -
----------- ----------- ----------- ------
Total $11,500,000 $ 2,500,000 $12,750,000 $ -
=========== =========== =========== ======
</TABLE>
The remaining payments are based upon achievement of specified events.
During March 2000, we received $5,000,000 from Novartis, which represents a
milestone support payment received in advance of achievement of the milestone.
Under the agreement, we supply Novartis' global requirements for Apligraf and
receive revenue consisting of a per unit manufacturing payment and royalty on
net product sales.
During the first quarter of 1999, Novartis agreed to provide funding for
certain programs to be conducted by Organogenesis. We have recorded $572,000 for
the period ended December 31, 1999 relating to the initiation of these programs,
which is included in "Other income".
37
<PAGE>
In 1994, we signed a license agreement with Toyobo Ltd. granting Toyobo a
license to manufacture and market TESTSKIN(TM) in Japan in exchange for royalty
payments. Additionally, Toyobo may, but is not obligated to, purchase collagen
and other products from us. Revenues under this arrangement are included in
other income. This agreement is coterminous with certain patents.
Research Agreements
We have entered into various collaborative research agreements that are
generally funded over a one or two-year period. Each agreement is reviewed at
least annually and the amounts to be funded for the next period are then
determined. Either party may cancel the agreement upon advance written notice.
Total payments under these agreements were $571,000, $648,000 and $662,000 for
1997, 1998 and 1999, respectively. All our research agreements are early stage
today, but have the potential to develop into more material relationships in the
future.
License Agreement
Certain of our technologies are licensed under an exclusive patent license
agreement with the Massachusetts Institute of Technology. The agreement with MIT
covers certain US patents and corresponding patents in European and Far East
countries. Pursuant to the MIT agreement, we have been granted an exclusive,
worldwide license to make, use and sell the products covered by the patents and
to practice the procedures covered by the patents. The MIT agreement requires us
to pay to MIT a royalty on the cumulative net sales of licensed products ranging
from 3% to 4.5% of annual sales.
Convertible Debt
On March 31, 1999, we completed a financing of $20,000,000 through the
private placement of five-year convertible debentures and 400,000 warrants to
purchase common stock. The debentures are convertible at a fixed price of $14.50
per share at any time on or after March 30, 2000. Interest on the debentures
accrues at 7% annually, payable in cash, common stock (at the average trading
price for the twenty trading days preceding the due date) or any combination
thereof, at our option, semi-annually on September 30 and March 31 or on the
date any of the principal outstanding under the notes has been converted into
common stock. At our option, at any time on or after March 30, 2002, the
debentures may be prepaid by conversion of the principal into common stock at
the conversion price of $14.50, cash or any combination thereof and payment of
any accrued interest as described above, provided that the average per share
market value for the twenty consecutive trading days immediately preceding the
date of prepayment equals or exceeds $38.67 per share. The notes mature on March
29, 2004 and are payable in cash. The warrants grant the right to purchase one
share of common stock at the exercise price of $21.75 for each $50.00 in face
value of the convertible notes at any time before March 30, 2004. Approximately
$2,318,000 of the $20,000,000 financing is allocated to the estimated fair value
of the warrants and is included in additional paid in capital. This amount is
amortized as a non-cash charge to interest expense over the life of the
debentures. Debt issuance costs are included in other assets and are amortized
to interest expense over the life of the debentures. In May 1999, we filed a
registration statement for 2,096,333 shares of Common Stock issuable as follows:
(1) 1,646,333 shares of Common Stock which may become issuable by reason of the
conversion of the convertible debt, and accrued interest, (2) 400,000 shares
which may become issuable upon the exercise of the warrants issued in the
financing, and (3) 50,000 shares issued in connection with an asset purchase
transaction. All shares have been reserved for issuance. In May 1999, the
Securities and Exchange Commission declared this registration statement
effective.
38
<PAGE>
Stockholders' Equity
Preferred Stock
We have authorized 1,000,000 shares of preferred stock at December 31,
1999, comprised of the following designations:
o 250,000 shares Series A convertible preferred stock;
o 50,000 shares Series B Junior participating preferred stock;
o 200 shares Series C convertible preferred stock included in current
liabilitites; and
o 699,800 shares authorized and unissued.
The Series A convertible preferred stock that was previously issued was
subsequently converted into 312,500 shares of common stock in October 1995. No
shares of Series A or Series B preferred stock were issued and outstanding as of
December 31, 1997, 1998 and 1999.
In March 1998, we completed a placement of 200 shares of Series C
convertible preferred stock and warrant financing with two institutional
investors at a price of $100,000 per share. Proceeds from the offering, net of
placement agent fees and expenses, were approximately $19,117,000. The Series C
preferred stock pay no dividends, have no voting rights, and are convertible
into common stock on a scheduled basis over two years based on market price at
time of conversion (up to $28.80 per share). We may call for conversion of all
or part of the shares of Series C preferred stock under certain conditions based
on continued improvement in the price of our common stock. Conversions by the
investors are subject to certain limits; no limits exist for conversions on
redemption or upon a major transaction. Mandatory conversion is March 26, 2000,
at which time we have the option to redeem any outstanding Series C preferred
shares in cash or by issuing common stock. In addition, the investors received
three-year warrants to purchase an aggregate of 200,000 shares of common stock
at $31.20 per share. The warrants may be exercised at any time prior to April
2001. In July 1998, the investors exercised their right to receive additional
warrants to purchase 150,000 shares of common stock at $17.45 per share with an
expiration date of March 26, 2001. We also issued a warrant to purchase an
aggregate of 50,000 shares of common stock at $28.80 per share to the placement
agent that expires March 25, 2001. The total fair value of all warrants was
estimated to be approximately $2,509,000 and is included in additional paid-in
capital. No further warrants may be issued under the Series C preferred stock
placement.
In April 1998, we filed a registration statement for 1,800,000 shares of
common stock, the maximum number of shares that may be acquired relating to this
transaction; except for mandatory conversion where the common share limit does
not apply. All shares have been reserved for issuance. The SEC declared this
registration statement effective in May 1998.
In May, September and November 1998, an aggregate of $13,800,000 face
amount of the Series C preferred stock was converted into common stock resulting
in the issuance of approximately 1,136,000 shares of common stock. These
conversions are non-cash transactions. During March 2000, we redeemed in cash
all outstanding shares of Series C convertible preferred stock for approximately
$6,180,000.
Common Stock
We have authorized 80,000,000 shares of common stock, of which there were
30,479,719 and 30,689,019 shares issued and outstanding as of December 31, 1998
and 1999, respectively.
39
<PAGE>
The following one-for-four stock splits accounted for as stock dividends
were declared by the Board of Directors during the past three years:
<TABLE>
<CAPTION>
Stock Dividend Record Date Payable Date Common Shares Issued
<S> <C> <C> <C>
25% April 22, 1998 April 29, 1998 5,826,000
25% November 21, 1997 November 28, 1997 4,618,000
25% April 25, 1997 May 2, 1997 3,596,000
</TABLE>
All related share and per share data in the consolidated financial
statements reflect all stock dividends for all periods presented, except for the
Statements of Changes in Stockholders' Equity.
We received $6,000,000 from Novartis in 1998 relating to milestone equity
investments for approximately 240,000 shares of common stock. As a result of
these equity investments and a prior equity investment of $5,000,000 for
approximately 418,000 shares made in January 1996, Novartis holds approximately
2.1% of outstanding shares as of December 31, 1999. See notes on "Receivable
from Related Party" and "Collaborative and Other Agreements".
In July 1995, we completed a public offering of 230,000 units, at a unit
price of $66.25, resulting in net proceeds of approximately $14,774,000. Each
unit in the offering consisted of five shares of common stock and one common
stock purchase warrant to purchase one share of common stock. On July 21, 1997,
we gave notice of redemption with respect to all outstanding common stock
purchase warrants issued. All common stock purchase warrants were exercised
during 1997 for 357,000 shares of common stock, resulting in proceeds of
approximately $4,571,000.
Warrants Issued to a Consultant
In October 1999, we executed an agreement granting warrants to purchase
100,000 shares of common stock at an exercise price of $10.00 per share to a
consultant. These warrants were fully vested at December 31, 1999, with an
expiration of five years. We recorded approximately $411,000 of expense as of
December 31, 1999 relating to the fair value of these warrants (using an
option-pricing model).
Subsequent Common Stock Issuance
On February 14, 2000, the Securities and Exchange Commission declared
effective a shelf registration for the placement of up to 3,000,000 shares of
common stock with an aggregate offering price not to exceed $50,000,000. In
February 2000, we completed a private placement of 788,925 shares of common
stock at $14.00 per share under this shelf registration yielding net proceeds of
approximately $10,800,000. Gruntal & Co. acted in an agency capacity for this
placement. In March 2000, we completed a private placement of 300,000 shares of
common stock at $17.25 per share under this shelf registration yielding proceeds
of approximately $5,175,000. Additionally, from January 1 through March 29,
2000, we received approximately $10,072,000 from the exercise of employee stock
options.
Treasury Stock
In September 1998, the Board of Directors authorized a common stock
repurchase program. Repurchases are allowed through open-market transactions for
up to 500,000 shares that will provide us with treasury shares for general
corporate purposes. For the period ended December 31, 1998 and 1999, we
repurchased 40,000 and 95,000 shares of common stock for an aggregate purchase
price of approximately $391,000 and $951,000, respectively. In April 1999, we
reissued 50,000 shares of common stock held in treasury related to the purchase
of technology (see "Purchase of Technology" note). We had in treasury 40,000
shares of common stock at a cost of $391,000 and 85,000 shares of common stock
at a cost of $804,000, at December 31, 1998 and December 31, 1999, respectively.
The stock repurchase program may be discontinued at any time.
40
<PAGE>
Stockholder Rights Plan
In August 1995, the Board of Directors adopted a Stockholder Rights Plan
and declared a dividend of one right for each outstanding share of common stock
to stockholders of record on September 1, 1995. After adjusting for two
one-for-four stock dividends distributed during 1997 and one one-for-four stock
dividend distributed during 1998, there is approximately .51 of a right for each
outstanding share of common stock. Each right only becomes exercisable and
transferable apart from the common stock at the earlier of: (1) ten days after a
person or group acquires beneficial ownership of 15% or more of outstanding
common stock; or (2) ten business days following an announcement of a tender or
exchange offer of 30% or more of outstanding stock.
Initially, each right, upon becoming exercisable, would entitle the holder
to purchase one-thousandth of a share of Series B Junior participating preferred
stock at an exercise price of $85, subject to adjustment. If a person or group
acquires beneficial ownership of 15% or more of the outstanding shares of common
stock, then each holder of a right (other than rights held by the acquiring
person or group) would have the right to receive that number of shares of common
stock which equals the exercise price of the right divided by one-half of the
current market price of the common stock.
The rights may be redeemed for $0.01 per right at any time until the tenth
day following the stock acquisition date. The rights will expire on September 1,
2005.
Stock-Based Compensation
At December 31, 1999, we had five stock-based compensation plans
(collectively, Stock Option Plans), as described below. Consistent with the
provisions prescribed by SFAS 123, the following are the pro forma net loss and
net loss per common share (basic and diluted) for the years ended December 31,
1997, 1998 and 1999, respectively, had compensation cost for the Stock Option
Plans been determined based on the fair value at the grant date for grants made
in 1997, 1998 and 1999 (in thousands, except share data):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net loss $(19,807) $(18,686) $(14,031) $(17,985) $(28,350) $(33,335)
Net loss per common
share (basic and diluted) $ (0.70) $ (0.66) $ (0.48) $ (0.61) $ (0.93) $ (1.09)
</TABLE>
The effects on 1997, 1998 and 1999 pro forma net loss and net loss per
common share (basic and diluted) of expensing the estimated fair value of stock
options may not be representative of the effects on reporting pro forma results
for future years.
The weighted average fair value of options granted under the Stock Option
Plans was estimated using the Black-Scholes option-pricing model. The
Black-Scholes option-pricing model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions, including expected stock price volatility. Because our
employee stock options have characteristics significantly different from those
of traded options and changes in the subjective input assumptions may materially
affect the fair value estimate, in our opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of employee
stock options.
41
<PAGE>
The assumptions used to calculate the weighted average fair value of
options granted during 1997, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assumed life for options issued to employees (years) 5.0 5.0 5.0
Assumed life for options issued to directors and officers (years) 7.0 7.0 7.0
Risk-free interest rate 6.3% 5.3% 5.8%
Volatility 61.0% 65.0% 68.0%
Dividend yield - - -
Weighted average fair value per common share of options granted during the year $7.85 $14.48 $5.93
</TABLE>
In May 1997, the Board of Directors voted to extend the term of an option
granted to an officer in 1987 for an additional five years. The option allows
for the purchase of 732,423 shares of common stock at an exercise price of
$3.072. The extension of this option requires a new measurement date for valuing
the option, resulting in a non-cash compensation charge of $5,555,000 recorded
in the second quarter of 1997. The option is fully exercisable and the common
stock has been reserved for issuance.
The Stock Option Plans
In March 1999, the Board of Directors adopted the 1999 Nonqualified Stock
Option Plan (the "1999 Plan") providing for the issuance of up to 1,000,000
shares of common stock subject to adjustment for any dividend, stock split or
other relevant changes in capitalization. The Board of Directors' primary reason
for adopting the 1999 Plan was to enhance our ability to retain and motivate key
qualified persons who are officers, directors, and consultants. Under the 1999
Plan, the Compensation Committee of the Board of Directors may grant
non-qualified stock options to officers, directors, and consultants. The
Committee selects the individuals to whom options are granted and determines:
(1) the number of shares of common stock covered by the option; (2) when the
option becomes exercisable; (3) the duration of the option, which may not exceed
ten years; and (4) the vesting period, which, for officers, will generally occur
ratably over a five-year period beginning one year from the date of grant. All
stock options held under this 1999 Plan fully vest upon a change in control, as
defined in the plan.
In May 1995, a stock option plan was approved by shareholders providing
for the issuance of up to 5,000,000 shares of common stock options to enable us
to attract and retain key employees and consultants. Under the 1995 Plan, we may
grant incentive and non-qualified stock options to officers, employees,
consultants and advisors. The 1995 Plan, which took effect upon the expiration
of the 1986 Stock Option Plan in August 1996, is administered by a committee of
the Board of Directors. This committee selects the individuals to whom options
are granted and determines: (1) the type of option to be granted; (2) the number
of shares of common stock covered by the option; (3) when the option becomes
exercisable; and (4) the duration of the option which, in the case of incentive
stock options, may not exceed ten years. Vesting generally occurs ratably over a
five-year period beginning one year from the date of grant. No one person may be
issued options to purchase more than 500,000 shares of common stock in any one
calendar year. Stock options granted under the 1995 Plan may not be granted at
an exercise price less than 100% of the fair market value of the common stock on
the date of grant (or 110% of fair market value in the case of incentive stock
options granted to employees holding 10% or more of voting stock). The aggregate
fair market value (determined at the time of grant) of shares issuable pursuant
to incentive stock options which first become exercisable in any calendar year
by an employee may not exceed $100,000.
Our 1986 Stock Option Plan provided for the issuance of an aggregate of
4,882,812 shares of common stock for the granting of incentive and non-qualified
stock. The 1986 Plan was also administered by a committee of the Board of
Directors and had substantially the same terms and conditions as described under
the 1995 Plan. In August 1996, the 1986 Plan expired and no further grants were
made. All options outstanding on the expiration date remain in effect.
42
<PAGE>
In 1994, a stock option plan for non-employee directors was approved by
shareholders. Under the 1994 Director Plan, non-qualified stock options to
purchase up to 488,281 shares of common stock may be granted to non-employee
directors. The 1994 Director Plan provides that the option price per share be at
fair market value and vest ratably over a five-year period beginning one year
from the date of grant, with a duration not to exceed ten years.
The 1991 Director Stock Option Plan provided for the granting of options
to purchase 244,141 shares of common stock by non-employee directors and
terminated upon the adoption of the 1994 Director Plan. The options were granted
at fair market value and were immediately exercisable, subject to repurchase, at
the option price, in the event the optionee ceased to be a director. This
repurchase right terminates and the shares vest ratably over a five-year period
beginning one year from the date of grant. All options outstanding on the
termination date remain in effect.
In 1987, we granted to an officer an option to purchase 732,423 shares of
common stock at an exercise price of $3.072 per share. The shares have been
reserved for issuance and are fully vested and exercisable.
The following table presents the combined activity of all Stock Option
Plans for the years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------ ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 5,019,005 $5.56 5,320,206 $6.83 6,006,138 $9.10
Granted 1,041,795 12.47 954,889 22.00 1,721,400 9.20
Exercised (467,666) 5.60 (148,413) 6.39 (110,262) 6.59
Cancelled (272,928) 7.51 (120,544) 12.56 (167,402) 12.38
--------- --------- ---------
Outstanding at end of period 5,320,206 6.83 6,006,138 9.10 7,449,874 9.09
========= ========= =========
Exercisable at year end 2,729,631 4.47 3,297,005 5.18 3,987,847 6.39
========= ========= =========
Shares available for granting
of options at end of period 1,234,883 371,105 1,832,702
========= ======= =========
</TABLE>
The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 1999 for the Stock
Option Plans:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life (Years) Price Exercisable Price
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2.457 - 3.738 1,674,588 2.8 $ 3.15 1,674,587 $ 3.15
3.891 - 6.144 803,571 3.9 5.05 728,861 5.00
6.604 - 9.920 2,523,675 7.3 7.55 997,389 7.71
10.00 - 14.84 1,632,889 8.0 12.17 411,535 11.53
15.06 - 21.28 152,587 8.2 19.25 41,401 19.54
24.00 - 31.00 662,564 8.2 24.91 134,074 24.91
--------- ---------
7,449,874 6.2 9.09 3,987,847 6.39
========= =========
</TABLE>
43
<PAGE>
The 1991 Employee Stock Purchase Plan
Under the 1991 Employee Stock Purchase Plan, a total of 366,211 shares of
common stock are reserved for issuance (up to 30,000 shares may be issued in any
one year). The purchase plan allows eligible employees the option to purchase
common stock during two six-month periods of each year at 85% of the lower of
the fair market value of the shares at the time the option is granted or is
exercised. The term of this plan ends December 31, 2004. During 1997, 1998 and
1999, we issued a total of 6,507, 5,046 and 10,089 shares of common stock,
respectively, under this purchase plan. Remaining shares available under this
purchase plan were 307,273 as of December 31, 1999.
Employee Savings Plan
We have a 401(k) savings plan covering full-time employees who are
eligible to participate upon hire. Under this savings plan, we may match
employee contributions at management's discretion. Contributions made under the
savings plan were approximately $53,000, $62,000 and $80,000 as of December 31,
1997, 1998 and 1999, respectively.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
44
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in our Proxy Statement
for the 2000 Annual Meeting of Stockholders under the captions "Information
About the Board of Directors", "Information About Executive Officers " and
"ELECTION OF DIRECTORS" and is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is contained under the caption
"Information About Executive Officers" in our 2000 Proxy Statement and is
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in our 2000 Proxy
Statement under the captions, "Information About Principal Stockholders" and
"Information About Executive Officers" and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the caption
"Certain Transactions" in our 2000 Proxy Statement and is incorporated herein by
reference.
45
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 3. Exhibits
The exhibits filed as a part of this Annual Report on Form 10-K are listed
in the Exhibit Index immediately preceding the exhibits. The Registrant has
identified in the Exhibit Index each management contract and compensatory plan
filed as an exhibit to this Form 10-K in response to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K
None
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ORGANOGENESIS INC.
BY: /s/ PHILIP M. LAUGHLIN
-----------------------
Philip M. Laughlin
President and Chief Executive Officer
Date: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ PHILIP M. LAUGHLIN President, Chief Executive Officer and March 29, 2000
- --------------------------------------------------- Director (Principal executive officer)
Philip M. Laughlin
/s/ ALBERT ERANI Director and Chairman of the Board March 29, 2000
- ---------------------------------------------------
Albert Erani
/s/ RICHARD S. CRESSE Director March 29, 2000
- ---------------------------------------------------
Richard S. Cresse
/s/ DAVID A. GARDNER Director March 29, 2000
- ---------------------------------------------------
David A. Gardner
/s/ BERNARD A. MARDEN Director March 29, 2000
- ---------------------------------------------------
Bernard A. Marden
/s/ BJORN R. OLSEN Director March 29, 2000
- ---------------------------------------------------
Bjorn R. Olsen
/s/ MARGUERITE A. PIRET Director March 29, 2000
- ---------------------------------------------------
Marguerite A. Piret
/s/ ANTON E. SCHRAFL Director March 29, 2000
- ---------------------------------------------------
Anton E. Schrafl
/s/ DONNA ABELLI LOPOLITO Vice President, Finance and March 29, 2000
- --------------------------------------------------- Administration, Chief Financial Officer,
Donna Abelli Lopolito Treasurer and Secretary (Principal Financial
and Accounting Officer)
</TABLE>
47
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
(3)(a) Restated Certificate of Incorporation of the Company. (1)
(b) Certificate of Amendment to the Restated Certificate of
Incorporation of the Company. (8)
(c) Certificate of Stock Designation, Number, Voting Powers, Preferences
and Rights of the Series of the Preferred Stock of Organogenesis
Inc. to be Designated Series A Convertible Preferred Stock. (9)
(d) Certificate of Designation, filed with the Secretary of State of the
State of Delaware on August 29, 1995. (12)
(e) Bylaws of the Company, as amended. (2)
(f) Rights Agreement, dated as of September 1, 1995, between the Company
and American Stock Transfer & Trust Company. (12)
(g) Form of Unit Warrant Agreement. (13)
(h) Form of Investment Agreement. (13)
(i) Restated Certificate of Incorporation of the Company as amended.
(22)
(4)(a) Form of Warrant Agreement with respect to Warrants included as part
of the Units of the Company's securities. (1)
(b) Notice of Redemption of the Company's Redeemable Common Stock
Purchase Warrants. (3)
(c) Form of Unit Purchase Option, dated December 18, 1986, issued to
each of the Company's Unit Purchase Option holders. (4)
(d) Form of Stock Registration Rights Agreement, dated February 23,
1990, between the Company and certain security holders. (4)
(e) Form of Common Stock Purchase Warrant, dated February 23, 1990,
issued to certain security
holders. (9)
(f) Form of Non-Redeemable Warrant dated as of March 30, 1999. (21)
(g) Form of 7% Convertible Subordinated Note dated as of March 30, 1999.
(21)
(h) Securities Purchase Agreement between the Registrant and the
Purchasers dated as of March 30, 1999. (21)
(i) Form of Registration Rights Agreement between the Company and the
Purchasers dated as of March 30, 1999. (21)
(10)(a) 1986 Stock Option Plan of the Company, as amended. *(10)
(b) 1991 Director Stock Option Plan of the Company, as amended. *(10)
(c) 1991 Employee Stock Purchase Plan of the Company, as amended. *(23)
(d) 1994 Director Stock Option Plan of the Company, as amended. *(11)
(e) License Agreement among the Company, Eugene Bell and Massachusetts
Institute of Technology dated December 16, 1985 ("MIT License
Agreement"). (1)
(f) Amendment to MIT License Agreement, dated October 22, 1986. (1)
(g) Second Amendment to MIT License Agreement, dated as of March 31,
1988. (6)
(k) Subscription Agreement between the Company and a purchaser of the
Series A Convertible Preferred Stock and 10% Subordinated Promissory
Notes dated as of July 3, 1986, with a schedule of additional
purchasers. (1)
(l) Indenture of Lease between Canton Commerce Center Limited
Partnership and the Company, dated as of July 10, 1989, as amended.
(7)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
(m) Lease Agreement between North Queen Street LP and the Company, dated
as of May 21, 1999. (22)
(n) First Amendment to Lease Agreement between North Queen Street LP and
the Company, dated as of June 18, 1999. (22)
(o) Asset Purchase Agreement between the Company and Baxter Healthcare
Corporation, dated as of April 14, 1999. (22)
(q) Non-Statutory Stock Option Agreement between the Company and Herbert
M. Stein dated April 7, 1987, as amended. *(5)
(r) Manufacturing and Supply Agreement between the Company and Novartis
Pharma AG, dated as of August 11, 1997. **(15)
(s) Letter Agreement between the Company and Dr. David T. Rovee dated
September 23, 1991. *(14)
(u) 1995 Stock Option Plan, as amended. *(14)
(v) The License and Supply Agreement between the Company and Sandoz
Pharma Ltd., dated as of January 17, 1996. **(16)
(w) The Stock Purchase Agreement between the Company and Sandoz Pharma
Ltd., dated as of January 17, 1996. **(16)
(x) 1999 Nonqualified Stock Option Plan. *(20)
(y) Severance Benefits Plan. *(17)
(z) Third amendment to Indenture of Lease between between 150 Canton
Office Associates , Successor as Landlord to Canton Commerce Center
Limited Partnership and the Company, dated as of March 4, 1998. (19)
(aa) Addendum to The License and Supply Agreement between the Company and
Novartis Pharma Ltd., dated March 23, 1998. (19)
(bb) Letter Agreement between the Company and Mr. Philip M. Laughlin
dated September 24, 1999. filed herewith.
(cc) Credit agreement between the Company and Fleet National Bank dated
November 12,1999, filed herewith.
(21) Subsidiaries of the Company, filed herewith.
(23) Consent of PricewaterhouseCoopers L.L.P., filed herewith.
(27) Financial Data Schedule (filed with electronic submission only)
- ----------
(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-9832).
(2) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K, filed March 31, 1987, amended and incorporated herein
by reference to the exhibits to the Company's Quarterly Report on Form
10-Q, filed May 14, 1999.
(3) Incorporated herein by reference to the exhibits to the Company's Current
Report on Form 8-K, filed February 18, 1987.
(4) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-3 (File No. 33-33914).
(5) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K, filed March 30, 1988, amended and incorporated herein
by reference to the Exhibit 10 to the Company's Quarterly Report on Form
10-Q, filed August 14, 1997.
(6) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K, filed March 31, 1989.
(7) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K, filed April 2, 1990.
(8) Incorporated herein by reference to Exhibit 3(a) to the Company's Form
10-K, filed April 1, 1991.
<PAGE>
(9) Incorporated by reference to Exhibit 4 to the Company's Quarterly Report on
Form 10-Q, filed August 13, 1991.
(10) Incorporated herein by reference to the exhibits to the Company's Annual
Report Form 10-K, filed March 31, 1993.
(11) Incorporated herein by reference to Appendix A of the Company's Definitive
Proxy Statement filed April 19, 1994.
(12) Incorporated herein by reference to the exhibits to the Company's Current
Report on Form 8-K, filed August 29, 1995, amended and incorporated herein
by reference to the exhibits to the Company's Quarterly Report on Form
10-Q, filed May 14, 1999.
(13) Incorporated herein by reference to the exhibits to the Company's Amended
Registration Statement on Form S-3, filed July 5, 1995.
(14) Incorporated herein by reference to Appendix A of the Company's Definitive
Proxy Statement filed April 14, 1995, amended and incorporated herein by
reference to the exhibits to the Company's Quarterly Report on Form 10-Q,
filed November 15, 1999.
(15) Incorporated herein by reference to the exhibits to the Company's Annual
Report Form 10-K, filed March 30, 1998.
(16) Incorporated herein by reference to the exhibits to the Company's Annual
Report Form 10-K, filed March 29, 1996,
(17) Incorporated herein by reference to Exhibit 10 to the Company's Quarterly
Report on Form 10-Q, filed May 14, 1997.
(18) Incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q, filed May 13, 1998.
(19) Incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q, filed May 13, 1998.
(20) Incorporated herein by reference to the exhibits to the Company's Annual
Report Form 10-K, filed March 30, 1999.
(21) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q, filed May 14, 1999.
(22) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q, filed August 16, 1999.
(23) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q, filed November 15, 1999.
- ----------
* Management contract or compensatory plan identified pursuant to Item 14(a)3.
**Confidential Treatment requested.
<PAGE>
Exhibit 10(bb)
ORGANOGENESIS INC.
150 Dan Road
Canton, Massachusetts 02021
September 24, 1999
PRIVATE AND CONFIDENTIAL
Mr. Philip M. Laughlin
4913 Rolling Green Parkway
Edina, Minnesota 55436
Dear Phil:
I am very enthusiastic about having you join Organogenesis Inc. (the
"Company"). This letter confirms the terms of our offer to employ you as
President, Chief Operating Officer and a member of OI's Board of Directors. We
expect you to lead the Company and to help deliver value to patients, the
healthcare industry and to OI's shareholders. We very much hope that you will
find this opportunity attractive and rewarding and will accept our offer. The
terms of your employment with the Company are as follows:
1. You will join the Company as soon as possible, which we hope will be no
later than October 11, 1999 (your "Employment Commencement Date") as
President, Chief Operating Officer and a member of OI's Board of Directors.
Our expectation is that you will subsequently be named Chief Executive
Officer of the Company by October 1, 2000. The term of your employment will
be from your Employment Commencement Date until December 31, 2000 and will
be automatically renewed for successive one year periods (the "Term"),
unless and until at least sixty (60) days' prior written notice of
termination is given by either party stating the date of termination.
You will devote substantially all of your business time to your duties and
responsibilities with the Company. You may serve as an officer or member of
the board of directors of other companies, but only with the Board of
Directors' prior approval. We encourage your active participation in
relevant professional organizations and will pay your expenses for
involvement with such organizations, provided it does not interfere with
completion of your responsibilities to the Company.
2. Your beginning annual base salary will be $325,000 and will be subject to
annual review for increases at the discretion of the Board of Directors.
<PAGE>
Mr. Philip Laughlin
September 24, 1999
Page 2
3. You will be eligible for annual incentive compensation as determined by the
Compensation Committee of the Board of Directors of up to 50% of your Base
Salary.
4. On your Employment Commencement Date, you will receive a stock option award
for 500,000 shares of the Company's common stock, vesting as follows:
100,000 shares vesting on each of the next five anniversaries of your
Employment Commencement Date. The exercise price of the stock options will
be the fair market value (defined in the Company's Stock Option Plan) for
OI on your Employment Commencement Date. All stock options will be
"Incentive Stock Options" to the maximum extent permitted (defined by the
Internal Revenue Code as the first $100,000 in value vesting per calendar
year), and the remainder will be non-qualified stock options. All stock
options will be subject to the terms of said Plan. You will be eligible for
consideration for additional stock options grants commencing in Fiscal Year
2000 as determined by the Board of Directors in its sole discretion. A copy
of your stock option letter is attached as Exhibit "A".
5. Organogenesis will provide a managed market assistance program and through
the auspices of DeWolfe Relocation until a Buyer is identified for your
Minnesota residence, at which time DeWolfe Relocation Services will assume
responsibility of closing the transaction with the new buyer. We will pay
all closing costs associated with the sale of your property in Minnesota,
which are customary, and a sales commission not to exceed 5%. There will be
no advance of equity for the property. Additionally, reasonable household
moving costs in relocating from Minnesota to Massachusetts will be borne by
Organogenesis and up to one month storage of household goods, if needed.
The Company will also pay for three round trip air fares from Minnesota for
you and your spouse and will pay three months of temporary living
accommodations at Candlewood Suites in Braintree. We will reimburse your
mortgage interest expense for three months for the home in Massachusetts,
not to exceed $5,000 a month at current conventional interest rates as
quoted by BankBoston, as long as your house in Minnesota is not sold. The
terms of Organogenesis relocation benefits, as defined shall be in effect
for six months from hire date.
6. You will receive employee benefits in line with the general programs
applicable to other senior OI executives. Additionally, you shall be
entitled to four weeks of vacation each year, accruing in accordance with
the Company's vacation policy for senior executives.
7. If your employment is involuntarily terminated by the Company other than
for Cause (as defined below), which the Company reserves the right to do at
any time during or after the Term, or you terminate your employment for
Good Reason (as defined below), during the Term of this Agreement, provided
that you (a) do not breach the terms of your Non-Competition and
Non-Disclosure Agreement with the Company (the "NDA"), and (h) execute a
complete release and waiver of any claims you may have against the Company,
2
<PAGE>
Mr. Philip M. Laughlin
September 24, 1999
Page 3
claims you may have against the Company, then, as liquidated damages and in
lieu of any other damages or compensation, you shall be entitled to receive
(a) in twenty-four equal monthly installments commencing immediately an
amount equal to two years' base salary as in effect on your date of
termination; (ii) in twenty-four equal monthly installments commencing on
March 1 of the fiscal year following the date of your termination an amount
equal to two times the amount you would have received as a bonus in such
year if you had worked for the full year but in any event no less than
$200,000 in the aggregate; (iii) you will receive a pro-rated annual
incentive compensation award in March of the year following your employment
termination equal to the amount you would have received if you had worked
for the full year as adjusted for the performance criteria specified for
your award multiplied by a fraction where the numerator is the number of
months (rounded to the next highest number for a partial month) of the year
elapsed prior to your termination and the denominator is 12; (iv) you and
your dependents shall continue to participate (with the same level of
coverage) for one additional year following your employment termination
date, in all medical/dental, accident, disability and life insurance plans
on the same terms as in effect immediately prior to your termination,
unless such continued participation is prohibited by applicable law or the
existing terms of such plans, and further provided, however, that such
benefits will cease on the date of your receiving similar benefits from a
new employer; (v) you shall receive any other cash amounts earned, accrued
or owing to you under the plans and programs of the Company (other than any
stock option plans, which are provided for in item (vi) below), and (vi)
all stock options which would otherwise vest in the next twenty-four (24)
calendar months from the effective date of termination shall vest
immediately.
If you violate the provisions of Sections 11 or 12 of this Letter, and you
have received severance payments under subparagraph (i) above, or
additional retirement or other employee benefits under subparagraph (ii)
above, then, in addition to whatever other remedies may be available to the
Company in law or in equity, you agree to promptly repay the amount of such
severance payments and additional retirement or other employee benefits to
the Company.
9. If during the Term, you voluntarily terminate your employment (other than
for Good Reason) or you are discharged by the Company for Cause, you will
forfeit your right to receive any salary, incentive compensation, severance
pay or benefits that has not been filly earned at the time your employment
terminates, provided, however, you will be entitled to receive any benefits
or amounts accrued but not yet paid as of the date of your termination.
3
<PAGE>
Mr. Philip M. Laughlin
September 24, 1999
Page 4
10. You are authorized to incur reasonable expenses in carrying out your duties
and responsibilities with the Company, and the Company shall promptly
reimburse you for all business expenses in accordance with Company policy.
11. You agree to sign the Company's NDA in the form attached as Exhibit "B".
12. If your employment is terminated, you will immediately, unless otherwise
requested by the Company's Board of Directors, resign from all
directorships, trusteeships, or other offices and employment held at that
time with the Company or any of its subsidiaries or affiliates.
13. For purposes of this Agreement, "Cause" means (i) a material breach by you
of your duties and responsibilities (other than as a result of incapacity
due to physical or mental illness), which breach is not cured within two
weeks following written notice by the Board of Directors, (ii) actions
taken by you or at your request which are demonstrably willful and
deliberate on your part, which is committed in bad faith or without
reasonable belief that such breach is in the best interests of the Company,
(iii) your indictment on a felony charge involving moral turpitude, or (iv)
fraud, embezzlement or any other act undertaken by you which is materially
and demonstrably injurious to the Company as determined in the sole
discretion of the Board of Directors of the Company.
14. For purposes of this Letter, "Good Reason" means that, without your consent
(i) your rate of base salary is reduced in a manner that is not applied
proportionately to other senior executives of the Company; (ii) there is a
material diminution of your primary job function, or the assignment to you
of duties which are materially inconsistent with your primary job function,
or which materially impair your ability to perform your primary job
function with the Company which is not remedied in a reasonable period of
time after receipt of written notice from you specifying such breach; (iii)
the Company delivers to you a notice of termination of your employment at a
time when the Company would not have Cause to terminate your employment or
fails to appoint you to the position of Chief Executive Officer on or prior
to October 1, 2000; (iv) there is a material breach by the Company of its
obligations described herein which is not remedied in a reasonable period
after receipt of written notice from you specifying the breach; or (v) with
or without your consent, a "Change of Control", as defined in Section 9 of
your Stock Option Grant Letter attached hereto, occurs and you terminate
your employment with the Company.
[THIS SPACE INTENTIONALLY LEFT BLANK]
4
<PAGE>
Mr. Philip M. Laughlin
September 24, 1999
Page 5
This Letter and the Stock Option Grant Letter and NDA attached hereto set
forth our entire agreement in respect of the subject matter contained herein.
Again Phil, we look forward to you joining OI and in helping us build upon our
early achievements. We believe that your efforts will help propel OI to great
financial success.
Very truly yours,
ORGANOGENESIS, INC. ACCEPTED AND AGREED:
By: _____________________________ _____________________________
Herbert M. Stein, Chairman Philip M. Laughlin
5
<PAGE>
Exhibit 10(cc)
ORGANOGENESIS INC.
150 Dan Road
Canton, MA 02021
November 12, 1999
Fleet National Bank
100 Federal Street
Boston, MA 02110
Gentlemen:
This letter agreement will set forth certain understandings between
Organogenesis Inc., a Delaware corporation (the "Borrower"), and Fleet National
Bank (the "Bank") with respect to Term Loans (hereinafter defined) to be made by
the Bank to the Borrower. In consideration of the mutual promises contained
herein and in the other documents referred to below, and for other good and
valuable consideration, receipt and sufficiency of which are hereby
acknowledged, the Borrower and the Bank agree as follows:
I. AMOUNTS AND TERMS
1.1. References to Documents. Reference is made to (i) that certain
$5,000,000 face principal amount promissory note (the "Term Note") of even date
herewith made by the Borrower and payable to the order of the Bank, and (ii)
that certain Security Agreement (Equipment) of even date herewith from the
Borrower to the Bank (the "Security Agreement").
1.2. The Borrowing; Term Note. Subject to the terms and conditions
hereinafter set forth, the Bank will make one or more loans (the "Term Loans")
to the Borrower, as the Borrower may request, on any Business Day prior to the
first to occur of (i) the close of business on September 29, 2000 or (ii) the
earlier termination of the within-described term loan facility pursuant to
ss.5.2 or ss.6.5. A Term Loan shall be made, not more than once per calendar
quarter (except that more than one Term Loan may be made in any calendar quarter
provided that each additional Term Loan in any one calendar quarter is in an
amount of at least $100,000), in order to finance the costs of Qualifying
Equipment acquired by the Borrower within the 90 days (or 210 days in the case
of the initial Term Loan) preceding the request for such Term Loan and/or the
costs of Qualifying Leasehold Improvements installed or constructed within the
90 days (or 210 days in the case of the initial Term Loan) preceding the request
for such Term Loan, each such Term Loan to be in such amount as may be requested
by the Borrower; provided that (i) no Term Loan will be made after September 29,
2000; (ii) the aggregate original principal amounts of all Term Loans will not
exceed $5,000,000; (iii) the aggregate original principal amounts of all Term
Loans made in respect of Qualifying Leasehold Improvements and/or software will
not exceed $3,000,000; and (iv) no Term Loan will be in an amount more than 90%
of the invoiced actual costs of the tangible property constituting the items of
Qualifying Equipment and/or Qualifying Leasehold Improvements with respect to
which such Term Loan is made (excluding taxes, shipping, software (except as
otherwise provided in the next following sentence), installation charges (except
as otherwise provided in the next following sentence), training fees
<PAGE>
and other "soft costs"). Notwithstanding the provisions of clause (iv) of the
immediately preceding sentence (but subject always to the limitations contained
in clause (iii) of the immediately preceding sentence), (i) construction costs
incurred by the Borrower in connection with the installation of leasehold
improvements at the Borrower's Canton, MA premises may be included in Qualifying
Leasehold Improvements and (ii) the Borrower may include within Qualifying
Equipment up to $500,000 in costs of software acquired by the Borrower. Prior to
the making of each Term Loan, and as a precondition thereto, the Borrower will
provide the Bank with: (i) invoices supporting the costs of the relevant
Qualifying Equipment and/or Qualifying Leasehold Improvements (as the case may
be); (ii) such evidence as the Bank may reasonably require showing that all
Qualifying Equipment has been delivered to and installed at the Borrower's
premises at 150 Dan Road, Canton, MA and/or 85 John Road, Canton, MA, has become
fully operational, has been paid for by the Borrower (or is being paid for by
the Borrower from the proceeds of the relevant Term Loan) and is owned by the
Borrower free of all liens and interests of any other Person (other than the
security interest of the Bank pursuant to the Security Agreement); (iii) such
evidence as the Bank may reasonably require showing that the Qualifying
Leasehold Improvements have been installed at the Borrower's premises at 150 Dan
Road, Canton, MA and/or 85 John Road, Canton, MA, have been paid for (or are
being paid for by the Borrower from the proceeds of the relevant Term Loan) by
the Borrower and are owned by the Borrower free of all liens and interests of
any other Person (other than the security interests of the Bank pursuant to the
Security Agreement), it being acknowledged that such Qualifying Leasehold
Improvements are to be affixed to the Borrower's premises and may become so
built into such premises that they become part of the realty, with the result
that the owner of such premises would have rights thereto upon the termination
of the Borrower's lease and the Bank would no longer have a security interest
therein; (iv) if reasonably required in order to effect and maintain the
security interest contemplated by the Security Agreement, an appropriate
supplement to the Security Agreement and Uniform Commercial Code financing
statements reflecting the relevant Qualifying Equipment and/or Qualifying
Leasehold Improvements with respect to which such Term Loan is being made (all
in form and substance reasonably satisfactory to the Bank); and (v) evidence
satisfactory to the Bank that the items of Qualifying Equipment and/or
Qualifying Leasehold Improvements (as the case may be) are fully insured against
casualty loss, with insurance naming the Bank as secured party and first loss
payee.
The Term Loans will be evidenced by the Term Note. The Borrower hereby
irrevocably authorizes the Bank to make or cause to be made, on a schedule
attached to the Term Note or on the books of the Bank, at or following the time
of making each Term Loan and of receiving any payment of principal, an
appropriate notation reflecting such transaction and the then aggregate unpaid
principal balance of the Term Loans. The amount so noted shall constitute
presumptive evidence as to the amount owed by the Borrower with respect to
principal of the Term Loans. Failure of the Bank to make any such notation shall
not, however, affect any obligation of the Borrower or any right of the Bank
hereunder or under the Term Note.
2
<PAGE>
1.3. Principal Repayment of Term Loans. The Borrower shall repay principal
of the Term Loans in 12 equal consecutive quarterly installments, commencing on
December 29, 2000 and continuing on the last Business Day of each calendar
quarter thereafter. Each such quarterly installment of principal of the Term
Loans shall be in an amount equal to 1/12th of the aggregate principal amount of
the Term Loans outstanding at the close of business on September 29, 2000. In
any event, the then outstanding principal balance of all Term Loans and all
interest then accrued but unpaid thereon shall be due and payable in full on
September 30, 2003. The Borrower may prepay, at any time or from time to time,
without premium or penalty, the whole or any portion of the Term Loans to the
extent that same are Floating Rate Loans; provided that each such principal
prepayment shall be accompanied by payment of all interest under the Term Note
accrued on the amount so prepaid but unpaid to the date of payment. The Borrower
may prepay the whole or any portion of any LIBOR Loan; provided that (i) the
Borrower gives the Bank not less than two (2) Business Days' prior written
notice of its intent so to prepay, (ii) the Borrower pays all interest on each
LIBOR Loan (or portion thereof) so prepaid accrued to the date of such
prepayment, (iii) any voluntary prepayment with respect to a LIBOR Loan must be
in a principal amount of $100,000 or an integral multiple of $100,000 and, after
giving effect to such voluntary prepayment, the remaining outstanding balance of
such LIBOR Loan shall be not less than $500,000 and (iv) if the Borrower for any
reason makes any prepayment of a LIBOR Loan prior to the last day of the
Interest Period applicable thereto, the Borrower shall forthwith pay all amounts
owing to the Bank pursuant to the provisions of ss.1.7 with respect to such
LIBOR Loan. Any partial prepayment of principal of the Term Loans will be
applied to installments of principal of the Term Loans thereafter coming due in
inverse order of normal maturity. Amounts repaid or prepaid with respect to the
Term Loans are not available for reborrowing.
1.4. Interest Rate. Except as otherwise provided below in this ss.1.4,
interest on the Term Loans will be payable at a fluctuating rate per annum (the
"Floating Rate") which shall at all times be equal to the Prime Rate as in
effect from time to time (but in no event in excess of the maximum rate
permitted by then applicable law), with a change in such rate of interest to
become effective on each day when a change in the Prime Rate becomes effective.
Subject to the conditions set forth herein, the Borrower may elect that all or
any portion of any Term Loan to be made under ss.1.2 will be made as a LIBOR
Loan with an Interest Period of one month, two months, three months or six
months (as the Borrower may select), that all or any portion of any Floating
Rate Loan will be converted to a LIBOR Loan with an Interest Period of one
month, two months, three months or six months (as the Borrower may select)
and/or that any LIBOR Loan will be continued at the expiration of the Interest
Period applicable thereto as a new LIBOR Loan with an Interest Period of one
month, two months, three months or six months (as the Borrower may select). Such
election shall be made by the Borrower giving to the Bank a written or
telephonic notice received by the Bank within the time period and containing the
information described in the next following sentence (a "LIBOR Borrowing
Notice"). The LIBOR Borrowing Notice must be received by the Bank no later than
10:00 a.m. (Boston time) on that day which is two Business Days prior to the
date of the proposed borrowing, conversion or continuation, as the case may be,
and must specify the amount of the LIBOR Loan requested (which shall be $500,000
or an integral multiple of $100,000 in excess of $500,000), must identify the
particular Term Loan or Loans so to be made, converted or continued, as the case
may be, and must specify the proposed commencement date of the relevant Interest
Period and the duration (one month, two months, three months or six months) of
such relevant Interest
3
<PAGE>
Period. Notwithstanding anything provided elsewhere in this letter
agreement, the Borrower may not elect to have any installment of a Term Loan
included in a LIBOR Loan if the Interest Period applicable thereto would
continue after the due date of such installment. Any LIBOR Borrowing Notice
shall, upon receipt by the Bank, become irrevocable and binding on the Borrower,
and the Borrower shall, upon demand and receipt of a Bank Certificate with
respect thereto, forthwith indemnify the Bank against any loss or expense
incurred by the Bank as a result of any failure by the Borrower to borrow any
requested LIBOR Loan, including, without limitation, any loss or expense
incurred by reason of the liquidation or redeployment of deposits or other funds
acquired by the Bank to fund or maintain such LIBOR Loan. At the expiration of
each Interest Period applicable to a LIBOR Loan, the principal amount of such
LIBOR Loan may be continued as a new LIBOR Loan to the extent and on the terms
and conditions contained in this letter agreement by delivery to the Bank of a
new LIBOR Borrowing Notice conforming to the requirements set forth above in
this ss.1.4 (and any LIBOR Loan not repaid and not so continued as a new LIBOR
Loan will be deemed to have been converted into a Floating Rate Loan).
Notwithstanding any other provision of this letter agreement, the Bank need not
make any LIBOR Loan or allow any conversion of a Floating Rate Loan to a LIBOR
Loan at any time when there exists any Event of Default.
The Borrower may request and the Bank may issue caps, collars, swaps and
other rate protection products, using the Bank's then customary documentation
for such transactions. Such caps, collars, swaps and other rate protection
products will be issued for such fees and upon such other terms and conditions
as may be agreed upon by the Bank and the Borrower at the time of issuance
thereof.
Any request for a LIBOR Loan and any election to convert all or any portion
of the Term Loans to a LIBOR Loan may be made on behalf of the Borrower only by
a duly authorized officer; provided, however, that the Bank may conclusively
rely upon any written or facsimile communication received from any individual
whom the Bank believes in good faith to be such a duly authorized officer.
1.5. Interest Payments. The Borrower will pay interest on the unpaid
principal amount of the Term Loans outstanding from time to time, from the date
hereof until payment of the Term Loans and the Term Note in full and the
termination of this letter agreement. Interest on Floating Rate Loans will be
payable monthly in arrears on the first day of each month. Interest on each
LIBOR Loan will be payable in arrears on each applicable Interest Payment Date.
In any event, interest shall also be payable on the date of payment of the Term
Loans in full. Interest on Floating Rate Loans shall be payable at the Floating
Rate. The rate of interest payable on any LIBOR Loan will be the LIBOR Interest
Rate applicable thereto. Notwithstanding the foregoing, at any time after
maturity of the Term Loans or after the occurrence and during the continuance of
any Event of Default, each Term Loan shall bear interest at a rate per annum
which at all times shall be equal to the sum of (i) four (4%) percent per annum
plus (ii) the interest rate otherwise then applicable to such Term Loan. All
interest and fees payable under this letter agreement and/or under the Term Note
will be calculated on the basis of a 360-day year for the actual number of days
elapsed.
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1.6. Rate Determination Protection. In the event that:
(a) the Bank shall determine that, by reason of circumstances
affecting the London interbank market or otherwise, adequate and
reasonable methods do not exist for ascertaining the LIBOR Interest
Rate which would otherwise be applicable during any Interest Period,
or
(b) the Bank shall determine that:
(i) the making or continuation of any LIBOR Loan has been made
impracticable or unlawful by (1) the occurrence of any
contingency that materially and adversely affects the London
interbank market or (2) compliance by the Bank with any
applicable law or governmental regulation, guideline or order or
interpretation or change thereof by any governmental authority
charged with the interpretation or administration thereof or with
any request or directive of any such governmental authority
(whether or not having the force of law); or
(ii) reserve-adjusted LIBOR will not, in the reasonable
determination of the Bank, adequately and fairly reflect the cost
to the Bank of funding the LIBOR Loans for such Interest Period
then the Bank shall forthwith give notice of such determination (which
shall be conclusive and binding on the Borrower) to the Borrower. In
such event the obligations of the Bank to make LIBOR Loans shall be
suspended until the Bank determines that the circumstances giving rise
to such suspension no longer exist, whereupon the Bank shall notify
the Borrower.
1.7. Prepayment of LIBOR Loans. The following provisions of this ss.1.7
shall be effective only with respect to LIBOR Loans: If, due to acceleration of
the Term Note or due to voluntary prepayment or mandatory repayment or
prepayment or due to any other reason, the Bank receives payment of any
principal of a LIBOR Loan on any date prior to the last day of the relevant
Interest Period or if for any reason any LIBOR Loan is converted to a Floating
Rate Loan prior to the expiration of the relevant Interest Period, the Borrower
shall, upon demand and receipt of a Bank Certificate from the Bank with respect
thereto, pay forthwith to the Bank a yield maintenance fee in an amount computed
as follows: The current rate for United States Treasury securities (bills on a
discounted basis shall be converted to a bond equivalent) with a maturity date
closest to the last day of the Interest Period applicable to the affected LIBOR
Loan shall be subtracted from the "cost of funds" component (i.e.,
reserve-adjusted LIBOR) of the LIBOR Interest Rate in effect with respect to the
relevant LIBOR Loan at the date of such prepayment or conversion. If the result
is zero or a negative number, there shall be no yield maintenance fee. If the
result is a positive number, then the resulting percentage shall be multiplied
by the amount of the principal balance being prepaid. The resulting amount shall
be divided by 360 and multiplied by the number of days remaining in the relevant
Interest Period. Said amount shall be reduced to present value calculated by
using the number of days remaining in the relevant Interest Period and by using
the above-referenced United States Treasury securities rate as the discount
rate. The resulting amount shall be the yield maintenance fee due
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to the Bank upon prepayment or conversion of the applicable LIBOR
Loan. Any acceleration of a LIBOR Loan due to an Event of Default will
give rise to a yield maintenance fee calculated with the respect to
such LIBOR Loan on the date of such acceleration in the same manner as
though the Borrower had exercised a right of prepayment at that date,
such yield maintenance fee being due and payable at that date.
1.8. Increased Costs; Capital Adequacy.
(i) If the adoption, effectiveness or phase-in, after the date hereof,
of any applicable law, rule or regulation, or any change therein, or
any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with
the interpretation or administration thereof, or compliance by the
Bank with any request or directive (whether or not having the force of
law) of any such authority, central bank or comparable agency:
(A) shall subject the Bank to any Imposition or other charge with
respect to any LIBOR Loan, the Term Note or the Bank's agreement
to make LIBOR Loans, or shall change the basis of taxation of
payments to the Bank of the principal of or interest on any LIBOR
Loan or any other amounts due under this letter agreement in
respect of LIBOR Loans or the Bank's agreement to make LIBOR
Loans (except for changes in the rate of tax on the over-all net
income of the Bank); or
(B) shall impose, modify or deem applicable any reserve, special
deposit, deposit insurance or similar requirement (including,
without limitation, any such requirement imposed by the Board of
Governors of the Federal Reserve System, but excluding, with
respect to any LIBOR Loan, any such requirement already included
in the applicable Reserve Rate) against assets of, deposits with
or for the account of, or credit extended by, the Bank or shall
impose on the Bank or on the London interbank market any other
condition affecting any LIBOR Loans, the Term Note or the Bank's
agreement to make LIBOR Loans
and the result of any of the foregoing is to increase the cost to the
Bank of making or maintaining any LIBOR Loan or to reduce the amount
of any sum received or receivable by the Bank under this letter
agreement or under the Term Note with respect to any LIBOR Loan by an
amount deemed by the Bank to be material, then, upon demand by the
Bank and receipt of a Bank Certificate from the Bank with respect
thereto, the Borrower shall pay to the Bank such additional amount or
amounts as the Bank certifies to be necessary to compensate the Bank
for such increased cost or reduction in amount received or receivable.
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(ii) If the Bank shall have determined that the adoption,
effectiveness or phase-in after the date hereof of any applicable
law, rule or regulation regarding capital requirements for banks
or bank holding companies, or any change therein after the date
hereof, or any change after the date hereof in the interpretation
or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or
administration thereof, or compliance by the Bank with any
request or directive of such entity regarding capital adequacy
(whether or not having the force of law) has or would have the
effect of reducing the return on the Bank's capital with respect
to its agreement hereunder to make Term Loans or with respect to
any Term Loan (whether or not then subject to any LIBOR Interest
Rate) to a level below that which the Bank could have achieved
(taking into consideration the Bank's policies with respect to
capital adequacy immediately before such adoption, effectiveness,
phase-in, change or compliance and assuming that the Bank's
capital was then fully utilized) by any amount deemed by the Bank
to be material: (A) the Bank shall promptly after its
determination of such occurrence deliver a Bank Certificate with
respect thereto to the Borrower; and (B) the Borrower shall pay
to the Bank as an additional fee from time to time on demand such
amount as the Bank certifies to be the amount that will
compensate it for such reduction.
(iii) A Bank Certificate of the Bank claiming compensation under
this ss.1.8 shall be conclusive in the absence of manifest error.
Such certificate shall set forth the nature of the occurrence
giving rise to such compensation, the additional amount or
amounts to be paid to the Bank hereunder and the method by which
such amounts are determined. In determining any such amount, the
Bank may use any reasonable averaging and attribution methods.
(iv) No failure on the part of the Bank to demand compensation on
any one occasion shall constitute a waiver of its right to demand
such compensation on any other occasion and no failure on the
part of the Bank to deliver any Bank Certificate in a timely
manner shall in any way reduce any obligation of the Borrower to
the Bank under this ss.1.8.
1.9. Illegality or Impossibility. Notwithstanding any other provision of
this letter agreement, if the introduction of or any change in or in the
interpretation or administration of any law or regulation applicable to the Bank
or the Bank's activities in the London interbank market shall make it unlawful,
or any central bank or other governmental authority having jurisdiction over the
Bank or the Bank's activities in the London interbank market shall assert that
it is unlawful, or otherwise make it impossible, for the Bank to perform its
obligations hereunder to make LIBOR Loans or to continue to fund or maintain
LIBOR Loans, then on notice thereof and demand therefor by the Bank to the
Borrower, (i) the obligation of the Bank to fund LIBOR Loans shall terminate and
(ii) all affected LIBOR Loans shall be deemed to have been converted into
Floating Rate Loans (with the Borrower to be responsible for any amount payable
under ss.1.7 as a consequence of such conversion) at the last day on which such
LIBOR Loans may legally remain outstanding. Except as expressly provided in the
immediately preceding sentence, no LIBOR Loan may be converted into a Floating
Rate Loan prior to the end of the Interest Period applicable to such LIBOR Loan.
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1.10. Advances and Payments. The proceeds of all Term Loans shall be
credited by the Bank to a general deposit account maintained by the Borrower
with the Bank. The proceeds of each Term Loan will be used by the Borrower
solely to pay or reimburse acquisition costs of Qualifying Equipment and/or
Qualifying Leasehold Improvements.
The Bank may charge any general deposit account of the Borrower at the Bank
with the amount of all payments of interest, principal and other sums due, from
time to time, under this letter agreement and/or the Term Note; and will
thereafter notify the Borrower of the amount so charged. The failure of the Bank
so to charge any account or to give any such notice shall not affect the
obligation of the Borrower to pay interest, principal or other sums as provided
herein or in the Term Note.
Whenever any payment to be made to the Bank hereunder or under the Term
Note shall be stated to be due on a day which is not a Business Day, such
payment may be made on the next succeeding Business Day, and interest payable on
each such date shall include the amount thereof which shall accrue during the
period of such extension of time. All payments by the Borrower hereunder and/or
in respect of the Term Note shall be made net of any Impositions or taxes and
without deduction, set-off or counterclaim, notwithstanding any claim which the
Borrower may now or at any time hereafter have against the Bank. All payments of
interest, principal and any other sum payable hereunder and/or under the Term
Note shall be made to the Bank, in lawful currency of the United States in
immediately available funds, at its office at 100 Federal Street, Boston, MA
02110 or to such other address as the Bank may from time to time direct. All
payments received by the Bank after 2:00 p.m. on any day shall be deemed
received as of the next succeeding Business Day. All monies received by the Bank
shall be applied first to fees, charges, costs and expenses payable to the Bank
under this letter agreement, the Term Note and/or any of the other Loan
Documents, next to interest then accrued on account of any Term Loans and only
thereafter to principal of the Term Loans.
1.11. Conditions to Advance. Prior to the making of the initial Term Loan,
the Borrower shall deliver to the Bank duly executed copies of this letter
agreement, the Security Agreement, the Term Note and the documents and other
items listed on the Closing Agenda delivered herewith by the Bank to the
Borrower, all of which, as well as all legal matters incident to the
transactions contemplated hereby, shall be satisfactory in form and substance to
the Bank and its counsel.
Without limiting the foregoing, any Term Loan (including the initial Term
Loan) is subject to the further conditions precedent that on the date on which
such Term Loan is made (and after giving effect thereto):
(a) All statements, representations and warranties of the Borrower
made in this letter agreement and/or in the Security Agreement shall
continue to be correct in all material respects as of the date of such Term
Loan.
(b) All covenants and agreements of the Borrower contained herein
and/or in any of the other Loan Documents shall have been complied with in
all material respects on and as of the date of such Term Loan.
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(c) No event which constitutes, or which with notice or lapse of time
or both could constitute, an Event of Default shall have occurred and be
continuing.
(d) No other material adverse change shall have occurred in the
financial condition of the Borrower from that disclosed in the financial
statements then most recently furnished to the Bank.
Each request by the Borrower for any Term Loan, and each acceptance by the
Borrower of the proceeds of any Term Loan, will be deemed a representation and
warranty by the Borrower that at the date of such Term Loan and after giving
effect thereto all of the conditions set forth in the foregoing clauses (a)-(d)
of this ss.1.11 will be satisfied.
Section 1.12. Rate Adjustment. This letter agreement contemplates that the
Applicable Rate Increment will be adjusted upon each change in Compliance Level
(hereinafter defined). As used herein, (i) the term "Rate Adjustment Date" will
mean the 45th day after the close of each fiscal quarter of the Borrower, the
first such Rate Adjustment Date being November 15, 1999, and (ii) as to each
Rate Adjustment Date, the relevant "Adjustment Measurement Date" will be the
fiscal quarter-end immediately preceding such Rate Adjustment Date. The
Compliance Level will be determined on each Rate Adjustment Date, based on the
Borrower's Debt Service Coverage Ratio determined as at the Adjustment
Measurement Date relevant thereto and (except as otherwise provided below) will
remain in effect until (but not including) the next following Rate Adjustment
Date. For the purposes of this letter agreement, the Borrower will be deemed to
be in Level One Compliance as at any Rate Adjustment Date if and only if the
Borrower's Debt Service Coverage Ratio as at the relevant Adjustment Measurement
Date is greater than or equal to 1.5 to 1. The Borrower will be deemed to be in
Level Two Compliance as at any Rate Adjustment Date if the Borrower is not in
Level One Compliance as at such Rate Adjustment Date. The Compliance Level to
take effect on each Rate Adjustment Date (including, without limitation, that
Rate Adjustment Date which falls in the first quarter of each fiscal year of the
Borrower) will be determined based on the unaudited consolidated financial
statements of the Borrower as at the relevant Adjustment Measurement Date
furnished pursuant to clause (ii) of ss.3.6; provided that if the audited annual
consolidated financial statements of the Borrower (when received by the Bank
pursuant to clause (i) of ss.3.6) indicate that as at any Adjustment Measurement
Date which is a fiscal year-end the Borrower's Debt Service Coverage Ratio, as
evidenced by said audited financial statements (the "Audited Q4 Debt Service
Coverage Ratio"), was different from that Debt Service Coverage Ratio (the
"Unaudited Q4 Debt Service Coverage Ratio") which had been shown on the
management-generated financial statements theretofore delivered to the Bank
pursuant to clause (ii) of ss.3.6 with respect to such Adjustment Measurement
Date and the difference is such that the Audited Q4 Debt Service Coverage Ratio
would result in a Compliance Level different from that calculated with reference
to the Unaudited Q4 Debt Service Coverage Ratio, then, promptly after the
relevant audited financial statements have been received by the Bank, (i) the
Compliance Level will be adjusted to reflect the Audited Q4 Debt Service
Coverage Ratio and (ii) as applicable, either the Borrower will pay to the Bank
(in the case of a decrease in the Debt Service Coverage Ratio) an amount which
reflects the additional interest which the Bank would have received for the
period beginning on the relevant Rate Adjustment Date and continuing through the
date of such adjustment if the lower Debt Service Coverage Ratio had been in
effect, or (in the case of an
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increase in the Debt Service Coverage Ratio) the Bank will pay to the Borrower
or will credit to the next following interest payment or payments an amount
equal to the excess interest which the Bank actually received for the period
beginning on the relevant Rate Adjustment Date and continuing through the date
of such adjustment, "excess interest" being deemed to mean for the purposes of
this paragraph, the result, if positive, of (x) the interest on the Term Note
actually received by the Bank for such period minus (y) the interest on the Term
Note which would have been received by the Bank for such period had the
Compliance Level corresponding to the Audited Q4 Debt Service Coverage Ratio
been in effect throughout such period. Further, and notwithstanding anything
provided above in this ss.1.12, if the Borrower's financial statements for any
fiscal quarter are for any reason not timely delivered to the Bank, the Borrower
will be deemed to be in Level Two Compliance unless and until such financial
statements are so delivered to the Bank, at which time the Compliance Level will
be determined based on such financial statements and the Applicable Rate
Increment will be adjusted (if the Compliance Level so determined is not Level
Two Compliance), such adjustment to be retroactive to the preceding Rate
Adjustment Date. No rate adjustment provided for herein will be deemed to excuse
or waive any default resulting from the failure by the Borrower to comply with
any other provision of this letter agreement (including, without limitation,
ss.3.9 of this letter agreement and, in the event of any such default, the Bank
will have all of its rights and remedies described in Article V below consequent
thereon. In any event, the Borrower will be deemed to be in Level Two Compliance
from the date of this letter agreement to November 15, 1999, at which date the
Compliance Level will be determined on the basis of the Debt Service Coverage
Ratio as at the then relevant Adjustment Measurement Date (i.e., September 30,
1999).
II. REPRESENTATIONS AND WARRANTIES
2.1. Representations and Warranties. In order to induce the Bank to enter
into this letter agreement and to make Term Loans hereunder, the Borrower
warrants and represents to the Bank as follows:
(a) The Borrower is a corporation duly organized, validly existing and
in good standing under the laws of Delaware. The Borrower has full
corporate power to own its property and conduct its business as now
conducted and as proposed to be conducted, to grant the security interests
contemplated by the Security Agreement and to enter into and perform this
letter agreement and the other Loan Documents. The Borrower is duly
qualified to do business and in good standing in Massachusetts and in each
other jurisdiction in which the Borrower maintains any plant, office,
warehouse or other facility and in each other jurisdiction where the
failure so to qualify could (singly or in the aggregate with all other such
failures) have a material adverse effect on the financial condition,
business or prospects of the Borrower, all such jurisdictions being listed
on item 2.1(a) of the attached Disclosure Schedule. At the date hereof, the
Borrower has no Subsidiaries, except as shown on said item 2.1(a). The
Borrower is not a member of any partnership or joint venture.
(b) At the date of this letter agreement, no Person is known by the
Borrower to own, of record and/or beneficially, more than 5% of the
outstanding shares of any class of the Borrower's capital stock, except as
set forth on item 2.1(b) of the attached Disclosure Schedule.
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(c) The execution, delivery and performance by the Borrower of this
letter agreement and each of the other Loan Documents have been duly
authorized by all necessary corporate and other action and do not and will
not:
(i) violate any provision of, or require as a prerequisite to
effectiveness any filing (other than filings under the Uniform
Commercial Code), registration, consent or approval under, any law,
rule, regulation, order, writ, judgment, injunction, decree,
determination or award presently in effect having applicability to the
Borrower;
(ii) violate any provision of the charter or by-laws of the
Borrower, or result in a breach of or constitute a default or require
any waiver or consent under any indenture or loan or credit agreement
or any other material agreement, lease or instrument to which the
Borrower is a party or by which the Borrower or any of its properties
may be bound or require any other consent of any Person; or
(iii) result in, or require, the creation or imposition of any
lien, security interest or other encumbrance (other than in favor of
the Bank), upon or with respect to any of the properties now owned or
hereafter acquired by the Borrower.
(d) This letter agreement and each of the other Loan Documents has
been duly executed and delivered by the Borrower and each is a legal, valid
and binding obligation of the Borrower, enforceable against the Borrower in
accordance with its respective terms.
(e) Except as described on item 2.1(e) of the attached Disclosure
Schedule, there are no actions, suits, proceedings or investigations
pending or, to the knowledge of the Borrower, threatened by or against the
Borrower or any Subsidiary of the Borrower before any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic
or foreign, which could hinder or prevent the consummation of the
transactions contemplated hereby or call into question the validity of this
letter agreement or any of the other Loan Documents or any action taken or
to be taken in connection with the transactions contemplated hereby or
thereby or which in any single case or in the aggregate may result in any
material adverse change in the business, prospects, condition, affairs or
operations of the Borrower.
(f) The Borrower is not in violation of any term of its charter or
by-laws as now in effect. Neither the Borrower nor any Subsidiary of the
Borrower is in material violation of any term of any mortgage, indenture or
judgment, decree or order, or any other material instrument, contract or
agreement to which it is a party or by which any of its property is bound.
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(g) The Borrower has filed (and has caused each Subsidiary of the
Borrower to file) all federal, foreign, state and local tax returns,
reports and estimates required to be filed by the Borrower or any such
Subsidiary. All such filed returns, reports and estimates are proper and
accurate and the Borrower (or the Subsidiary concerned, as the case may be)
has paid all taxes, assessments, impositions, fees and other governmental
charges required to be paid in respect of the periods covered by such
returns, reports or estimates. No deficiencies for any tax, assessment or
governmental charge have been asserted or assessed, and the Borrower knows
of no material tax liability or basis therefor.
(h) The Borrower is in compliance with (and each Subsidiary of the
Borrower is in compliance with) all requirements of law, federal, foreign,
state and local, and all requirements of all governmental bodies or
agencies having jurisdiction over it, the conduct of its business, the use
of its properties and assets, and all premises occupied by it, failure to
comply with any of which could (singly or in the aggregate with all other
such failures) have a material adverse effect upon the assets, business,
financial condition or prospects of the Borrower. Without limiting the
foregoing, the Borrower has all the material franchises, licenses, leases,
permits, certificates and authorizations needed for the conduct of its
business and the use of its properties and all premises occupied by it, as
now conducted, owned and used and as proposed to be conducted, owned and
used.
(i) The audited annual financial statements of the Borrower as at
December 31, 1998 and the quarterly financial statements of the Borrower as
at June 30, 1999 (collectively, the "Financial Statements"), each
heretofore delivered to the Bank, are complete and accurate and fairly
present the financial condition of the Borrower as at the dates thereof and
for the periods covered thereby. The Borrower does not have any liability,
contingent or otherwise, not disclosed in the aforesaid financial
statements or in any notes thereto that could materially affect the
financial condition of the Borrower. Since December 31, 1998, except as
indicated in the Financial Statements, there has been no material adverse
development in the business, condition or prospects of the Borrower, and
the Borrower has not entered into any material transaction other than in
the ordinary course.
(j) The principal place of business and chief executive offices of the
Borrower are located at 150 Dan Road, Canton, MA 02021. The books and
records of the Borrower are located at said address. Except as described on
item 2.1(j) of the attached Disclosure Schedule, no assets of the Borrower
are presently located at any other address. Said item 2.1(j) of the
attached Disclosure Schedule also sets forth the names and addresses of all
record owners of any premises where Collateral may be located.
(k) To the Borrower's knowledge, the Borrower owns or has a valid
right to use all of the patents, licenses, copyrights, trademarks and trade
names now being used or necessary to conduct its business. To the
Borrower's knowledge, the conduct of the Borrower's business as now
operated does not conflict with valid patents, copyrights, trademarks or
trade names of others in any manner that could materially adversely affect
the business, prospects, assets or condition, financial or otherwise, of
the Borrower.
(l) To the Borrower's knowledge, none of the executive officers or key
employees of the Borrower is subject to any agreement in favor of anyone
other than the
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Borrower which limits or restricts that person's right to engage in the
type of business activity conducted or proposed to be conducted by the
Borrower or which grants to anyone other than the Borrower any rights in
any inventions or other ideas susceptible to legal protection developed or
conceived by any such officer or key employee.
(m) The Borrower is not a party to any contract or agreement which now
has or, as far as can be reasonably foreseen by the Borrower at the date
hereof, may have a material adverse effect on the financial condition,
business, prospects or properties of the Borrower.
(n) The Borrower has reviewed the hardware and software which it uses
in its business for "Year 2000" compliance and reasonably believes that
such hardware and software will continue to function in the manner intended
without any interruption of service or other difficulty resulting from the
"Year 2000 problem" that would have a material adverse effect on the
financial condition, business, prospects or properties of the Borrower. The
Borrower will, at the request of the Bank, provide such reports and other
information as the Bank may reasonably request in order to evidence such
Year 2000 compliance.
III. AFFIRMATIVE COVENANTS AND REPORTING REQUIREMENTS
Without limitation of any other covenants and agreements contained herein
or elsewhere, the Borrower agrees that so long as all or any portion of any Term
Loan is outstanding or any commitment on the part of the Bank to make any Term
Loan is in effect:
3.1. Legal Existence; Qualification; Compliance. The Borrower will maintain
(and will cause each Subsidiary of the Borrower to maintain) its corporate
existence and good standing in the jurisdiction of its incorporation. The
Borrower will remain qualified to do business and in good standing in
Massachusetts. The Borrower will qualify to do business and will remain
qualified and in good standing (and the Borrower will cause each Subsidiary of
the Borrower to qualify and remain qualified and in good standing) in each other
jurisdiction where the Borrower or such Subsidiary, as the case may be,
maintains any plant, office, warehouse or other facility and in each other
jurisdiction where such qualification is required and where the failure so to
qualify could (singly or in the aggregate with all other such failures) have a
material adverse effect on the financial condition, business or prospects of the
Borrower or any such Subsidiary. The Borrower will comply with (and will cause
each Subsidiary of the Borrower to comply with) its charter documents and
by-laws. The Borrower will comply with (and will cause each Subsidiary of the
Borrower to comply with) all applicable laws, rules and regulations (including,
without limitation, ERISA and those relating to environmental protection) other
than (i) laws, rules or regulations the validity or applicability of which the
Borrower or such Subsidiary shall be contesting in good faith by proceedings
which serve as a matter of law to stay the enforcement thereof and (ii) those
laws, rules and regulations the failure to comply with any of which could not
(singly or in the aggregate) have a material adverse effect on the financial
condition, business or prospects of the Borrower or any such Subsidiary.
3.2. Maintenance of Property; Insurance. The Borrower will maintain and
preserve (and will cause each Subsidiary of the Borrower to maintain and
preserve) all of its properties in good working order and condition, making all
necessary repairs thereto and replacements thereof. The Borrower will maintain
all such insurance as may be required under the Security
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Agreement and will also maintain, with financially sound and reputable insurers,
insurance with respect to its property and business against such liabilities,
casualties and contingencies and of such types and in such amounts as shall be
reasonably satisfactory to the Bank from time to time and in any event all such
insurance as may from time to time be customary for companies conducting a
business similar to that of the Borrower in similar locales.
3.3. Payment of Taxes and Charges. The Borrower will pay and discharge (and
will cause each Subsidiary of the Borrower to pay and discharge) all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or property, including, without limitation, taxes, assessments, charges
or levies relating to real and personal property, franchises, income,
unemployment, old age benefits, withholding, or sales or use, prior to the date
on which penalties would attach thereto, and all lawful claims (whether for any
of the foregoing or otherwise) which, if unpaid, might give rise to a lien upon
any property of the Borrower or any such Subsidiary, except any of the foregoing
which is being contested in good faith and by appropriate proceedings which
serve as a matter of law to stay the enforcement thereof and for which the
Borrower has established and is maintaining adequate reserves. The Borrower will
pay, and will cause each of its Subsidiaries to pay, in a timely manner, all
lease obligations, material trade debt, purchase money obligations and equipment
lease obligations and all of its other material Indebtedness. The Borrower will
perform and fulfill all material covenants and agreements under any leases of
real estate, agreements relating to purchase money debt, equipment leases and
other material contracts. The Borrower will maintain in full force and effect,
and comply with the terms and conditions of, all permits, permissions and
licenses necessary or desirable for its business.
3.4. Accounts. The Borrower will maintain its principal operating accounts
with the Bank.
3.5. Conduct of Business. The Borrower will conduct, in the ordinary
course, the business in which it is presently engaged. The Borrower will not,
without the prior written consent of the Bank, directly or indirectly (itself or
through any Subsidiary) enter into any other lines of business, businesses or
ventures outside of the fields in which the Borrower conducts its business at
the date of this letter agreement or any substantially related businesses.
3.6. Reporting Requirements. The Borrower will furnish to the Bank:
(i) Within 90 days after the end of each fiscal year of the Borrower,
a copy of the Borrower's Annual Report on Form 10-K for such fiscal year,
as filed with the SEC, and (whether or not contained in such an Annual
Report on Form 10-K) all of the following: the annual audit report for such
fiscal year for the Borrower, including therein consolidated and
consolidating balance sheets of the Borrower and Subsidiaries as at the end
of such fiscal year and related consolidated and consolidating statements
of income, stockholders' equity and cash flow for the fiscal year then
ended. The annual consolidated financial statements shall be certified by
independent public accountants selected by the Borrower and reasonably
acceptable to the Bank, such certification to be in such form as is
generally recognized as "unqualified". The Borrower will also deliver to
the Bank, within 90 days after the commencement of each fiscal year,
projections (including balance sheet and income statement projections) for
the Borrower for such
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fiscal year, prepared by the Borrower's management and approved by the
Borrower's Chief Financial Officer, such projections to be in such detail
as is reasonably satisfactory to the Bank.
(ii) Within 45 days after the end of each fiscal quarter of the
Borrower, a copy of the Borrower's Quarterly Report on Form 10-Q for such
fiscal quarter, as filed with the SEC, and (whether or not contained in
such a Quarterly Report on Form 10-Q) all of the following: consolidated
and consolidating balance sheets of the Borrower and Subsidiaries and
related consolidated and consolidating statements of income and cash flow,
unaudited but prepared in accordance with generally accepted accounting
principles consistently applied fairly presenting the financial condition
of the Borrower and Subsidiaries as at the dates thereof and for the
periods covered thereby (except that such quarterly statements need not
contain notes to the financial statements) and certified as complete by the
chief financial officer of the Borrower, such balance sheets to be as at
the end of such fiscal quarter and such statements of income and cash flow
to be for such fiscal quarter and for the fiscal year to date, in each case
together with a comparison to the results for the corresponding fiscal
period of the immediately prior fiscal year.
(iii) At the time of delivery of each annual or quarterly report or
financial statement of the Borrower, a certificate executed by the chief
financial officer of the Borrower stating that he or she has reviewed this
letter agreement and the other Loan Documents and has no knowledge of any
Default or Event of Default or, if he or she has such knowledge, specifying
each such Default or Event of Default and the nature thereof. Each
financial statement given as at the end of any fiscal quarter of the
Borrower will also set forth the calculations necessary to evidence
compliance with ss.ss.3.7-3.9.
(iv) Promptly after receipt, a copy of all audits or reports submitted
to the Borrower by independent public accountants in connection with any
annual, special or interim audits of the books of the Borrower and any
"management letter" submitted by such accountants.
(v) As soon as possible and in any event within ten (10) days after
the occurrence of any Default or Event of Default, the statement of the
Borrower setting forth details of each such Default or Event of Default and
the action which the Borrower proposes to take with respect thereto.
(vi) Promptly after the commencement thereof, notice of all actions,
suits and proceedings before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
to which the Borrower or any Subsidiary of the Borrower is a party which,
if determined adversely to the Borrower or such Subsidiary, could
reasonably be expected to have a material adverse effect on the financial
condition, business or prospects of the Borrower or such Subsidiary.
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(vii) Promptly upon filing any registration statement, a copy of same.
(viii) As long as the Borrower has a class of securities which is
publicly traded, one copy of each periodic or current report of the
Borrower filed with the SEC or any successor agency, of each press release
or other communication disseminated to the public generally, and of each
annual report, proxy statement and other communication sent by the Borrower
to shareholders or other securityholders generally, such copy to be
provided to the Bank promptly upon such filing with the SEC, such public
dissemination or such communication with shareholders or securityholders,
as the case may be.
(ix) Promptly after the Borrower has knowledge thereof, written notice
of any development or circumstance which may reasonably be expected to have
a material adverse effect on the Borrower or its business, properties,
assets, Subsidiaries or condition, financial or otherwise.
(x) Promptly upon request, such other information respecting the
financial condition, operations, receivables, inventory, machinery or
equipment of the Borrower or any Subsidiary as the Bank may from time to
time reasonably request.
3.7. Capital Base. The Borrower will maintain, as at the end of each fiscal
quarter of the Borrower (commencing with its results as at September 30, 1999),
a consolidated Capital Base of not less than $10,000,000.
3.8. Liquidity. The Borrower will maintain, as at the end of each fiscal
quarter of Borrower (commencing with its results as at September 30, 1999), a
ratio of Net Quick Unrestricted Assets to Senior Debt, which ratio shall be not
less than 1.5 to 1.
3.9. Debt Service Coverage. As used herein, "Determination Date" means the
last day of each fiscal quarter of the Borrower. The Borrower will maintain on a
consolidated basis, as at each Determination Date (commencing with its results
as at September 30, 1999), a Debt Service Coverage Ratio of not less than 2.0 to
1. As used herein, the "Debt Service Coverage Ratio", as determined as at any
Determination Date, means the ratio of (x) EBITDA of the Borrower and
Subsidiaries for the period of the four fiscal quarters ending on such
Determination Date to (y) the total of (1) all interest on any Indebtedness
(whether senior or subordinated, long-term or current), which interest was paid
or payable or accrued by the Borrower or any Subsidiary of the Borrower during
such four-quarter period ending on such Determination Date, plus (2) the
aggregate current maturities of long-term debt of the Borrower and Subsidiaries
outstanding at such Determination Date, plus (3) the total Capital Expenditures
incurred by the Borrower and/or any of its Subsidiaries and not financed by the
Borrower as permitted under this letter agreement during the four-quarter period
ending on such Determination Date. Notwithstanding the foregoing, the Borrower
need not comply with the foregoing provisions of this ss.3.9 as at any
Determination Date if the Borrower's Unencumbered Cash Balance as at such
Determination Date is at least equal to the then Cash Balance Requirement. As
used herein, "Cash Balance Requirement", as determined at any date, means the
lesser of (x) 200% of the aggregate principal amount of the Term Loans
outstanding at that date or (y) $10,000,000; provided, however, that the Cash
Balance Requirement shall never be less than $5,000,000.
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3.10. Books and Records. The Borrower will maintain (and will cause each of
its Subsidiaries to maintain) complete and accurate books, records and accounts
which will at all times accurately and fairly reflect all of its transactions in
accordance with generally accepted accounting principles consistently applied.
The Borrower will, at any reasonable time and from time to time upon reasonable
notice and during normal business hours (and without any necessity for notice
following the occurrence of an Event of Default), permit the Bank, and any
agents or representatives thereof, to examine and make copies of and take
abstracts from the records and books of account of, and visit the properties of
the Borrower and any of its Subsidiaries, and to discuss its affairs, finances
and accounts with its officers, directors and/or independent accountants, all of
whom are hereby authorized and directed to cooperate with the Bank in carrying
out the intent of this ss.3.10. Each financial statement of the Borrower
hereafter delivered pursuant to this letter agreement will be complete and
accurate and will fairly present the financial condition of the Borrower as at
the date thereof and for the periods covered thereby; provided that interim
financial statements may be subject to normal recurring year-end adjustments.
IV. NEGATIVE COVENANTS
Without limitation of any other covenants and agreements contained herein
or elsewhere, the Borrower agrees that so long as all or any portion of any Term
Loan is outstanding or any commitment on the part of the Bank to make any Term
Loan is in effect:
4.1. Indebtedness. Without the prior written consent of the Bank, the
Borrower will not create, incur, assume or suffer to exist any Indebtedness (nor
allow any of its Subsidiaries to create, incur, assume or suffer to exist any
Indebtedness), except for:
(i) Indebtedness owed to the Bank, including, without limitation, the
Indebtedness represented by the Term Note;
(ii) Indebtedness of the Borrower or any Subsidiary for taxes,
assessments and governmental charges or levies which are not yet due and
payable or thereafter can be paid without interest or penalty or are being
contested in good faith and by appropriate proceedings which serve as a
matter of law to stay any enforcement thereof and as to which adequate
reserves are maintained;
(iii) unsecured current liabilities of the Borrower or any Subsidiary
(other than for money borrowed or for purchase money Indebtedness with
respect to fixed assets) incurred upon customary terms in the ordinary
course of business;
(iv) purchase money Indebtedness (including, without limitation,
Indebtedness in respect of capitalized equipment leases) hereafter incurred
to equipment vendors, equipment lessors and other Persons providing
purchase money financing to the Borrower for equipment purchased or leased
by the Borrower for use in the Borrower's business; provided that the total
of Indebtedness permitted under this clause (iv) plus presently-existing
equipment financing permitted under clause (v) of this ss.4.1 will not
exceed $2,000,000 in the aggregate outstanding at any one time;
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(v) other Indebtedness (not described in any of clauses (i)-(iv)
above) existing at the date hereof, but only to the extent set forth on
item 4.1 of the attached Disclosure Schedule;
(vi) any guaranties or other contingent liabilities expressly
permitted pursuant toss.4.3;
(vii) Indebtedness which may now or hereafter be incurred by the
Borrower to purchase approximately 98 acres of real estate in Smithfield,
Rhode Island for $1,450,000;
(viii) Indebtedness under the 1999 Subordinated Notes; and
(ix) any additional Subordinated Debt incurred after the date hereof;
provided that the subordination provisions governing same are approved by
the Bank in writing (which approval may be given or withheld by the Bank in
its discretion) prior to the date when such additional Subordinated Debt is
incurred.
4.2. Liens. The Borrower will not create, incur, assume or suffer to exist
(nor allow any of its Subsidiaries to create, incur, assume or suffer to exist)
any mortgage, deed of trust, pledge, lien, security interest, or other charge or
encumbrance (including the lien or retained security title of a conditional
vendor) of any nature (collectively, "Liens"), upon or with respect to any of
its property or assets, now owned or hereafter acquired (including, without
limitation, any trustee process affecting any account of the Borrower with the
Bank), except that the foregoing restrictions shall not apply to:
(i) Liens for taxes, assessments or governmental charges or levies on
property of the Borrower or any of its Subsidiaries if the same shall not
at the time be delinquent or thereafter can be paid without interest or
penalty or are being contested in good faith and by appropriate proceedings
which serve as a matter of law to stay any enforcement thereof and as to
which adequate reserves are maintained;
(ii) Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar Liens arising in the ordinary course of
business for sums not yet due or which are being contested in good faith
and by appropriate proceedings which serve as a matter of law to stay the
enforcement thereof and as to which adequate reserves are maintained;
(iii) pledges or deposits under workmen's compensation laws,
unemployment insurance, social security, retirement benefits or similar
legislation;
(iv) Liens in favor of the Bank;
(v) Liens in favor of equipment vendors, equipment lessors and other
Persons securing purchase money Indebtedness to the extent permitted by
clauses (iv) or (v) of ss.4.1; provided that no such Lien will extend to
any property of the Borrower other than the specific items of equipment
financed;
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(vi) rights of the licensee under any commercially reasonable license
of technology or other intellectual property given by the Borrower to any
of the Borrower's customers in the ordinary course of its business;
(vii) any mortgage or other Lien securing the Indebtedness described
in clause (vii) of ss.4.1; provided that no such mortgage or other Lien
will encumber any property of the Borrower other than the Smithfield, Rhode
Island property described in said clause (vii) of ss.4.1; or
(viii) other Liens existing at the date hereof, but only to the extent
and with the relative priorities set forth on item 4.2 of the attached
Disclosure Schedule.
Without limitation of the other representations, warranties, covenants and
agreements of the Borrower set forth elsewhere in this letter agreement, the
Borrower (i) represents and warrants that neither the Borrower nor any of its
Subsidiaries is now a party to any Restrictive Agreement and (ii) agrees that
the Borrower will not enter into (nor permit any of its Subsidiaries to enter
into) any Restrictive Agreement, except that the Borrower may enter into a
Restrictive Agreement with the lessor of any equipment or with any Person
providing purchase money financing permitted by clause (iv) of ss.4.1 above;
provided that such Restrictive Agreement relates only to the particular item or
items of equipment so leased or financed. As used herein, a "Restrictive
Agreement" is any agreement, covenant, undertaking or understanding (other than
a commercially reasonable license of technology or other intellectual property
entered into by the Borrower in the ordinary course of its business) which could
have the effect of preventing the Borrower or any Subsidiary from granting a
Lien on any of its assets (including, without limitation, any of its
intellectual property) to the Bank.
4.3. Guaranties. The Borrower will not, without the prior written consent
of the Bank, assume, guarantee, endorse or otherwise become directly or
contingently liable (including, without limitation, liable by way of agreement,
contingent or otherwise, to purchase, to provide funds for payment, to supply
funds to or otherwise invest in any debtor or otherwise to assure any creditor
against loss) (and will not permit any of its Subsidiaries so to assume,
guaranty or become directly or contingently liable) in connection with any
indebtedness of any other Person, except (i) guaranties by endorsement for
deposit or collection in the ordinary course of business, and (ii) guaranties
existing at the date hereof and described on item 4.3 of the attached Disclosure
Schedule.
4.4. Dividends. The Borrower will not, without the prior written consent of
the Bank, make any distributions to its shareholders, pay any dividends (other
than dividends payable solely in capital stock of the Borrower) or redeem,
purchase or otherwise acquire, directly or indirectly any of its capital stock,
except as expressly permitted by the next following sentence. Notwithstanding
the foregoing, the Borrower may, without being deemed to be in violation of this
ss.4.4, redeem shares of its existing Preferred Stock as and to the extent
required by the Borrower's Certificate of Incorporation; provided that at the
time of each such redemption and after giving effect thereto (1) there is not
(nor will there result therefrom) any Default or Event of Default and (2) in any
event the Borrower's Unencumbered Cash Balance would not be less than the then
applicable Cash Balance Requirement.
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4.5. Loans and Advances. The Borrower will not make (and will not permit
any Subsidiary to make) any loans or advances to any Person, including, without
limitation, the Borrower's directors, officers and employees, except advances to
such directors, officers or employees with respect to expenses incurred by them
in the ordinary course of their duties and advances against salary, all of which
loans and advances will not exceed, in the aggregate, $250,000 outstanding at
any one time.
4.6. Investments. The Borrower will not, without the Bank's prior written
consent, invest in, hold or purchase any stock or securities of any Person (nor
will the Borrower permit any of its Subsidiaries to invest in, purchase or hold
any such stock or securities) except: (i) readily marketable direct obligations
of, or obligations guarantied by, the United States of America or any agency
thereof; (ii) other investment grade debt securities; (iii) mutual funds, the
assets of which are primarily invested in items of the kinds described in the
foregoing clauses (i) and (ii) of this ss.4.6; (iv) commercial paper rated not
less than A-1/P-1; (v) deposits with or certificates of deposit issued by the
Bank and any other obligations of the Bank or the Bank's parent; (vi) deposits
with or certificates of deposit issued by any other bank organized in the United
States having capital in excess of $100,000,000; (vii) any money market
accounts; (viii) existing investments described in Part A of item 4.6 of the
attached Disclosure Schedule and investments which may hereafter be acquired by
the Borrower in compliance with Part B of said item 4.6; (ix) investments in any
Subsidiaries now existing or hereafter created by the Borrower pursuant to
ss.4.7 below; provided that in any event the Tangible Net Worth of the Borrower
alone (exclusive of its investment in Subsidiaries and any debt owed by any
Subsidiary to the Borrower) will not be less than 80% of the consolidated
Tangible Net Worth of the Borrower and Subsidiaries; and (x) Permitted
Acquisitions (provided that any such Permitted Acquisition which involves the
creation or acquisition of a Subsidiary must also satisfy the test set forth in
the proviso contained in clause (ix) above).
4.7. Subsidiaries; Acquisitions. The Borrower will not, without the prior
written consent of the Bank, make any acquisition of all or substantially all of
the stock of any other Person or of all or substantially all of the assets of
any other Person, other than pursuant to a Permitted Acquisition which also
complies with the proviso contained in clause (ix) of ss.4.6. The Borrower will
not become a partner in any partnership pursuant to any arrangement which
permits a third party to incur Indebtedness on behalf of the Borrower without
the Borrower's consent or to commit any assets of the Borrower without the
Borrower's consent. The Borrower will promptly inform the Bank if it forms any
Subsidiaries.
4.8. Merger. The Borrower will not, without the prior written consent of
the Bank, merge or consolidate with any Person (other than a merger pursuant to
a Permitted Acquisition in which the Borrower is the surviving corporation), or
sell, lease, transfer or otherwise dispose of (whether in one or more
transactions) any material portion of its assets (including, without limitation,
any material portion of its intellectual property), other than (i) the sale of
inventory in the ordinary course; (ii) licensing of any of its intellectual
property in the ordinary course of Borrower's business to another Person on
commercially reasonable terms; or (iii) transfer of any of the Borrower's
intellectual property for reasonable consideration to a research and development
entity in which the Borrower participates as an equity owner.
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4.9. Affiliate Transactions. The Borrower will not, without the prior
written consent of the Bank, enter into any transaction, including, without
limitation, the purchase, sale or exchange of any property or the rendering of
any service, with any affiliate of the Borrower, except as permitted under
ss.4.5 or in the ordinary course and pursuant to the reasonable requirements of
the Borrower's business and upon fair and reasonable terms no less favorable to
the Borrower than would be obtained in a comparable arms'-length transaction
with any Person not an affiliate; provided that nothing in this ss.4.9 shall be
deemed to restrict the payment of salary or other similar payments to any
officer or director of the Borrower at a level consistent with the salary and
other payments being paid at the date of this letter agreement and heretofore
disclosed in writing to the Bank, nor to prevent the hiring of additional
officers at a salary level consistent with industry practice, nor to prevent
reasonable periodic increases in salary or benefits. For the purposes of this
letter agreement, "affiliate" means any Person which, directly or indirectly,
controls or is controlled by or is under common control with the Borrower; any
officer or director of the Borrower; any Person owning of record or
beneficially, directly or indirectly, 5% or more of any class of capital stock
of the Borrower or 5% or more of any class of capital stock or other equity
interest having voting power (under ordinary circumstances) of any of the other
Persons described above; and any member of the immediate family of any of the
foregoing. "Control" means possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of any Person,
whether through ownership of voting equity, by contract or otherwise.
4.10. Change of Address, etc. The Borrower will not change its corporate
name or legal structure, nor will the Borrower change its chief executive
offices or principal place of business from the premises described in ss.2.1(j),
nor will the Borrower keep any Collateral at any location other than at those
premises described in ss.2.1(j) without, in each instance, giving the Bank at
least 30 days' prior written notice and executing and delivering all such
financing statements, certificates and other documentation as the Bank may
reasonably request in order to maintain the perfection and priority of the
security interests granted or intended to be granted pursuant to the Security
Agreement. The Borrower will not change its fiscal year or materially change its
methods of financial reporting unless, in each instance, prior written notice of
such change is given to the Bank and prior to such change the Borrower enters
into amendments to this letter agreement in form and substance reasonably
satisfactory to the Bank in order to preserve unimpaired the rights of the Bank
and the obligations of the Borrower hereunder.
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4.11. Hazardous Waste. Except as provided below, the Borrower will not
dispose of or suffer or permit to exist any hazardous material or oil on any
site or vessel owned, occupied or operated by the Borrower or any Subsidiary of
the Borrower, nor shall the Borrower store (or permit any Subsidiary to store)
on any site or vessel owned, occupied or operated by the Borrower or any such
Subsidiary, or transport or arrange the transport of, any hazardous material or
oil (the terms "hazardous material", "oil", "site" and "vessel", respectively,
being used herein with the meanings given those terms in Mass. Gen. Laws, Ch.
21E or any comparable terms in any comparable statute in effect in any other
relevant jurisdiction). The Borrower shall provide the Bank with written notice
of (i) the intended storage or transport of any hazardous material or oil by the
Borrower or any Subsidiary of the Borrower, (ii) any potential or known release
or threat of release of any hazardous material or oil at or from any site or
vessel owned, occupied or operated by the Borrower or any Subsidiary of the
Borrower, and (iii) any incurrence of any expense or loss by any government or
governmental authority in connection with the assessment, containment or removal
of any hazardous material or oil for which expense or loss the Borrower or any
Subsidiary of the Borrower may be liable. Notwithstanding the foregoing, the
Borrower and its Subsidiaries may use, store and transport, and need not notify
the Bank of the use, storage or transportation of, (x) oil in reasonable
quantities, as fuel for heating of their respective facilities or for vehicles
or machinery used in the ordinary course of their respective businesses and (y)
hazardous materials that are solvents, cleaning agents or other materials used
in the ordinary course of the respective business operations of the Borrower and
its Subsidiaries in reasonable quantities, as long as in any case the Borrower
or the Subsidiary concerned (as the case may be) has obtained and maintains in
effect any necessary governmental permits, licenses and approvals, complies with
all requirements of applicable federal, state and local law relating to such
use, storage or transportation, follows the protective and safety procedures
that a prudent businessperson conducting a business the same as or similar to
that of the Borrower or such Subsidiary (as the case may be) would follow, and
disposes of such materials (not consumed in the ordinary course) only through
licensed providers of hazardous waste removal services.
4.12. No Margin Stock. No proceeds of any Term Loan shall be used directly
or indirectly to purchase or carry any margin security.
4.13. Subordinated Debt. The Borrower will not directly or indirectly make
any optional or voluntary prepayment or purchase of Subordinated Debt or modify,
alter or add any provisions with respect to payment of Subordinated Debt. The
Borrower will not make any payment on account of any Subordinated Debt in
violation of the subordination agreement or subordination provisions governing
same.
V. DEFAULT AND REMEDIES
5.1. Events of Default. The occurrence of any one of the following events
shall constitute an Event of Default hereunder:
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(a) The Borrower shall fail to make any payment of principal of or
interest on the Term Note on or before the date when due; or
(b) Any representation or warranty of the Borrower contained herein
shall at any time prove to have been incorrect in any material respect when
made or any representation or warranty made by the Borrower in connection
with any Term Loan shall at any time prove to have been incorrect in any
material respect when made; or
(c) The Borrower shall default in the performance or observance of any
agreement or obligation under any of ss.ss.3.1, 3.3, 3.6, 3.7, 3.8 or 3.9
or any provision of Article IV; or
(d) The Borrower shall default in the performance of any other term,
covenant or agreement contained in this letter agreement and such default
shall continue unremedied for 30 days after written notice thereof shall
have been given to the Borrower; or
(e) Any default on the part of the Borrower or any Subsidiary of the
Borrower shall exist, and shall remain unwaived or uncured beyond the
expiration of any applicable notice and/or grace period, under any other
contract, agreement or undertaking now existing or hereafter entered into
with or for the benefit of the Bank (or any affiliate of the Bank); or
(f) Any default shall exist and remain unwaived or uncured with
respect to any Subordinated Debt of the Borrower or with respect to any
instrument evidencing, guaranteeing or otherwise relating to any such
Subordinated Debt, or any such Subordinated Debt shall not have been paid
when due, whether by acceleration or otherwise, or shall have been declared
to be due and payable prior to its stated maturity, or any event or
circumstance shall occur which permits, or with the lapse of time or the
giving of notice or both would permit, the acceleration of the maturity of
any Subordinated Debt by the holder or holders thereof; or
(g) Any default shall exist and remain unwaived or uncured with
respect to any other Indebtedness of the Borrower or any Subsidiary of the
Borrower for borrowed money or representing the deferred purchase price of
the property in excess of $100,000 in aggregate principal amount or with
respect to any instrument evidencing, guaranteeing, securing or otherwise
relating to any such Indebtedness, or any such Indebtedness in excess of
$100,000 in aggregate principal amount shall not have been paid when due,
whether by acceleration or otherwise, or shall have been declared to be due
and payable prior to its stated maturity, or any event or circumstance
shall occur which permits, or with the lapse of time or the giving of
notice or both would permit, the acceleration of the maturity of any such
Indebtedness by the holder of holders thereof; or
(h) The Borrower shall be dissolved, or the Borrower or any Subsidiary
of the Borrower shall become insolvent or bankrupt or shall cease paying
its debts as they mature or shall make an assignment for the benefit of
creditors, or a trustee, receiver or liquidator shall be appointed for the
Borrower or any Subsidiary of the Borrower or for a substantial part of the
property of the Borrower or any such Subsidiary, or bankruptcy,
reorganization, arrangement, insolvency or similar proceedings shall be
instituted by or against
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the Borrower or any such Subsidiary under the laws of any jurisdiction
(except for an involuntary proceeding filed against the Borrower or any
Subsidiary of the Borrower which is dismissed within 60 days following the
institution thereof); or
(i) Any execution or similar process shall be issued or levied against
any property of the Borrower or any Subsidiary and such execution or
similar process shall not be paid, stayed, released, vacated or fully
bonded within 10 days after its issue or levy; or
(j) The Borrower or any Subsidiary of the Borrower shall fail to meet
its minimum funding requirements under ERISA with respect to any employee
benefit plan (or other class of benefit which the PBGC has elected to
insure) or any such plan shall be the subject of termination proceedings
(whether voluntary or involuntary) and there shall result from such
termination proceedings a liability of the Borrower or any Subsidiary of
the Borrower to the PBGC which, in each case, in the reasonable opinion of
the Bank may have a material adverse effect upon the financial condition of
the Borrower or any such Subsidiary; or
(k) The Security Agreement or any other Loan Document shall for any
reason (other than due to payment in full of all amounts secured or
evidenced thereby or due to discharge in writing by the Bank) not remain in
full force and effect; or
(l) The security interest and liens of the Bank in and on any of the
Collateral covered or intended to be covered by the Security Agreement
shall for any reason (other than written release by the Bank or the Bank's
failure to file adequate and timely Uniform Commercial Code financing
statements or continuations or amendments thereof or the Bank's failure to
give value) not be fully perfected liens and security interests; or
(m) If, at any time, more than 50% of any class of voting stock of the
Borrower shall be held, of record and/or beneficially, by any Person or by
any "group" (as defined in the Securities Exchange Act of 1934, as amended,
and the regulations thereunder), other than as set forth on item 5.1(m) of
the attached Disclosure Schedule; or
(n) There shall occur any other material adverse change in the
condition (financial or otherwise), operations, properties, assets,
liabilities or earnings of the Borrower.
5.2. Rights and Remedies on Default. Upon the occurrence of any Event of
Default, in addition to any other rights and remedies available to the Bank
hereunder or otherwise, the Bank may exercise any one or more of the following
rights and remedies (all of which shall be cumulative):
(a) Declare the entire unpaid principal amount of the Term Note then
outstanding, all interest accrued and unpaid thereon and all other amounts
payable under this letter agreement, and all other Indebtedness of the
Borrower to the Bank, to be forthwith due and payable, whereupon the same
shall become forthwith due and payable, without presentment, demand,
protest or notice of any kind, all of which are hereby expressly waived by
the Borrower.
(b) Terminate the arrangements for Term Loans provided for by this
letter agreement.
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(c) Exercise all rights and remedies hereunder, under the Security
Agreement, under the Term Note and under each and any other agreement with
the Bank; and exercise all other rights and remedies which the Bank may
have under applicable law.
5.3. Set-off. In addition to any rights now or hereafter granted under
applicable law and not by way of limitation of any such rights, upon the
occurrence of any Event of Default, the Bank is hereby authorized at any time or
from time to time, without presentment, demand, protest or other notice of any
kind to the Borrower or to any other Person, all of which are hereby expressly
waived, to set off and to appropriate and apply any and all deposits and any
other Indebtedness at any time held or owing by the Bank or any affiliate
thereof to or for the credit or the account of the Borrower against and on
account of the obligations and liabilities of the Borrower to the Bank under
this letter agreement or otherwise, irrespective of whether or not the Bank
shall have made any demand hereunder and although said obligations, liabilities
or claims, or any of them, may then be contingent or unmatured and without
regard for the availability or adequacy of other collateral. As further security
for the Obligations, the Borrower also grants to the Bank a security interest
with respect to all its deposits and all securities or other property in the
possession of the Bank or any affiliate of the Bank from time to time, and, upon
the occurrence of any Event of Default, the Bank may exercise all rights and
remedies of a secured party under the Uniform Commercial Code. ANY AND ALL
RIGHTS TO REQUIRE THE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO
ANY OTHER COLLATERAL WHICH SECURES ANY OF THE OBLIGATIONS PRIOR TO THE EXERCISE
BY THE BANK OF ITS RIGHT OF SET-OFF UNDER THIS SECTION ARE HEREBY KNOWINGLY,
VOLUNTARILY AND IRREVOCABLY WAIVED.
VI. MISCELLANEOUS
6.1. Costs and Expenses. The Borrower agrees to pay, on demand, all
reasonable costs and expenses (including, without limitation, reasonable legal
fees) of the Bank in connection with the preparation, execution and delivery of
this letter agreement, the Security Agreement, the Term Note and all other
instruments and documents to be delivered in connection with any Term Loan and
any amendments or modifications of any of the foregoing, as well as the
reasonable costs and expenses (including, without limitation, the reasonable
fees and expenses of legal counsel) incurred by the Bank in connection with
preserving, enforcing or exercising, upon default, any rights or remedies under
this letter agreement, the Security Agreement, the Term Note and all other
instruments and documents delivered or to be delivered hereunder or in
connection herewith, all whether or not legal action is instituted. In addition,
the Borrower shall be obligated to pay any and all stamp and other taxes payable
or determined to be payable in connection with the execution and delivery of
this letter agreement, the Security Agreement, the Term Note and all other
instruments and documents to be delivered in connection with any Obligation. Any
fees, expenses or other charges which the Bank is entitled to receive from the
Borrower under this Section shall bear interest from the date of any demand
therefor until the date when paid at a rate per annum equal to the sum of (i)
one (1%) percent per annum plus (ii) the Floating Rate (but in no event in
excess of the maximum rate permitted by then applicable law).
6.2. Facility Fee. With respect to the Term Loans, the Borrower is paying
to the Bank, at the date of execution and delivery of this letter agreement, a
non-refundable facility fee in the
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amount of $25,000. The fee described in this Section is in addition to any
balances and fees required by the Bank or any of its affiliates in connection
with any other services now or hereafter made available to the Borrower.
6.3. Other Agreements. The provisions of this letter agreement are not in
derogation or limitation of any obligations, liabilities or duties of the
Borrower under any of the other Loan Documents or any other agreement with or
for the benefit of the Bank. No inconsistency in default provisions between this
letter agreement and any of the other Loan Documents or any such other agreement
will be deemed to create any additional grace period or otherwise derogate from
the express terms of each such default provision. No covenant, agreement or
obligation of the Borrower contained herein, nor any right or remedy of the Bank
contained herein, shall in any respect be limited by or be deemed in limitation
of any inconsistent or additional provisions contained in any of the other Loan
Documents or any such other agreement.
6.4. Addresses for Notices, etc. All notices, requests, demands and other
communications provided for hereunder shall be in writing and shall be mailed or
delivered to the applicable party at the address indicated below:
If to the Borrower:
Organogenesis Inc.
150 Dan Road
Canton, MA 02021
Attention: Donna Abelli Lopolito, Chief Financial Officer
Telephone: (781) 575-0775
Telecopier: (781) 575-1570
If to the Bank:
Fleet National Bank
High Technology Division
Mail Code: MA BOS 01-08-06
100 Federal Street
Boston, MA 02110
Attention: Kimberly A. Martone, Senior Vice President
Telephone: (617) 434-5316
Telecopier: (617) 434-2473 or (617) 434-0819
or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the terms of this Section. All such notices, requests, demands and other
communications shall be deemed delivered on the earlier of (i) the date received
or (ii) the date of delivery, refusal or non-delivery indicated on the return
receipt if deposited in the United States mails, sent postage prepaid, certified
or registered mail, return receipt requested, addressed as aforesaid. If any
such notice, request, demand or other communication is hand-delivered, same
shall be effective upon receipted delivery.
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6.5. Binding Effect; Assignment; Termination. This letter agreement shall
be binding upon the Borrower, its successors and assigns and shall inure to the
benefit of the Borrower and the Bank and their respective permitted successors
and assigns. The Borrower may not assign this letter agreement or any rights
hereunder without the express written consent of the Bank. The Bank may, in
accordance with applicable law, from time to time assign or grant participations
in this letter agreement, the Term Loans and/or the Term Note. Without
limitation of the foregoing generality,
(i) The Bank may at any time pledge all or any portion of its rights
under the Loan Documents (including any portion of the Term Note) to any of
the 12 Federal Reserve Banks organized under Section 4 of the Federal
Reserve Act, 12 U.S.C. Section 341. No such pledge or the enforcement
thereof shall release the Bank from its obligations under any of the Loan
Documents.
(ii) The Bank shall have the unrestricted right at any time and from
time to time, and without the consent of or notice to the Borrower, to
grant to one or more banks or other financial institutions (each, a
"Participant") participating interests in the Bank's obligation to lend
hereunder and/or any or all of the Term Loans held by the Bank hereunder.
In the event of any such grant by the Bank of a participating interest to a
Participant, whether or not upon notice to the Borrower, the Bank shall
remain responsible for the performance of its obligations hereunder and the
Borrower shall continue to deal solely and directly with the Bank in
connection with the Bank's rights and obligations hereunder. The Bank may
furnish any information concerning the Borrower in its possession from time
to time to prospective assignees and Participants; provided that the Bank
shall require any such prospective assignee or Participant to agree in
writing to maintain the confidentiality of such information to the same
extent as the Bank would be required to maintain such confidentiality.
The Borrower may terminate this letter agreement and the financing
arrangements made herein by giving written notice of such termination to the
Bank; provided that no such termination will release or waive any of the Bank's
rights or remedies or any of the Borrower's obligations under this letter
agreement or any of the other Loan Documents unless and until the Borrower has
paid in full the Term Loans and all interest thereon and all fees and charges
payable in connection therewith.
6.6. Consent to Jurisdiction. The Borrower irrevocably submits to the
non-exclusive jurisdiction of any Massachusetts court or any federal court
sitting within The Commonwealth of Massachusetts over any suit, action or
proceeding arising out of or relating to this letter agreement and/or the Term
Note. The Borrower irrevocably waives, to the fullest extent permitted by law,
any objection which it may now or hereafter have to the laying of venue of any
such suit, action or proceeding brought in such a court and any claim that any
such suit, action or proceeding has been brought in an inconvenient forum. The
Borrower agrees that final judgment in any such suit, action or proceeding
brought in such a court shall be enforced in any court of proper jurisdiction by
a suit upon such judgment, provided that service of process in such action, suit
or proceeding shall have been effected upon the Borrower in one of the manners
specified in the following paragraph of this ss.6.6 or as otherwise permitted by
law.
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The Borrower hereby consents to process being served in any suit, action or
proceeding of the nature referred to in the preceding paragraph of this ss.6.6
either (i) by mailing a copy thereof by registered or certified mail, postage
prepaid, return receipt requested, to it at its address set forth in ss.6.4 (as
such address may be changed from time to time pursuant to said ss.6.4) or (ii)
by serving a copy thereof upon it at its address set forth in ss.6.4 (as such
address may be changed from time to time pursuant to said ss.6.4).
6.7. Severability. In the event that any provision of this letter agreement
or the application thereof to any Person, property or circumstances shall be
held to any extent to be invalid or unenforceable, the remainder of this letter
agreement, and the application of such provision to Persons, properties or
circumstances other than those as to which it has been held invalid and
unenforceable, shall not be affected thereby, and each provision of this letter
agreement shall be valid and enforced to the fullest extent permitted by law.
6.8. Governing Law. This letter agreement and the Term Note shall be
governed by, and construed and enforced in accordance with, the laws of The
Commonwealth of Massachusetts.
6.9. Replacement Note. Upon receipt of an affidavit of an officer of the
Bank as to the loss, theft, destruction or mutilation of the Term Note or of any
other Loan Document which is not of public record and, in the case of any such
mutilation, upon surrender and cancellation of the Term Note or other Loan
Document, the Borrower will issue, in lieu thereof, a replacement Term Note or
other Loan Document in the same principal amount (as to the Term Note) and in
any event of like tenor.
6.10. Usury. All agreements between the Borrower and the Bank are hereby
expressly limited so that in no contingency or event whatsoever, whether by
reason of acceleration of maturity of the Term Note or otherwise, shall the
amount paid or agreed to be paid to the Bank for the use or the forbearance of
the Indebtedness represented by the Term Note exceed the maximum permissible
under applicable law. In this regard, it is expressly agreed that it is the
intent of the Borrower and the Bank, in the execution, delivery and acceptance
of the Term Note, to contract in strict compliance with the laws of The
Commonwealth of Massachusetts. If, under any circumstances whatsoever,
performance or fulfillment of any provision of the Term Note or any of the other
Loan Documents at the time such provision is to be performed or fulfilled shall
involve exceeding the limit of validity prescribed by applicable law, then the
obligation so to be performed or fulfilled shall be reduced automatically to the
limits of such validity, and if under any circumstances whatsoever the Bank
should ever receive as interest an amount which would exceed the highest lawful
rate, such amount which would be excessive interest shall be applied to the
reduction of the principal balance evidenced by the Term Note and not to the
payment of interest. The provisions of this ss.6.10 shall control every other
provision of this letter agreement and of the Term Note.
6.11. WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY MUTUALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN
RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS LETTER AGREEMENT, THE TERM NOTE OR ANY OTHER LOAN DOCUMENTS OR OUT OF ANY
COURSE OF CONDUCT,
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COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY PARTY.
THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE BANK TO ENTER INTO THIS
LETTER AGREEMENT AND TO MAKE TERM LOANS AS CONTEMPLATED HEREIN.
VII. DEFINED TERMS
7.1. Definitions. In addition to terms defined elsewhere in this letter
agreement, as used in this letter agreement, the following terms have the
following respective meanings:
"Applicable Rate Increment" - At any time while the Borrower is in Level
One Compliance - 1.75% per annum; and at any time while the Borrower is in Level
Two Compliance - 2.25% per annum.
"Bank Certificate" - A certificate signed by an officer of the Bank setting
forth in reasonable detail any additional amount required to be paid by the
Borrower to the Bank pursuant to ss.1.4, ss.1.7 or ss.1.8 of this letter
agreement and the basis therefor and the computation thereof, which certificate
shall be submitted by the Bank to the Borrower in connection with each demand
made at any time by the Bank upon the Borrower with respect to any such
additional amount, and each such certificate shall, save for manifest error,
constitute presumptive evidence of the additional amount required to be paid by
the Borrower to the Bank upon each demand. A claim by the Bank for all or any
part of any additional amount required to be paid by the Borrower may be made
before and/or after the end of the period to which such claim relates or during
which such claim has arisen and before and/or after any payment hereunder to
which such claim relates. Each Bank Certificate shall set forth in reasonable
detail the basis for and the calculation of the claim to which it relates.
"Business Day" - Any day which is not a Saturday, nor a Sunday nor a public
holiday under the laws of the United States of America or The Commonwealth of
Massachusetts applicable to a national banking association or other day on which
banks in Boston, Massachusetts are authorized or directed to close; provided
however that if the applicable provision relates to a LIBOR Loan, then the term
"Business Day" shall not include any day on which dealings are not carried on in
the London interbank market or on which banks are not open for business in
London.
"Capital Base" - At any time, the sum of (i) the consolidated Tangible Net
Worth of the Borrower and Subsidiaries then existing, plus (ii) the principal
amount of Subordinated Debt of the Borrower then outstanding (nothing contained
herein being deemed to authorize the incurrence of any such Subordinated Debt).
"Capital Expenditures" - All acquisitions of machinery, equipment, land,
leaseholds, buildings, leasehold improvements and all other expenditures for
purposes which are considered to be fixed assets under generally accepted
accounting principles consistently applied. When a fixed asset is acquired by a
lease which is required to be capitalized pursuant to generally accepted
accounting principles, the amount required to be capitalized pursuant thereto
shall be considered to be a Capital Expenditure in the year such asset is first
leased.
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"Cash Balance Requirement" - As defined in ss.3.9.
"Cash-Equivalents" - Each of the following: (i) readily marketable direct
obligations of, or obligations guarantied by, the United States of America or
any agency thereof and entitled to the full faith and credit of the United
States of America, (ii) other investment grade debt securities, mortgage-backed
obligations, eurodollar time deposits, bankers acceptances, commercial paper and
repurchase agreements fully collateralized by treasury or federal agency
obligations, but, as to each of the foregoing items in this clause (ii), only to
the extent that same comply with all of the Borrower's cash management
guidelines set forth in paragraph B.2 of item 4.6 of the attached Disclosure
Schedule, (iii) deposits with or certificates of deposit issued by the Bank or
the Bank's parent or deposits with or certificates of deposit issued by any
other bank chartered by the United States or by any state and having capital in
excess of $100,000,000, (iv) any money market accounts, or (v) interests in
mutual funds, substantially all of the assets of which shall be obligations of
the types described in the foregoing clauses of this sentence.
"Collateral" - All property now or hereafter owned by the Borrower or in
which the Borrower now or hereafter has any interest which is now or hereafter
described as "Collateral" in the Security Agreement.
"Compliance Level" - Level One Compliance and Level Two Compliance, as the
case may be.
"Debt Service Coverage Ratio" - As defined in s.3.9.
"Default" - Any event or circumstance which, with the passage of time or
the giving of notice or both, could become an Event of Default.
"EBITDA" - The consolidated Net Income (or, if relevant, the consolidated
Net Loss, expressed as a negative number) of the Borrower and Subsidiaries for
any period, plus, without duplication of any item, (i) all federal and state
income taxes (but not taxes in the nature of an ad valorem property tax or a
sales or excise tax) paid or accrued with respect to such period, (ii) all
interest on any Indebtedness (whether senior debt or subordinated debt) paid or
accrued by the Borrower and/or any of its Subsidiaries for such period and
actually deducted on the consolidated books of the Borrower for the purposes of
computation of its consolidated Net Income (or consolidated Net Loss, as the
case may be) for the period involved, and (iii) the amount of the provision for
depreciation and/or amortization actually deducted on the consolidated books of
the Borrower for the purposes of computation of its consolidated Net Income (or
consolidated Net Loss, as the case may be) for the period involved.
"ERISA" - The Employee Retirement Income Security Act of 1974, as amended.
"Eurocurrency Liabilities" - Has the meaning assigned to that term in
Regulation D of the Board of Governors of the Federal Reserve System (or any
successor), as in effect from time to time, or in any successor regulation
relating to the liabilities described in said Regulation D.
"Event of Default" - As defined in s.5.1.
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"Floating Rate" - As defined in ss.1.4.
"Floating Rate Loan" - All or any portion of any Term Loan which bears
interest at a rate calculated with reference to the Prime Rate.
"Impositions" - All present and future taxes, levies, duties, impositions,
deductions, charges and withholdings applicable to the Bank with respect to any
LIBOR Loan, excluding, however, any taxes imposed directly on the Bank's income
and any franchise taxes imposed on it by the jurisdiction under the laws of
which the Bank is organized or any political subdivision thereof.
"Indebtedness" - All obligations of a Person, whether current or long-term,
senior or subordinated, which in accordance with generally accepted accounting
principles would be included as liabilities upon such Person's balance sheet at
the date as of which Indebtedness is to be determined, and shall also include
guaranties, endorsements (other than for collection in the ordinary course of
business) or other arrangements whereby responsibility is assumed for the
obligations of others, whether by agreement to purchase or otherwise acquire the
obligations of others, including any agreement, contingent or otherwise, to
furnish funds through the purchase of goods, supplies or services for the
purpose of payment of the obligations of others.
"Interest Payment Date(s)" - As to each LIBOR Loan, the last day of
Interest Period applicable to such LIBOR Loan; provided, however, that if such
Interest Period is more than three months, then there shall be two Interest
Payment Dates for such Interest Period -- the first such Interest Payment Date
being three months from the commencement of such Interest Period, and the second
such Interest Payment Date being the last day of such Interest Period.
"Interest Period" - As to each LIBOR Loan, the period commencing with the
date of the making of such LIBOR Loan and ending one month, two months, three
months or six months thereafter (as the Borrower may select); provided that (A)
any such Interest Period which would otherwise end on a day which is not a
Business Day shall be extended to the next succeeding Business Day unless such
Business Day occurs in a new calendar month, in which case such Interest Period
shall end on the immediately preceding Business Day, (B) any such Interest
Period which begins on a day for which there is no numerically corresponding day
in the calendar month during which such Interest Period is to end shall end on
the last Business Day of such calendar month, and (C) no Interest Period may be
selected as to any principal amount of any Term Loan if such Interest Period
would end after the regularly-scheduled due date of such principal amount.
"Level One Compliance" and "Level Two Compliance" are each defined in
ss.1.12.
"LIBOR" - With respect to each Interest Period for a LIBOR Loan, that rate
per annum (rounded upward, if necessary, to the nearest 1/32nd of one percent)
which represents the offered rate for deposits in U.S. Dollars, for a period of
time comparable to such Interest Period, which appears on the Telerate page 3750
as of 11:00 a.m. (London time) on that day that is two (2) London Banking Days
preceding the first day of such Interest Period; provided, however, that if the
rate described above does not appear on the Telerate System on any applicable
interest determination date, LIBOR for such Interest Period shall be the rate
(rounded upwards as
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described above, if necessary) for deposits in dollars for a period
substantially equal to such Interest Period shown on the Reuters Page "LIBO" (or
such other page as may replace the LIBO Page on that service for the purpose of
displaying such rates), as of 11:00 a.m. (London Time), on that day that is two
(2) London Banking Days prior to the beginning of such Interest Period. "London
Banking Day" shall mean any date on which commercial banks are open for business
in London. If both the Telerate and Reuters systems are unavailable, then LIBOR
for any Interest Period will be determined on the basis of the offered rates for
deposits in U.S. Dollars for a period of time comparable to such Interest Period
which are offered by four major banks in the London interbank market at
approximately 11:00 a.m., London time, on that day that is two (2) London
Banking Days preceding the first day of such Interest Period, as selected by the
Bank. The principal London office of each of four major London banks will be
requested to provide a quotation of its U.S. Dollar deposit offered rate. If at
least two such quotations are provided, the rate for that date will be the
arithmetic mean of the quotations. If fewer than two quotations are provided as
requested, the rate for that date will be determined on the basis of the rates
quoted for loans in U.S. Dollars to leading European banks for a period of time
comparable to such Interest Period offered by major banks in New York City at
approximately 11:00 a.m., New York City time, on that day that is two London
Banking Days preceding the first day of such Interest Period. In the event that
the Bank is unable to obtain any such quotation as provided above, it will be
deemed that LIBOR for the proposed Interest Period cannot be determined. The
Bank shall give prompt notice to the Borrower of LIBOR as determined for each
LIBOR Loan and such notice shall be deemed presumptively correct, absent
manifest error.
"LIBOR Interest Rate" - For any Interest Period, an interest rate per
annum, expressed as a percentage, determined by the Bank pursuant to the
following formula:
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* LIR = LIBOR + ARI
------------
[1.00 - RR]
Where LIR = LIBOR Interest Rate
LIBOR = See definition of LIBOR
RR = Reserve Rate
ARI = The then Applicable Rate Increment
*LIR to be rounded upwards to the next higher 1/32 of 1%.
The LIBOR Interest Rate will be adjusted during any Interest Period to reflect
any effective change in the Applicable Rate Increment during such Interest
Period and/or any change in the Reserve Rate during such Interest Period.
"LIBOR Loan" - All or any portion of a Term Loan which bears interest at a
particular LIBOR Interest Rate.
"Loan Documents" - Each of this letter agreement, the Term Note, the
Security Agreement and each other instrument, document or agreement evidencing,
securing, guaranteeing or relating in any way to any of the Term Loans, all
whether now existing or hereafter arising or entered into.
"London" - The City of London in England.
"Net Income" (or "Net Loss") - The book net income (or book net loss, as
the case may be) of a Person for any period, after all taxes actually paid or
accrued and all expenses and other charges determined in accordance with
generally accepted accounting principles consistently applied.
"Net Quick Unrestricted Assets" - Such current assets of the Borrower as
consist (without duplication) of cash, Cash-Equivalents and Receivables (net of
appropriate reserves), but excluding any of the foregoing which are subject to
any pledge, lien, encumbrance or other similar restriction.
"1999 Subordinated Notes" - The Borrower's 7% Convertible Subordinated
Notes due March 29, 2004 in an aggregate amount not to exceed $20,000,000 issued
pursuant to a Securities Purchase Agreement dated as of March 30, 1999.
"Obligations" - All Indebtedness, covenants, agreements, liabilities and
obligations, now existing or hereafter arising, made by the Borrower with or for
the benefit of the Bank or owed by the Borrower to the Bank in any capacity.
"PBGC" - The Pension Benefit Guaranty Corporation or any successor thereto.
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"Permitted Acquisition" - The acquisition by the Borrower of all or
substantially all of the stock or other equity ownership interests or assets of
another Person; provided that all of the following criteria are met: (1) such
Person conducts a business (or the assets so acquired are used to conduct a
business) which is the same as or is substantially related to the business
conducted by the Borrower at the time of such acquisition; (2) the Board of
Directors of the Person so acquired (as such Board was constituted prior to the
commencement of the acquisition) has approved the acquisition; (3) the total
cash consideration paid or payable by the Borrower for all such acquisitions
will not (unless the prior written consent of the Bank is obtained) exceed
$2,000,000 in the aggregate during the term of this letter agreement; (4) at the
time of each such acquisition and after giving effect thereto there shall be no
Default or Event of Default, with compliance with each of ss.3.7 and ss.3.8 and
the Unencumbered Cash Balance test of ss.3.9 being measured for this purpose as
at the then most recent fiscal quarter-end, giving effect to such acquisition on
a pro forma basis as if it had occurred immediately prior to such fiscal
quarter-end, and with compliance with the Debt Service Coverage Ratio test
contained in ss.3.9 being measured for this purpose as at the then most recent
fiscal quarter-end, giving effect to such acquisition as if it had occurred at
the beginning of the 12-month period ended at said fiscal quarter-end; and (5)
prior to such acquisition the Borrower shall have delivered to the Bank
projections, in form and substance reasonably satisfactory to the Bank, showing
that the Borrower will be in compliance with each of ss.3.7, ss.3.8 and ss.3.9
for the balance of the fiscal year in which such acquisition takes place and for
the next following fiscal year.
"Person" - An individual, corporation, partnership, limited partnership,
limited liability company, joint venture, trust or unincorporated organization,
or a government or any agency or political subdivision thereof.
"Prime Rate" - That variable rate of interest per annum designated by the
Bank, from time to time, as being its prime rate, it being understood that such
rate is merely a reference rate and does not necessarily represent the lowest or
best rate being charged to any customer.
"Qualifying Equipment" - Laboratory equipment and other capital equipment
purchased by the Borrower within the 90 days (or 210 days in the case of the
initial Term Loan) preceding the date of the relevant Term Loan for use in the
Borrower's business and meeting all of the following criteria: (i) each item of
such equipment has been delivered to and installed at the Borrower's premises at
150 Dan Road, Canton, MA or 85 John Road, Canton, MA and has become fully
operational, (ii) the Borrower has paid in full for each item of such equipment
(or is paying for same from the proceeds of the Term Loan supported by such
equipment) and the Borrower holds title to each such item of equipment, free of
all interests and claims of any other Person (other than the security interest
of the Bank), and (iii) the Bank has (assuming that it has given value and has
filed appropriate Uniform Commercial Code financing statements) a fully
perfected first security interest in such equipment. The Borrower may include
certain costs of software in its Qualifying Equipment to the extent expressly
provided for in ss.1.2.
"Qualifying Leasehold Improvements" - Leasehold improvements affixed to,
installed in and/or made to the Borrower's premises at 150 Dan Road or 85 John
Road, Canton, MA within the 90 days (or 210 days in the case of the initial Term
Loan) prior to the date of the advance of the relevant Term Loan, all of which
leasehold improvements must meet all of the following criteria: (i) the Borrower
has paid in full for such leasehold improvements (or is paying for same
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from the proceeds of the Term Loan supported by such leasehold improvements) and
holds title to such leasehold improvements, free of all interests and claims of
any other Person (other than the security interest of the Bank), and (ii) the
Bank has (assuming that it has given value and has filed appropriate Uniform
Commercial Code financing statements) a fully perfected first priority security
interest in such leasehold improvements, except as set forth in the next
sentence. The Bank acknowledges that such leasehold improvements are to be
affixed to the Borrower's premises and may become so built into such premises
that they become part of the realty, with the result that the owner of the
premises would have rights thereto upon the termination of the Borrower's lease
and the Bank would no longer have a security interest therein.
"Receivables" - As to any Person, all of such Person's present and future
accounts receivable for goods sold or for services rendered.
"Reserve Rate" - The aggregate rate, expressed as a decimal, at which the
Bank would be required to maintain reserves under Regulation D of the Board of
Governors of the Federal Reserve System (or any successor or similar regulation
relating to such reserve requirements) against Eurocurrency Liabilities, as well
as any other reserve required of the Bank with respect to the LIBOR Loans. The
LIBOR Interest Rate shall be adjusted automatically on and as of the effective
date of any change in the Reserve Rate.
"SEC" - The Securities and Exchange Commission or any successor thereto.
"Senior Debt" - The Total Liabilities of the Borrower and Subsidiaries on a
consolidated basis, exclusive of any such Total Liabilities which constitute
Subordinated Debt.
"Subordinated Debt" - Any Indebtedness of the Borrower which is
subordinated, pursuant to a subordination agreement in form and substance
satisfactory to the Bank, to all Indebtedness now or hereafter owed by the
Borrower to the Bank. The Bank has informed the Borrower that the Borrower's
1999 Subordinated Notes in an aggregate principal amount not to exceed
$20,000,000 will be deemed to constitute "Subordinated Debt" for the purpose of
this letter agreement, but that the subordination provisions contained in the
1999 Subordinated Notes will not necessarily be acceptable as a template for
subordination provisions to be used in the context of any subsequent issue of
Subordinated Debt.
"Subsidiary" - Any corporation or other entity of which the Borrower and/or
any of its Subsidiaries, directly or indirectly, owns, or has the right to
control or direct the voting of, fifty (50%) percent or more of the outstanding
capital stock or other ownership interest having general voting power (under
ordinary circumstances).
"Tangible Net Worth" - An amount equal to the total assets of any Person
(excluding (i) the total intangible assets of such Person, (ii) any minority
interests in Subsidiaries and (iii) any assets representing amounts due from any
officer or employee of such Person or from any Subsidiary of such Person) minus
the total liabilities of such Person. Total intangible assets shall be deemed to
include, but shall not be limited to, the excess of cost over book value of
acquired businesses accounted for by the purchase method, formulae, trademarks,
trade names, patents, patent rights and deferred expenses (including, but not
limited to, unamortized debt discount and expense, organizational expense,
capitalized software costs (to the extent required
35
<PAGE>
by generally accepted accounting principles to be treated as intangible assets)
and experimental and development expenses).
"Total Liabilities" - All Indebtedness of the Borrower and/or any
Subsidiary of the Borrower (secured or unsecured, senior or subordinated) which
would properly be included in liabilities shown on a balance sheet of the
Borrower prepared in accordance with generally accepted accounting principles.
"Unencumbered Cash Balance" - At any time, the total of all cash and
Cash-Equivalents of the Borrower which are not subject to any pledge, lien,
encumbrance or other similar restriction.
Any defined term used in the plural preceded by the definite article shall
be taken to encompass all members of the relevant class. Any defined term used
in the singular preceded by "any" shall be taken to indicate any number of the
members of the relevant class.
36
<PAGE>
This letter agreement is executed, as an instrument under seal, as of the
day and year first above written.
Very truly yours,
Organogenesis Inc.
By _____________________________________
Name: Donna Abelli Lopolito
Title: Chief Financial Officer
Accepted and agreed:
FLEET NATIONAL BANK
By ________________________________
Name:Kimberly A. Martone
Title: Senior Vice President
37
<PAGE>
DISCLOSURE SCHEDULE
Item 2.1(a) Jurisdictions in which Borrower is qualified; Subsidiaries
Item 2.1 (b) 5% Stockholders
Item 2.1(e) Litigation
Item 2.1 (j) Collateral locations; record owner of each location
Item 4.1 Existing Indebtedness
Item 4.2 Existing Liens
Item 4.3 Existing Guaranties
Item 4.6 Permitted Investments
Item 5.1(m) Permitted 50% Stockholders
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
Dan Capital Corp. (Del.)
ECM Pharma(TM), Inc. (Del.)
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (File Nos. 33-12761, 33-41862, 33-48888, 33-49236,
33-49248, 33-48890, 33-86506, 33-86508, 33-48892 and 33-64319) and on Forms S-3
(File Nos, 33-33914, 33-40287, 33-43648, 33-60381, 33-63393, 33-63397,333-3995
and 333-50755) of Organogenesis Inc. of our report dated March 27, 2000 relating
to the financial statements, which appear in this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,727
<SECURITIES> 6,712
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,973
<PP&E> 22,811
<DEPRECIATION> 11,080
<TOTAL-ASSETS> 27,305
<CURRENT-LIABILITIES> 11,992
<BONDS> 0
0
0
<COMMON> 307
<OTHER-SE> (7,281)
<TOTAL-LIABILITY-AND-EQUITY> 27,305
<SALES> 0
<TOTAL-REVENUES> 3,578
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 31,928
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (28,350)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,350)
<EPS-BASIC> (.93)
<EPS-DILUTED> (.93)
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